December 7, 2013

Milk price could rise to $6 per gallon if farm bill fails

A 1938 law requires the federal government to purchase dairy products at higher than wholesale prices if Congress can’t agree on a bill.

By J. Craig Anderson canderson@pressherald.com
Staff Writer

If Congress fails to pass a farm bill by the end of the year, it will set off a cascade of events that could send milk prices in Maine as high as $6 a gallon, dairy industry and economic experts said.

Today's poll: Milk prices

How would you react to higher milk prices?

I'll stop buying milk

I'll switch to non-dairy milk

I won't change my buying habits

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Bottles of milk are lined up at Smiling Hill Farm in Westbrook on Thursday. The dairy version of a fiscal cliff looms, industry and economic experts say.

John Ewing/Staff Photographer

The prices of butter, cheese and ice cream also could increase significantly, they said.

However, they said that price increases would happen gradually, and only if the farm bill issue remains unresolved for an extended period.

There is a great deal of uncertainty about exactly how long it would take for dairy prices to increase if Congress fails to pass a farm bill or extend the current one, said Brian Gould, a professor in the Department of Agricultural and Applied Economics at the University of Wisconsin in Madison.

“We’ve never been in this situation before, so I don’t know what the dynamics are going to be,” Gould said.

The expected price increases would result from the dairy industry version of a fiscal cliff, he said.

The Agricultural Adjustment Act of 1938, which is still in effect today, states that unless a farm bill is enacted to supersede it, the federal government must agree to purchase certain agricultural products from their producers at set prices that are significantly higher than their current market value. The law’s effects are intentionally dire to ensure that Congress always passes a farm bill.

The higher prices for each agricultural product are based on a benchmark known as “parity” that is roughly equivalent to the market value of that product from 1909 to 1914, a time period in which farms prospered and prices were historically high.

The 1938 law remains on the books as a deterrent to letting the current farm bill expire without passing a new one. The current farm bill was passed in 2008, and expired in 2012, but was extended another year by Congress when a proposed 2012 update to the bill failed.

Each farm product covered by the law has its own parity price, Gould said. In the case of milk, the parity price is $49.60 per hundredweight, which is roughly 12 gallons, he said.

The 1938 law requires the federal government to purchase milk from farmers at no less than 75 percent of the parity price, which would be $37.20 per hundredweight, he said.

That’s nearly twice the current wholesale price of $21.30 per hundredweight of raw milk, Gould said.

It’s possible that the commercial market would have to match that higher government price in order to keep store shelves stocked with dairy products, he said.

However, that price only accounts for about half of what consumers pay at the grocery store for milk, he said. The rest of the cost, such as pasteurization, bottling, distribution and retail sales, would not change unless retailers exploited the crisis as an opportunity to boost their profits.

“It could go up dramatically, but not as much as at the farm,” Gould said.

The most likely scenario is that milk prices would top out at about 50 percent higher than they are today, said Gould, who recently completed a study of the likely economic impact of failing to pass a farm bill.

On Friday, milk prices in Portland ranged from about $3.50 to $4.50 per gallon at major grocery chains. Based on the average price of $4 per gallon, a 50 percent price increase would bring that average to $6 a gallon.

Shaw’s grocery store shoppers Barbara Cobb and Nancy McKeil said that price would be prohibitively expensive for them.

“I guess we would have to switch to powdered milk,” said Cobb, who lives in Portland.

(Continued on page 2)

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Today's poll: Milk prices

How would you react to higher milk prices?

I'll stop buying milk

I'll switch to non-dairy milk

I won't change my buying habits

View Results