Low milk prices no national emergency

Published 7:46 pm Tuesday, January 20, 2015

Watch closely; even as you enjoy those cheaper by-the-gallon prices and the boost in your weekly income that results, lobbyists are gearing up to demand government action to “stabilize” markets and keep prices up — all in the name of national and economic security.

We’re not talking about gasoline, though the same dynamic is at work. We’re talking about milk. But like with gas, the government should simply step aside and let free markets work their magic.

“Milk sales set records in 2014, but plummeting prices are forcing some dairy farmers to spill the surplus down the drain,” the Associated Press reports. “Already disheartened by the current glut, which is due to global factors and overproduction, dairy farmers say they worry that futures markets predict dwindling prices in 2015. Over in the dairy aisle, though, shoppers are milking savings by the gallon.”

There’s a reason for that overproduction.

“Less than a year ago, they struggled to meet global demand and milk prices climbed to record highs — about $25 per hundredweight, or roughly the equivalent of a 10-gallon tank, according to Mark Stephenson, director of dairy policy analysis at the University of Wisconsin,” AP explains. “So, many farmers bought new equipment and expanded their herds to meet demand. But when China pulled back on its dairy imports after stockpiling milk powder and Russia imposed sanctions against the U.S. by halting trade, dairy farmers nationwide were left with a surplus, Stephenson said.”

Consumers see that surplus in lower prices. And that’s good for everyone — except for dairy farmers, who will see a temporary drop in their earnings.

Many other Americans experience the same sort of boom-and-bust cycles in their own businesses; homebuilders and construction workers have seasonal ups and downs, for example, and pizza makers see booms during NFL games and busts on family-oriented holidays.

The difference, however, is that the federal government feels compelled to step in and protect dairy farmers from normal, natural business cycles, with things like the Federal Margin Protection Program.

“The U.S. Department of Agriculture program, a product of the 2014 Farm Bill, serves as a sort of insurance policy for farmers,” AP says. “The program sets average national feed prices, and farmers subtract that price from their milk price to determine their margin; if the margin is below a pre-determined amount, farmers get money from the USDA.”

So dairy farmers reap the rewards of higher milk prices and understandably increase production to take advantage of them, but they’re protected from the effects of the lower milk prices.

Who loses? Well, consumers do — dairy farmers have lobbyists in the halls of Washington arguing on their behalf, but consumers don’t have that advantage.

But the larger system loses, as well. What those margin guarantees do is insulate producers from their own bad decisions. That’s called “moral hazard.”

Of course dairy farmers want a bailout. Who doesn’t? But who’s going to bail out consumers when prices creep up across the board, because of industry influence in Washington?

Let the markets work. That’s what they do.