Forget the fiscal cliff, there's a new row being milked

You think going over the fiscal cliff might be a big deal? Wait until you get a dose of the dairy cliff.

Dairy cows stand in a barn at Hunter Haven Farms in Pearl City, Illinois, U.S., on Friday, March 30, 2012. Milk futures for April delivery rose 1.6 percent to $15.87 per 100 pounds at Chicago Mercantile Exchange. Photographer: Daniel Acker/Bloomberg
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You think going over the fiscal cliff might be a big deal? Wait until you get a dose of the dairy cliff.

Sad to say it but the arrival of 2013 may bring a doubling in the price of milk to as much as US$6 (Dh22.04) to $8 a gallon, up from about $3.75. For this, you can thank congress, which seems to have lost the ability to carry out its most basic functions, starting with passing legislation.

The source of the dairy cliff can be found in the failure of congress to agree on a new farm bill, which is normally renewed every five years. Not this year, and the deadline for passing a new law expires tomorrow.

The upshot is that the rules governing dairy price supports will revert to legislation adopted in 1949, forcing the government to buy milk at elevated prices. With Washington soaking up milk, market prices would follow.

How does a law from 1949 lead to a doubling of milk prices? The law sets a floor for milk prices based on dairy production costs 63 years ago, when farms were much less efficient and mechanised than they are today. Add in adjustments for inflation and a few bells and whistles and out comes a formula that requires Washington to buy milk at roughly twice the current price. That works out to about $40 per hundredweight compared with $18.56 now.

Dairy farmers probably won't mind. But everyone else down the dairy food chain would be affected, from consumers to cheese, butter and yogurt makers, who will probably resort to buying more imported milk to keep their costs in check.

This could all be averted if congress passed a new farm bill that included a minimum price floor, like the one in the legislation about to expire.

In recent years, with commodity prices at or near record highs, this floor has been lower than market prices for milk. Farmers could make more by selling their goods on the open market, and the floor never kicked in.

The deadlock over the farm bill has dragged on for half a year. The senate passed a bill that included $23 billion of cost savings during the next 10 years.

The lower house version contained $35bn in savings, though that version never came to a vote because of opposition from members who sought more savings, mainly from the food-stamp portion of the bill.

However, the US house and senate agriculture committees are working on a short-term extension to the expired farm bill, legislators and aides said last week. The proposed extension to farm legislation could be for six months to a year.

"We'll find a way" to get an extension passed, said Amy Klobuchar, a member of the senate agriculture committee, who added that the senators' preference was still to pass a complete bill.

"This is so much 'Plan B' that it's like 'Plan M' for milk," Mrs Klobuchar said.

The price of milk will not double tomorrow if congress does not act, but would likely rise gradually as supplies are removed from normal merchandising channels and instead land in US department of agriculture (USDA) storage facilities.

"USDA continues to review a variety of options for administering programmes, should permanent law become legally effective on January 1," a spokesman said.

Government buying could quickly produce a glut of milk, butter, cheese and powdered milk that would get stored in warehouses, given to food banks and exported as food aid, said Jay Gordon, a dairy farmer and executive director of the Washington State Dairy Federation, a trade organisation.

"We're not going to sit around watching the Super Bowl and eating chunks of butter," said Mr Gordon, who has about 150 cows on his farm in Washington state. "But the government has to keep buying" to keep the price up.

The threat of reverting to the 1949 law is supposed to work just like the fiscal cliff, the combined $600 billion in tax increases and spending cuts if Washington can't reach a budget deal before the new year. It seems neither has worked.

In the end, there is a lot not to like about the two proposed versions of the farm bill. A better alternative would be to end most government subsidies for the farm industry. But congressional inaction that leads to soaring milk prices is inexcusable.

* Bloomberg News, with additional reporting by Reuters