Organization of Milk Exporting States

Down, but almost never out, agricultural price support programs have tremendous staying power in Washington. Attempts to eliminate them are fought tooth and nail by constituencies dependent on price-fixing for their livelihood. Like many other congressionally-mandated price-fixing cartels, the Northeast Dairy Compact was instituted as a temporary measure to ensure the viability of farmers in a time of declining prices. Like most other “temporary” government subsidies dairy price supports have become a “necessary” component of U.S. agriculture policy.

As is the case with all other price subsidies and tariffs, the compact ensured that northeastern dairy farmers would never have to address the overproduction that led the price of milk to fall in the first place. By rewarding overproduction with stable prices, the compact encouraged farmers to maximize their production, making them even more vulnerable to a price crash when the compact expired. Now that it has, farmers are pulling out all the stops to make sure it is re-instituted.

While the compact has spoiled Northeast dairy farmers, it has done so at the expense of dairy producers and consumers everywhere else. In fact, facing opposition from both Republicans and Democrats, the powerful Northeastern congressional delegation could not even get a compact renewal to the senate floor. The opponents came from two distinct camps: one that opposed a milk compact of any sort, and another that simply wanted the benefits of the cartel extended to their states.

When Senator Jim Jeffords (I-Vt.) changed his official political affiliation in May, many commentators suggested that the Republicans should kill the dairy compact, both for its excesses, and as a way to punish Jeffords for his defection. With the political bulls-eye on Jeffords’s causing more Republicans to try blocking the legislation, Vermont’s other senator, Judiciary Chairman Patrick Leahy (D-Vt.), has taken up the call to prop up prices for dairy farmers in the Northeast.

To capture the votes of those sympathetic to dairy farmers in their states, Leahy proposed creating a $300 million fund for small dairy farmers and set a national minimum price for milk at $14.25 per hundredweight. Under Leahy’s proposal, if the price of milk were to dip below $14.25 – a virtual certainty – the difference in price would be paid to the fund and divided up among dairy farms across the nation that have fewer than 300 cows. For the past four years, the compact price has been a more generous $16.94, but the additional $300 million from the Treasury should make up for the difference.

It is unclear whether Leahy’s plan will pass, as it has drawn the ire of western senators, but it does underscore some political dynamics that often lead to terrible legislation. It creates a climate where those who represent the affected constituency know that failure to reinstate the subsidy will be a political liability. These representatives then offer a piece of the action to constituencies in other states, which leads them to pressure their own representatives for the subsidy. As a result, the deeply flawed, but targeted, original program retains all of its flaws, but now covers a nationwide constituency.

If the Leahy plan passes, it will be at the expense of consumers and taxpayers, whose interests are rarely considered in political horse-trading. But as tariffs and restraints on trade become an international issue, agricultural price supports and barriers to competition will harm American industry and encourage trade retaliation from the World Trade Organization (WTO) and its member nations.

Defenders of economic liberty should welcome foreign challenges to harmful, protectionist policies; the question of who is restricting consumer freedom should be a secondary issue. The most important thing is that the freedom of exchange not be uninhibited by a regulatory system that favors producers over consumers or one constituency over another.

From 1996 until this October, the Northeaster Dairy compact robbed consumers of an estimated $400 million in higher prices. Although cartel supporters argue that subsidies protect small producers from larger counterparts, empirical studies have demonstrated time and again that compact premiums – the difference between market and cartel price – are always passed on to consumers.

Given past experience, the Leahy national milk cartel would likely raise the price of a gallon by 26 cents – a full 10 percent above today’s price. This would not only transfer wealth from the producers of products that use milk as an input – cheese, yogurt, ice cream – to small dairy farmers, but would also restrict the ability of the large dairy farms to offer volume discounts to these same producers. But even more distressing is the way this tax on milk consumption would hit those in lower income brackets. Milk is found in nearly every refrigerator in America; no item for sale could be considered any less of a luxury. Yet, the interests of these consumers are ignored, in favor of dairy farmers.

While many in Congress are quick to attack the trade practices of OPEC and foreign steel manufacturers, too often the subsidies and restraints on trade that really harm consumers are devised by our own government. Hopefully Leahy’s attempt to establish an OPEC for dairy farmers will be soundly defeated, but if it his plan proves too tempting for Congress to resist, consumers might find solace in the fact that a different organization has their interests in mind, even if it is a horribly inefficient international bureaucracy.

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