I grew up on a family dairy farm and have always known the government had some sort of control over the pricing of milk. I wasn't sure exactly how or why they decided to stick their nose into the dairy industry until just recently. The government started regulating milk prices back in the 1930's. I found an article written by Chris Edwards in June of 2009 that outlined 5 ways in which the government intervenes into the dairy markets.
The first way is through marketing orders. Marketing orders are essentially a minimum price set by the federal government. Two-thirds of the milk produced in the U.S. is sold under these marketing orders, with much of the remaining one-third sold under similar state government schemes. These marketing orders work essentially like cartels to limit competition. Entrepreneurs are not allowed to operate outside of the marketing order system to provide milk to consumers at a lower price. The system also prevents lower-cost milk from area's of more efficient operation such as the Midwest from gaining any market advantage over higher-cost milk from other regions.
The second way the government intervenes is through price support programs, which keep the price of milk artificially high by guaranteeing to purchase any quantity of milk produced at a minimum price. This program creates a steady demand and higher prices.
The third way the government intervenes is through an income support program. This program provides monthly payments to dairy farmers when the market price drops below target levels. These payments tend to encourage overproduction which as we learned drives the price of milk down.
The fourth way is through trade barriers which limit the amount of dairy products that can be imported into the U.S. These barriers are intended to keep prices artificially high.
The fifth method used by the government is export subsidies. This method is used to entice the dairy industry to export milk. It is necessary because with the artificially higher prices received in the U.S. nobody would want to export any milk and receive a lower international price.
I remember a few years back the government sponsored a milk buyout program trying to reduce the amount of milk being produced to give a higher price to the dairymen. Under the buyout program producers were paid higher than normal prices to send their milk cows to slaughter. They had hoped this decrease in cows would decrease milk production. Their idea was a complete failure. Producers saw the buyout as an opportunity to get rid of their low producing cows at a better than normal price and in turn used that money to buy better replacement heifers. The program actually ended up hurting dairy producers that didn't participate and also beef producers because the beef market was flooded with dairy cows causing the price of beef to go down.
All these different government programs make one wonder what it would be like if the government didn't step in and regulate things. They have probably saved many small family dairy operations such as my family's or at least prolonged their existence. At any rate they are costing the consumers lots of money every year.