Got Milk?

According to this article on Fox News, the price of milk could skyrocket and the supply to commercial markets would decline.  This is all in thanks to Congress getting involved in the dairy industry and passing a law many years ago that dictated how much dairy producers would be paid.  According to various people in the House and in Congress, it doesn't look very promising that this issue will be resolved in a timely manner.

If it isn't, the farm policy would revert back to an antiquated 1949 bill that mandated higher prices be paid by the government to dairy producers.  If this happens, it could set off a chain of events that results in higher prices for the government and ordinary shoppers.  By raising the price the government pays for dairy products, producers would be more likely to sell to the government instead of in commercial markets which would decrease the supply for the average consumer.

I am certainly not claiming to fully understand the whole process (and the economics behind it) of why the government gets involved in the pricing and production levels of various commodities, or lack there of (USDA), but I think it would be a better system if the government allowed the market to determine those things.  If the price of milk or corn began to increase greatly under the free market, then the demand would decrease and it would force the farmers to find new innovative ways to do things in a more cost effective manner in order to bring prices down and demand up.  Otherwise, consumers might go out and start buying substitutes for those products.


Dave Tufte said...

BOHICA: 50/50

This is one of those nonsense issues that professors get tired of talking about.

BOHICA has got the facts down. Yet, students raise this issue in disbelief every semester or two.

Politically, I think what's going on here is that the 1949 law is the big stick. The dairy lobby doesn't let that big stick get removed. As a result, eventually Congress comes around and passes an extension (or improvement) in the existing dairy price supports.

It's just political extortion: dairy farmers benefit monetarily, members of Congress benefit politically, and each of the rest of us pays a little extra.

I have one economics criticism. In the last paragraph, demand wouldn't go down (meaning the whole curve shifts because people's preference change, instead quantity demanded would decline (we'd move up and to the left along the same demand).

Dave Tufte said...

Oops. This is a post: 100/100.

Matt Walter said...

I don't know all of the in's and out's of the farm bill, but my limited understanding leads me to believe the discussion of milk potentially rising to $7 or more per gallon if the bill doesn't pass is unlikely. As the price begins to rise, it seems consumers would simply change to more economical alternative products (such as soy), enticing the dairy producers to lower the price towards equilibrium.

The farm bill mainly protects the large producers. Most small shops don't have the expertise, know how, or ability to take advantage of whatever incentives the farm bill provides. By changing the way it is structured could potentially really help local producers and provide the consumer with more dairy choices.

Dave Tufte said...

Matt Walter 50/50

I agree. The rise is unlikely: this is just a threat.

If it did happen though, it would be more of an instantaneous sort of thing; there's actually parts of the law that would make it illegal to discount off that high price.

You're right about consumers perhaps switching to other products. Of course, any agricultural board knows better than to ever give people a reason to do this.

I tend to agree about the farm bill mostly benefiting large producers. But, I have heard anecdotal evidence from students over the years that their family's collect the dairy incentives ... and none of them seem like they're "large producers".