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‘Dairy cliff’? Milk prices poised to spike unless Congress acts

Prices could surge in January, but probably not double, if inaction by Congress results in the revival of a 1949 price system. And it probably won’t come to that, as lawmakers work to avert dairy-case price shock.

Unless Congress acts to update its legislation on farming, milk prices could rise sharply in 2013.

That’s a worrisome prospect for budget-strapped families who already don’t like paying $3.53 – the average price per gallon of whole milk nationwide.

But prices wouldn’t spike overnight. Prices probably wouldn’t double, despite recent news reports citing the risk of $8 or $9 milk. And many political analysts expect that Congress will act to avoid having farm policy revert to a 1949 law’s arcane formula on milk pricing.

Top leaders on the House and Senate Agriculture Committees have agreed to a one-year extension of the 2008 farm bill that expired in October, according to news reports as calendar year 2012 ticked to a close. But a vote by the full Congress on a farm-bill extension hasn’t been scheduled.

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So for now, American consumers are still waiting to see they are pushed over a so-called “dairy cliff.” That clunky name is, of course, derived from the “cliff” metaphor that’s being used for Congress’s larger debate on tax and spending policies. In both cases, the similarity is that something will happen that most people don’t like, unless lawmakers act soon.

Senate Agriculture Committee Chairman Debbie Stabenow (D) of Michigan indicated the House could vote on the bill soon, though House leaders have not yet agreed to put the bill on the floor. In addition to the one-year extension that has the backing of the committees, the House GOP is also considering two other extension bills: a one-month extension and an even smaller bill that would merely extend dairy policy that expires Jan. 1.

Without legislative action by year-end, US farm policy would revert on Jan. 1 to the provisions of the last permanent farm bill, the Agricultural Act of 1949.

Under that law the government would be bound to offer so-called “parity pricing” for fluid milk, under a scheme originally designed to ensure that farmers would be adequately compensated relative to the changing cost of living.

But “parity” was based on price relationships among various goods dating back to the period of 1910 to 1914. Agriculture experts say the original basket of prices used in the calculations included the price of a mule as a useful benchmark.

The result of reimposing the 1949 formula today would roughly double the wholesale price that dairy farmers currently receive for their milk.

But that doesn’t mean retail prices would double.

“Such a headline is a little reckless,” Mark Stephenson, a dairy policy analyst at the University of Wisconsin in Madison, writes in an analysis on the university website. He notes that costs for processing, distribution, and retail marketing “are about half of the total cost of today’s gallon of milk,” and these costs would not change.

Still, if the “dairy cliff” isn’t addressed by Congress, the resulting price hike could be a hefty $1.75 per gallon, he writes.

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Mr. Stephenson expects that lawmakers will pass legislation soon to keep milk prices from surging. If by some chance the law did revert to 1949 provisions, it would obligate the US government to start offering farmers the “parity” price for milk. Dairy farmers would presumably start selling at the higher price, and the government would then sell the milk to firms that wanted to sell the milk in stores or use it for other food products.

But Stephenson says it could take weeks before the US Agriculture Department would be ready to start buying milk, and that dairy farmers might be wary of disrupting their sales to regular customers who they hope to maintain relations with for years to come.

The big point, he and others agree, is that reverting to the old law would make no sense. Tim Worstall, a fellow at the Adam Smith Institute in London, said on the Forbes website Monday that “the ratio of farm prices to non-farm prices has been falling since the neolithic [age],” so it’s wrong-headed to try to force the price of a farm product into parity with nonfarm prices.

“The very point of inventing farming [is] that food should become ever cheaper,” he says, adding that the declining cost of food production was the foundation of civilization.

Does this mean America is facing not just a “dairy cliff” but a “civilization cliff”? We can hope that, with a little cooperation from Congress, we won’t have to carry the cliff metaphors quite that far.