WUD: ‘Dairy cliff’ not going to happen

By Michael Marsh, CPA, Chief Executive Officer, Western United Dairymen

As if people didn’t have enough to worry about with holiday bills and New Year’s resolutions and the U.S. fiscal cliff that Congress has to deal with, American consumers are being told to beware of the “dairy cliff” that will occur on December 31. 

What’s being referred to here is the potential for the permanent law, signed by Harry Truman in 1949, to kick in due to Congress’ failure to pass a Farm Bill this year. Under that statute and with congressional inaction, the USDA’s Commodity Credit Corporation (CCC) would be charged with being a ready and willing buyer for dairy products offered to it for sale at a price of about $38/cwt. 

What?! You read correctly. $38/cwt.! 

The media is full of this story. It’s being posted everywhere that on Jan. 1, 2013, consumers will be paying $7/gallon for conventional milk in the grocery store as a result of this law. The story being played is that overnight, consumers who might be watching the ball drop in Times Square would also bear witness to the country plunging over the “dairy cliff.” 

Much like the end of days predicted by the Mayan calendar, the dairy cliff is not going to happen. 

We hear this story every five years as Congress struggles with finding consensus to pass a Farm Bill. It didn’t happen in 1996, in 2002 nor in 2008. It’s not going to happen now either. 

The target for the farm price of milk is $38. USDA would need to determine the price it would offer for cheese, butter and powder in order to support the farm price of milk at $38/cwt. That calculation of prices, and their relationships to each other, will take some time. 

USDA will also need to develop and issue packaging requirements for long-term storage. It’s likely no processor is currently packaging for what USDA specs would be in a world where the support price is $38. It will then take some time for processors to re-tool their lines to package to those specifications. 

Implementation of the 1949 Act will also explode the cost of federal nutrition assistance programs, school lunch, military purchases, etc. In WIC, where the benefit is fixed, participants will have to purchase fewer dairy products or less of other foods if they want to continue current dairy purchasing levels. 

So, USDA doesn’t even have regulations drafted that would enable the CCC to purchase product at $38. It would likely take months to develop and implement those regulations. And, what would USDA do if they did? How much product would be offered to the government at $38 versus being sold in the market for $20. All of it? Probably. What cooperative manager would be foolish enough to report to his board, “Well, we could have gotten you $38 if we had sold to the government, but our regular buyer offered us $20 and I thought that was good enough.” 

What importer wouldn’t salivate at the thought of only having to beat the $38 price less transportation to cherry pick good U.S. customers when the world price is at or below $20? At the same time, how many of our international customers would agree to pay the $38 when they could buy the same product in the global market for $20? Why would they? 

Congress is far more likely to pass an extension of current farm policy than to plunge the country over a “dairy cliff.” Look for that as precedent to a Farm Bill being passed by the next Congress.