Washington's fiscal drama could send consumers over 'dairy cliff'

SACRAMENTO -- How does $7 sound for a gallon of milk?

It isn't out of the question.

Call it the "dairy cliff," the quiet, rural cousin of the fiscal drama that's gripping Washington. Unless Congress acts by New Year's Day, a federal farm policy from the Truman era would kick in, sending dairy prices into the stratosphere.

The impact wouldn't be felt immediately, and Congress could remedy things before prices get out of hand. But the price of milk could double to $7 or more a gallon in a few months.

That would be disastrous for consumers and could bring chaos to California's $7.7 billion-a-year dairy industry, the largest in the nation.

Dairy farmers are struggling and would welcome more money for their milk, but they aren't embracing a huge spike in prices. They believe it would bring in a flood of cheap imported milk, possibly crowding California producers out of the market, said Michael Marsh of Western United Dairymen, a Modesto trade organization.

Then there's the effect on sticker-shocked consumers, who might find ways to sidestep the supermarket dairy counter.

"There are people who would quit drinking milk," said Case Van Steyn, whose family operates a 1,000-cow dairy farm in the Galt area. "It's not reasonable. It's not fair to consumers."

The problem stems from machinations in Congress over the farm bill, the law establishing price supports for dairy and other commodities.

The farm bill is supposed to be renewed every five years. The last one expired Sept. 30. As a result, unless Congress intervenes, the dairy price support mechanism will revert as of Tuesday to a 1949 dairy law.

The 1949 law sets out of a formula for price supports that dates to World War I. Under that formula, the U.S. Department of Agriculture would pay $38 for every hundredweight, or 100 pounds, of surplus dairy products, said Leslie "Bees" Butler, an agricultural economist at the University of California at Davis. Commodity prices often are expressed in hundredweight increments.

That's far above the current federal support price of $10, and more than double the $18 farmers are currently getting on the open market, Butler said.

As more product is sold to the government, Butler said retail prices for milk, currently about $3.60 a gallon, could double.

"The dairy industry is really concerned that consumers would go elsewhere, start buying soy milk and other substitutes," he said.

Higher prices, however, wouldn't hit consumers right away. The government doesn't have to start buying surplus products until there's actually a surplus. Winter is the low point for milk production, and a surplus wouldn't occur until spring or early summer, Butler said.

"Government is not obliged, at least immediately, to start purchasing," he said. "It would take several months … for that to work its way through the system."

Also, dairy producers would be reluctant to "short their commercial customers" in order to sell to the government, said Bill Schiek, economist with the Dairy Institute of California.

Months in the making

The impasse in Washington has been brewing for months. The Senate passed a farm bill over the summer and the House Agriculture Committee passed a different version. But it hasn't come to a vote of the full House.

On Friday, congressional leaders began talking about a temporary fix — a one-year extension of the bill that would prevent milk prices from skyrocketing.

"We certainly want to make sure we have a responsible short-term extension if it is not possible to get the farm bill done," Senate Agriculture Committee Chairwoman Debbie Stabenow, a Michigan Democrat, told the online news service The Hill.

Dairy farmers are struggling. Their profits have been squeezed by runaway prices for feed. About 50 of the 1,600 California farms that belong to Western United Dairymen went out of business this year, Marsh said.

So why not embrace a doubling of milk prices? Marsh said the U.S. milk supply would explode as domestic and foreign farmers rushed to expand production.

"You'd see milk, dairy products, flood in from Canada, Mexico," he said.

Then, at some point, Congress would slash price supports, and the country would be awash in cheap milk.

"They'd crash the price to oblivion," Van Steyn said.

The Galt farmer, whose family has been in the dairy business since 1956, said producers need prices to go up from the current $18 per hundred pounds.

Something on the order of $22 or so would be nice, he said, "if we want dairy farmers to stop going bankrupt."