The specter of milk jumping to $7 a gallon as U.S. farm programs expire probably will be held off because regulators will need time to write new pricing rules, even if Congress fails to avert a so-called dairy cliff.
House and Senate agriculture committee chiefs yesterday backed a one-year extension of the 2008 farm bill, trying to stave off higher prices that emerge when expired rules force the U.S. Department of Agriculture to revert to policies set in 1949. Neither chamber has voted on the plan, or on narrower alternatives, with both houses set to resume work today. Still, should Congress fail to deal with milk costs that may double without action, price increases may be slowed while the USDA seeks to turn back time, analyst Dave Kurzawski said.
"Everyone won't start selling their butter and cheese to the U.S. government on Jan. 2," Kurzawski, a consultant at INTL FCStone Inc. in Chicago, said in an interview. "We are going to need to find a resolution to this, though."
The most recent farm law, passed in 2008, expired Sept. 30. Without a replacement, agricultural programs return to earlier rules that are the basis of all subsequent legislation. The effects of that transition have been delayed because of the growing seasons of different crops. Dairy, a year-round business, is the first major commodity affected. In November, the USDA estimated the price of a gallon of fresh whole milk at just under $3.54.
The draft bill agreed upon by the farm-panel leaders would extend the expired farm law through Sept. 30, provide disaster aid for producers affected by this year's drought, and make changes to milk policy. The new dairy program would manage supply partly by setting production limits for farmers who enroll in a market-stabilization program.
House Speaker John Boehner, an Ohio Republican, has opposed that concept, calling it worse than current policies that he termed "Soviet-style." The proposal wasn't on a list of measures released last night to be considered by the House during today's session.
President Harry S. Truman's farm policy from 1949 required the government to buy supplies of a product until its price approached "parity" with the cost immediately before World War I. Adjusted for a century of inflation, the USDA milk-support price today would be $39 per hundred pounds, more than double the dairy futures price in Chicago today.
This price-support policy, which once brought rivers of dumped milk and free cheese for the poor, was gradually abandoned as U.S. agriculture law became more market oriented.
Massive government purchases "would dramatically increase government spending, would force consumers to pay significantly more for dairy products, and would impose long-term damage to the dairy industry," the Washington-based International Dairy Foods Association wrote in a letter to Agriculture Secretary Tom Vilsack last week.
The group, which represents Kroger Co., the largest U.S. grocery chain, and Nestle SA, the world's biggest food company, urged the USDA to "proceed in a thoughtful and deliberate manner" in any move to implement the 1949 law. It said today it opposes the dairy plan included in the proposed farm-bill extension for potentially limiting the supply of milk by encouraging farmers to cap production.
"It is ironic that the threat of higher dairy prices for consumers, caused by the possible implementation of the 1949 Act, is being used to force Congress to pass a new program that will result in higher prices," Jerry Slominski, the group's senior vice-president for legislative and economic affairs, said in a statement.
The National Milk Producers Federation, an organization of farmers and dairy cooperatives, has supported the supply- management concept.
Vilsack hasn't offered specifics as to how the USDA would intervene in milk markets, while warning consumers that inaction on a new farm bill will have far-reaching consequences.
"Consumers, when they go in the grocery store, are going to be a bit shocked when instead of seeing $3.60 a gallon for milk, they see $7 a gallon," he said yesterday on CNN's "State of the Union" broadcast. "That's going to ripple throughout all of the commodities if this thing goes on for an extended period of time."
Should Congress not reach a deal on either a separate extension of agriculture legislation or its inclusion in a plan to avert the so-called fiscal cliff of tax increases and spending cuts that are set to take effect tomorrow, a new farm law may be delayed until at least March.
The House Agriculture Committee plans to start drafting new legislation on Feb. 27. Its Senate counterpart will debate a new bill "soon," should an extension fail, Chairwoman Debbie Stabenow, a Michigan Democrat, said yesterday. The Senate passed a five-year plan in June, followed by the House farm panel in July. The full House never voted on a plan. The Congress that convenes Jan. 3 must restart work on a farm bill.
In the meantime, implementing 1949 rules would "take a considerable amount of time," House Agriculture Committee Chairman Frank Lucas said in an e-mail last week. The Oklahoma Republican said Vilsack should follow the federal rulemaking process, including a public comment period, before moving ahead.
Even if the USDA immediately embraced the 1948 law, the effects might not reach consumers for weeks, said Mike North, a senior risk-management adviser at First Capitol Ag in Platteville, Wisconsin. Swift action on rules is unlikely, he said.
Government purchases would follow specifications that not all processors could immediately meet, he said in a telephone interview. Then, products must be packaged and distributed to retailers. Because the commodity is only about half the total cost of a dairy product, doubling the price paid to farmers may make $4 milk "only about $6 milk once it reaches the consumer," he said.
Still, the possibility of higher prices may push up milk futures, and raising consumer costs, said FCStone's Kurzawski. "The uncertainty isn't good for the industry," he said.
Farm bills, which Congress usually passes every five years, set policy and fund USDA programs including food stamps and crop subsidies. They frequently lapse before a new law is passed. The bill that ended in September took effect on June 18, 2008, more than nine months after its predecessor expired.