August, 2001

From the Editor

Spilled Milk

Politics in America is a peculiar thing. At virtually every national election you can find a candidate proudly announcing that he has voted to do something to increase the price of milk. Now with almost 300 million milk drinkers, including poor children, and only a tiny minority of milk producers, one would think this bad politics…yet it seems to work every time.

The reason is a quirk of contemporary politics in affluent democracies: When politicians propose to increase the cost of milk, the very fact that producers are few in number means that the politicians are offering a substantial bounty to those who might benefit, in this case dairy farmers. On the other hand, because the consumers of milk are so numerous, the cost being imposed on any individual is minute. The politics of this play out predictably; with concentrated benefits we get motivated advocates for a particular policy. Dairy farmers will vote, raise money and remember who stood by them. Highly diffused costs means that the great mass of the population will neither know nor care that their milk costs have been raised slightly.

So, raising milk costs for Americans turns out to be all political gain and no loss. Multiply the milk story by a zillion other products and you see how the country can easily get into trouble.

Every once in awhile though, one of these efforts goes a little too far and stands a chance of being killed. Such is the case of the Northeast Dairy Compact. At the last minute before its August break, the Senate – being desperate to do one of the few things Senators always seem to be desperate to do, go on recess – dropped its battle for a $7.5 billion dollar farm aid bill and adopted the $5.5 billion dollar farm aid bill that the House had already passed.

The Ag bill made no mention of the Northeast Dairy Compact. That is significant as the Compact is scheduled to expire at the end of September.

The Compact raises the price of milk by making it more difficult for dairy farmers outside the region to supply the New England market. Roughly speaking, it keeps the price of fluid milk about 20 cents a gallon above where it would be in the absence of the Compact. The beneficiaries are a few thousand dairy farmers in the covered states.

Now if it were just a question of a few dairy famers looking to have a monopoly to overcharge consumers, the dairy farmers would win in a minute. In fact, since the Great Depression, milk has been priced under a national program that already inflates milk costs. The outdated plan sets prices based on the distance the buyer is from Eau Claire, Wisconsin, which was the milk capital of the country in 1937. What little logic existed for this plan evaporated with the invention of refrigerated trucks.

This irrational milk price support program has existed for over half a century. But for all our crazy quilt of governmental programs in agriculture, the Northeast Dairy Compact is the only compact dealing with agriculture. The reason is simple: We may want to encourage wheat, corn or soybean farmers or even milk production, but we do it in a non-discriminatory way between the states. We don’t offer a wheat farmer in Nebraska a different deal than one in Kansas.

So it happens to be that the Northeast Dairy Compact is bumping up against dairy farmers in other states. The Northeast Dairy Compact, by definition, keeps out-of-state producers from selling in New England. Roughly speaking, it is a $100-million-a-year hit to other dairy states. So people like Senator Herb Kohl, D-Wis., are leading the charge against the Compact. In the end it may all come down to politics.

Senator Jim Jeffords, then a Republican, now the infamous Senator whose switch to independent status led to the loss of Republican control in the Senate, is the father of the Northeast Dairy Compact. Back when Jeffords was a Republican, he went to Trent Lott, then the Republican majority leader of the Senate and said he needed to prove that he could deliver for his state with the Republican leadership. Trent Lott slipped the Compact through and the rest is history.

Now, the Democrats are conflicted. They want to reward Jeffords for switching sides, but many Democrat Senators represent states like Wisconsin, so the Compact goes against their interests.

Though the Compact only affects fluid milk prices directly, the creation of an artificial price floor has predictable effects; New England dairy farmers have started producing more milk to get at this higher price. In the meantime, the higher price is affecting consumption, which is dipping since the price rise. This means more milk gets diverted to cheese and other uses.

So some cheese maker in Wisconsin or California will find itself fighting against pricing pressure caused by a desire to help dairy farmers in Vermont.

It is called the Law of Unintended Consequences, and it is why, as an industry, we have to look beyond Federal legislation and regulatory decisions that directly affect our interests. A broader view shows us that in the modern-day regulatory state, the price of prosperity is eternal legislative vigilance.    DB