NO one seems to be batting an eye at the fiscal cliff or what has been termed the "dairy cliff" in which farm policy reverts to 1949 legislation and dairy provisions beginning Jan. 1.
The reality of milk prices doubling after the first of the year is not likely, despite attempts to scare legislators into action on the soon-to-expire farm bill.
Even Senate Agriculture Committee chair Debbie Stabenow (D., Mich.) said the fiscal cliff tax increases would hit middle-class families' pocketbooks, but so would paying $6 or $7 for a gallon of milk.
It is not uncommon for farm bills to expire, but this year, it doesn't appear like Congress will pass an extension before the 1949 law goes into effect.
The Agricultural Act of 1949 and its Dairy Price Support Program requires the secretary of agriculture to purchase as much cheddar cheese, butter and nonfat dry milk as producers want to sell to the Commodity Credit Corp. at announced purchase prices.
University of Wisconsin-Madison dairy policy analyst Mark Stephenson explained that the secretary does have the authority to move milk prices, but the prices must be set at values consistent with a milk price goal within 75-90% of "parity." This parity, however, was based on price relationships between agricultural inputs bought and products sold during 1910-14.
Today, 75% of parity would mean a milk price of more than $38/cwt., which is about double current market levels.
Stephenson said it is important to remember that the original basket of inputs used in the parity calculation contained items like the cost of a mule. He noted that advances in farming technology and management make direct application of the original rules "unwieldy at best and foolish at worst."
Stephenson said doubling the price of a gallon of milk is not an accurate estimate. Since processing, distribution and retailing costs make up about half of the total cost of today's gallon of milk and these costs won't change under the farm law, milk prices could increase about $1.75/gal. to account for the "dairy cliff prices," he explained.
In a conference call with reporters Dec. 20, Agriculture Secretary Tom Vilsack said the U.S. Department of Agriculture was exploring all of its options in case 1949 law goes into effect.
"We will do whatever we are legally obligated to do in a timely way," Vilsack said, without being more specific.
Stephenson said Vilsack is obligated to implement the permanent legislation, but it could take several weeks before USDA is ready to begin purchasing dairy products.
"In my opinion, there would be time to pass an extension of the previous farm bill during January," he said. "While we would be technically under the permanent legislation at that point, it is unlikely that any sales to the government would take place, and there would be no disruptions to commercial channels or consumers."
He noted that dairy processors also have to make a judgment call on whether to sell to the government. While high prices could be attractive in the short term, processors could also be required to make products that meet government specifications, purchase special packaging and probably disrupt sales to their regular customers, many of whom they may have spent years cultivating relationships with for sales.
Vilsack acknowledged that the situation could force food processors to find substitutes and could put a strain on the nation's nutrition programs.
The International Dairy Foods Assn. (IDFA) sent a letter to Vilsack outlining legal options available to the government to avoid the dairy cliff.
IDFA president and chief executive officer Connie Tipton noted, "The secretary of agriculture has ample authority to postpone and even avoid any negative impact of a delay in passing a new farm bill, and we expect that USDA will take careful and deliberate actions to avoid short-term market disruptions."
If a farm bill is not addressed early in the new session of Congress, it may not beat out an updated Congressional Budget Office scoring, which likely will offer less money for agriculture.
Stephenson suggested keeping an eye on the second half of January, and "if nothing happens by then, we can start contemplating what a $38 price goal (for milk) would mean."