Congress's Dairy Dilemma: Are Compacts the Best Way to Save Family Farms? (Agriculture)

By Bailey, Kenneth W. | Regulation, Winter 2001 | Go to article overview

Congress's Dairy Dilemma: Are Compacts the Best Way to Save Family Farms? (Agriculture)


Bailey, Kenneth W., Regulation


LAST FALL, CONGRESSIONAL AUTHORITY expired for the Northeast Interstate Dairy Compact (better known as the New England compact), a landmark agreement that empowered a special regional commission to regulate wholesale milk prices for six New England states. Under the compact, farmers in the participating states --- Maine, Vermont, Connecticut, Massachusetts, New Hampshire, and Rhode Island --- were guaranteed a minimum return on at least a portion of the milk they sold to processors located in those states. Together, the states' farms produced 2.8 percent of the United States' milk supply in 2000.

When it was first authorized in 1996, proponents hailed the compact as an effective way to stabilize milk prices for small family farmers without the infusion of federal tax dollars. What is more, proponents said, the compact helped to maintain tourism, rural economic development, and green space in New England. But compact opponents -- mainly processors and consumer groups in the affected areas and farmers in the Midwest -- claimed that the compact amounted to a price-fixing cartel that artificially protected farmers in compact states while lowering farm prices in non-compact states. Consumer groups also argued that it created a regressive milk tax on the poor who resided in compact states.

Lawmakers on Capitol Hill now are considering whether to reauthorize the compact and expand it to include such large dairy states as New York, Pennsylvania, and Ohio. There also is consideration of authorizing similar compacts for the Southeast (encompassing 17 states from Virginia to Florida to Texas to Nebraska), West (Washington, Oregon, and California), and Mountain (Colorado, Nevada, and Utah) regions of the country. If all four of those compacts are authorized, they will regulate milk prices for farms that produced 58.7 percent of the total U.S. milk supply in 2000.

Although a number of prominent lawmakers -- including Senators James Jeffords (I-Vt.), Patrick Leahy (D-Vt.), and Arlen Specter (R-Pa.) -- have endorsed the reauthorization of the New England compact, others on Capitol Hill are expressing concern over the effects of such legislation on consumers and farmers nationwide. Lawmakers now seem inclined to step back and evaluate the economics of compacts, as well as alternative policies for shoring up small farms, as part of the debate over a new farm bill.

HOW ARE MILK PRICES ESTABLISHED?

Dairy compacts work within the current structure of milk pricing, rather than replacing it with a new system. Most milk in the United States is marketed under federal or state regulations known as "milk marketing orders." Currently, there are 11 federal orders that regulate how milk is priced in distinct geographical regions. The Northeast federal order, for example, covers milk prices for an area that stretches from the southern border of Maine to northern Virginia and includes eastern New York and eastern Pennsylvania.

Milk classes Federal orders set different prices for milk depending on whether it is marketed in a fluidic form or in a solid form such as butter or cheese. Each month, a market administrator announces four separate class prices for milk: Class I is bottled milk and fetches the highest price, Class II is used mainly for ice cream, yogurt, and cottage cheese, Class III is used to manufacture hard cheeses, and Class IV is used to make butter and nonfat dry milk. The federal order class prices are determined monthly by economic formulas that are based on the wholesale prices for cheese, butter, nonfat dry milk, and whey. Thus, they vary each month with changing market conditions.

The Class II, III, and IV prices are announced nationally each month by the federal Department of Agriculture (USDA) and apply to all federal orders. The Class I price, however, is different. It is equal to a Class I mover, which moves up and down each month with market conditions, plus a unique Class I differential that varies by county and market order.

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