Dairy Compacts A Sour Deal For All US Farmers
The Agreements Threaten To Undermine Export Growth For The Rest Of American Culture
March 18, 1999
by Dennis T. Avery
CHURCHVILLE, Va.—Enthusiasm for "dairy compacts" is sweeping America. Nearly 30 states now seem likely to pass legislation for such compacts, which are designed to bar dairy products from outside a state or region.
The U.S. government has already authorized such a dairy compact for New England, and dairy farmers recently staged a Washington fly-in to rally congressional support for expanding the concept.
Supporters of these compacts are trying to recreate a dairy industry of price supports and supply management. Such a vision is incompatible with reducing tariffs on other farm commodities or ending Europe's price-depressing export subsidies.
Europe dumps huge amounts of dairy products, along with wheat, feedstuffs and meat, onto the world market at prices far below cost, depressing world markets.
U.S. dairy compacts threaten to undermine export growth for the rest of American agriculture and fly in the face of liberalizing farm trade.
Free farm trade can't be arranged one commodity at a time. What U.S. dairy farmers are considering could limit the potential for lowering trade barriers on beef, pork, corn, wheat, soybeans and poultry.
ALTHOUGH DAIRY farmers have never seen themselves as exporters, perhaps they should start. After all, this is an era of high-value cheese markets, chilled concentrated and ultra-heat-treated milk, and rising demand in industrializing countries like India.
Moreover, South Korea's bonds have regained investment status, after a year of being classified as lower-rated "junk bonds." Over the next three years the South Koreans will lead a parade of Asian countries back into the realm of economic growth.
At the moment, however, dairy farmers are willing to write off export markets. Producers of other commodities can't do that—exports are their only path to prosperity.
IOWA STATE UNIVERSITY says the current "bleak situation" for U.S. crop, livestock and poultry farmers is likely to continue for at least three more years.
Iowa net farm income was down 31 percent in 1998 and will fall further in 1999. Big supplies and low prices will continue as far as the forecasters can see. Corn prices in the state are below $2 per bushel, and Iowa farmers will cut plantings.
Pork prices are expected to make only a slow, modest recovery from their recent desperate lows. Cattle prices are falling.
How can this be, in a world with rising farm demand and a scarcity of good farmland? The problem is a thicket of trade barriers.
SINCE 1992, the world's feed grain consumption has risen 30 million tons, but feed grain trade has fallen by 4 million tons. Wheat shows the same pattern, with consumption up but exports down.
Rising Third World affluence has made the world's annual appetite for pork jump 17 million tons since 1992. But pork trade has increased only 1 million tons during that same period.
With U.S. population growth about 1 percent per year, there's little room for domestic market growth.
Meanwhile, 3 billion people in "poor" countries are seeing their per capita purchasing power rise 3.8 percent per year. They're buying more milk, butter, cheese and ice cream, even as they eat more meat, french fries and frozen peas.
THE MOST puzzling thing about dairy compacts is why dairy farmers are so keen on them.
Millions of dairy farmers were driven out of business between 1933 and 1996, despite federal milk marketing orders and dairy price supports that provided far bigger subsidies than the compacts can hope to offer.
The dairy compacts double-cross U.S. dairy farmers who happen to live in low-population states, where much of the milk goes into butter, powder and cheese. The dairy compacts would lock up 60 percent of the higher-priced fluid milk market.
Dairy farmers in Wisconsin, Minnesota, California, Washington and Idaho would get a double whammy. Less of their milk would draw the higher prices for fluid milk, and the discount against their manufacturing milk (milk that goes to make butter, milk powder and cheese) would rise.
DO DAIRY farmers think they can charge higher prices to consumers without other local dairy farmers raising production, thus driving net dairy earnings back down? When the inevitable surpluses appear, what would a compact do with them? Spend dairy farmers' own money to sell the surplus at a loss on the world market?
Legislators love having dairy farmers come to them asking for a compact that doesn't cost the government anything. But the wheat growers, corn growers, pork producers and soybean farmers should have plenty to say about the dairy farmers' cutting off their future in the export business.
Even the dairy farmers should have second thoughts.
Dennis T. Avery is based in Churchville, VA, and is director of the Hudson Institute's Center for Global Food Issues.