Distortions In Dairy

What follows are excerpts written by Calvin for an upcoming debate tournament.  It explains how to rectify dysfunction in the dairy industry.  I'm posting it because the solution he offers applies to all dysfunctional markets:

Got milk? Well the US certainly does. To be more specific, the US has a dairy glut right now. According to Vox news source “The United States is currently in the midst of an epic cheese glut — with 1.2 billion pounds of cheese sitting in cold storage.” It goes on to say that “America’s dairy farms are expected to produce a record 212 billion pounds of milk this year — and there aren’t nearly enough customers to buy it all.” Why so much dairy? Well according to the article the US used to have a big overseas customers, mainly being China and Europe. But as of late China's economy has taken a dive, the EU has started producing more dairy, and Russia has slapped trade sanctions on foreign cheese. Yet even though the dairy market has lost some substantial customers, why according to the USDA's statistics does the US keep producing more milk that it ever has been before? Why hasn't the market yet solved for this overproduction problem? The answer can be fond in the fact that dairy producers are so heavily subsidized. The American Action Forum reported in an article regarding the 2014 farm bill that “The dairy market is so tightly controlled that it is completely unresponsive to consumer demand.” So I invite you judge, to please join me and my partner as we affirm that the United States government should substantially reform its agricultural and/or food safety policy by reforming it's broken dairy support program.

FACT 1. The Dairy Producer Margin Protection Program (DPMPP) is a subsidies program (editor's note: "subsidy" is a euphemism for redistributed wealth). AMERICAN ACTION FORUM, Feb. 2014: The DPMPP pays dairy farmers when the national margin on milk sales falls to below a set threshold. Margin insurance is highly subsidized—the premiums are fixed—and ripe for abuse from farmers seeking the maximum payout.

FACT 2. The Dairy Product Donation Program does not rectify the problems created by FACT 1. AMERICAN ACTION FORUM, Feb. 2014: The 2014 farm bill also directs the Secretary of Agriculture to establish a Dairy Product Donation Program.  The Secretary is authorized to purchase excess dairy products at market prices for distribution to low income groups. The supply management program was intended to be a counterbalance to the new margin insurance program, which could encourage overproduction and drive down prices.

So exactly what problems does a dairy policy create?

1. Burden of cost from overproduction is placed on taxpayers, not farmers. AMERICAN ACTION FORUM, Feb. 2014:  Current federal dairy programs are the antithesis of free market. Despite the massive overhaul this farm bill proposes, pricing will continue to be set by the federal government rather than the market. The new margin insurance program proposes to shift more risk to farmers, but the heavy subsidies and fixed premiums keep the burden on taxpayers. The dairy product donation program is flawed as well. While donations to low income groups are laudable, buying up excess supply in order to further manipulate the dairy market is absurd. The dairy market is so tightly controlled that it is completely unresponsive to consumer demand. Daren Bakst Research Fellow in Agricultural Policy Thomas A. Roe Institute for Economic PolicyStudies, Sep 2016: Ultimately, both programs influence the prices consumers pay for both milk and milk-based products, impact the costs of other federal safety net programs, and make taxpayers subsidize dairy producers instead of requiring them to improve the efficiency of their operations or otherwise manage their operating risks.

2. Dairy policy encourages massive waste. FOX NEWS, Oct. 2016: America’s dairy farmers are crying over spilled milk — the 43 million gallons of it they have dumped in fields and elsewhere over the first eight months of the year as the US deals with a massive milk glut. It’s the most discarded milk in at least 16 years.

3. Dairy policy causes the milk market to be unresponsive to consumers. John Stossel, host of Stossel, on FOX Business Network, Sep. 2013: The price of milk is decided by regulators, using complicated formulas. They set one price for wholesale milk used to produce "fluid" products and another for milk used in making cheese. It's a ridiculous game of catch-up, in which the regulated prices never change as fast and efficiently as they would in a market.

How do we solve this problem? 

1. Congress votes to cancel the Dairy Producer Margin Protection Program and Dairy production donation program and any other subsidized dairy insurance programs.
2. Funding is a net reduction in federal spending because programs are eliminated.

How will these actions manifest themselves?

1. The free market (demands of consumers) will create efficiency by reallocating the work of producers to where they are needed most. VOX, Oct. 2016: If there’s a glut of milk out there, that means there are too many dairy farmers. The most economically efficient option is to let the excess dairy farmers go out of business and find other consumer needs to meet (e.g., poultry, beef, etc.), rather than pay them to keep milking their cows, exacerbating the glut. (see also reason.com / Baylen J. Linnekin). CNN, reporting on the USDA's use of taxpayer funds to buy up some of what it referred to as our "massive cheese stockpile," attributed the cause of our oversupply of cheese to "increased milk inventories, higher European exports, low prices, sluggish demand and shifting consumption habits." In any normal industry, certainly any one in which the free market is given even lip service, these factors would signal producers about the need to change:

2. Responses to market demand lead to better practices. AGRILAND, Jan. 2016: “After the dropping of New Zealand’s agricultural subsidies “Herds were consolidated, and breeds that reflected market demand—producing leaner milk, for instance—rose to prominence. And benefits to the land were dramatic. Pesticide use declined by 50%. Soil erosion, land clearing, and overstocking also declined. The entire agricultural sector was forced to shift toward better practices that increased efficiency and yield.” In the words of law school professor and food lawyer Baylen J Linnekin, “who can get us out of this mess? Expecting those same farm lobbies, Congress, and USDA bureaucrats to break the wheel is a fool's errand.” We can't rely on government intervention to change this curdled catastrophe.

It is time to debunk this myth that subsidies are required. "The distortions caused by federal farm policies have long been recognized. In 1932 a member of Congress noted that the Agriculture Department spent "hundreds of millions a year to stimulate the production of farm products by every method, from irrigating waste lands to loaning and even giving money to the farmers, and simultaneously advising them that there is no adequate market for their crops, and that they should restrict production." That sort of folly is similar eight decades later, except that subsidies have increased from "hundreds of millions" to tens of billions of dollars. The Federated Farmers of New Zealand argues that New Zealand's experience "thoroughly debunked the myth that the farming sector cannot prosper without government subsidies." That myth needs to be debunked in the United States as well.”