Kirk Kardashian is a senior writer at the Tuck School of Business at Dartmouth, and the author of the new book Milk Money: Cash, Cows and the Death of the American Dairy Farm.
Under normal circumstances, America's dairy farmers have an incredible number of variables to worry about. Put yourself in their boots for a moment. Just a few of the things on your mind on any given day include the health of your herd, the reliability of your workers, the milk futures market, the weather on your farm, the global economy, and that arthritic knee you haven't had a chance to get fixed.
After this summer, you can add one more thing to that list: melting Arctic snow and ice. More snow and sea ice melted in the Arctic this summer than ever before in recorded history, and climate scientists say there's a distinct possibility that this was a major cause of the extreme drought that gripped the Midwest. The drought, in turn, ruined the corn crop and sent grain prices through the roof. As a dairy farmer whose cows eat grain, feed costs represent 80 percent of your operating costs, and 54 percent of the total cost of your milk production.
Most businesses can pass some of their increased costs on to consumers, but not dairy farmers. The price they receive for their milk is set by the U.S. Department of Agriculture with a formula that only looks at supply and demand in a given region—cost of production is not part of the equation. What this means today, when corn reserves have hit a 15-year low and grain prices are almost double what they were before the drought, is that dairy farmers are losing $8.65 for every hundred pounds of milk they produce. Clearly, the milk pricing system is broken.
The drought this summer is just the most recent case study of a dysfunctional pricing scheme that dates back to the Great Depression. The last time milk prices paid to farmers were so low, relative to input costs, was during the dairy crisis of 2009. In the years leading up to 2009, farmers responded to increased global demand by adding cows to their herd and expanding their facilities. The first sign of trouble came in 2006, when the ethanol industry started eating up a large part of the corn, increasing grain prices. Then came a melamine scare in China that suppressed milk demand from that country. The final blow was the global recession that struck in the fall of 2008. Demand eroded further, costs were still high, and the milk checks in farmers' mailboxes were, in some cases, barely enough to cover their overheard, never mind the idea of paying themselves a salary.
Given this history, dairy farmers were hoping the 2012 farm bill would include some provisions that gave them a fairer price for milk. The best chance for reform this time around is the Dairy Security Act, which is part of the farm bill that the Senate passed in June. The act allows farmers to sign up for margin insurance, at subsidized rates, that would pay the difference between the milk price and the cost of production. In return for this inexpensive insurance, farmers agree to make small cuts in production when there's an oversupply of milk and prices are too low.
Unfortunately, the House of Representatives failed to bring the farm bill to a vote before it expired on September 30. Now the country is in an odd no-man's land, with some parts of the 2008 Farm Bill still in effect, while others have disappeared, and still others will expire at the end of the year.
Dairy farmers are feeling the impact of this lapse of leadership already. The Milk Income Loss Contract, which pays farmers when the milk price dips below a certain threshold, ended on September 30. The Dairy Price Support Program, a government effort to buy up excess supply, will expire on January 1.
Meanwhile, if Congress doesn't authorize a new farm bill before the end of 2012, the commodity programs in the law will revert to the "permanent law" contained in the 1938 and 1949 farm bills. This would return us to the old system of "parity pricing" for the Price Support System, nearly quadrupling the price the government must pay for cheese. While that would be good for farmers, it's an overcompensation that would be disastrously expensive for the government and consumers.
So put yourself back in the shoes of a dairy farmer. You know Congress isn't going to pass a new farm bill until after the election, quite possibly not until sometime in 2013. Your grain costs are high, your milk price isn't cutting it. The cost of living is rising. You just hope you can hold on a little bit longer, and that people care enough to tell their Congressman to fix this problem before it spirals out of control.