America's dairy farmers crying over milk market bust

As the recession causes worldwide milk demand to slip, dairy processors seem to be manipulating the market to keep retail prices high in an attempt to prop up profits. As they are going out of business, farmers are protesting by organizing milk dumping protests. In other countries, farmers have even resorted to piling manure in front of government offices.

When it comes to pricing, milk is a fairly unique product. To begin with, it is difficult to store and is quick to spoil, which means that milk farmers can't stockpile their produce and wait for the best price. They either have to sell their daily milk yield or pour it out.

Another key issue with milk is its nutritional importance. While there are ongoing controversies about lactose intolerance, bovine growth hormones, and other health issues, the general consensus is that milk is a key foodstuff for growing children and healthy diets. While this would seem to be a boon for the dairy industry, the dietary importance of milk also inspires price ceilings. Because municipalities perceive milk as a necessity, they often set limits on how much it can cost. This, in turn, can leave producers squeezed between rising costs and falling profits.

Many milk processors have claimed, in fact, that their current milk profits are merely offsetting the substantial losses that they took when wholesale milk costs were up. At the time, many dairy farms increased the size of their herds in order to take advantage of rising prices. Now that prices are down, they are faced with having to sell or slaughter their cows in order to make ends meet.

One potential solution is a federal bill that would mandate a strict regulation of the dairy industry. It would, presumably, cap retail prices and distributor profits, ensuring that farmers would receive a minimum price for their milk and consumers would only pay so much for it.

The trouble, however, is that the government cannot guarantee the health of the dairy market. The original cause of the dairy crisis was falling demand for milk, related in large part to the recession. While the government can (and has) given away dried milk to other countries in an attempt to reduce domestic stockpiles, this is a stopgap solution. In the long run, dairy market regulation is almost guaranteed to result in a constant outpouring of subsidies to farmers and/or milk producers, as the government would attempt to account for fluctuating consumer demand.

States have tried to impose some level of control on the flow of milk revenue. For example, Massachusetts once tried to subsidize its dairy farmers with a tax on milk processing. However, given that the tax was sometimes levied on milk that was produced surrounding states, the US Supreme Court ruled that it was an unconstitutional tariff on raw materials.

In a broad context, the milk crisis is similar to most of the other recent financial crises. When wholesale milk prices were high, milk processors suffered as farmers reaped larger profits and expanded their operations to cash in on the market. Later, when profits dropped, processors grabbed the money as farmers scrambled to fund their now-outsized operations. Ultimately, this has led to a situation wherein farmers are paying skyrocketing prices to produce milk that is priced where it was in the 1970s.

At root, the problem seems to lie with milk processors, who are using the current price drop to do a little profiteering. In the process, they are squeezing both producers and consumers, as one group barely makes enough to stay in business and the second group is buying less milk because it is no longer affordable.

In the long run, three things would have to happen to make the dairy industry completely sustainable: consumers would have to get used to paying more for milk, processors would have to get by with making a little less profit, and farmers would have to restrain their exuberance when the price of milk goes up. However, unless all involved parties are willing to submit to complete government control, it seems likely that the dairy industry will just have to toddle along with booms and busts, just like everyone else.

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