If supply management is so great, why don’t we have it already?

Managing national milk production to boost dairy farm profitability is not a new concept. The U.S government has made at least three notable attempts to manage the milk supply since the 1970’s, however these attempts were largely unsuccessful. This begs the question, if managing the milk supply is such a great idea, why aren’t we doing it? And why have previous programs failed to stabilize the dairy economy? To answer these questions, let’s take a closer look at previous attempts to address the persistent problem of oversupply.

The first government programs aimed at curbing milk production were implemented during the 1980’s. Prior to that, prices were held relatively stable through federal price support programs implemented during President Franklin D. Roosevelt’s New Deal era. These programs set a price floor for milk and authorized the U.S government to purchase dairy products--namely cheese, butter, and nonfat dry milk--when surpluses threatened to push prices below that floor. The price supports were effective at boosting farm income, but without a signal to tell dairy farmers to slow production in times of surplus, government purchases soared. To keep government expenditures from ballooning even further, the options were to reduce the price supports, or reduce milk production. Ultimately, we did some of both.

In 1981 the support price for milk was frozen and its tie to farmers’ cost of production was severed. And in 1983, the government took its first stab at encouraging farmers to scale back production with the Milk Diversion Program. Intended as a temporary measure to clear out existing dairy stocks, farmers were offered direct payments of $10/cwt to reduce their production by 5 to 30 percent. Some 38,000 farms participated and received a total of $955 million in payments. The program reduced production by 9.4 billion pounds on participating farms, but other farms increased production at the same time, resulting in a net reduction of roughly 7.4 billion pounds. After the program ended, milk production quickly rebounded and soon reached record levels. All told, the Milk Diversion Program didn’t solve, but rather delayed, the overproduction problem.

In 1985, we took a more aggressive approach. Rather than paying farmers to reduce production, the government paid them to terminate entire herds and shutter their facilities for at least five years. The Milk Termination Program, more commonly known as the Whole Herd Buyout, aimed to cut milk production by 8.7 percent. Farmers placed bids on the dollar amount they would accept to quit milking cows. Out of 30,000 bids, 14,000 were accepted for a total of $1.8 billion in payments, a portion of which was covered by assessments on non-participating farmers. Similar to the Milk Diversion Program, there was nothing to stop other dairy farmers from expanding. While production was flat in 1987, it never actually decreased and, once again, it quickly rebounded when the program ended.

At this point the year was 1988, and we still had 216,000 operating dairy farms in the U.S. Just 15 years later, in 2003, that number had dropped to 86,000. Today only 37,000 dairy farms remain. Despite losing a whopping 83 percent of our dairy farms in the last 30 years, milk production has continued to rise, the average herd size and production per cow have increased dramatically, and we are still dealing with chronic oversupply. And yet, we still haven’t found a meaningful way to curb overproduction and stabilize prices.

As recently as the 2014 Farm Bill, there was significant discussion around the topic of dairy supply management and a handful of proposals were considered. One that nearly crossed the finish line was the Dairy Market Stabilization Program, a fairly mild form of supply management that would have penalized farmers who failed to reduce production when margins fell below a certain level. Then House Speaker, John Boehner, dubbed it “Soviet-style agriculture” and had the supply adjustment mechanism tossed out. Though that particular program would not have prevented the subsequent 5-year downturn, we now know that similar versions would have produced higher and more stable prices, significantly reduced government expenditures, and kept hundreds of dairy farmers in business each year.

So then, if managing the milk supply is such a great idea, why aren’t we doing it?

One reason is what Mr. Boehner so eloquently expressed when he killed supply management in 2014: the idea that markets function best without the government stepping in to muck everything up. To the John Boehners of the world, any policy that limits one farmer’s ability to expand represents total government overreach. Nevermind that one farmer’s decision to expand might force two or three others out of business. This anti-government control rhetoric has presided over farm policy since at least the 1970’s. And it is largely why earlier attempts to boost farm gate prices and manage oversupply were ineffective.

The price support program of the pre-1980’s worked by creating a price floor and letting the government purchase dairy products when prices were low. Rather than limiting supply, it generated a sort of artificial demand in response to oversupply, forcing prices back up again. This system was costly to the government and it didn’t prevent the milk from coming out of the cow in the first place, or save the time and investment the farmer put into it. But telling farmers how much to produce was seen as un-American, even if doing so was ultimately to their benefit.

The failed attempts at scaling back milk production during the 1980’s were similar. Both the Milk Diversion and Milk Termination programs were voluntary and temporary, thus avoiding the appearance that the government was telling farmers what to do. But that essentially rendered them useless. Because farmers could opt in or out, you had some farmers cutting production to boost prices and others boosting production to take advantage of it. And because the programs were never in place for more than two years, they failed to provide long-term stability.

The fear of government control is part of an ideology that rejects supply management and supports the current agribusiness model. The power dynamics in our political system are very much at play here. Farm policy is largely dictated by the interests of agribusiness, not by the dwindling number of family farmers. And agribusiness actually benefits from overproduction- from the seed and chemical companies that get to sell more product to the processors who benefit from buying cheap milk. These companies gobble up the lion’s share of the profit and use their wealth to influence our elected officials, advocating for policies that perpetuate overproduction and consolidation. The result is a system that rewards the farmers that produce the greatest volume at the lowest cost, and lets everyone else fall by the wayside. But beware of the government telling farmers to do anything different.

At this point many of the farmers left standing have accepted that expansion is the only road to profitability - even going so far as to say it’s the natural order of things. The free market rewards efficiency; survival of the fittest, right? Tell farmers there is a way to make more money milking fewer cows and at least some of them will think it’s a trap. I’ve seen it before - their minds spiraling down a rabbit hole of questions like, well isn’t that socialism? How will we feed the world? The propaganda runs deep.

What this anti-government, ‘get big or get out’ ideology is missing is the recognition of how heavily involved the government is in our agricultural system, for better or worse. The idea that agricultural markets can operate independently from the government is a fantasy. In fact, governments allow markets to function, and even to exist in the first place. Overproduction, low milk prices, the sustained loss of thousands of family farms - these are not the result of natural market forces, they are deliberate policy choices.

Wouldn’t you rather have policies that offer farmers a fair price and a level playing field than policies that force some out of business and hand the rest government checks? Shouldn’t we value all the benefits that family farm agriculture can provide besides fueling the profits of agribusiness? Benefits like economic vitality in rural towns; clean air, water, and soil; and healthy food, fiber, and fuel. Don’t you think that agriculture is too important to lose?

We know why past attempts to manage oversupply and boost farm profits failed: they relied too much on government expenditures, allowed farmers to opt in or out, or they were short-term bandaids on a long-term wound. But ultimately, they failed because they succumbed to the powerful influence of agribusiness - a model that depends on overproduction and consolidation. We also know that there is a better path forward. We can have fair prices, more family farms, healthy rural communities, and fewer government handouts. The demise of family farm agriculture is not a foregone conclusion. Perhaps after many failed attempts to chart a different course, we will finally get it right.

Resources:

https://www.fb.org/market-intel/reviewing-u.s.-dairy-supply-management-efforts

Catherine de Ronde’s presentation from 2018 Dairy Summit - no longer online