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Dairy Market Update: Why the Votes Against Goodlatte-Scott?

Jun 26, 2013

By Bob Yonkers, IDFA Chief Economist

The dairy policy debate on the floor of the House of Representatives is over. An amendment offered by Representatives Bob Goodlatte (R-VA) and David Scott (D-GA), also known as the Dairy Freedom Act, was passed by a vote of 291-135. Joining the amendment’s authors as co-sponsors were Mike Coffman (R-CO), Chris Collins (R-NY), Diana DeGette (D-CO), Sean Duffy (R-WI), Darrell Issa (R-CA), Barbara Lee (D-CA), Gregory Meeks (D-NY), Jim Moran (D-VA) and Jared Polis (D-CO) and Pete Sessions (R-TX).

Proponents of the Dairy Security Act (DSA), which was included in the Farm Bill passed by the House Committee on Agriculture and replaced by Goodlatte-Scott, claim that the wrong dairy policy won. Let’s look at some facts about this topic.

Supporters of DSA have repeatedly said that the Goodlatte-Scott alternative will cost taxpayers more. That’s simply not true, according to the non-partisan Congressional Budget Office (CBO), the final authority when it comes to researching whether or not a policy alternative will cost the government more or less than existing policy. CBO found that Goodlatte-Scott would cost $15 million less than DSA over the next 10 years.

However, instead of using the CBO analysis, proponents of DSA cited a study by University of Missouri Professor Scott Brown, which indeed does show that, over the four-year period of 2009 to 2012, Goodlatte-Scott would cost the government about $1 billion more than DSA. More important, however, is the study’s finding that, over the same four-year period, the cost to consumers would increase by about $2 billion. [1]

The DSA proponents who cited this study as reason to vote against Goodlatte-Scott wanted everyone to believe that taxpayers are not consumers. Fortunately, 291 members of the House of Representatives were not fooled by that sleight of hand. They realized a dairy policy that saves taxpayers $1 billion but at the same time costs consumers $2 billion is a net cost of $1 billion to Americans.

This finding should not surprise members of Congress; a study by the Congressional Research Service clearly stated that the DSA is designed “to result in a higher future farm price for milk.” It also should not be a surprise to proponents of DSA; an April 4, 2013, press release by the National Milk Producers Federation noted that the “Dairy Security Act would have increased farm milk prices more than $1.00 per cwt. had it been in effect last year.”

So, let’s put to rest the myth that the study by Dr. Brown somehow “proved” that the DSA would cost Americans less than Goodlatte-Scott – neither the CBO nor Dr. Brown’s study supported this position.

Goodlatte-Scott proponents pointed to the negative implications of the DSA on U.S. dairy product exports, which the study by Dr. Brown confirms: “Exports of dairy products decline under DSA when DMSP [Dairy Market Stabilization Program] operates.” In addition, many in the dairy industry believed Dr. Brown underestimates the negative impact of DSA on dairy exports. The model makes no allowance for changes in the behavior of foreign customers to periodically finding U.S. dairy products, at best, priced higher than those of our competitors around the globe and, at worst, unavailable to be exported due to DSA mandates designed to force down U.S. farm milk production and increase U.S. domestic demand at the same time.[2]

Would you keep shopping at the same store if at times the prices were higher and/or the products you wanted were not on the shelf while competing stores had lower prices and plenty of products on the shelf? And would you go back to the store that had those higher prices and/or didn’t have the products you wanted?

According to the study by Dr. Brown, you wouldn’t shop at the first store so much during the times of higher prices or insufficient stock, but it assumed you would return to the first store at other times, which is not how the real world operates. It is likely that U.S. dairy product exports would have been less plentiful under the DSA even when the Dairy Market Stabilization Program was not causing higher prices and less product availability. Dairy customers – and consumers – want fair prices and consistent product availability, and they will not hesitate to look elsewhere to fill those needs.

Remember when the proponents of DSA repeatedly talked about having to reign in milk price volatility? Have you noticed that this is no longer mentioned? Maybe that is because the study by Dr. Brown found that DSA would increase milk price volatility, not reduce it.

Blimling and Associates, a dairy market consultancy, analyzed the milk price data in Table 2 of the study by Dr. Brown and found DSA would significantly increase milk price volatility.[3] During the four-year period analyzed by Dr. Brown (2009-2012), the month-to-month changes in actual farm milk prices ranged from -$1.70 to +$2.40 per hundredweight, for a range of $4.10 with a standard deviation of $0.91. However, had the DSA been the dairy policy of the land, the month-to-month changes in farm milk prices would have ranged from -$1.82 to +$3.30, a range of $5.12 (25 percent more than actual) with a standard deviation of $1.22 per hundredweight (34 percent higher than actual).

That same analysis under Goodlatte-Scott found that the month-to-month changes in milk prices would have ranged from -$1.70 to +$2.40 per hundredweight with a standard deviation of $0.90, much less than under DSA and the same as was actually observed.

In summary, the study by Dr. Brown is frequently cited by proponents as providing a reason to oppose Goodlatte-Scott, but it does anything but that. In fact, every result of that study instead says just the opposite; the better dairy policy alternative for Americans is Goodlatte-Scott, not DSA. The study by Dr. Brown shows that:

  1. Goodlatte-Scott would cost Americans less than DSA,
  2. Goodlatte-Scott would not negatively impact U.S. dairy product exports (and as a result not reduce the American jobs needed for those exports), and
  3. Goodlatte-Scott would not increase milk price volatility, but DSA would definitely increase milk price volatility.

Instead of asking why 291 members of the House of Representatives voted against DSA, maybe everyone should be asking why 135 members voted against Goodlatte-Scott.

[1] See Table 2 in the study by Dr. Brown; on average, milk prices under DSA were $0.25 per hundredweight higher than under Goodlatte-Scott. With about 7.8 billion hundredweights of milk produced and priced during those four years (see Table 3 in the study by Dr. Brown), that amounts to $1.95 billion in higher costs for milk. If, like the DSA proponents, you believe that changes in farm milk prices are not reflected in changes in retail prices to consumers, read "Dairy Market Update: The Farm-to-Retail Milk Price Myth Revisited Yet Again."

[2] DSA mandates that dairy producers who wish to be covered by the dairy farm safety net must periodically either reduce the amount of farm milk they ship to processors or instead have those processors withhold a portion of their milk check. They would be required to send those dollars to the U.S. Department of Agriculture to be used to purchase dairy products to be given away to food banks and related entities, therefore reducing the supply of milk and at the same time increasing the domestic demand for dairy products.

[3] “Slouching Toward Summer,” Blimling and Associates, Inc., Research Report, May 29, 2013, Volume 17, Number 6.  Cited with permission.