Cato institute calls for significant reforms of U.S. dairy policies.

The large budget deficit, significant costs to consumers and downstream producers, and America's interests in free and open markets demand that Congress use its opportunity in the next farm bill to abolish the federal dairy programs. This is just one conclusion drawn by Sallie James, a policy analyst with the Cato Institute, in a report on U.S. dairy policies.

The report also claims that U.S. dairy policies are "stifling innovation and irritating our trade partners and are egregiously out of date with modern dairy farming." Given historically high world dairy prices, now is an opportune time to implement fundamental reforms with a relatively small political and taxpayer cost of adjustment, says James. A better policy, she says, would be one that allows farmers to make their living, like other entrepreneurs, from markets rather than a government check.

According to the report, current U.S. dairy policies cost taxpayers more than $4 billion per year in subsidies and adds millions of dollars to the grocery bills of U.S. consumers and to the costs of food product manufacturers. "By boosting prices, the dairy program encourages overproduction and penalizes more efficient farmers in the futile attempt to prop up smaller dairy farmers and stem the tide of decades of changes in the dairy market," says James. By keeping prices artificially high, guaranteeing income supports and preventing import competition, U.S. farmers produce dairy products regardless of market demand, James says. That encourages overproduction, which puts further strain on the price-support system and the stocks of dairy products the government must buy to maintain it.

And, James says, some dairy policies are in direct conflict with one another. As an example, she cites the milk income loss contract (which she says encourages overproduction and depresses prices) and the milk price support program (which attempts to hold the price up). In a recent USDA report that touches on this conflict, the department wrote: "The result is that milk prices stay lower longer than they otherwise would, increasing the likelihood of larger CCC purchases and raising government costs for both programs."

In addition, says USDA, "Because they have modest effect on prices and returns, federal dairy programs have a limited impact on profitability and viability of dairy farms.... [B]y increasing farm level returns, these programs may enable high-cost farms to remain in the business longer, but only in the short to medium term. In the longer run, high-cost farms will have difficulty competing with low-cost dairy producers."

As the farm bill comes up for renewal and as lawmakers look for ways to reduce the budget deficit, James says the federal dairy program "is a prime example of a policy that belongs in a bygone era. It is in America's interest to remove a program that the Office of Management and Budget says is 'causing unnecessary expenditures, product accumulation well above use, and significant market distortions.'"

Political considerations mean that eliminating dairy programs and a wholesale withdrawal of government intervention in dairy markets is unlikely without some sort of compensation for farmers. James recommends that if compensation is deemed necessary to enact reform, "the fairest way to finance it would be to tax those producers who choose to remain." As she sees it, producers would either decide to stay in the industry "and pay a tax to finance the adjustment for their least efficient brethren," or realize that they are no longer competitive and exit the industry.