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Washington - Forget the fiscal crisis and the automatic budget cuts. Come Jan. 1, milk prices could rise to $6 to $8 a gallon if Congress does not pass a new farm bill that amends farm policy dating to the Truman presidency.
Lost in the political standoff between the Obama administration and congressional Republicans over the budget is a virtually forgotten impasse over a farm bill that covers billions of dollars in agriculture programs. Without last-minute congressional action, the government would have to follow an antiquated 1949 farm law that would force Washington to buy milk at wildly inflated prices, creating higher prices in the dairy case. Milk now costs an average of about $3.65 a gallon.
Higher prices would be based on what dairy farm production costs were in 1949, when milk production was almost all done by hand. Because of adjustments for inflation and other technical formulas, the government would be forced by law to buy milk at roughly twice the current market prices to maintain a stable milk market.
But the market would be anything but stable. Farmers, at first, would experience a financial windfall, as they rushed to sell dairy products to the government at higher prices than those they would get on the commercial market. Then the prices customers pay at the supermarket would surge as shortages developed and fewer gallons of milk were available for consumers and for manufacturers to produce products like cheese and butter.
For dairy farmers like Dean Norton in upstate New York, who are struggling with high feed costs caused by this summer's drought, a jump in prices would be welcomed.
"But it would be short-term euphoria followed by a long hangover that would be difficult for us to recover from," said Norton, who is president of the New York Farm Bureau. "I don't think customers and food processors are going to pay double what they are paying now for dairy products."
The Senate passed a farm bill in July. A House version made it out of committee, but House leaders have yet to bring it to the floor.
Under the current program, the government sets a minimum price to cover dairy farmers' production costs. If the market price drops below that, the government buys dairy products from farmers to buoy prices and increase demand. Since milk prices have remained steady, and even risen slightly in recent years, dairy farmers usually do better by selling their products commercially rather than to the government.
But if 1949 rules goes into effect, the government would be required to purchase dairy products at around $40 per hundredweight - roughly twice the current market price - to drive up prices to cover dairy producers' cost.
"It would be bad for consumer demand in the long run," said Chris Galen, a spokesman for the National Milk Producers Federation, which represents more than 32,000 dairy farmers.
Galen and others in the dairy industry said reverting to 1949 policies could probably force the makers of butter, cheese, yogurt and other dairy products to look for cheaper alternatives like imported milk from countries like New Zealand.
Most dairy companies declined to discuss plans to purchase dairy supplies from aboard if they are forced to pay higher prices for milk.
But Land O' Lakes, a dairy company based in Arden Hills, Minn., said the 1949 law could be potentially disruptive for dairy industry operations.
"Congress needs to pass a comprehensive farm bill that helps farmers continue to feed the world, keeps food prices affordable and provides farmers some financial stability in the very unpredictable profession of farming," said Rebecca Lentz, a company spokeswoman.
In a conference call with reporters Thursday, Tom Vilsack, the agriculture secretary, said the department was exploring all its options to deal with the possibility of the 1949 law going into effect.
"We will do whatever we are legally obligated to do," said Vilsack, who declined to say what steps the department would take to prepare for what dairy lobbyists and industry officials are calling the "milk cliff."
Among the options: The agriculture secretary could drag his heels on the milk purchases until Congress passed a new farm bill or an extension of the 2008 one that expired in September, said Vincent Smith, a professor of agriculture at Montana State University.
"This is a totally antiquated law that has nothing to do with farming conditions today," Smith said. "It was put as a poison pill to get Congress to pass a farm bill by scaring lawmakers with the prospect of higher support prices for milk and other agriculture products. Letting it go into effect for even a few months would be particularly disastrous for consumers and food processors."