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Milk prices may climb if Congress fails to pass farm bill

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Those who enjoy dunking cookies in milk now have a legitimate reason for concern — unless they don’t mind buying the powdered variety.

That’s because the price of milk could skyrocket to $6 to $8 a gallon, experts say, if Congress fails to make a last-minute push to pass or extend a federal farm bill into law by Jan. 1 — a deadline that’s now being dubbed the “milk cliff.” Consumers could get socked by higher prices as early as January.

Inflated milk prices would become a reality because the U.S. Department of Agriculture would be required by law to follow an outdated farm policy established in 1949 during the Truman presidency. If this worst-case scenario takes effect, the government’s policy for purchasing milk from dairy farmers would be calculated based on much higher dairy farm production costs in 1949 — a time when production was done by hand. The USDA would be forced by law to purchase milk for about twice the amount at which processors in the commercial market are buying it from farmers, about $40 per hundredweight. That price would be calculated by making adjustments for inflation since 1949 and using other technical formulas with the goal of maintaining a stable market. But the outdated law would create anything but a stable market, experts say, because it’s based on production costs that don’t apply to today’s marketplace.

The USDA, which oversees federal milk insurance programs for dairy farmers, only reimburses farmers for losses in production costs when milk drops below an established national price. Under the Milk Income Loss Contract program now in use, the government buys milk from farmers when prices drop below the federal support price as a way to increase milk prices and demand. Farmers have historically sold their milk on the commercial market — not to the government — because prices are higher than the federal target.

Adopting the law, however, would spur farmers to abandon their contracts with milk processors and sell to the government instead.

Among those irked by inaction on the farm bill in Congress is Rep. William L. Owens, D-Plattsburgh. He told the Times on Wednesday that Republican leaders in the House of Representatives, Speaker John A. Boehner and Majority Leader Eric I. Cantor, have reneged on their plan to bring the farm bill to the floor for a vote during the lame-duck session.

“They both said they would bring it to the floor for a vote but have absolutely refused to do it,” he said.

He added Mr. Boehner recently stated the farm bill won’t be considered in ongoing “fiscal cliff” budget negotiations with the Obama administration, even though its passage would save the government millions.

The Senate passed a farm bill in July, but the bill’s House version still hasn’t been voted on — even though it gained the House Agriculture Committee’s recommendation in the summer.

In the past, Mr. Owens said, the antiquated 1949 farm policy has prodded lawmakers to approve farm bills to keep the statute from taking effect. But in this case, its dire consequences haven’t given lawmakers enough motivation to get the job done. He doesn’t expect the farm bill to be approved by Jan. 1.

“When the statute was enacted in 1949, it met the needs of the time, but the issue is inflation has crept in over a 60-year period; it was never intended to be implemented in 2012.” Mr. Owens said. “As the years rolled on, it was used to get Congress to act on the farm bill every five years. But this time it hasn’t happened.”

Talks have started about how Congress might prevent the 1949 law from taking effect in January. Agriculture Secretary Thomas J. Vilsack, for example, has considered ways to delay its immediate onset. But Mr. Owens said the USDA doesn’t have the authority to do so.

“As a practical matter, this means it could happen in January,” he said. “This is highly problematic and irresponsible, but it’s the way it’s been handled by the Republicans. We could have passed this bill on a bipartisan basis, but (House leaders) are again reverting back to wanting to do things only with Republican votes.”

If milk prices double, Mr. Owens said, it would mean a major blow to the national economy. Because they’d have to double what they’re paying now to compete with the USDA for business, dairy processors that purchase milk from farmers would have a challenging time. Consumers would likely stop purchasing fluid milk, too, choosing powdered varieties instead.

Because they’d benefit by selling milk to the government at higher prices, dairy farmers would be the only ones benefiting from the 1949 policy. But those benefits would last only a short time, Mr. Owens said, before the national milk market becomes unstable.

“It would be a short-term gain for farmers but longer-term pain,” Mr. Owens said. “People will cut back on the quantity of milk they buy and revert back to powdered milk. And over time, they might not return to buying fluid milk once the prices go back to the normal level. You risk losing the national milk market.”

But milk prices won’t double right away if the law takes effect, said Bruce W. Krupke, vice president of the Northeast Dairy Foods Association. That’s because many dairy farmers will continue doing business with customers they now have contracts with in the short term, even though they could get better prices from the USDA. Prices could go up anywhere from 5 to 15 percent in the first two months, he projected, before a significant number of farmers across the country enroll in the government program.

“Farmers are not about to jeopardize their relationships with customers, and those who are manufacturing milk will still need to fulfill their obligations,” he said. “I think supply and demand will hold back milk prices and don’t think we’ll see them double. But if this goes on for more than four to eight weeks, the fallout would affect everyone. If there’s a silver lining to this for consumers, it’s that if prices go up over the short term, then it will go to dairy farmers.”

Mr. Krupke said dairy farmers would only be allowed to sell milk that’s produced after Jan. 1 to the government, which will limit the amount they’ll be able to sell in January if the law takes effect.

The farm bill’s “milk cliff” has been overshadowed in the national media by the “fiscal cliff” budget talks, Mr. Owens said. But if milk prices rise to $6 a gallon, he predicted there will be a frenzy nationwide.

“This is a real potential problem for consumers, milk distributors, farmers, producers, school districts and grocery stores — everyone involved in the production and sale of milk,” he said. “When people start to pay those prices, they’re going to be screaming quite loudly to members of Congress in their districts. And they should.”

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