US tries to stop growth of its milk, cheese surpluses

Instead of awarding blue ribbons to America's 11 million dairy cattle for setting new productivity records year after year, Congress may help turn more cows into hamburger.

The problem is that while the nation's dairy herd is 57 percent smaller than 40 years ago, it is producing 15 percent more milk. The result is a steadily mounting and increasingly costly dairy surplus. The only way out, it seems, is to send more dairy cows to the slaughterhouse.

Genetically improved cows and far more efficient dairy farms have brought dramatic gains in milk output per cow. United States milk production rose to a record 135.8 billion pounds for 1982. The US Department of Agriculture (USDA) expects 1983 production to climb once again, probably reaching 139 billion pounds, or 16 billion gallons of milk - enough to make a 7 million-ton mountain of cheese.

At current levels of supply and demand, America's cows produce about 10 percent more than the country needs to meet domestic and export demand for milk, butter, cheese, and ice cream. By law, this surplus must be purchased by the federal government at a fixed price, which currently has been set by Congress at

One result of farmers having this guaranteed, fixed-price government market is that the US government today owns and stores the surplus: some 215,000 tons of butter, 445,000 tons of cheese, and 650,000 tons of dried milk. Even with increased donations of surplus dairy products to the needy in countries such as Poland and greater distribution to America's poor under provisions of the new jobs bill, government stocks are expected to continue growing.

Congress, the Reagan administration, and the dairy industry agree on the need to cut milk production in order to reduce the drain on the federal budget. For 1982 alone, the government's obligation to purchase 7.15 million tons of surplus milk in the form of dried milk, cheese, and butter added $2.3 billion to the federal deficit. Now the USDA warns that government purchases could reach 8 million tons for 1983 as cow numbers and output per cow continue to increase.

The Reagan administration's initial attempt to control production came in 1981, when Congress reluctantly agreed to freeze the milk price-support level at increases that would have resulted in a $14.60 level by 1985. Last year Congress went further by authorizing two controversial 50-cent ''assessments'' on the $13 .10 payments to dairy farmers. If Agriculture Secretary John Block overcomes court challenges to the assessment approach, he will be able to lower the actual cash dairy farmers can pocket to $12.10 per hundredweight. According to a recent study by the Virginia Polytechnic Institute, a $1 price cut could help cut government purchases in half within two years. The theory is that dairy farmers will respond to a lower price guarantee by reducing the number of cows they milk.

Mr. Block himself opposes the assessments and calls instead for an overall restructuring of the nation's complex dairy support program. But he threatens that unless Congress agrees on a new dairy program before August, he will impose the full $1 fee to save an estimated $60 million per month in government outlays. Block says today's costly dairy surpluses are the inevitable result of farmers ''producing more in response to a price-support level that has been artificially high since 1977.'' His answer is to ask Congress to grant him the discretionary authority to adjust price supports up or down in response to shifting market conditions.

The nation's largest farm organization, the American Farm Bureau Federation, favors giving Block the new price-setting authority he wants. Farm Bureau vice-president Elton R. Smith, a dairy farmer and president of the Michigan Farm Bureau, warns that it may be necessary to drop the milk support price nearly $2 below current levels to bring the reduction in herd size needed to balance supply with demand.

Major milk-industry organizations, however, support a more complex legislative solution that has won the support of a bipartisan group of farm-belt congressmen. The proposed Dairy Production Act of 1983 would combine:

* Bonus ''set aside'' payments for dairymen who cut their production.

* Cash penalties for dairymen who increase production.

* A national program to promote greater use of dairy products.

National Milk Producers Federation president Norman Barker insists that offering cash incentives to individual farmers who voluntarily cut milk output will bring an immediate cut in milk production and an immediate reduction in government spending. By contrast, he and other dairymen explain, any across-the-board cut in the milk price penalizes all dairymen, even those who cut production. A price cut, they say, simply drives individual producers into increasing output as the only way to maintain their incomes when the price per gallon is reduced.

Irvin Elkin, president of Associated Milk Producers Inc., says that applying the set-aside incentive payment approach to reducing the dairy surplus can be as successful as the Reagan administration's ''payment in kind'' solution to the problem of grain surpluses.

''The set-aside can achieve the necessary short-term reduction in milk production,'' says Wisconsin dairyman Elkin.