Farmers' Beef Over Milk Supports

But consumers may pay less to quench thirst if federal dairy subsidies are reduced

FROM Wisconsin to Vermont, America's dairy farmers are facing the biggest industry shake-up since the days when Depression-era horse-drawn wagons delivered fresh milk door to door.

Under the controversial "Freedom to Farm" bill passed by House Republicans last week, the government would deregulate the nation's dairies, beginning Jan. 1, scrapping its decades-old regime of price-support subsidies for milk.

The milk deal passed by the House would be sweet for American consumers, farm economists say. Fresh milk would likely become cheaper, especially from New England down to Florida, where federally bolstered prices are now highest. Cheese prices would rise slightly.

"Overall, the American consumer gains out of this deregulation," says Bob Cropp, a dairy-marketing specialist at the University of Wisconsin in Madison.

Dairy farmers, however, are bitterly divided over the proposed law, with regional factions staking out positions that are as black-and-white as their Holstein cows.

Midwest milk producers favor a shift toward market competition. Farmers here receive the least in government subsidies and stand to gain most from the lifting of price controls.

Wisconsin free-marketeers

"If federal help is eliminated, we'll benefit," says Gary Anderson, who grazes 50 dairy cows on a 130-acre family farm near Cecil, Wis. "We've got a history of established markets, and people recognize our products," he says, speaking from his barn amid the clatter of milking machines.

"We could better market our milk on a free-market system," agrees Dave Daniels, a dairy farmer in Kenosha County, Wis.

In contrast, producers in the Northeast and Southeast oppose the withdrawal of large federal subsidies.

Up to one-quarter of New England's 4,000 dairies could close because of lower prices for drinking milk, says Bob Wellington, an economist at the Agrimart milk-marketing coop based in Massachusetts.

"I might go out of business," says Harvey Smith, a dairyman who tends 65 Holstein milkers in Vermont's picturesque Champlain Valley. "A lot of dairy farmers here would not survive," says Mr. Smith, who believes many smaller producers would have to sell out to larger, mechanized farms. Milk shortages and "chaos" in local distribution would result from the end of federal regulation, he warns.

In New York, some 10 percent of dairies would close within a year, says John Lincoln, a western New York dairy farmer and president of the state farm bureau.

Central to the battle between regional milk producers is whether Congress should eliminate a 58-year-old dairy-subsidy program known as federal milk-marketing orders.

The program, last revised in 1961, establishes Eau Claire, Wis., as the center of America's milk universe. The national base price for milk is determined by the price in Eau Claire. From there, the floor price increases by 22 cents per 100 pounds of drinking milk for every 100 miles of distance from Eau Claire.

"Back then, the system made sense because Wisconsin was the major producer and the South and Southwest often ran short of milk," says Mr. Cropp. Over the years, however, California, Washington, Texas, Florida, and other states all began producing milk. There, as well as in the Northeast, subsidized milk prices based on the old Eau Claire standard led to inefficiencies and overproduction.

The government program further distorts regional prices by adding subsidies based on the milk's end use. Fluid milk for drinking gets the biggest premium. Next comes milk for soft goods such as yogurt and ice cream. Milk for making cheese has no premium.

Northeast price drop

For example, the Northeast, which produces more than 40 percent bottled milk, is far more heavily subsidized than are the Upper Midwest states of Wisconsin, Minnesota, and the Dakotas, where 80 percent of output goes to making cheese. Economists estimate that without the subsidies, fluid-milk prices would drop about 15 percent, while the price of cheese would increase between 2 and 8 percent.

Alarmed by the specter of a sharp drop in drinking-milk prices, Northeastern dairy farmers are seeking special protection through a six-state regional dairy compact. The Northeast Interstate Dairy Compact - comprising Maine, Vermont, New Hampshire, Connecticut, and Rhode Island - would add a premium to prices for all drinking milk sold in the region. Approved by the Senate last Friday, the pact drew sharp criticism from Wisconsin free-market advocates. But New England producers defend the pact, arguing that they need protection because they rely on fluid milk markets that are inherently more risky and volatile than the Midwestern cheese-centered markets.

"When schools close at the end of June - boom - we suddenly have a flood of milk. The cheese guys in the Midwest don't have that," says Mr. Wellington.

House leaders are still negotiating over the final bill with their Senate counterparts, who envision a less-sweeping reform of dairy policy. In both the House and Senate, the proposals are part of farm packages that aim to save the government about $13.4 billion over seven years.

House and Senate Republicans are likely to jockey for a compromise between competing regions as they horse-trade over how and whether to abolish federal marketing orders. The Senate bill currently leaves the federal orders in place.

There is broad agreement between House and Senate lawmakers, as well as the nation's milk producers, however, on the need to end another longtime policy: the dairy price-support program.

Formally set up in 1950, the price-support program allows dairy farmers to sell butter, cheese, and milk powder to the government when the price for those goods drops below a federally set minimum. In the 1980s, after inflation pushed support prices artificially high, the government had to buy truckloads of surplus cheese and butter. Since then, however, government-support purchases have slowed to a trickle.

"Price supports inhibit innovativeness and make producers complacent, because they are selling to the government, not the market," says Tom Thieding of the Wisconsin Farm Bureau.