This generally is due to a simple lack of information. But if you see it in a congressional news release, be on your guard for intentional misrepresentation. When politicians call for subsidies to a particular industry because the market price for its goods is less than the “cost of production,” citizens should guard the Treasury.
An Oct. 21 joint news release by Vermont’s three-person congressional delegation is a good example. Heralding President Barack Obama’s signature on a bill to provide $350 million in subsidies to dairy farmers, the Vermont release contains the following statement: “The average price farmers received for their milk fell this year to $11.30 per hundredweight, down from $19.30 in July 2008. It costs farmers at least $18 per hundredweight to produce milk.”
The first sentence is correct. Farmers got more than $19 per hundred pounds (about 12 gallons) for milk in mid-2008, and the price has been about $11 or less for much of 2009.
The second sentence is questionable, however. Adding adjectives like “a few,” “some” or “many Vermont” before “farmers” would make it reasonable. But as written, the assertion is wrong. More important, the way in which it is wrong explains why, over decades, many farm subsidy programs have failed or been counterproductive.
Costs are complex, including fixed costs, which do not change with different levels of production, and variable costs that do. Moreover, both fixed and variable costs vary from one region of the country to another. Blanket assertions about what it “costs to produce” milk or corn or anything else may be true for some producers but false for others.
Government programs intended to cover such asserted “costs of production” for farmers as a whole invariably are well above the costs of production for many operators. They ramp up output in response to government-originated profits, thus increasing supply. This drives down market prices, and even more government help is demanded.
Across crop and livestock products, there is a long history of government programs that ratcheted up profits for lower-cost producers and, over the long run, helped drive high-cost producers out of business.
Feed costs were high in 2008. Nevertheless, many dairy farms in Wisconsin, Minnesota, Idaho, Arizona and California made good money last year. Indeed, that year’s high prices motivated an expansion that, coupled with falling demand worldwide as the recession set in, caused this year’s low prices.
In the $11 range, farmers nearly everywhere are hurting, even though feed prices belatedly have fallen. Some of these farmers are my relatives and friends, and I sympathize with them. But government action to push prices above $18 would harm the overall U.S. dairy industry.
The $350 million bill in itself won’t do that. Like $250 payments to Social Security recipients, it is a token favor to a politically powerful group rather than a fundamental change in policy. But it does open the door to the bad old days, in both the United States and Europe, where government efforts to keep milk prices above the “cost of production” of the highest-cost producers motivated the production of vast quantities of unneeded milk, cheese and butter at enormous cost to national treasuries.
Some dairy farmers indeed are going bankrupt at current prices. All would welcome higher prices. But if any really need more than $18 over the long run to survive, they should call the auctioneer today. There are many existing operations that would sharply increase output at that price level and still others that would start up.
© 2009 Edward Lotterman
Chanarambie Consulting, Inc.