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Here is a question I ask my freshmen economics students:

I sometimes feel like the world wishes to live in a “Goldie-Locks Economy.” For example, I often hear complaints about interest rates that are too high (discrimination) AND also about interest rates that are too low (predatory lending); about gas prices that are too high (gouging) and about gas prices that are too low (luring). Is there a “right” price for anything? What do economists mean by the “right” price as opposed to what a Goldie-Locks thinks about it?

It would be too nice of me to suggest an answer to you right now, wouldn’t it? Why am I bringing this up? Because right here in my part of the world, our esteemed Senator Kristen Gillibrand is holding hearings to get to the bottom of the milk price crisis that Western New York dairy farmers are facing. Now I have no idea what the right price for milk should be, but it does seem to be a good deal right now (less than $2 per gallon) and I recall it being more expensive in recent years. One of the Senator’s concerns is that it appears that dairy farmers are being forced to sell their milk for prices below what it costs them to produce it.

Let that last sentence sink in just a little bit.

First of all, of no concern to the senator is that millions of New Yorkers, particularly poorer ones, benefit enormously from low milk prices, but who cares about us? Of more importance, what economic factors would lead to an equilibrium where milk producers are forced to sell their product for less than it cost them to produce it. And I would note to those who have taken price theory, that this is not just a short-run operational phenomenon. Since I know nothing, absolutely nothing, about the milk market I cannot say what is going on, but here are some possibilities (probably in order of importance):

  1. The good ol’ government has done it again. Someone is getting a guaranteed low price, or someone is getting subsidized, or some dairy land is being taxed differently, or producers of milk products have some strong voices in Albany and DC, … it is completely inconceivable to me that the USDA or some other state agency does not have their hands all over the milk industry.
  2. Other states practice beggar-thy-neighbor policies in regard to protecting their own daiy industries, and these policies have been becoming more honerous over the past couple of years.
  3. Greedy evil consumers have banded together and refused to buy any milk at all when the price exceeds $2. We are exploiting the weak and vulnerable dairy farmers.
  4. While dairy farmers are making cash flow losses, the value of their farms has been increasing (like some sports teams) for some reason – thereby making them remain in business, even while operating at an annual net loss. This is hard to believe given the real estate crisis … but then again, there are things called ethanol, and oil and gas leases on farms, and wind leases on farms (there seems to be one of these on a farm off of I-81 between Syracuse and Binghamton) …

This list could go on … I’d love to ask one question. What is an appropriate price for milk? It is a question similar to what I would like to ask an Earth Scientist, “what is the right temperature?”

2 Responses to “What is Squeezing the Wintercow Farmers?”

  1. Speedmaster says:

    GREAT post. This bothers me all the time.

    If you charge too much, you’re “gouging.”
    If you charge too little, it’s “predatory.”
    If you charge the same as everyone else, it’s “collusion.”

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