A good friend and regular commenter Rod Wood was a dairy farmer for many years down in pretty southeastern Pennsylvania. He has a wonderful illustration of a second reason why we may be moving to fewer farms than in the past. I normally would have posted this under, “unintended consequences,” but that does not seem right to me. There is just no credible way I am going to be convinced that the central planners could not envision that these sorts of programs are harmful and massively distort incentives. And just one caveat, while Mr. Wood’s final point is well taken, and I sympathize with farmers who may actually have this bumper sticker on their car, where I live the only places I see those bumper stickers are on Subaru wagons and Volvos coming out of the Eastview Mall parking lot.
Here is the piece:
For a significant part of my life, I was a full-time dairy farmer, so I know first-hand how difficult it is to turn a profit on a farm. Fortunately, a drought in 1983 forced the sale of my herd; otherwise I might still be getting a lot of exercise and earning what my Agway field man called “psychic income.”
The government has long pursued a cheap food policy, and nowhere is that evident more than in the dairy business. Their objective is to have an “orderly market,” as opposed to a free market. The idea is that no one should have to pay too much for a food that babies and young children need. The problem is that it’s far easier to get cows bred in the spring than in the winter, so the supply of milk tends to be short in the fall and flush in January and February (for the city people reading this, cows need to have calves in order to produce milk, and the ideal cow has one calf on or around the same date every year. The gestation period for a cow is 305 days, and so an ideal lactation is also 305 days. Cows get a two-month dry period every year so they can build up the nutritional reserves they will need when they freshen).
Under the terms of the federal milk market orders, dairy farmers earn a “base” according to their production from August to the end of October. For that average daily quantity, they then receive a higher price for their “base milk” than for “excess milk.” I’m not sure what the differential is now, but when I worked at the business end of the cow, it was $2.50 — a considerable penalty for exceeding one’s base. Thus dairy farmers had a positive incentive to get cows bred to calve in the fall, and a negative incentive in the spring. (It’s also true that consumers drink more milk in the fall than in the winter months — give the credit to ginger snaps.)
It’s important to note that the farmers producing the milk don’t have any incentive to sell their milk to the public. Before we were enslaved by the federal order system, we shipped our milk to a dairy (called a “handler” by the milk market administration) owned by my uncles. Because we wanted a good price for our milk, we actually sold retail routes and restaurant accounts that exceeded the production of our farm, so my uncles could not give us any crap about how tough it was to sell milk on the retail end. What they paid us was a matter of mutual agreement, with an eye on what prices one could charge for retail dairy products. Another thing in our favor was that our milk on the farm and the milk and ice cream at the dairy were arguably the best in the world. That made it easier for us to sell the production from our farm.
Under the federal order, however, all handlers were required to “pool” the revenue (“receipts”), and the market administrators determined what the average “utilization” of milk was in the market order. Let’s say for the sake of illustration that 60 percent of the milk was sold as Class I fluid milk (the highest value utilization), while the rest was Class II or Class III manufacturing milk. Then little dairies like my uncles’ that sold 90 percent or more as fluid milk would pay into the pool according to their abilities, while Kraft and other big manufacturing operations would take money from the pool according to their needs (a little Communist Manifesto lingo there).
Pretty collectivist, eh? But there’s more — the prices themselves were derived by a formula based on the price of manufacturing milk in Minnesota and Wisconsin (eat cheese or die).
And more still. Given the fact that this whole system was designed to encourage the overproduction of milk so the babies would always have enough, any milk that could not be sold for any purpose was bought by the federal government and was stored in salt caverns and silos in the midwest. The government paid a per-mile rate to truck the stuff from Pennsylvania to Kansas City — once you got 50 miles from City Hall in Philadelphia, the mileage charges started adding up. I am not making this up.
All those surplus dairy products were then release on the market whenever milk prices appeared to be getting too high. Also, they were used for the school lunch program, WIC, and for welfare recipients. (There is a board game in this somewhere, like “Public Assistance.”)
At any rate, it’s easy to see why the dairy farming business turned out to be so unprofitable. The manufacturing prices of milk in Minnesota and Wisconsin tended to reach their limit at the point that reflected the cost of machinery, cows and equipment, which meant in practical terms that most farmers lived off depreciation. Add to this an abundance of farmers, like myself, who had a romantic view of farm life and an unwarranted appreciation of psychic income. And don’t forget the Mennonites and Amish who knock themselves out for religious reasons.
There are two other fairly recent developments that have made things worse for dairy farmers. The first of these is the sexing of semen: it’s now possible to separate male sperm from female sperm, so that there’s a 90 percent chance one could get heifer calves from all those cows having one calf a year. This was something scientists were working on in the 1970’s, and initially the cost of separating semen was expensive and only used when breeders were inseminating embryos from top sires and dams for the purpose of making embryo transfers. Now, however, it’s just something you get with every dose of semen used in artificial breeding. The result of all this is that dairy cow populations can roughly double in two years, shortening the business cycle considerably. It’s not as bad as the chicken business, but when milk prices rise, dairy farmers can expand their herds quickly as everyone tries to catch the boom before the bust.
Three years ago, dairy prices were relatively high, so many heifers were saved and milk production exploded just as the price of feed was being pushed upward by the second recent development, the subsidies for ethanol.
High corn prices have encouraged farmers everywhere to grow corn for ethanol, and that has affected the price of feed for dairy cattle and has pushed up the price of everything else, like fertilizer, tractors and farm equipment. A ton of mixed feed that cost me $100 in 1983 now costs over $500. Hay, even junky hay that used to go for $40 a ton now costs $300 a ton. The price of milk in 1983 was $13 per hundredweight. Now it’s in the neighborhood of just $15. Oops!
So the “No Farms” concept is not that far fetched, especially if you see the bumpersticker on a dairy farmer’s pickup: the fate of his farm is in jeopardy as long as the feds tinker with supplies and prices. Those farmers who can add and subtract are going to sell their cows and put the whole farm into corn. If they get lucky, maybe Halliburton will drill down to the Marcellus Shale, and they can skip trying to raise corn with $500 per ton fertilizer.