Obama just signed a bill of $350 million in emergency subsidies to help dairy farmers get through falling milk prices. A good op-ed from Edward Lotterman on why it isn’t that simple. Something to ponder:
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.
In a way, it seems that no matter what distortion is presented, the market reverts back to equilibrium. The only difference here is that farmers reap large profits from the government when otherwise the economic profits wouldn’t be present. The $350 million the treasury hands over will, in the long run, yield the same outcome.
Is the dairy lobby that strong? Why doesn’t the government take into consideration that a) milk isn’t necessarily a nutritional necessity as much as maybe corn would be (that’s arguable) or b) factor in the unneeded environmental waste caused by over production?
UPDATE (10/27): So dairy farms are effectively handling the oversupply of milk. In a sad, but necessary, move for the industry, co-ops have ordered that dairy cows be killed in order to bring the milk price up. So far it has been effective. If dairy farmers are effectively handling the downturn, then why did we give dairy farmers $350 million?