TOPICS > Economy

Price Squeeze: Milk Pricing

March 31, 2000 at 12:00 AM EDT

KWAME HOLMAN: David Krug has lived and worked on this small dairy farm in Owen, Wisconsin all his life.

SPOKESMAN: Here you are girls, come on. Come on.

KWAME HOLMAN: 35 years ago he took over operation of the dairy farm from his father.

DAVID KRUG, Wisconsin Dairy Farmer: We milk 70 cows and raise all of our own young stock. We produce most of our own feed. And it’s been in the family for over a hundred years now, 105 in fact.

KWAME HOLMAN: But over the years, Krug has found farm life more and more difficult. (Cows)

DAVID KRUG: It’s been really tough the last couple of years, with the escalation of prices and inflation and so forth, our costs keep going up, there’s more squeeze put on efficiency and fact of the matter is, we’ve squeezed about as much as we can squeeze.

KWAME HOLMAN: The squeeze comes in part from milk prices that have remained stagnant over the past decade. In 1989, farmers were paid $12.37 cents for 100 pounds of milk, and the price didn’t change much until late last year, when it began to plummet down to $9.50. The price drop is due, in part, to improved technology, which has prompted the growth of large, corporate dairies, which now are flooding the market with milk. Dan Glickman is U.S. Secretary of agriculture.

DAN GLICKMAN, Secretary of Agriculture: It has, in a sense, drowned the country in a greater amount of dairy products. You know, both in terms of milk, cheese, ice cream, other things, which has kept prices down.

KWAME HOLMAN: Low milk prices leave small dairy farmers like David Krug struggling to stay in business. The numbers are telling. Since 1993, more than 40,000 mostly small and mid-sized dairy farms nationwide shut down. Of the 3.6 million dairy farms that existed in 1950, only 116,000 remain. And in Wisconsin alone, an average of five dairy farms a day go out of the business. Recently that included three of David Krug’s neighbors.

DAVID KRUG: Many of those going out are probably farmers like myself: Retirement age, or nearing retirement age, but there are a lot of farmers exiting the business because they just can’t make it economically. But it’s the continued existence of a 60-year-old federal program that Krug and other upper Midwest dairy farmers say is adding to their troubles, giving dairy farmers in other parts of the country a financial advantage. Their complaints are being echoed in Washington.

REP. PAUL RYAN, (R) Wisconsin: It pits one, two, three regions of dairy farmers against one region, the upper Midwest. We simply want a chance to compete fairly on a level playing field.

KWAME HOLMAN: The federal program was created during the Great Depression. The concern was that milk– that most perishable of farm commodities– might not be available to large population centers developing outside the upper Midwest’s rich dairy belt. And so Congress approved a program of financial incentives to encourage dairy farms to take root all across the nation. It was based on a scale of escalating milk price supports, with Eau Claire, Wisconsin, a town in the heart of Dairyland, chosen as the starting point. The farther away from Eau Claire milk was marketed, the higher the federally-guaranteed payment. And so, even today, a farmer in Eau Claire is guaranteed an extra $1.70 per hundred pounds of milk, while a dairy farmer in Knoxville, Tennessee gets an additional $2.80. A farmer near New Orleans gets an additional $3.60, and farmers near Miami, an additional $4.30. For years, the program has caused regional warfare.

REP. RON KIND, (D) Wisconsin: Where is one of the last remaining vestiges of a Soviet style, state-controlled economic industry? Right here in the blessed United States of America, with a Depression-era federal milk marketing order policy.

KWAME HOLMAN: Last fall, the Congressional delegations from Wisconsin and other upper Midwest states demanded the antiquated Eau Claire system be scrapped, saying it clearly no longer was necessary.

REP. COLLIN PETERSON, (R) Minnesota: There was a good reason back in 1937 why we set up the system we have now, because we wanted to keep fluid milk close to the population centers, but times have changed. We have interstate highways, we have refrigeration, we have a lot of things that we did not have back in 1937, and because of that, it is time to change this policy.

KWAME HOLMAN: And four years ago, Congress agreed to move toward changing the policy. It ordered the Agriculture Department to restructure its entire plan for milk price supports.

DAN GLICKMAN, Secretary of Agriculture: I took the position that we ought to, if nothing else, kind of equalize the prices a little bit more around the country, which was the position the upper Midwest took as well.

KWAME HOLMAN: But last November, when the time came to put those changes into effect, Congress balked.

DAN GLICKMAN: Unfortunately for them, in the upper Midwest, there were more members of Congress from other parts of the country where they viewed this as perhaps a disproportionate hit on dairy producers in the Southeast or New York State, or in Texas or wherever.

KWAME HOLMAN: Congress overwhelmingly defeated Secretary Glickman’s plan to level off federal milk price supports. It then added to the frustration of Midwest dairy farmers by extending for two years a program that exclusively benefits New England dairy farmers. It’s called the northeast dairy compact, a temporary program created in 1996 to boost dairy prices for struggling farmers in the six New England states. For instance, the milk taken in and distributed through this cooperative in St. Albans, Vermont is priced by a group of local dairy farmers, processors, and consumers. And that price routinely is higher than Congress allows anywhere else in the nation. For the 4,000 dairy farmers in New England, the Northeast Compact has brought some stability to their businesses and lives.

TOM MAGNANT: It was our only salvation as far as we could see and it has worked out excellent.

KWAME HOLMAN: Tom Magnant and son Tim run a 70-cow dairy farm in Franklin, Vermont. In December, workers put a new roof on their century-old barn.

TOM MAGNANT: Last year we received a little over $6,000 in addition to our regular pay through the compact, which makes quite a difference when you come to do repairs, like putting a new roof on the barn, and so on. It allows you to do those things that you probably would have to postpone otherwise.

KWAME HOLMAN: That roof is going on because of the compact?

TOM MAGNANT: Well, we would have to put it on anyway, but it makes it a lot easier to pay for it with the compact, there’s no question about it.

KWAME HOLMAN: But back in Blair, Wisconsin, sixth-generation dairyman Joe Hanson complains the Northeast compact encourages New England farmers to overproduce, which depresses milk prices everywhere else. The surplus also drives down the cost of other dairy products, like Wisconsin cheese. That’s what Joe Hanson’s milk is used for.

JOE HANSON, Wisconsin Dairy Farmer: Right now we’re trying to fix prices for some people without supply management. I would say if you want a Northeast Compact that you have to put a supply management system in place so that you won’t produce more milk that is going to drive my price down.

KWAME HOLMAN: Ken Becker, director of the Northeast Dairy Compact is somewhat sympathetic.

KEN BECKER, Director, Northeast Dairy Compact: This compact mechanism was created as a solution to volatile milk prices and relatively low milk prices. Maybe what we need to do is to talk further with the farm folks in the upper Midwest to see if there isn’t some way to also help them, because certainly what we don’t want to do is to see any farmers lost in the upper Midwest either.

KWAME HOLMAN: The government price supports and compacts have impacted consumers as well. They’ve kept milk prices higher than market forces might otherwise allow. The average retail price for a gallon of whole milk rose from $2.28 in 1995 to nearly $3.00 last year.

REP. EDWARD ROYCE, (R) California: Dairy cartels are economically inefficient. They are protectionist. They are unfair. They cost the consumer $1 billion a year.

KWAME HOLMAN: The farmers however say they aren’t benefiting from the higher prices consumers have to pay.

REP. BERNARD SANDERS, (I) Vermont: Farmers today are receiving 35 percent less in real dollars than they received 15 years ago, which explains why all over America we are seeing family farms going out of business, we are not seeing young people getting into farming, and we are seeing the industry becoming dominated by larger and larger agribusiness corporations, rather than small family-owned farms.

JOAN HOFF: The regional battle continues in Congress. Senate Agriculture Committee Chairman Richard Lugar says he would like to push for dairy reform legislation sometime this year, but the prospects of compromise appear slim. Back in Owen, Wisconsin, David Krug sees little reason of staying in the dairy business much longer. At 61, Krug is preparing to leave the land, ending his family’s century-long tradition of working on the farm.

DAVID KRUG: It’s not easy. It’s definitely not easy. My wife and I are struggling with the anxiety of what might happen to the farm or so forth. But, hopefully we can find a good progressive farmer that would come on and take over and we can certainly help him get going and it’ll move on. I’ll probably have to get a real job. I’ve got several things in mind, different things that I could do, and maybe I just get away from the cows for a bit.