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John E. Sununu

Milk-pricing morass in Calif. shows folly of misguided regulation

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In Monty Python’s parody “Life of Brian,” bad acoustics and petty bickering make it difficult for a group of bystanders to catch all the details of a Sermon on the Mount. “I think it was. . . ‘blessed are the cheese makers,’ ” comes the translation.

Those aren’t words that inspire the faithful, but they do appear to have inspired agricultural regulators in California. During the past weeks, a battle over milk prices in the Golden State turned ugly, pitting dairy farmers against cheese makers, with consumers caught in the middle. Accusations of “bullying” and “shaving the truth” filled the air; but more pointedly, the confrontation exposed the utter insanity of a price-fixing system that would make Soviet central planners blush.

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In California, cheese makers pay nearly $2 less for 100 pounds of milk than the rest of the country. As a result, The Wall Street Journal reports, nearly 100 dairy farms are shutting their doors this year. Who said regulation doesn’t destroy jobs? Ironically, the cheese industry argues that they need the pricing deal because all the other regulations in California are killing them.

To be fair, not even Californians could come up with the silliness that passes for American dairy regulations all on their own. The federal program dates to the 1930s and has only grown more complex through the years.

Today, there are four different classes of milk and 10 separate pricing regions — 11 if one counts California. Regulators calculate prices for fluid milk nationally, but prices for the other three classes, including milk for cheese and butter, are set within each region. Processors pay for the milk based on how it is used, but farmers receive a single, blended price for what they sell. Get that?

In setting the minimum allowable price, regulators make general assumptions about the costs of production and plant efficiencies. Plant-to-plant variations are ignored. It’s a system that minimizes competitive advantages, effectively creating cartels that limit competition; all the while, new entrants are prohibited from selling products below the government-set prices.

The point here is not to explain how the system works. (The Wisconsin Cooperative Extension’s “Basic Milk Pricing Concepts” runs 28 pages. Its first sentence: “Milk pricing is complicated.”) But with a farm bill awaiting congressional action, it might be a good time to ask whether this type of intense market manipulation is justifiable in the 21st century.

For starters, the program is expensive. Measuring administrative and compliance costs can be a tricky business, but when the three-stage pricing process involves “multiplying the applicable skim milk price calculated in the second stage by 0.965 and adding 3.5 times the butterfat price calculated in the first stage,” the cost of bureaucrats adds up fast. Believe it or not, the minimum price for milk in most parts of the United States still depends on how far you are from Eau Claire, Wis.

The pocketbook test is easier. The General Accounting Office calculated that American consumers pay a 50 percent premium above prevailing world prices for both butter and cheese. That easily adds up to billions per year in higher household costs created purely by the regulatory machine.

Defenders of the status quo include dairy farmers, most of whom benefit despite California’s mess; liberals who favor strong market regulation; and the broader agricultural community, whose lobbyists tend to support one another’s programs. They fall back on platitudes about assuring an adequate supply and protecting price stability. But these vague, shallow arguments could easily be used to defend government intervention into every corner of every marketplace in the country.

Agriculture policy should focus not on collective planning but on product quality. In post-Depression America, poor transportation infrastructure and lack of refrigeration meant that, in a typical community, the only reliable suppliers of dairy products were local farms. Intervention to protect that network could at least be plausibly defended. Those concerns, however, were rendered obsolete by technology — about 40 years ago. Today, there simply are no arguments left to justify a system of market controls that are so fragmented, anti-competitive, and expensive.

One of the funniest things I ever heard on the House floor came during a farm bill debate more than a decade ago. Addressing a group of farm-state Republicans, Barney Frank took aim at the byzantine set of milk-pricing rules — one of the few issues where he and I saw eye to eye. “Let me get this straight,” he deadpanned. “You guys are for free trade with China, but not with Wisconsin?” Blessed are the cheese makers? The bystanders in “Life of Brian” were right: “Obviously it’s not to be taken literally. It refers to any manufacturers of dairy products.”

John E. Sununu, a former Republican senator from New Hampshire, writes regularly for the Globe.
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