Dairy Compacts Set Poor Trade Precedent
August 1, 1999
Farm Journal Guest Viewpoint
Some dairy farmers are pursuing misguided regional compacts that could inflict further harm on struggling sectors of U.S. agriculture. Compacts set the price processors must pay for milk in a region. Already there is a compact in New England the Northeast Interstate Dairy Compact (NEIDC), which dairy producers want to expand as far south as Maryland. They also want to create a Southern dairy compact (SDC), which starts in Virginia and stretches south to Georgia and west to Texas. These new compacts are no small potatoes they d regulate about 40% of the nation s milk supply and 60% of domestic milk demand. And now there s even talk about a Western states compact.
The surprise is that some other commodity groups are going along with the idea that is adverse to their interests. SDC alone could cause Wisconsin to lose $64 million in annual milk sales according to a study by the University of Missouri s Extension service and the Food and Agricultural Policy Research Institute (FAPRI). Such a loss in dairy income, and the accompanying loss of cows, would cause a surge in corn from the Upper Midwest to the South, complicating problems on the Mississippi s deteriorating transportation system.
More shipments would only exacerbate the deteriorating lock and dam system on the Mississippi and Illinois rivers before the U.S. Army Corps of Engineers could modernize the river system. Clogging transportation and storage infrastructure, new tonnagecould maintain downward pressure on corn and soybean prices.
Damaging diversion. Even worse, the compact battle is an obstacle to farm groups top priority success in the Seattle Round of the World Trade Organization (WTO) this December. The WTO round is the single best hope to pull prices out of the economic basement. The American Farm Bureau Federation says technical trade barriers are holding up $5 billion worth of U.S. commodity sales to 63 countries.USDA estimates that free farm trade would mean about 25% to 30% higher commodity prices for U.S. farmers and ranchers. Others speculate that for dairy products, that return might even reach as high as 50%.
Compacts are the antithesis of open trade and freer markets. Essentially, the point of dairy compacts is to prevent milk produced outside a region from entering that market. According to the NEIDC Commission, the purpose of their compact is “to assure consumers of an adequate, local supply of pure and wholesome milk.”
Do unto others. Where have U.S. farmers heard that kind of talk before? The “local supply” argument is the same hackneyed excuse China has been using to keep its borders closed, and that Japan used for years to keep out U.S. rice including rice produced in many states that would be part of the SDC. And that “pure and wholesome” dig, of course, is the same tactic the European Union uses to keep out U.S. beef and GMO [genetically modified organism] crops.
The NEIDC Commission is echoing every baseless argument made against U.S. agriculture as if milk produced in Wisconsin, or Minnesota, or Iowa is somehow less wholesome or less pure once it crosses the state line. If dairy farmers in America can make that claim, how can trade negotiators argue any different with Canada, Mexico, or even now that we have better transportation technology India, where milk consumption is doubling and production can’t keep up? If the NEIDC were to expand southout of New England as proposed, would the commission then concede that Vermont milk would be less wholesome and pure once it reached Baltimore?
After all, there are plenty of Virginia dairy farms near Baltimore but, of course, Virginia would be in the SDC, making them the part of the production cartel that is supposed to supply Dallas.
Sadly, dairy compacts would certainly become the strongest argument foreign trade negotiators could make in trying to save their own market-distorting policies. EU negotiators would claim rightly so that compacts are an import barrier and that artificially high milk prices would inevitably result in the dumping of excess dairy product on the export market.
Déjà vu. Indeed, that s the great irony of dairy compacts: they won t work. The New England compact hasn t changed the laws of economics. The higher milk price has increased production there s 9% more milk in New England. The price pass-through to the retail level has depressed consumption about 4%. That, in turn, has depressed prices for Class II and Class III milk and boosted milk powder production by 60% in New England.
The bottom line is that compacts create unsustainable production growth and collapsing consumption the exact formula that led to the whole-herd buyout in the mid-1980s. That was an economic fiasco for beef, pork, poultry and even feedgrain producers.
Agriculture can’t afford another bad dairy scheme. Likewise, agriculture can t afford a political sell-out before the upcoming WTO trade round.
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