Farmers Seek Solutions as Price of Milk Goes Sour : Agriculture: Crisis has spawned a flood of plans in Congress and raised questions about consumer costs.

It has a nice ring to it. American dairy farmers are hurting because they are producing too much milk, and most of Kuwait’s cattle were wiped out in the war. Why not ship 10,000 or 15,000 U.S. cows over there to rebuild the dairy herd?

The trouble is that U.S. taxpayers would have to subsidize the deal to the tune of several hundred dollars a cow to compete against the prices being offered to the Kuwaitis by European dairy farmers.

The reward for U.S. taxpayers? They would get to pay higher prices for milk.

Indeed, raising milk prices is the whole point of the cattle-export plan and a flood of other proposals rushed before Congress this summer to help out the nation’s dwindling ranks of dairy farmers in the wake of a collapse in milk prices.

Poor dairy prices are the chief culprit in a projected $600-million drop in farm cash receipts this year in California, which now ranks second to Wisconsin in milk output. Nationally, the U.S. Department of Agriculture says dairy income will tumble $3 billion this year.

“Dairy farmers are hurting. We’re selling assets to pay bills,” said state Assemblyman Rusty Areias, chairman of the Agriculture Committee and owner of a big family dairy farm in California’s Central Valley.

The dairy debacle has hastened the flow of farmers out of the business, pitted the huge California dairy industry against the rest of the nation’s dairy farmers and given new life to the family-farm lobby.

It also has raised questions about middleman price-gouging, concerns about why the price consumers pay for milk in the supermarket has not fallen as far as the price paid to farmers.

After a decade of generally stable prices, drought drove up the sum fetched by milk producers in 1989 to a record high--and dairy farmers responded by producing so much milk that prices promptly tumbled to their lowest level since the late 1970s.

The price of milk collapsed by one-third from a record $14.93 per 100 pounds in December, 1989, to $10.02 this March. Since then, the benchmark U.S. milk price has edged back up to $10.58 after the USDA took interim steps to reduce the surplus. USDA economists argue that market forces are already returning dairy prices to those that prevailed in the 1980s.

But the steep swings in price have increased the pace of financial failures among dairy farmers around the country and triggered a wide-ranging review of the complex and oft-criticized U.S. dairy price-support system that has been cobbled together over the past 54 years.

Dairy farmers complain that today’s prices are $2 per 100 pounds or more below the cost of producing milk.

“It’s just too bad that we have to have a drought to get prices up to where they should be, and it’s too bad that such a small surplus can drive prices so far down,” said dairy farmer Dennis Rosen of St. Croix County, Wis., who could not make this year’s payment on the farm he bought from his father in 1978.

The episode also has some people wondering why the price of milk in the supermarket has not gone down more. In a phenomenon that mimics the familiar behavior of gasoline prices and credit card interest rates, retail dairy prices in some cities have hardly budged despite the steep decline in farm prices. Though the evidence is mixed, farm supporters accuse retailers of gouging.

While the Bush Administration is opposing any change in dairy policy and insists that dairy farmers are in generally good shape, John Campbell, deputy undersecretary of agriculture, told a House subcommittee in June: “This is not the time for processors to take a bigger slice out of the (farmer’s) check.”

Shipping cows to Kuwait or elsewhere is one idea among many being pushed by a frequently divided dairy industry as it peers toward a future of sharp gains in the amount of milk produced by each cow--and the seemingly inevitable need for fewer dairy farmers.

A few other proposed fixes before Congress:

--Reducing the dairy surplus by mandating “thicker” milk--with slightly more nonfat solids--such as that required in California. Advocates like the Western United Dairymen of Modesto and Sen. Patrick J. Leahy (D-Vt.) say it would make milk more nutritious, though that is disputed. Milk processors say it would boost costs up to 15 cents a gallon.

--Simply raising the government-guaranteed price farmers get for their surplus milk from the current floor of $10.10 per 100 pounds. The support price has been allowed to drop slowly for a decade to dissuade farmers from producing so much.

--Setting per-farmer production limits and slashing the price farmers would get for milk produced beyond the quotas. The University of Missouri’s Food and Agricultural Policy Research Institute says the plan before Congress would boost milk prices 18.5% annually and jack up returns to dairy farmers by 80%.

All the ideas are intended to bolster milk prices in the name of saving the family dairy farm, a long-embraced national goal that increasingly runs up against the shift toward free markets in agriculture and other regulated parts of the economy.

The cornerstone of federal policy, aimed at supporting farmers’ income and ensuring there is enough milk, is the USDA’s guaranteed purchase at a minimum price of all butter, cheese and nonfat dry milk that is not needed by the marketplace.

In the late 1970s, higher floor prices encouraged farmers to produce so much milk that the taxpayer tab for the price-support program surged tenfold in four years, to $2.6 billion by 1983. This situation was defused by a 1985 change to automatically lower the floor prices if surpluses were expected to exceed certain levels.

This “supply-demand adjuster” made it less attractive to overproduce and, with other measures, served to slowly reduce the dairy surplus while tying farmer behavior more closely to the nation’s need for milk.

But in the late 1980s, drought triggered a chain of events that threw supply and demand out of balance again, driving prices up steeply in late 1989 and then down with a crash last year.

The volatility has given new life to the family-farm lobby, which is pushing a series of measures through Congress that would mark a reversal of the Republican-era move toward free dairy markets and try again to stem the decline of the small dairy farmer.

“I think the battle is about the family farm,” said an aide to Leahy, chairman of the Senate Agriculture Committee. “We do a lot of things that are economically inefficient because we think they’re important.”

But over the years, the dairy landscape has changed in ways that divided the milk community.

Some 4,500 dairy farmers have been getting out of the business annually, and the amount of milk produced by each cow has been jumping by 400 pounds a year. Growth was mainly in California, where big herds and efficient practices to serve the burgeoning market led to lower farm prices.

That in turn lured food processors, a chief customer of dairy farms, away from the traditional Midwest and Northeast dairy states.

Such regional rivalries are souring the milk industry’s efforts to unite, as shown by the fuss over the most far-reaching and controversial plan before Congress.

The heart of the dairy bill passed last week by the House Agriculture Committee, it would replace the current price-support system by setting quotas that limit how much milk each farmer can produce. To dissuade them from producing more, it provides that farmers would get only one-fourth the price for any excess milk they produce.

Critics fear that this will turn farmers into bootleggers, as those who exceed their quota strike secret deals with underproducing neighbors to “transfer” low-priced milk from one dairy farmer’s ledger to another’s.

Moreover, because quotas would be based on past production, they would freeze each farmer’s output at current levels.

Meanwhile, the whole plan is undermined by the political brokering that led to the exemption of the entire Southeast from the quotas. It was the quid pro quo for winning congressional support from that region--whose farmers then could boost milk output while the rest of the industry stood still.

“We are concerned about concentrating milk production in California and the Southeast,” said spokesman Clay Pederson of the National Farmers Union, which is pushing the so-called supply-management idea but whose members are mostly in the Midwest and Northeast.

The way around this conundrum might be even messier: Backers would make the quotas transferable. This would be money in the bank for today’s farmers, whose very quotas would take on an instant market value that has been estimated at more than $100,000 for a small herd of 50 cattle.

That sounds good to Rosen, who figures the 65-head dairy farm that has been in his family since the late 1800s is supporting its last generation of Rosens. Selling the quota given by Uncle Sam would create a nice nest egg for retirement.

“The real problem is there is no value in dairying,” said Rosen, who is also president of the Wisconsin Farmers Union. “We need to have some value.”

But it gets even murkier still: Who would be allowed to buy the quotas?

The National Farmers Union would confine such sales not merely to buyers from the same state but the same county. Otherwise, the big, fast-growing dairy producers in California would swoop in on Wisconsin and Vermont and buy up the government-bestowed rights to make milk.

“It sounds good if you’re in the Midwest,” said Ray Veldhuis, a Merced, Calif., dairy farmer who has guided a small family operation from its original site near what is now Disneyland to a 4,000-head spread. “But how can you limit an individual’s aggressiveness?”

The USDA and Congress’ research arm, the General Accounting Office, have both weighed in against such a scheme as worse than the current policy. President Bush has vowed to veto such a plan.

The USDA, which bungled a cow-export scheme in 1987, is also showing no interest in subsidizing the export of live cattle to Kuwait or anywhere else.

The brainchild of Holstein owners, the export initiative--already approved once by the Senate but later dropped--seeks federal subsidies enabling U.S. farmers to sell cows abroad. Annual exports of 50,000 head could reduce the U.S. dairy surplus, recently about 9 billion pounds, by 2 billion pounds or more per year, says Jim Copper of the Holstein Assn. in Brattleboro, Vt.

“I don’t want to put a Kuwaiti slant on the legislation we are introducing,” Copper said. “We want to export cattle wherever they are needed. But Kuwait would no doubt be a high-priority country.”

The Kuwaitis have already been approached, but they told U.S. interests that they can get a much better deal on cows subsidized by the German government, says an aide to Sen. James M. Jeffords (R-Vt.).

Whatever the solution, there is no question of the dairy farmers’ vulnerability. On the horizon, perhaps next year, is the expected federal approval of a drug capable of boosting milk production by up to 20% per cow.

“As a long-run proposition,” said Robert Jacobson, agricultural economist at Ohio State University, “there is no end in sight to the ability of cows to produce more milk than the market needs, and there will continue to be a pressure of supply over demand.”

For many, it will be a losing battle.

Said Rosen: “My oldest son just finished high school, and I know this farm isn’t going to support another generation. I’m 40 years old. The rest of us have to decide whether it’s all worth it. It doesn’t look good.”