Let’s go way back. Historically, dairy farmers produced and distributed their own milk and other dairy products. As demand increased, transportation improved and dairy farmers became more involved in milk production, there was less time to distribute the products themselves1.
Enter the middleman. Milk dealers and distributors popped up to buy milk from farmers and get it to market. At the same time, some farmers formed cooperative associations to negotiate milk prices with dealers and distributors.
There was no standard milk pricing system before the 1930s. A few different schemes were attempted. Classified pricing emerged as the best approach.
In classified pricing, each dairy product was assigned to a class. Handlers paid for milk based on the amount of milk used in each class.
To keep things equitable, a cooperative pooled the revenue from all milk sales, and farmers received an average price. All farmers in the same cooperative would get the same price, no matter how their milk was used.
The government first entered the fray because of the Great Depression. Federal milk marketing orders were introduced through the Agricultural Adjustment Act of 1933 and tweaked with the Agricultural Marketing Agreement Act of 1937.
The goal of the federal orders was to ensure reasonable prices for farmers and consumers and ensure an adequate supply of milk for consumers.
Federal milk marketing orders are regional markets that enforce a classified pricing structure.
Dairy farmers can request and approve a federal marketing order, but it’s not mandatory to participate in one. Today, there are 11 federal orders.
1940s – 1960s:
jumps into dairy
During the world wars, the demand for milk increased dramatically.
During World War II, some of the government support mechanisms that would carry dairy into the next century were born. At that point, it was out of sheer necessity.
The Steagall Amendment of 1941 set a support price for dairy products and other non-basic commodities to help meet wartime demand. The federal government purchased butter off the open market.
Government support began in earnest through the Agricultural Act of 1949. The government decided there needed to be a steady supply of dairy products for Americans.
Enter the Milk Price Support Program.
The government didn’t pay farmers directly through this program. Instead, it purchased storable dairy products — butter, cheese and nonfat dry milk — at support prices through the Commodity Credit Corporation.
The price support system worked well for farmers for decades, said Dianne Shoemaker, dairy production economics specialist with Ohio State University Extension. It made sure that processors could at least pay farmers legislated support prices, if nothing else.
Farmers could count on the support price to come in and that was enough to make a living on, Shoemaker said. You could milk cows like your family had done historically and you could make a living. You wouldn’t get rich, but you could support your household.
“Milk pricing drove the way people ran farms,” Shoemaker said. “Before, people farmed for the love of it. If you needed to increase family living, you could work a little harder or add a few cows.”
That was part of the program’s eventual downfall as well.
Because there was no production control mechanism associated with the support program, dairy farmers could milk more cows and be certain they’d get more money.
After all, the federal government was buying its surplus off the market.
1970s – 1980s:
A rollercoaster ride
In the early 1970s, there was a domestic dairy shortage. As a result, prices shot up. Milk prices went up 30% in late 19732. The government tried to intervene by relaxing import quotas and ended up dropping the price of milk.
President Jimmy Carter came into office in 1977 promising higher milk prices for farmers. He increased the milk support price. Congress used the Food and Agriculture Act of 1977 to maintain the higher milk prices and require a semi-annual adjustment.
The federal government pumped nearly $2 billion into the dairy industry as a result of those changes.
Then, things got crazy in the 1980s.
The legislated support price continued to increase each year, and the government continued to buy surplus dairy products.
These government dairy purchases increased from about $247 million in 1979 to a high of $2.7 billion in 1983.
Legislators froze the support price at $13.10 per hundredweight in 1981 and eliminated semi-annual adjustments. There were later reductions in support price.
By this point, the federal government had stockpiled millions of pounds of cheese and butter it had bought off the market. It had no idea what to do with it. The cheese was getting moldy.
“Probably the cheapest and most practical thing would be to dump it in the ocean,” one USDA official told The Washington Post in 19813.
President Ronald Reagan’s solution? Give the cheese away.
Starting in 1981, low-income families were given blocks of this commodity cheese through the Temporary Emergency Food Assistance Program. The program distributed more than 300 million pounds of surplus cheese, which became known as “government cheese.”
Next, the federal government tried to control production.
First, was the Dairy Production Stabilization Act of 1983. Dairy farmers were offered direct payments to reduce their milk production through the Milk Diversion Program. The goal was to decrease milk marketed by 5 to 30%.
Did it work? Sort of. From January 1984 to March 1985, 20% of commercial dairies, or about 38,000, participated1. Production was reduced by 9.4 billion pounds in 1984 and the first quarter of 1985. The government paid $955 million to participating farmers.
But nonparticipating farmers increased their production during this time. So, the actual reduction was less than 7.4 million pounds1. And, after the program ended, participants upped their production again.
1985 – 2014:
The Dairy Termination Program and its aftermath
Next, the feds tried something a little more drastic. The Dairy Termination Program was part of the 1985 Farm Bill. The goal was to reduce production by nearly 9%4.
Under the program, the USDA paid participating farmers to slaughter or export their entire herd and get out of dairying for at least five years. Farmers submitted bids to get into the program.
Almost 40,000 farmers submitted bids for the program. The USDA accepted about 14,990 dairy farmers, with bids ranging from $3.40 to $22.60 per hundredweight, according to a 1988 report on the program from the General Accounting Office, the congressional watchdog agency4.
The federal government paid out about $1.8 billion to producers and took about 12.3 billion pounds of milk off the market. More than 1.5 million dairy cattle were slaughtered or exported between April 1986 and September 1987.
Did it work? Temporarily. “Nonparticipating dairy farmers continued to increase their production,” the General Accounting Office report found. In 1986, overall production actually increased by a fraction.
But there were decreases in production in 1987 and 1988. A second report from the General Accounting Office evaluating the program’s cost-effectiveness found the program saved the federal government $2.4 billion over four years5.
The support price continued to fluctuate through the 90s, mostly downward. 6
In 1999, it went down to $9.90. That’s where it remained until 2014 when the price support system finally died.
The 2014 Farm Bill replaced it with something totally different — the Dairy Margin Protection Program. It worked like an insurance program for margins.
Farmers pay a premium to insure a margin. If the margin drops below the insured level, the farmer receives an indemnity, Shoemaker said.
It had good bones, but it didn’t work well for a number of reasons, she said. One of the biggest issues was the cost to participate and the coverage available.
The way it was set up, farmers would never reach the margin that was covered, Shoemaker said. So they’d never get the financial help they needed.
“The best thing it did was start the process of looking at supporting the dairy industry in a different way,” Shoemaker said.
- The Evolution of Milk Pricing and Government Intervention in Dairy Markets
- How the U.S. Ended Up With Warehouses Full of ‘Government Cheese’
- Cheese giveaway churning
- General Accounting Office Dairy Termination Program: A Perspective on its Participants and Milk Production
- General Accounting Office Dairy Termination Program: An Estimate of Its Impact and Cost Effectiveness
- Milk Price Support Program fact sheet