The reduction in federal dairy price supports voted by the U.S. Senate on Tuesday is unlikely to halt the current round of increases in retail milk prices, but it probably will drive some marginal and undercapitalized dairy farms out of business, according to farmers and industry experts.
If sustained by the House, the cut in supports will curtail payments that stimulate production just as farmers need to produce more to meet rising costs, they said. The result is likely to be a further consolidation of the industry, especially in Maryland and Virginia where most of the 3,000 to 4,000 dairy farms are small, family owned operations.
"Collectively we're producing too much milk, but on an individual basis the farmers all need to produce more because costs are going up," said Clyde Crum, who runs a farm in Thurmont, Md., and is past president of Capitol Milk Producers Cooperative, the parent company of High's dairy stores. "The only thing that corrects it is that some don't make it and some do. There's going to be a shakeout."
"It's going to put the hurt on us," said Dennis Savage, whose family runs a 1,200-acre dairy farm in upper Montgomery County. "The price of feed is going up. The cost of labor is going up. Some of the small farmers -- the ones that can't grow their own feed -- will be in trouble."
Federal dairy support funds are not paid directly to farmers and are not directly related to the price farmers get for their milk. The U.S. Department of Agriculture uses the money to finance its guaranteed purchases of surplus cheese, butter and powdered milk produced by dairy-product manufacturers. With nationwide dairy pro duction running almost 10 percent ahead of consumption, the Agriculture Department has been forced to make rapidly growing payouts to buy the surplus.
By cutting the payment levels for such purchases, the Senate bill in effect would reduce the processing plants' overproduction insurance. That in turn is likely to cause the plants to buy less from the farmers, while the farmers -- who are carrying heavy debts at high interest costs -- need to produce more to stay afloat, industry analysts say.
At present the government's support price for surplus dairy products is $13.10 per hundredweight, or 80 percent of parity, a theoretical fair price. The senate bill would reduce it to 70 percent and change the frequency of adjustments from semiannually to annually. The House version of the farm bill sets dairy parity at 75 percent, but the Reagan administration is expected to press hard for a cut to the Senate level. "Nobody is even dreaming of holding on to the 75 percent," a key staff member said.
At the reduced support level, "The efficient and well-financed farmers are going to continue to produce," said John Mengel, chief economist for the National Milk Producers Association. "If they have to put on more cows to produce more milk to cover their costs, they will. But certain marginal farmers are going to be squeezed out. Part of their herds will go into other herds, and part will go to the slaughterhouse."
Bob Rawlins, spokesman for the Maryland-Virginia Milk Producers Association, a marketing cooperative, said that "the least efficient and the marginal farms are going to fall by the wayside. It's sad, but this is going to happen."
The price-support program guarantees that farmers can increase their revenues by increasing production, in effect providing guaranteed sales at the government's expense regardless of the relationship between supply and demand. Rawlins said that farmers who need revenue to cover their costs of feed, labor, machinery and interest increase herds and production to generate revenue, and the difference between 80 percent parity and 70 percent could determine whether some of them survive.
The price paid to Maryland and Virginia farmers who produce the milk sold in Washington-area stores is set by a federal "marketing order," which uses a variant of the current price paid to farmers by cheese plants in Minnesota and Wisconsin. The Minnesota-Wisconsin price has been stable, and the fluctuations in local milk prices have been caused by other factors, dairy industry officials said.
Retail prices for a gallon of milk dropped to $1.69 in many area markets in June, but are now back to $1.89 and appear to be headed back to the $2.09 that was reached before the supermarket price war.