ONE OF the subtle complications of modern American life is that the people tend to live a long way from the cows. The largest concentrations of people are along the coasts; the national dairy herd is based in Wisonsin.
Partly to compensate for this - to assure that milk moves evenly to market all across the country - the Agriculture Department over the years has developed a national milk pricing system that makes up one of the most complex chapters in the Code of Federal Regulations.
The price of milk in America has become a federal artifact, a political creation.
Item: The government seeks, through this pricing system, to make sure there will always be enough milk reserved for drinking, as opposed to milk used for cheese or other manufactured products. It has therefore set higher minimum prices for milk that ends up in a bottle than for the same milk if it ends up in a mold or churn. An American cow can give two prices of milk in one day. Drinking milk prices are higher than they would otherwise be, but cheese prices are lower. Milk drinkers are subsidizing cheese eaters, paying a disproportionate share of the national dairy bill.
Item: The government also seeks, through price, to make sure that drinking milk is distributed properly throughout the country. It therefore tries to set minimum drinking milk prices in each region high enough to encourage adequate local production - but not so high as to bring down a devastating flood of competing milk from Wisconsin, where there is almost always a surplus. To achieve these conflicting objectives, the government has decided that the farther you live from Eau Claire, Wis., the more you ought to pay for milk (but only if you live east of the Rockies; in this as in so many other respects, California has rules of its own.) Minimum prices rise with distance from Eau Claire at the rate of about 15 cents per hundred pounds - a penny and a half per gallon - per hundred miles.
Item: All these minimum prices - for drinking and manufacturing milk, and for drinking milk sold everywhere from Eau Claire to Key West, Fla. - are locked together in a grid. The government is able to move that grid up and down through price supports - a promise to step in and buy if prices fall below a specified point because supply exceeds demand. The government's aim is to keep these supports high enough to call forth exactly as much milk for all purposes as the nation needs each year, and no more. If there is extra, the Commodity Credit Corp will have to buy it.
The Carter administration is supporting a bill in Congress that, at least for now, would keep rice supports from falling. Yet the administration will also soon send Congress a trade bill whose likely effect would be to reduce dairy farmers' income, by liberalizing the import quotas that now keep out so much foreign cheese.
No deregulation demand
We live in a day when it is intellectually and politically fashionable - almost an act or orthodoxy - to denounce federal regulation. Here is the most elaborate of federal regulatory systems serving to raise the price of the most homely and familiar of all products; milk. Why is there no great demand that the government deregulate our cows?
On reason is that most people are not aware that the federal milk-pricing system exists. A more important reason may be this: It works pretty well. In most years, it has brought forth about the right amount of milk, in the right places and the right time (which is not as easy as it sounds: Cows produce more in spring, but we drink more in winter).
Much has been written about the political nature of the dairy price support system and the political slush funds of the dairy farmer cooperatives. Dairy farmers give nearly as much as doctors to political candidates, and dairy campaign contributions produced one of the subscandals of the Nixon administration. The Carter administration has also been attentive to the dairymen's needs, in some ways even more so.
Vice President Mondale is from the dairy state of Minnesota; so is Agriculture Secretary Bob Bergland. In the 1976 Democratic presidential primary in Wisconsin, candidate Jimmy Carter outbid both rivals - Rep. Morris K. Udall (D-Ariz.) and Sen. Henry M. Jackson (D-Wash.) - in promising to increase dairy price supports, and when elected, President Carter kept the promise.
Carter had Bergland increase price supports to such a point in 1977, his first year in office, that the CCC had to buy $710 million in dairy products, a modern high. In that same year Carter signed a bill lifting the minimum possible level of price support to what is called 80 percent of parity. Republican predecessor Gerald Ford had vetoed similar legislation in both 1975 and 1976 as inflationary.
Yet the Carter administration, while now supporting the successor legislation to keep the minimum parity level at 80 percent, this time has proposed an important anti-inflationary caveat: The secretary could lower the parity level if the government ended up having to buy more than a specified amount of milk. The House Agriculture Committee said no to that.
But earthy as some of its politics are, it is hard to find anyone getting rich off the present system. There are nearly 90 percent fewer farms with dairy cows in America than there were 25 years ago, and the average surviving farm is larger in this as in other farms. But this average farm is still small. Eighty-five percent of U.S. dairy farmers still have fewer than 50 cows; these farmers account for half of all dairy cows and half of all milk production.
There are a few large dairy farmers, particularly in Florida, California and Arizona, for whom a small increase in the support level means a large increase in income. But they are atypical.
The system's defenders also say dairy prices have not increased as much as prices generally, or even as much as all food prices, in recent years. From 1960 through 1977, prices for dairy products rose 97 percent; for all food, 118 per cent; for consumer goods and services generally, 105 percent.
Still there are critics. A year ago, for example, two Agriculture Department economists, Richard F. Fallert and Boyd M. Buston, studied the various distributional effects of the milk pricing system. They found that:
Minimum drinking-milk prices in many parts of the country, including the Washington area, are higher than necessary to bring forth an adequate local supply of milk. Prices here may be 10 cents a gallon too high, they say.
These higher prices for drinking milk are not completely offset by the lower prices for cheese and other manufactured dairy products that the system also produces.
The higher-than-necessary drinking milk prices have helped keep some marginal dairy farmers in business in several areas, particularly the Northeast. At the same time, in an unspoken regional trade-off, they have cost dairy farmers in the upper Midwest some business.
A team of economists and laywers from the Justice Department's antitrust division was also critical of the system in a previous study. They found it helped producer cooperatives divide up and dominate markets.
These co-ops have become a problem for the government in recent years. Most are now strong enough to exact prices from processors that are higher than the federal minimums.
The Justice Department filed antitrust suits against the three largest dairy co-ops several years ago. Two were settled through consent decrees; the third went to trial, and the department is now appealing the decision, which was substantially less than it had sought.
Meanwhile, the Agriculture Department is gently threatening the co-ops another way. Farmers are given a certain immunity from antitrust laws when they form cooperatives. That immunity comes from the Capper-Volstead Act. But the legislation says co-ops may not engage in "undue price enhancement," and gives the secretary of agriculture power to discipline them when they do.
That power has never been used. In fact, undue price enhancement has never been formally defined by the Agriculture Department. A task force is now at work producing such a definition.
The milk pricing system has also come up, in a limited way, in the administration's internal debates over inflation. The president's wage-price watchers are taking a crash course in the system, in search of ways to moderate inflation. Consumer advocates have also zeroed in on certain aspects.
One complaint has to do with the rules governing what is known as reconstituted milk - milk sold in liquid form but made from powder. Proponents say it would be possible to lower milk prices in many regions by shipping powder from states such as Wisconsin, then liquefying it. They claim consumers would happily buy it. But current regulations forbid selling reconstituted milk for less than fresh milk.
The other complaint has to do with the parity formula, according to which price supports are set. This one is complicated, but essentially the price of milk has been hitched by act of Congress in part to the price of beef. You ask yourself why milk is up and the answer is that beef is up, even though milk and beef tend to come from different kinds of cattle. And that is true no matter how far you live from Eau Claire. tconsumer groups want the price support formula revised. CAPTION: Illustration, no caption, Allen Carroll for The Washington Post