Milk Price and Power
Public education provides little information on economics. Most people are simply told: the U.S. has the best economic system, a market system. The word economics comes from the Greek and means, essentially, the management of the household.
A true market system operates under the principle that price guides supply and demand. The law of supply states that supply is directly related to price; the higher the price of the product, the more the producer will supply. However, when it comes to milk and dairy farms, in spite of the fact that the terms “supply” and “demand” are commonly used, the reality is that power, political power, calls the shots.
There really was a Reagan Revolution. Prior to Ronald Reagan’s presidency, milk pricing regulations had evolved to the point where farmers were paid a price based on input cost plus a profit. The system was known as parity pricing. All parity did was to insure an important facet of capitalism: there generally must be a profit for a business or industry to survive and prosper.
With the stroke of his pen, Ronald Reagan eliminated parity pricing for dairy. As can be seen from the graph below, in the 25 years prior to Ronald Reagan’s presidency, the farm milk price and consumer milk price rose at the general rate of inflation.
Figure one shows changes in price indices from a base period (1982-1984) set to equal 100. The consumer price index for all dairy products trended steadily upward from 100 in 1983 to 185 in 2006. In contrast, the price for milk at the farm remained essentially unchanged. In 2006, the farm milk price index was 99.3. Remember that farmers are consumers too; their cost of living, as reflected in the overall consumer price index, rose 85% while their income stagnated.
Making matters worse, Reagan reduced the resources dealing with antitrust to one eighth of what they had been the year before he took office. Consequently, rapid consolidation of supermarkets soon took place without any interference from the Department of Justice. The Justice Department stood by while supermarkets gained power, and retailers began dictating terms to dairy processors.
Naturally, the Justice Department saw consolidation by dairy processors as no problem. In the early 1990s, one fluid milk processor, known at the time as Suiza Foods, came from nowhere to become the dominant player in the fluid milk processing area and is now known as Dean Foods.
Sitting on the board of Dean Foods is John Muse. John Muse heads HM Capitol, a leveraged buyout firm. The “H” stands for Hicks or Thomas Hicks, the financial mentor to George W. Bush. Hicks arranged the oil deal for George W. which was then spun into the football team that provided George W. with millions of dollars.
One step removed from the U.S. president, John Muse receives, annually, several hundred thousand dollars of Dean Foods stock at no cost. The recent $15 per share dividend paid by Dean Foods yielded $72,735 to John Muse for the stock he’d acquired for nothing in 2006.
In 2006, Dean Foods had a return on equity of 14.87 percent. According to First Pioneer Farm Credit, a major lender to Northeast dairy farms, the average farm in their survey lost $64 per cow in 2006.
So while conventional experts wax lyrical about the market, political power trumps all in dairy, virtually all of the time.
Long-term solutions to the dairy farm crisis cannot be found by those who created the original problem. Solutions can only be found if the public chooses to become self educated about the importance of their food supply system. Little time is left for this important task.
(John Bunting is a bio-dairy farmer, dairy activist and researcher/writer on dairy and food issues. He is a regular contributor to The Milkweed, ( themilkweed.com ) the only investigative publication in U.S. dairy.)
