Milk Prices and the Fiscal Cliff

An interesting and unintended consequence of the fiscal cliff is the “milk cliff” (perhaps better thought of as a "milk mountain") – lost in the budget battle is the fact that there is a Senate ratified farm bill that has yet to make it to the floor of the House.  The farm bill covers multiple billions of dollars in various agricultural programs, including dairy.


As it currently stands, the government sets a price minimum for milk that supports the supply of a very important staple product for families and also affords some stability with respect to financial planning for milk producers.  Obviously, if supply and demand dictates a higher price than the government “floor”, producers happily sell on the open market for an incremental profit.  Our understanding is that unless a new deal is put in place, the calculation mechanism for the price floor will revert to a 1949 law that reflects milk production technology that is 6 decades obsolete, adjusted for inflation. 


We have seen various sources that suggest this would put the government in a position where it is forced to support a “floor” that will be about 2x the current market price.  The potential impact to consumers is a doubling, over time, of the current average cost of $3.50 for a gallon of milk.

While milk consumption has been on a steady decline since the 1960s, per capita milk consumption is still approximately 20.6 gallons per person per year (U.S. Department of Agriculture).  And while a doubling of the price represents “only” an annual price increase of $72 per person, the total “tax” hike is a highly regressive $22.7 billion.  Again, not the end of the world, and there are certainly ways for the government to delay and or mitigate the impact, but the reality is that the potential exists for consumers and producers to see a material disruption in the dairy market.


Finally, even with declining per capita consumption as a backdrop, retailers still rely on the milk category to drive traffic, so this development represents a marginal negative for food retailers as well.


Robert  Campagnino

Managing Director






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