Buttering Up the Farmers

U.S. dairy stockpiles just keep on growing

Every week, freight trains that are sometimes 80 cars long rumble across the Midwest and into the mouth of a mammoth limestone cave in Kansas City, Kans. Below ground, workers descend upon the boxcars and begin unloading the crated cargo. The tight security suggests an underground nuclear test facility, or maybe a toxic waste storage dump. In fact, the site is actually the U.S. Government's largest warehouse for surplus butter.

Into that frigid cavern, and 328 smaller warehouses and depositories around the country, the Department of Agriculture each week deposits 45 million lbs. of unwanted butter, cheese and nonfat dry milk. The accumulating hoard, which now totals 800,000 tons, or enough to fill a fleet of supertankers, is the result of the U.S. Government's 32-year-old dairy-price-support program. How to keep the stockpile from swelling even larger is now giving the Reagan Administration something approaching collective indigestion.

The new Administration has singled out dairy-price supports as a grade A example of waste, only to collide with the National Milk Producers Federation, one of the most influential lobbies in Washington. The dairy-support system that the two sides are quarreling over will cost $2.1 billion during the current fiscal year, almost twice as much as all other commodity supports combined.

The problem is now becoming acute because storage space, which the Agriculture Department leases from private companies, is growing scarce. Moreover, once acquired by the Government, the surplus food becomes exceedingly difficult to get rid of. Social welfare programs such as subsidized school lunches and foreign aid absorb only a small fraction of what the U.S. buys each day. The U.S. could easily sell some of the rest abroad, but only at a discount. The 95-c- per lb. that the Government pays for dry milk, for example, is almost 70-c- higher than the price on world markets. Moreover, any markdown could anger consumers, since other nations would be getting U.S. dairy produce at a cheaper price than Americans pay for it.

Like most Government programs, the surplus dairy supports began for sound reasons. Because cows give more milk in spring than in winter, dairy farmers have always had trouble tailoring milk supplies to fit demand. In 1949 Congress passed a law obligating the Government to buy all surplus milk, which it does in the form of butter, cheese and dry milk. The idea was to keep the goods in storage during peak production periods, and then sell them back to distributors later in the year when production dropped off. The program gave farmers a steadier income while stabilizing the year-round milk supply for consumers.

In recent years two forces have thrown the system out of kilter. One is the outdated Government index known as "parity." Its purpose is to make sure that milk retains, relatively speaking, the same value in 1981 that it had before World War I. Improvements in dairy technology have now boosted productivity dramatically, but the rickety parity index has never been updated, causing the price of milk to stay artificially high.

The other force frustrating efforts to keep the system in check has been the lobbying expertise of the milk producers, who have consistently fought reform. Their biggest gains have come from passage of a 1977 amendment that has boosted the minimum price that the Agriculture Department is required to pay for surplus dairy goods from 75% of parity to 80%. The amendment further requires the Government to readjust support prices twice a year to keep pace with inflation. Result: even at 80% of parity, the U.S. now pays $1.50 per Ib. for butter, 50-c- more than the world wholesale price.

Some dairy food processors, like Land O' Lakes Inc. of Minneapolis, have figured out another way to milk the program. There is a loyal consumer market for aged Cheddar cheese, which has a sharper taste than new Cheddar. Since storing the cheese would tie up the companies' capital, companies sell the cheese to the Government as a surplus dairy product, at anywhere from $1.36 to $1.39 per Ib., then buy it back at only a 10% markup six months or so later when the cheese is ready for market. The arrangement sticks the Government with the storage and transportation costs.

The program's immediate fault is its excessively generous parity level. A recent Agriculture Department tally found that after 27 years of diminishing dairy herds, dairy farmers last year added 72,000 milk cows, even though the only market for the extra output was the Government. When the dairy program comes up for a four-year renewal vote in Congress some time before Sept. 30, the Reagan Administration is planning to push for leeway to drop dairy-support prices to 70% of parity, or even lower if especially large surpluses occur.

The proposals would not eliminate dairy stockpiles, but they would reduce the cost of the supports from $2.1 billion a year to an estimated $1.2 billion. Said one high-ranking Agriculture Department official: "That in itself would be a great achievement."

The dairy industry is ready to fight the Administration's cutback proposals. The lobby's position is that the price supports are simply helping dairy farmers to make a reasonable profit, which only appears large when compared with other farm earnings. "We are producing too much milk," concedes Dairy Lobbyist Patrick Healy, "but the price-support program exists to ensure an adequate supply of milk. It does that."

Even if the White House succeeds in whittling down the price-support system, the Agriculture Department will still be stuck with the mountains of butter, cheese and dry milk that it already owns. Secretary of Agriculture John Block wants authority to unload some of the Government's butter on world markets at a competitive price before it turns rancid. But Secretary of State Alexander Haig worries lest any additional butter on the world market be bought up by the Soviet Union. Now that the Government has lifted its grain embargo to the U.S.S.R., Haig seems to be saying, "All the bread you want, but no butter."

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