Can we talk about the dairy cliff?
Let me start by saying I'm not doing this again. I got sucked into the whole drama over milk prices last year. The dairy cliff and the farm-bill extension kinda ruined the holidays. CNN, FOX, etc., got to kill a whole lot of TV time talking about what Congress would do to ordinary consumers if the farm bill wasn't extended.
The Taxpayer Relief Act last January extended commodity programs including the dairy price supports and Milk Income Loss Contract program, or MILC. However, MILC expired on Sept. 30, even though the price supports were extended to Dec. 31, 2013. Dairy is the first commodity to revert to permanent law. The dairy cliff is born.
What the dairy cliff essentially would do is require USDA under permanent farm law to buy dairy products, such as nonfat milk, cheese and butter in enough volume to boost the farm price to price support level for milk to around $37 per cwt. The federal price floor right now is $9.90 per cwt even though market prices for all milk products averaged $21.30, about 80 cents lower than a year ago.
The CME Class III price for December futures is closer to $19 per cwt.
The Senate could refuse this week to take up the House's farm-bill extension. That would fuel more speculation about the dairy cliff even though Agriculture Secretary Tom Vilsack said last week that USDA could slow down any effort to implement permanent law if it looks like Congress is making legitimate progress toward a final bill.
Here's why milk prices are not going to go to $8 a gallon on Jan. 1: Executive Order 12866 and the likelihood that reverting back to permanent law would cost an estimated $1 billion per month just on dairy price supports.
USDA cannot simply start buying milk products at higher support levels. Procedure has to be followed and thus far, USDA hasn't begun to openly inform anyone that it will be changing price programs for dairy in the immediate future. As of Monday, USDA has not submitted any proposed regulatory change to the White House Office of Management and Budget that would revert any commodity program to permanent law.
In drafting new program rules for dairy in 2010, USDA noted that its proposed rule at that time was not reviewed by the White House because OMB designated the dairy rule as "not significant" under Executive Order 12866. That executive order, dating back to 1993, classifies a "significant regulatory action" as any rule that would result in an annual $100 million or more adverse effect on the economy.
Right now, USDA is spending less than $100 million a year on dairy price supports. The White House estimated in a report last month that reverting to permanent law for dairy would cost the federal government $12 billion a year just for dairy programs.
President Obama also created Executive Order 13563, a somewhat of a reaffirmation of EO 12866. Under EO 13563, all regulatory changes must ensure public input and also "must take into account benefits and costs, both quantitative and qualitative." There must be reasonable justification for the rule change.
USDA also would have to explain whether reverting to permanent law would lead to any new environmental impacts that require review under the National Environmental Policy Act. FSA would have to determine whether NEPA applies. From past experiences, if USDA says NEPA doesn't apply, that generally leads to litigation.
There may be questions whether Executive Order 13132 would also apply, meaning USDA would have to consult with state and local governments about the price impacts of reverting to permanent law on dairy. Specifically, the 1999 executive order requires agencies to consult with state and local governments on rules that would "impose direct compliance costs on state and local governments." In this situation, a rule reverting dairy policy to permanent law would translate into a compelling case about direct compliance costs for states when it comes to buying any dairy products for institutions. Certainly, schools would see milk prices double.
Thus, 16 days until Jan. 1, USDA has not sent any proposed changes to OMB about dairy price support for the White House to review, let alone approve. USDA also would need a Federal Register notice explaining how the department addressed all of the other various executive orders and administrative requirements to greenlight spending $37 for 100-pound blocks of cheese.
Not to mention, reverting to permanent law on dairy support comes with the inevitable headline, "Obama Lets Milk Prices Spike."
If you are interested in more information about permanent law, read last week's Congressional Research Service report, http://www.fas.org/…
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