Milk Money: How Incentives Lead to Milk Down the Drain

The 1990s ad campaign from milk producers, "Got Milk?," permeated the ad world and transcended into pop culture. Yet despite the public's awareness of milk and dairy products, farmers still need to dump millions of gallons of milk every year. Dairy farmers face fierce competition to produce milk in vast quantities and are supported to do so through various incentives, both direct and indirect. These incentives, along with other factors, have led dairy operations to grow into large factory operations and squeeze out small farmers.

High Cost of Subsidies

In the US, the dairy industry has had access to direct and indirect subsidies for many years. Historically, the direct subsidy programs made payments to dairy operations for any losses due to the price of milk falling below a certain point or implicitly through a price support program. The Environmental Working Group calculated that dairy program subsidies totaled $5.6 billion from 1995 to 2014. Indirect subsidies come in the form of allowances for pollution, exemptions from environmental regulations and lack of standards regarding animal welfare. Until a recent ruling, factory farming operations were exempt from EPA regulations on reporting on hazardous air emissions, like ammonia and hydrogen sulfide.

Federal subsidies refer to national averages for the price of feed and market price for milk. For small dairy farms, these national averages may not resemble what they must pay for feed or what price they receive for the milk they produce, thus they may not fully reap the benefits of the federal support programs.

Subsidy Reform

To cut down on the price of subsidies, the incentives shifted under the 2014 Farm Bill from a direct payment scheme to an insurance based-mechanism for managing risk. The old system would pay dairy farmers for the difference if the price of milk fell below a certain amount. The current insurance-based program, called the Margin Protection Program, provides risk protection if the margin between the national milk price and the national feed costs falls below the level of coverage that the farmer had enrolled. The feed costs include the price of corn, soybean meal and hay prices. For large producers, this support program may give larger payouts than the previous price program, so there isn't an incentive to change practices. However, the program collects premiums and fees that may be unaffordable to small farms and payouts may be volatile year to year.

What to Do with Too Much Milk

While the new dairy protection program helps to reduce the direct subsidies to dairy farmers, 43 million gallons of milk were dumped or lost in just the first eight months of 2016. The glut of milk also caused the USDA to help out and buy $20 million in cheddar cheese, while large-scale milk producers and fast food companies are investing millions of dollars to develop milk-heavy menu items like Taco Bell's "Quesalupa." Since milk is perishable, turning it into cheese and other milk products ensures that it doesn't spoil, but it is still being turned into products for which there is not a demand in the market.

The incentives some dairy farmers rely on can result in larger farm sizes, which can then squeeze out small operations - and ultimately produce too much milk. Excess milk results in millions of gallons wasted and products people neither want (e.g., $20 million in cheddar cheese) nor really need (e.g., Quesalupas). The current incentive structure for dairy farms needs to be rethought to help out small dairy farmers and to become less wasteful and more sustainable.


Image "WSPA" by WSPA International  on Flickr used under a Attribution-ShareAlike 2.0 Generic license.