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Quantitative Cheesing

January 31, 2017

Here’s the cheesy truth: Dairy prices are too low and supply is too high. Cheese prices dropped from $24 per 100 pounds of milk in 2014 to $17.10 in 2015. As a result, dairy farmers have seen their revenues drop 35% over the last two years, despite expanding their herds. [1] To help farmers cope with this price falloff, the United States Department of Agriculture (USDA) announced a $20 million plan to buy back 11 million pounds of cheese from American dairy farmers. [1]

<p><strong>Image: </strong>A year-over-year comparison of monthly US American cheese holdings. <strong>Source: </strong><a href="https://www.ams.usda.gov/market-news/dairy">USDA</a></p>

Image: A year-over-year comparison of monthly US American cheese holdings. Source: USDA

International demand-side and domestic supply-side developments caused the 2014-2015 price slump. Abroad, the growing strength of the dollar forced China, the EU and other nations to reduce their dairy imports. Russia also stopped importing US dairy products following their annexation of Crimea. [2] Furthermore, high prices in previous years encouraged farmers to raise more cows and produce more. [3] These larger herds placed downward pressure on prices as consumption remained steady throughout 2015. Together, slack international demand and excess supply pushed average prices to less than $17 by the end of 2015.  But this price decline merely signaled a return to historical norms. From 2001 - 2015 the median price for cheese was $16.30, meaning farmers have experienced current price levels before. [1] Why then did the government intervene with a $20 million bailout? This bailout is emblematic of the federal government’s interventionist relationship with the dairy market.

<strong>Image: </strong>Correlation between changes in cheese and milk prices. <strong>Source:</strong> <a href="http://milkprice.blogspot.com/2010_06_01_archive.html">MilkPrice</a> 

This intervention in American dairy markets isn’t unprecedented. The US government adopted the practice during the Great Depression with the establishment of the Agricultural Adjustment Administration (AAA). The organization paid farmers to plow under their crops, artificially limiting supply and bolstering prices. [5] Intervention in the dairy markets continued after the AAA shutdown in 1936, as well.

<strong>Image: </strong>Milk pricing per pound in terms of constituent components. <strong>Source: </strong><u>MilkPrice</u>

More recently, Congress passed the Farm Security and Rural Investment Act of 2002 to support the industry. Provisions in the law included export incentives, the promotion of fluid milk, and funding for national dairy research. The law also established the Margin Protection Program (MPP): a price support function that helps farmers hedge against market fluctuations. The program makes direct cash infusions to struggling farms to make up the difference between prices and costs so that farmers aren’t forced off their land in a short term cash crunch. Another initiative, the Milk Support Program, guarantees that the government will purchase excess production of dairy products. [6] These two programs reward overproduction, which puts downward pressure on prices. This phenomenon creates a persistent cycle of government intervention.

Every year, the US government spends an estimated $25 billion dollars of taxpayer money on agricultural subsidies, $1.5 billion of which go to the dairy market. [3] Per capita dairy subsidies vary greatly, with the largest ($13 million) going to a farm in Texas called McNutt Brothers Dairy.

<strong>Image: </strong>Historical and projected farm income subsidies adjusted for inflation. <strong>Source:</strong> <a href="http://www.npr.org/sections/thesalt/2016/02/01/465132866/farm-subsidies-persist-and-grow-despite-talk-of-reform">NPR</a>Agricultural subsidies also negatively affect Americans’ health. Experts agree that a healthy diet should consist of roughly 50% fruits and vegetables, but the government does not heed this medical advice in current agricultural policy. Instead, the vast majority of current subsidies go towards red meat, corn, and soybeans, rather than comparatively healthier fruits and vegetables. According to researchers at the Centers for Disease Control and Prevention and Emory University in Atlanta, $170 billion was spent between 1995 on 2010 on corn, soybeans, wheat, rice, sorghum, dairy, and livestock alone. The researchers also surveyed the dietary habits of 10,308 individuals to determine if subsidizing certain crops correlated with their health. The results of the survey, which were summarized in a paper posted in JAMA Internal Medicine, concluded that those who consumed the most calories from subsidized food had a higher rate of obesity and higher blood sugar levels, which can lead to diabetes and heart disease.

<strong>Image: </strong>Average American dairy consumption per year in different forms. <strong>Source:</strong> <a href="https://cspinet.org/resource/changing-american-diet">Center for Science in the Public Interest</a>Such results make sense given corn and livestock, the most heavily subsidized agricultural products, often end up in unhealthy foods, such as high fructose corn syrup and heavily processed red meats. According to a report from the U.S. Public Interest Research Group, only a fraction of one percent of all agricultural subsidies funds fresh fruits and vegetables [12]. Of course, no one makes the argument that agricultural policy alone has caused America’s junk food craze. Everything from biology to branding has contributed to the problem. However, agricultural subsidies have certainly helped bring about the obesity epidemic by reducing the prices of foods dangerous for cardiovascular health relative to healthier alternatives. A more health-conscious system of agricultural subsidies—one that incentivizes the production of vitamin-rich fruits and vegetables–could help Americans make healthier choices at the grocery store.

On a similar note, agricultural subsidies can have detrimental effects on the environment. Because subsidies reward increased levels of production, farmers use more fertilizer to cultivate marginal, nutrient-poor land that might otherwise be left untouched, absent subsidies. [7] The Florida Everglades offer an unfortunate case study of this phenomenon. There, phosphorous found in fertilizers and pesticides used by subsidized sugar farmers led to the contamination of water supply and severely threatened the local ecosystem. [7] Additionally, the EPA found that the agricultural industry is responsible for 9% of all greenhouse gases emitted in the United States. [8] This figure suggests agricultural subsidies that reward overproduction contribute to global warming and environmental decline. The continuation of these subsidies threatens the long-term viability and availability of American farm land.

Widespread agricultural subsidies also contribute to global inequality. [9] Subsidies depress long-term agricultural prices by artificially bolstering domestic supply. This places downward pressure on the world price of crops. While American farmers benefit from subsidized crops, the inefficient farming technology, low prices, and low subsides disadvantage farmers in developing nations. For example, the National Center for Policy Analysis concluded that Central and West African countries lose up to $250 million annually on cotton sales due to foreign subsidies. [7] Equally startling, the NCPA gauges that sugar subsidies in developed nations caused developing nations’ share of the market to decline from 71% in 1985 to 54% in 2000. [7] This decline contributes to financial insecurity for foreign farmers and undermines the growth of emerging markets around the world.

That agricultural subsidies harm emerging markets, contribute to environmental destruction, and incentivize unhealthy eating calls into question their continued existence. Originally, policymakers designed subsidies to help farmers recuperate in the short-term after the Great Depression and the Dust Bowl. Politicians intended to phase these early subsidies out in a matter of years, but the farmers who received them wouldn’t tolerate any program cuts. As sunset dates loomed, farmers marshalled funding, hired lobbyists, and organized grassroots campaigns to defend their handouts. Lawmakers responded to this considerable pressure by proposing new subsidies, delaying sunset dates, and designing long-term price support programs. Those who dared to propose meaningful reforms faced fierce opposition for re-election from lobbyists and irate farmers. In recent decades, the rise of international agricultural conglomerates has strengthened this lobby dramatically. In 2008 for instance, agricultural interests spent over $173.5 million lobbying Congress on the 2008 Farm Bill. [13]

The future of the federal government’s relationship with American agriculture remains unknown in the light of a Trump presidency. President Trump has spoken extensively about “draining the swamp” and combatting entrenched interest groups. This rhetoric suggests he may stand up to the agricultural lobby and re-evaluate interventionist agricultural policies. That said, he has never criticized subsidies directly. Instead, he has promised to end the “war on the American farmer” by slashing agricultural regulations. [14] Though this deregulation could help farmers cut costs, President Trump’s protectionist trade policies might depress prices.

On January 22nd 2017, the President officially withdrew the U.S. from the Trans-Pacific Partnership (TPP) and announced his intentions to renegotiate the North American Free Trade Alliance (NAFTA). The Trump Administration intends these efforts to shield domestic producers from international competition, but globalization doesn’t disadvantage American farmers. On the contrary, American agricultural firms benefit from international competition because they can afford to sell crops at lower prices than most foreign firms—thanks, in part, to generous federal subsidies and price supports. [11] As a result, American agricultural firms have become deeply dependent on the international markets President Trump’s protectionism threatens to destabilize. In 2013, firms exported more than 20% of domestic agricultural products. [14] Any efforts to reduce global competition will simultaneously reduce international demand for these products, drive prices down, and reduce American market share. Unless President Trump genuinely dismantles the agricultural lobby, these price effects will also trigger another round of subsidies, perpetuating the current cycle of dependency. Regardless of the Trump administration’s trade policies, the 115th Congress should consider reforming domestic agricultural policy.

Sources

  [1]http://dailysignal.com/2016/10/25/stop-the-cheese-bailouts/

  [2]http://time.com/4463378/cheese-usda-buy-20-million-surplus/

  [3]http://oecdobserver.org/news/archivestory.php/aid/1223/Farming_support:_the_truth_behind_the_numbers.html

  [4] http://www.agweb.com/article/plunge-in-milk-prices-stresses-dairy-farmers–naa-associated-press/

  [5]http://www.indiana.edu/~psource/PDF/Archive%20Articles/Fall2013/2013%20-%20Fall%20-%205%20-%20Higgins,%20Taylor.pdf

  [6]https://www.gpo.gov/fdsys/pkg/PLAW-107publ171/pdf/PLAW-107publ171.pdf

  [7]http://www.ncpa.org/pub/ib126

  [8]https://www.epa.gov/ghgemissions/sources-greenhouse-gas-emissions

  [9]

  [10]http://www.nationalreview.com/article/438433/protectionism-donald-trumps-economic-plan-would-be-anti-growth

  [11]http://www.cnbc.com/2016/11/15/trumps-protectionism-will-bite-the-us-economy-socgen-chairman.html

  [12] http://www.uspirg.org/sites/pirg/files/reports/Apples%20to%20Twinkies%20vUS_2.pdf

  [13]http://www.thefiscaltimes.com/Columns/2012/07/25/The-Outrageous-Farm-Bill-Thats-Packed-with-Pork

  [14] https://www.ers.usda.gov/topics/international-markets-trade/us-agricultural-trade/export-share-of-production/#exportshare

 

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