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MILC Money

House Republicans are supporting a dairy subsidy which is bad economics and bad politics.

12:00 PM, Dec 13, 2005 • By DAVE JUDAY
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KUDOS to House Speaker Dennis Hastert for insisting that the Christmas tree on the Capitol lawn be designated, once again, the Capitol Christmas Tree. Political correctness had worked to re-dub it a "Holiday Tree" in recent years. Hastert's edict that Congress simply recognize the obvious by using the term "Christmas tree" was a welcome moment of clarity and common sense that is, alas, all too rare on Capitol Hill.

The same can't be said for another recent Hastert pronouncement, however. Late last month, Hastert penned a letter that stated "when the House and Senate go to conference on their respective versions of the deficit reduction legislation, I will instruct conferees to secure an extension of a MILC program"--referring to the Milk Income Loss Contract program, a $1 billion dairy production subsidy program. That's right; the otherwise plain-spoken Speaker advocated $1 billion in needless new federal spending be included in the so-called "deficit reduction legislation."

IF EVER THERE WAS A SYMPTOM of Congress' lack of fiscal discipline, the current MILC debate is it. Authorized by the 2002 omnibus farm bill, MILC was originally budgeted for $1.3 billion, yet it ran up a tab of more than $2 billion. This year's Senate reconciliation bill adds $1 billion in new spending over the next two years for a new and unimproved MILC program. What is more disturbing is that MILC, from the very beginning, was conceived to be only a temporary payment program. It expired, as planned, on September 30, the last day of the 2005 fiscal year. Even though the House passed a budget package which wisely let MILC rest in peace, Hastert now wants it resurrected.

Why? Because Hastert thinks it might help Wisconsin Representative Mark Green in his 2006 run for governor. It's not coincidence that the letter Hastert wrote about MILC was addressed to Green, not to the chief negotiators of the conference with the Senate--overall negotiator Budget Committee Chairman Jim Nussle of Iowa, and farm policy negotiator, Agriculture Committee Chairman Robert Goodlatte. Wisconsin Democrats had been putting political pressure on Green for his apparent lack of ability to secure a new MILC program--like that included in the earlier passed measure in the Senate, where Wisconsin has an entirely Democratic delegation, Herb Kohl and Russ Feingold. Hastert took the bait.

Indeed, Hastert's letter was an ex post facto paper trail. The letter commended Green for his "efforts on behalf of Wisconsin dairy farmers." And in a choreographed response, Green's Washington Congressional office issued a press release based on the speaker's letter, detailing exactly what Green's commendable efforts were: he not only was "pushing (Hastert) for months," he "fought day and night" for MILC and "personally pressed . . . President George Bush" and offered up three versions of a renewed MILC program.

Republicans should be unsettled by this fiscal fiasco. First, undermining the House budget savings bill before it even goes to conference erases any hope of Congress taking seriously the need to curb spending. Second, it opens a political can of worms. Consider: If Republicans follow Hastert on this one, federal tax payers will provide a de facto $1 billion in-kind contribution to the Green for Governor campaign--and he still has a Republican primary opponent. But for what? The best message gubernatorial candidate Green has to offer is: Vote for me, I "pushed" and "pressed" and "fought day and night" against my party before they relented to do what the Democrats had already promised. Indeed, this isn't the first campaign appearance for the MILC program. Messrs. Hastert and Green would do well to recall that late in the presidential race in 2004, President Bush, while campaigning in Wisconsin, bowed to similar parochial political pressure and endorsed the idea of extending MILC. Bush lost Wisconsin.

MOST DISTURBING, however, is that the MILC program isn't worth fighting for--it is an unmitigated failure. While reinstating the MILC program would add to overall federal spending and, thus, expand the deficit, those payments ironically would not add much to dairymen's pocketbooks. According to USDA's economic modeling, "without the MILC program, the remaining dairy programs raise the all milk price by 3.8 percent over a five year period--when MILC is included, the increase is only about 1.5 percent."

Those findings are from a study, Economic Effects of US Dairy Policy and Alternative Approaches to Milk Pricing, which Congress requested in the 2002 Farm Bill when it implemented MILC as a stop-gap measure. To sum up the USDA's conclusion, the MILC program and the existing dairy price support program--a cornerstone of the longstanding diary subsidy apparatus--are in direct conflict. Hence the curdled results.

The USDA report explains the rather arcane interaction: "the price support program establishes a safety net floor under milk prices--milk prices are allowed to fall enough to induce a correction (in the market)" while producer incomes are protected by the price support level. But, the report goes on to say, "when market price has fallen toward the price support safety net and thus is calling for an adjustment in supply, the results are partially muted by the MILC program." Since MILC payments are tied to production, those payments actually stimulate increases in marginal production, and that added production puts even greater bearish pressure on milk prices. A vicious cycle, indeed.

Let's review. The MILC program is counter productive, has a history of cost overruns, and was never meant to be more than a temporary fix. And as a political tool, it has a similarly dismal record. It would be much better for Speaker Hastert and all concerned to have within the next few weeks, a real deficit reduction plan, with real savings, wrapped up and placed under the Capitol Christmas Tree.

Dave Juday is an agricultural commodity market analyst.