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The Stimulus Is Coming. Cows Should Be Worried.

One of the lesser-known consequences of the economic downturn is that the United States has ended up with a surplus of milk. Demand for dairy products—a relatively expensive source of calories—fluctuates with economic conditions, while the supply of milk is, in the short run, almost completely inelastic: A cow has to be milked twice a day, whether anybody wants to buy the milk or not. The result of this supply-side inelasticity is that even small changes in the demand for milk can cause large fluctuations in milk prices.

As The New York Times reported earlier this month, the federal government has responded to this surplus by buying up powdered milk and stockpiling it in warehouses, hoping to sell the milk once the economy recovers and demand goes back up. Thanks to the 2008 farm bill, the government also has a program that pays milk producers 45 cents for every dollar they lose by selling milk below a threshold price. Dairy farmers want the government to increase these payments, but are also lobbying for it to do something about the excess supply at the root of their problems.

The dairy industry's solution to the milk surplus is to have the government pay dairy farmers to "retire"—by which they mean slaughter—their cows, thereby decreasing the supply of milk. But the cows have found an unlikely protector in the National Cattleman's Beef Association, which opposes a mass dairy-cow "retirement" on the grounds that it would depress beef prices. The beef farmers (and the dairy cows) are currently winning the debate, thanks to House Appropriations Committee chairman David Obey, who resisted House Agriculture Committee chairman Collin Peterson's attempt to insert cow-retirement funds into the stimulus bill. But with the stimulus still unfinished, the cows aren't out of danger yet.

Most economists and environmental groups agree that these sorts of agricultural price-support programs—especially production subsidies that kick in when the price of a commodity gets too low—are bad ideas, since they distort the market and lead to more food production, and therefore more environmental damage, than would otherwise take place. But how else are dairy farmers supposed to survive in such an inherently volatile industry? One California dairy farmer says that he plans to downsize his operation, switch to feeding his cows on pasture, and sell his milk on the organic market. This switch, he says, will enable him to stop spending large amounts of money on grain and other trucked-in feed. It's an interesting idea that we've touched on before: while organic farming methods may be less profitable in the short run, they also limit farmers' dependence on purchased inputs, creating a steadier profit stream over time.

--Rob Inglis