Cows Flee California Seeking a Better Economic Climate

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It's not just millionaires and billionaires who are fleeing the economic madness in California. Even cows are starting to depart for greener pastures. That's right, 400 bovine refugees shuffled off to Kansas just this month, with more expected to follow as over 100 dairy farms in California close their doors.

Why are cows voting with their hooves?

It's hard to find a government program as insane as the complex web of price supports, market orders, direct payments, diversion programs, herd reductions, import barriers, export subsidies, and stacked-to-the-rafters cheese warehouses that characterize Uncle Sam's efforts to "rationally manage" the dairy market. If you really want to understand how crony capitalism works to create market conditions only a Soviet commissar could love, take a look at what happens when byzantine federal regulations collide with state interventions.

Around the time of the New Deal, guaranteeing the milk supply joined life, liberty, and the pursuit of happiness as one of the cardinal responsibilities of government. While this may be ascribed to a desire by politicians to always have enough babies to kiss, some suspect that buying the votes of dairy farmers had something to do with it.

And so, while presidents come and go and Congress regularly passes reform bills to correct distortions caused by prior reforms, dairy programs enjoy the closest thing to perpetual life that a lobbyist could hope for. The main task of these programs is to make sure that market forces will never be allowed to balance supply and demand.

To ensure the public good, the federal government and some states set a minimum legal price on milk. Selling milk for less can actually land you in jail. While this doesn't sound like such a good deal for consumers or innovative producers, it's great for well-connected dairy farmers and the politicians they support.

Artificially high prices impose a tax on anybody who drinks milk or eats cheese and other dairy products. Estimates put the cost to consumers as high as $5 billion a year. But since this tax is hidden, legislators get to enjoy the gratitude of dairy farmers without having to face the wrath of consumers, who remain in the dark about how much they are individually paying.

Our nation's 65,000 dairy farms have been producing a chronic oversupply of milk for as long as the government has taken an interest in their product. While 65,000 dairy farms sounds like a lot for a market that can't gag down all the milk modern hormone-boosted cows produce, things used to be even worse. There were once 200,000 dairy farms producing an oversupply of milk, at one point filling government cheese warehouses with $4 billion dollars of uneaten inventory.

Ever wondered where government cheese came from?

If milk can't find buyers at artificially inflated prices, the government buys the excess with our tax dollars and turns it into cheese. But we aren't allowed to eat the cheese we paid for as this would be unfair to commercial cheese makers. So the cheese sits in storage until it either rots or can be quietly given away to the poor, both at home and abroad.

The crisis in California stems from Golden State cheese makers carrying more political clout than dairy farmers. As a result, the minimum legal price of milk in California is 2 ½ cents per pound less than the average minimum legal price in other states. Two and a half cents may not sound like much, but in a business in chronic oversupply, that's larger than typical profit margins.

With feedstock costs skyrocketing due to the diversion of corn to make subsidized ethanol-another brilliantly managed business- California dairy farmers are on the ropes. Meanwhile, California cheese makers enjoy a competitive advantage because it is illegal for out-of-state cheese makers to buy cheaper California milk.

In desperation, instead of shipping the excess milk out of state, California dairy farms are shutting down and shipping their cows to states with higher minimum prices, allowing them to contribute to the glut there. This has caused California milk lobbyists to scream bloody murder, demanding that California bring its minimum prices in line with other states. Cheese lobbyists just smile, knowing that they have more legislators in their pockets and can afford to sit tight. That's just how central planning works.

A few years ago, the Office of Management and Budget assessed federal dairy price support programs as part of a broad initiative to gauge the effectiveness of over 1,000 government programs. It found that the dairy program had not demonstrated results, has design flaws that limit its effectiveness, and distorts trade in a way that puts the U.S. in violation of World Trade Organization rules.

What action was taken as a result of this negative report? None, of course. If you go to to read the program assessment, a note pops up that says, "This is historical material, ‘frozen in time.' The web site is no longer updated and links to external web sites and some internal pages will not work." That's just how special-interest democracy works.

So bon voyage, intrepid cows. Yet another trillion-dollar farm bill is being cobbled together in Washington as we speak. And the odds that any deficit producing, wealth-destroying, consumer-shafting dairy programs will be phased out, allowing the dairy industry to restructure itself on rational lines, are about as good as that of the Supreme Court waking up one morning and ruling that the Constitution never granted Congress the power to set milk prices in the first place.



Bill Frezza is a fellow at the Competitive Enterprise Institute, and a Boston-based venture capitalist. You can find all of his columns, TV, and radio interviews here.  If you would like to have his weekly columns delivered to you by e-mail, click here or follow him on Twitter @BillFrezza.

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