Government Subsidized Ethanol Leads to Government Subsidized Milk

For the first time in two years, the U.S. government will make payments to dairy producers through the Milk Income Loss Contract (MILC) program. The MILC program began with the 2003 Farm Bill and is designed to supplement the price dairy farmers are paid for milk when the milk price drops too low or feed prices get too high or a combination of both.

MILC payments are calculated each month using the latest milk price and feed cost. Payments are triggered when the Boston Class I milk price falls below $16.94/cwt (hundred pounds), after adjustment for the cost of feed. Milk prices have remained above the $16.94 base used in the MILC calculation, but the increase in feed prices has triggered payments.

A view from the tractor while feeding our cows
Payments under the MILC program are limited by production: currently, producers are eligible to receive payments on up to 2.985 million pounds per fiscal year. Larger producers must choose the month for which they want to start receiving payments; after that, they receive payments for all months until they reach their cap. Currently, MILC payments are projected from February through August 2012. The lowest payment is projected for February at $.35/cwt and the highest in May at $1.03/cwt.

The price we are receiving for milk would be adequate to cover the cost of production and make a good living if the price of feed was not so high. Why are feed prices so high? The main reason is ethanol.

Currently, 40% of the U.S. corn crop is used to produce ethanol. The increased demand for corn created by ethanol has pushed the corn price from historic levels of $2-$3/bushel to $6-$7/bushel today. In 2011, dairy farmers faced the highest feed costs in history. In the last two years, more corn was used to produce ethanol than cattle feed. See my post Ending the Ethanol Debacle.

Milk prices paid to dairymen reached record highs in 2011, so the record high cost of feed was more manageable than it is this year with lower milk prices. For a dairy our size, we’ll receive MILC payments for about 2 ½ months of milk production.

I wonder what the agriculture industry would be like today if the federal government was not so involved? Most likely the free market would be operating as it should and we would all be better off. To recap, the heavily subsidized ethanol industry has increased the price of subsidized corn which now makes it necessary for the federal government to subsidize the price of milk. Is this sound government or grossly negligent?