There’s been a lot of talk recently about the right balance between civil liberties and national security. To wit: the revelation that the Justice Department had seized telephone records of journalists who had reported leaked information and the ongoing saga of Edward Snowden, the NSA analyst who revealed that the government collects wholesale “metadata” of nearly every domestic phone call.

These are important issues that deserve spirited debate.

What’s surprising is that the tension between freedom and security has now spilled over to the dairy farm, in the form of a battle between the Dairy Security Act (DSA) and the Dairy Freedom Act (DFA). What’s going on here?

As most dairy farmers know, the DSA is a reform to the existing dairy safety nets (price supports, MILC and the dairy export incentive program) put forth by the National Milk Producers Federation.

It gets rid of those programs and gives farmers the option to buy subsidized margin insurance; those who enroll must agree to trim their milk production when conditions indicate an oversupply of milk.

The DFA is a variation on this theme, and it’s advocated mainly by the International Dairy Foods Association, which represents dairy processors. The DFA offers its own margin insurance program but without the market stabilization feature, which some refer to as “supply control.”

Make no mistake, either one of these laws will represent the biggest reform of dairy safety nets in decades. The question is which one makes the most sense.

And the question is urgent because the House of Representatives is currently trying to agree on the next farm bill. I’m putting my vote on the Dairy Security Act, and I’ll tell you why.

The two numbers that most dictate the fate of dairy farmers are milk price and feed costs. When feed costs approach or surpass milk prices, as they did to a tragic extent in 2009, farmers struggle.

And the existing safety nets do little to mitigate the adverse conditions. One reason is that farmers respond to low milk prices by making more milk, which drives prices down further. There is no coordination among farmers to secure their best interests as a group.

The DSA will change that. First, it will offer farmers government-sponsored margin insurance, basically insuring the difference between milk prices and feed costs.

This will put an end to the gut-wrenching losses and farm bankruptcies during the lean times. Importantly, the farmers who enroll in the margin insurance program will be subject to market stabilization, agreeing to slightly reduce their milk production when there’s too much milk.

This component of the program is crucial for two reasons: It helps keep milk prices higher on the farm, and in doing so it reduces the cost of the margin insurance for the government.

The DFA also offers margin insurance, but it lacks the market stabilization feature. This is dangerous because it provides little incentive for farmers to match their production with supply – since the margin insurance will cover their costs either way.

Of course, it will also tend to keep milk prices low, which is why processors are behind it. Perhaps the DFA has the word “freedom” in it because it frees farmers from the obligation to reduce production when milk prices get too low.

But is freedom really enjoyable when you’re working twice as hard for half the pay? It doesn’t sound like a good deal to me.

IDFA has two main arguments against the DSA. They say it will increase milk prices for consumers and will lead to more price volatility for farmers. These arguments are not borne out by the data.

At the direction of the House Agricultural Committee, University of Missouri agricultural economist Scott Brown studied the effect the DSA would have had if it was in place during the years 2009 through 2012.

In that analysis, the market stabilization would have kicked in only during four months. That period included some of the lowest milk prices in history, so it doesn’t even represent the average four-year span.

Still, the effect on milk prices to consumers was pennies per gallon – a negligible difference that couldn’t even be characterized as statistically significant. “On average,” Brown told me, “the DSA has very little effect on consumer prices.”

What about price volatility? It’s counterintuitive to think that market stabilization will lead to market volatility. Trust your instinct on this one.

IDFA’s claim is only accurate if you look at the small window in time when the market stabilization program is in effect. That’s because it’s a powerful tool that will change prices rapidly. But over the long run, it’s a different story.

“If you keep returns to dairymen higher during the very low periods, it tends to then reduce the highs on the other side as well,” Brown said. “You pull up the lows and pull down the highs. I think over the long term you actually get a reduction in volatility.”

So, it turns out this is not a debate about freedom versus security. It’s really about the interests of farmers and consumers versus processors. PD

Kardashian is a senior writer at the Tuck School of Business at Dartmouth and the author of “Milk Money: Cash, Cows, and the Death of the American Dairy Farm.”

Kirk Kardashian
Senior Writer
Tuck School of Business at Dartmouth