Dairy farmers feel slap of the Invisible Hand

My column for the West Bend Daily News is online. In this age of populism and protectionism, it is bound to be unpopular. Here it is:

Dozens of Wisconsin dairy farmers with thousands of cows received a letter a few weeks ago that spoiled their year. Grassland, the company that had been buying their milk, told the farmers that they could no longer buy the farmers’ milk because of a new Canadian policy that has dried up the demand for American milk. The calls for government action throw kindling on the friction between Americans who believe in free trade and those who support protectionist policies.

The price of milk for Canadian dairy processors is set by the Canadian Dairy Commission. The way they set prices was based on a complicated process, but the end result is that the price that Canadian dairy farmers received for milk was substantially higher than in the rest of the world. By comparison, a Canadian dairy farmer received almost 50 percent more for his or her milk than an American farmer.

This artificial pricing sounds great for Canadian dairy farmers, but economies are dynamic and protectionist policies rarely have the desired effect. Canada’s participation in NAFTA and trade agreements with the European Union and other entities give other countries fairly free access to Canadian markets to sell their goods — including milk. While the high price of milk for Canadian dairy farmers sounds good on paper, the actual result is that Canadian dairy processors were buying most of their milk from American dairy farmers because it was cheaper. In other words, Wisconsin dairy farmers were directly benefiting from what was supposed to be a protectionist policy by Canada to prop up prices for their own dairy farmers.

The new pricing policy from the Canadian Dairy Commission would allow Canadian dairy producers to buy milk at whatever the global price is. The new policy is arguably promoting freer trade by dropping an artificial price of milk and allowing it to fluctuate with global supply and demand. Canadian dairy farmers will no longer get the higher prices for their milk, but they will be able to sell more of it. Canadian dairy processors and consumers will benefit from saving the cost of transporting milk from distant places. Wisconsin dairy farmers are being hurt by the policy because the artificial demand for their product that was created by the old Canadian policies has now dried up. While the new policy is arguably freer than the old policy, there is no question that it favors Canadian dairy farmers over foreign ones.

With so many Wisconsin families hurting, one question is what, if anything, should our government do in response? In an increasingly rare bout of bipartisanship, both of Wisconsin’s U.S. senators are calling upon the Trump administration to do something about the new Canadian

policy. Sen. Tammy Baldwin has called the policy an “unfair trade scheme” and Sen. Ron Johnson said Wisconsin dairy farmers should not be “victims of a trade dispute they didn’t start.”

What should the American government do? Should the Trump administration demand that Canada reinstate artificially high milk process for their own dairy producers? Should America enact retaliatory protectionist policies on other goods?

The free trade of goods and services in a market economy has proven to be the most efficient and economical way to align supply with demand. The United States has been a perfect example of this. Our large, diverse national land mass means that our nation has a diverse and robust internal economy that allows for specialization. Instead of Wisconsin having to try to provide our own milk, beef, oranges, wheat, iron, copper, etc., the lack of trade barriers with other states allows Wisconsin to focus on developing the natural abundances within our state and buy the natural abundances of other states. As Adam Smith said, “never attempt to make at home what it will cost him more to make than to buy.”

The same is true in a global economy. Free trade is the most efficient, economical and fair way to allocate scarce resources to the greatest benefit of the most people.

But getting to that greatest benefit means that some folks will feel the sting when they are slapped by the invisible hand. Problems arise when we react to that inevitable sting by trying to protect that which the market no longer needs.

Wisconsin’s dairy farmers have benefited for years by an ill-conceived Canadian milk pricing policy and are feeling the sting of that policy being changed.

Our reaction should not be to enact further barriers to trade and further distort the market. Instead, our reaction should be to help our dairy farmers find a new market for their milk, or help them reallocate their resources to produce something for which there is market demand.

2 Responses to Dairy farmers feel slap of the Invisible Hand

  1. billphoto says:

    No clue what would be the best course of action here but I do know several now former dairy farmers.  Both sold their herds because they could not sell their milk for more than their production cost.  I do know some government entity (or more likely 3 or 4 redundant agencies) set the price of milk.

    My gut tells me if government would get out of the business of the free market, this might be a different story.

  2. Owen Owen says:

    I agree. North American dairy farmers have done a phenomenal job of increasing milk production in both quantity and quality for decades. Also, improved transportation infrastructure (remember Tommy paving all of those little county roads) and technologies have decreased spillage and spoilage. The result is that there is far more milk supply than there is demand, thus driving milk prices into the toilet. In order to protect the dairy farmers, well-meaning government officials on both sides of the border have monkeyed with protectionist policies and price supports for decades so that the whole system is a complicated web. Now, whenever any government makes a change, it ripples across that web.

    While nobody wants to hear it, the best solution is to let the market work. The glut of milk will drive prices down, thus forcing some dairy farmers into bankruptcy or into another line of work. Eventually, the supply will dwindle, prices will go up to an equilibrium where the dairy farmers left can make a living and the consumers will still buy the product.

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