Real-life Case Study: Government and the Market for Milk
Supply and Demand
The California dairy industry employs more than 250,000 full-time workers and produces over $35 billion in wages and revenues each year. The success of the California dairy industry, like that of most other American agricultural industries, is linked to government subsidies.
The Need for Subsidies California's dairy farms enjoy a good climate, up-to-date agricultural technology, and a ready market for their goods. And yet they all rely on government support to some degree.
The government provides subsidies for many reasons. Many people believe that agricultural businesses would not easily survive in a freely competitive international market. If many American farms were to go out of business, the United States would need to depend on other countries for its food supply. Others argue that without government intervention, basic food products like milk could change price rapidly and become too expensive for some families.
Federal and state governments influence the cost of many groceries.
Price Supports and Trade Barriers Government support of agriculture takes different forms. The federal government uses price supports to set a federal minimum price for some dairy products. Whenever the market price falls too low, the Department of Agriculture buys butter, cheese, and dry milk directly from the dairy producers to guarantee that they receive the minimum price. California has a similar state program for fluid milk. California also gives farmers special access to state water supplies, which provides inexpensive water for cows and supports the corn and alfalfa growers who provide cattle feed.
Another way that the federal government intervenes in the dairy market is by placing tariffs or other taxes on dairy imports. Tariffs raise the price of imported goods and give an advantage to locally produced milk and cheese.
The Future The federal government has reduced assistance given to dairy farmers, and many leaders would like to end the subsidy programs entirely. The United States is also entering into more and more free-trade agreements that require the United States to reduce financial support of farms and lower trade barriers. The future of dairy subsidies looks less and less certain every year.
Applying Economic Ideas
- Why do governments consider it necessary to treat agriculture differently from other manufacturing or production industries?
- What might happen if the government stopped all intervention in the market for dairy products?
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