Curbing runaway productivity on US dairy farms may be Reagan priority

Improved productivity brings lower prices: that conventional economic wisdom has a lot of people in the United States searching for Japanese-style productivity.

But the equation doesn't always work, as the Reagan administration will find when it tackles the problem of the US dairy industry's runaway productivity.

Each record-breaking new year on america's dairy farms means that a smaller Us cow herd produces more and more milk. Yet instead of seeing lower supermarket prices for milk, ice cream, and mozzarella, consumers wind up paying higher prices.

This is because the government has added a third factor to the equaton: A complex price-support system is supposed to serve the interests of both dairy farmers and consumers, but rarely pleases either group.

Ellen Haas, director of the consumer division of the Washington-based Community Nutrition Institute, says a present government support for the dairy industry "makes up pay in two ways, as taxpayers and as consumers." Her group is joining with Common Cause, the Consumers Union, and others in a drive to overhaul current policies which she believes "give great incentives to producers to overproduce."

Ms. Hass expects the incoming administration to favaor major changes. "The Reagan people have emphasized the need to cut inflation and government expenditure," she told the Monitor, "and there's no more glaring example of both problems then the dairy program.

Yet consumer advocates and Reagan budget cutters must deal with Congress -- which successfully resisted repeated Carter administration efforts to pare down dairy price supports.

US Rep. Tony Coelho (D) of California, a member of the House Dairy Subcommittee, supports the present program, saying only that it could be made more flexible. He warns against overreacting to the current milk surplus, explaining that cutting supports now to reduce overproduction "would only mean that within four or five years we would have to adjust the other way."

Members of Congress from dairy states join dairy industry spokesmen in arguing that the current price supports operate well over the long term to protect consumers from possible shortages. Their only concession is a willingness to permit modest policy adjustments so that price supports could be reduced by 5 percent at times of large surpluses.

Critics of the present system, however, believe that it will continue to create surpluses. They point to the fact that over the past year America's 10.8 million cows -- just half the number in milk production 25 years ago -- produced 128 billion pounds of milk -- an all- time record.

The secret is productivity. Today's cow gives an average of 11,813 pounds of milk per year, compared to the 1955 average of 5,842 pounds. Agricultural research programs using computerized feeding methods regularly achieve average milk production of over 20,000 pounds per cow. This gives scope for continuing expansion of US milk production.

A genetically improved herd, concentrate feeds, and modern management techniques all contribute to the constant improvement of productivity. Because US consumption of dairy products does not keep up with production, the US Department of Agriculture (USDA) purchases enough of the surplus to maintain fair prices for the dairy farmer.

Last year, this meant the USDA purchased more than 8.2 billion pounds of milk , approaching 7 percent of production and nearly four times as much as in 1979. The net cost to the taxpayer: $1.3 billion. On top of that, consumers paid an estimated $1 billion extra in supermarket milk prices driven higher by the large government purchases.

Halfway through 1980, the USDA estimated that the dairy support program would cost $800 million. At that time, USDA Economics, Policy Analysis, and Budget director Howard Hjort warned that the program was in trouble because it was "providing producers with strong economic signals to increase production at a time when milk and milk products are in surplus supply."

This concern has become more serious in recent months. The USDA now estimates that the 1981 dairy surplus will be still larger than in 1980, with inflated costs to match.

Key to the problem is the legal requirement that the USDA adjust dairy price supports regularly to protect farmers against inflation. The next hike is set for April 1. That hike -- plus a second bite due Oct. 1 -- will probably raise retail dairy prices for 1981 by 10 to 12 percent over 198 prices.

Unlike the case with US grain, there is no export market for dairy products. World dairy production outdistances demand and results in such problems as the European Community's dairy surplus -- dubbed the "butter mountain."

The answer, says Prudue University agricultural economist Emerson Babb, is a totally redesigned support program "related to supply and demand." He feels that a reasonable government surplus to protect against supply shortages would be 1 percent of production rather than the present, costly 7 percent.