Subsidy often ends up with milk processor instead of producer

By DARRIN YOUKER

Reading Eagle

READING, Pa. (AP) -- For each gallon of milk bought at Pennsylvania supermarkets and grocery stores, 25 cents is set aside with the intent to help state dairy farmers.

But, in some cases, that money never gets to the farm.

Under a complex pricing system designed to give Pennsylvania farmers a bit more money, shoppers who buy milk that is produced, bottled and sold in Pennsylvania pay what is known as an "over-order" premium.

But agricultural experts say that Pennsylvania farmers are not getting that premium when milk companies briefly ship the milk out of state for storage.

Even though consumers continue to pay the additional charge, those payments, totaling about $16 million annually, become "stranded" and remain with milk processors.

The system, which was developed in the 1980s, is antiquated and must be brought up to modern standards, said Zach Meck, a Marion Township dairy farmer and member of the Dairy Policy Action Committee.

That committee, most of whose members are Pennsylvania dairy farmers, is working with state lawmakers to rewrite regulations to allow farmers to receive payments for milk bottled out of state, Meck said.

Some dairy farmers, Meck said, believe that milk processors are exploiting a loophole in the system.

"They send the milk out of state and break the chain, but the producer still collects the premium," he said. "We are trying to get this shell game switched around."

Pennsylvania farmers, still reeling from a devastating 2009 that saw milk prices drop to historical lows, are looking at a number of regulatory and legislative changes that could give them more money for their milk and stabilize prices.

Recently, state lawmakers held a hearing about stranded premiums and how to rectify the situation, said Mark O'Neill, a Pennsylvania Farm Bureau spokesman.

Lawmakers know that they are facing a tricky situation when trying to reform the system, because any change must meet federal interstate commerce laws, said Bill Evans, administrative assistant for State Sen. Michael A. O'Pake, a Reading Democrat and minority chairman on the Senate Agriculture and Rural Affairs Committee.

Still, there is interest in pressing ahead on the issue to provide help for dairy farmers, Evans said.

"No options are being turned down," he said.

In the early 1980s, the Pennsylvania Milk Marketing Board enacted the premium to assist farmers through a devastating drought, O'Neill said.

Since then, the board has set the premium, which is tied to the wholesale price of milk, O'Neill said. As farmers get more money for their milk, the premium goes down, he said.

Currently, the premium is set at about a 25 cents a gallon, O'Neill said. It does not apply to milk imported from farms in neighboring states and is only charged to fluid milk, not butter or cheese.

Recently, the Milk Marketing Board adjusted regulations to require Pennsylvania milk producers who buy from several states to give preference to Pennsylvania farms for fluid milk, O'Neill said. That will bring in an additional $6.7 million for state farmers each year, he said.

That money, however, will be split among the state's 7,400 dairy farmers.

"We don't want to give the impression that it will be the difference between making or breaking farmers," O'Neill said.

Farmers say that the issue of premiums is only one of the reforms needed to return stability to the milk industry.

Tim Kurtz, who operates a dairy farm outside Morgantown, said greater attention must be paid to the complicated federal policy that sets milk prices, which often fall far below the farmers' production costs.

In nearly every case last year, farmers were losing money on each gallon of milk they produced, Kurtz said.

"We need to get as much as we can," he said of premiums. "We need to talk about addressing the volatility."

Meck believes it's important to reform the system and to return premiums to the farmers they were meant to help.

"It's almost like a milk tax," he said. "We have to have a more transparent way to make sure the money is returned to the system."