In case all that fear mongering and minute-by-by minute obsessing over the fiscal cliff hasn’t sated your desire for hyperbole and manufactured crisis, you’ll be happy to know that the “cliff” meme is spilling over into other areas, too. The Congressional gridlock we all know and love has prevented our legislators from addressing the expiring farm bill, which could be seriously bad news for any dairy fans out there. Via CNN Money:
Problem is, the current bill expired last summer, and Congress had been unable to agree on a new one. Several protections for farmers have already expired, and several more are set to do so over the next few months. One of them is the dairy subsidy, which expires January 1.
But instead of leaving farmers entirely out in the cold, the law states that if a new bill isn’t passed or the current one extended, the formula for calculating the price the government pays for dairy products reverts back to a 1949 statute. Under that formula, the government would be forced to buy milk at twice today’s price — driving up the cost for everyone.
Milk futures are bought and sold both electronically and in the pits, although they tend to be very thinly traded. So far in December the average daily volume for the front month class III milk contract has been under 300 and the average daily open interest just over 3000. That’s less than a rounding error compared to the heavily traded S&P 500 e-mini contract, which has consistently had around 2.5 million in volume and open interest during the same period. Even so, the handful of milk traders out there don’t seem to be too worried about this particular cliff:
Disclaimer: past performance is not necessarily indicative of future results.
Considering that the dairy cliff would be incredibly expensive for the US government, for US citizens, and even has the dairy industry worried (since it would almost certainly reduce milk consumption), this seems like a no-brainer. Call us hopeless optimists, but this looks like one item that even the US Congress ought to be able to deal with…
P.S. If you’re wondering why the chart for milk futures is in the $17-$19 range, it’s because each contract represents 200,000 pounds of milk, and each $0.01 tick represents $20.
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