American dairy cooperatives recently settled a class-action lawsuit for $52 million that was based on an unconstitutional federal act “regulating” the dairy industry. But despite heavy-handed federal meddling, markets with the help of state action can prevail.

Milk producers work together through coops that serve as middlemen between dairy farms and and processors. The lawsuit stemmed from what was known as the “herd retirement program,” an effort by dairy cooperatives to reduce the number of dairy cattle, cut supply and boost prices.

An article on the Mises Wire explains the root of the lawsuit.

If you’re wondering what’s wrong with all of this — legally speaking — you have to go back to 1922 when the Capper-Volstead Act was passed. This act was a response to anti-trust legislation and sought to allow producers of agricultural products to form cooperatives and work together to market farm products. So, apparently before this, it was potentially illegal for neighboring farmers to speak to each other and sell their products together. This act also concentrated authority with one person, the US Sectary of Agriculture, who was now able to break up “monopolies”.

We get a glimpse at how strange and limiting these types of regulations can be by looking further into this lawsuit. The Capper-Volstead Act may have allowed dairy producers to consolidate bargaining power through organizing while keeping the “profiteering” middlemen (i.e., the dairy processors who make salable products that consumers want) in check. But, the Act also limited organization among farmers in order to “protect” consumers:

“What [the Act] did not allow was the farmers to get together to sell their milk to decide how much they were going to produce,” said Jeff Friedman, a partner at the law firm that filed the suit, Hagens Berman Sobol Shapiro LLP.

The Capper-Volstead Act (You may recognize the name Volstead – he was the Congressman whose name was attached to the federal act effectuating alcohol prohibition.) isn’t the only federal regulation on dairy production. Many other exist, including those described here.

For example, the Federal Food Administration (1917-1919) dealt mainly with cooperatives and met milk producers’ price demands. This eventually resulted in wild fluctuations in milk pricing which “required” more government intervention to ensure “supplies of pure and wholesome milk at all times.” So, the result of this was a focus on the promotion of one product — fluid milk — that consumers started rejecting for decades before much of anything was done about it. A less-regulated industry would have, long ago, likely adjusted to the fact that, even though fluid milk demand is falling, overall demand for dairy products is actually increasing, with products such as Greek yogurt leading the way.

While purporting to help dairy producers and consumers, these regulations and government programs have actually hurt both. There is no guarantee that dairy producers will produce milk, that dairy processors will manufacture products that consumers want, and that consumers will be to find or afford certain dairy products. However, what has clearly happened here is that an entire industry has been distorted.

Fortunately, markets ultimately have more power than federal regulation – especially when states take actions to encourage markets. We’ve seen this vividly illustrated in states that have legalized raw milk.

In 1987, the feds implemented 21 CFR 1240.61(a), providing that, “no person shall cause to be delivered into interstate commerce or shall sell, otherwise distribute, or hold for sale or other distribution after shipment in interstate commerce any milk or milk product in final package form for direct human consumption unless the product has been pasteurized.”

Simply put, the federal government maintains complete prohibition on the transportation of raw milk across state lines. Carrying unpasteurized dairy from Pennsylvania to Maryland is a federal crime.

Not only that, the DEA claims it can not only regulate transport of raw milk across state lines, but can even ban unpasteurized milk within the borders of a state.

“It is within HHS’s authority…to institute an intrastate ban [on unpasteurized milk] as well.”

But while the feds maintain their ban, many states have legalized the production, sale and consumption of raw milk within their own borders. Of course, such state laws don’t directly nullify the federal prohibition, but they take an important step in that direction. Think of it this way – if all 50 states allow raw milk, will the federal ban even really matter?

As we’ve seen with marijuana and industrial hemp, an intrastate ban becomes ineffective when states ignore it and pass laws encouraging the prohibited activity anyway. The federal government lacks the enforcement power necessary to maintain its ban, and people will willingly take on the small risk of federal sanctions if they know the state will not interfere. This increases when the state actively encourages the market.

State actions can open up space for a strong raw milk market to take root and grow. Ultimately, when enough people and enough states join in, federal efforts to ban this food will be nullified in practice.

Mike Maharrey

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