$8 Gallon of Milk On the Way? Fiscal Cliff May Cause Dairy Prices to Soar

Amid all the other woes that could come if the country heads over the fiscal cliff this week, milk prices could rise dramatically, to as much as $8 per gallon.

Included in all the other negotiations in the showdown between Congressional Republicans and President Obama is the farm bill, which regulates payments to the agriculture industry, and sets standards, pricing and policy for most of the food the country eats.

At issue is one piece of the farm bill, called the Dairy Product Price Support Plan.

Decades ago, Congress put several programs into place to ensure an adequate supply of food was produced in America, a concern after the shortages during World War II.

The government still subsidizes many crops, most notoriously corn, even though the United States produces far more food than it can use.

In an effort to keep milk producers afloat to maintain an American dairy industry, Congress set a lower limit for the price of milk and dairy. When prices drop below that point, the government buys up excess dairy to limit supply, increase demand, and drive up the price.

But the dairy industry has done very well in the last several decades. Milk prices have dropped, but mainly because Americans need to spend much less of their income on food as they did in years past.

And the government hasn't had to buy milk in the last decade, because prices have been high enough for farmers to make a living.

But the lower price limit in the original bill was set in 1949. Since then, Congress has used the farm bill, which is passed every year, to set a current lower price limit.

This year's farm bill expired in September, and if a new one isn't passed before Jan. 1, the lower limit for milk prices reverts to the 1949 standard, which is about twice what farmers are getting now.

So a gallon of milk, which costs on average about $3.50 to $4 per gallon across the country, could jump to $6 or even $8 per gallon next year as the government must begin buying up milk products to drive up the price.

Fortunately, that's an unlikely scenario. No one wants milk prices to double -- not consumers, not Congress, and not farmers.

Congress has a record-low approval rating, and a hike in milk prices because they couldn't compromise would hurt their image even more. And while farmers would see a quick surge in short-term profits, the higher prices would likely cause a decrease in demand as consumers switched to milk alternatives that aren't subject to the price increase.

And farmers don't want too much scrutiny into the rest of the farm bill, which includes many controversial payments for things like letting land lie fallow.

Much like taxes for the middle class, expect Congress to push through at least some sort of stopgap measure to prevent surging prices on milk.