With the expiration of the Bush tax cuts, some temporary tax cuts passed under the Obama administration, and severe spending cuts all set for January 1, Washington is obsessed with the so-called fiscal cliff. But that’s not the only major policy change that could come into force next week. There’s also the “milk cliff.” And if we fall off that cliff, the price of milk could go up to $7 a gallon. Here’s why.

Seven dollars a gallon? That’s absurd? It’s an average of $3.56 today. Why would we let this happen?

The latest Farm Bill, enacted in 2008, is scheduled to expire at the end of 2012. If it expires, the 1949 Agricultural Act goes into effect, which includes a floor for milk prices.

Why would we let a bill that is more than 60 years old go into effect?

It’s what is known in Washington-speak as a “poison pill.” To give Congress extra incentives to pass a new Farm Bill, the current law includes provisions that if it were to expire at the end of the year, the 1949 law would go into effect. You could also call it an agricultural cliff.

How does the 1949 Agricultural Act get us to $7-per-gallon milk?

The 1949 bill mandates that the secretary of agriculture set a floor on prices for the milk sold by producers (usually dairy cooperatives) at what’s known as the parity price. According to the 1949 bill, that price is $39.53 per hundred pounds (PDF). The prevailing price for dairy producers is closer to $19 or $20 per hundred pounds. That $39.53 translates to roughly doubling milk prices, which means that the price for a gallon of milk would go up to about $7.

How does the secretary of agriculture set the price?

He orders the department to buy enough dairy products so that the prices go up. Since buying liquid milk isn’t an option (it goes bad), the secretary of agriculture is mandated to buy enough dry milk, butter, and cheese so that the price of milk goes up to the statutory floor. Jerry Slominski, vice president for legislative affairs at the International Dairy Foods Association, which represents companies that make 85 percent of the nation’s cheese, ice cream, and milk, said that the Department of Agriculture would have to spend “hundreds of millions of dollars” to end up with “mounds and mounds of cheese, butter and dry milk” to get prices up that high.

Does the government do anything like that now?

Yes, there’s the Dairy Product Price Support Program. But its price floor for milk producers is $9.90 per hundred pounds. So the Department of Agriculture doesn’t actually have to buy any milk products to enforce it.

Does anyone want to go over the milk cliff?

While a temporary boom in prices would benefit the dairy cooperatives that sell milk to dairy foods companies, it would cause an uproar among other companies involved in the dairy industry. It would also enrage consumers who would have to pay double for milk, cheese, yogurt, and anything else that’s mostly made of out milk. Tom Vilsack, the secretary of agriculture, has said that he would be legally obligated to enforce the 1949 Act should Congress do nothing and let it go back into effect, but he described that scenario as a “bad outcome”

Is there anything Vilsack can do to prevent the price hike?

Sort of. The IDFA, the dairy products trade group, wrote a letter to Secretary Vilsack (PDF) saying that, if we go over the milk cliff and the 1949 Act goes into effect, he should write the rules to enforce the new price regulations in a “in a thoughtful and deliberate manner.” Slominksi, the IDFA vice president, said he thinks that Vilsack is “not going to be in any hurry to do this,” and that the secretary could allow the rule-writing and implementation process to stretch out for months before any actual dairy products are bought at the new, high prices. This would give Congress time to either pass a new Farm Bill or pass legislation that would prevent the 1949 Agricultural Act from going into effect at all.