CNBC Explains

CNBC Explains: The 'dairy cliff' threatening milk prices

For months, Congress has been locked in negotiations about passing a new farm bill, with dairy price supports and food stamps the key points of contention.

This wrangling has brought Americans to the edge of a "dairy cliff" since the last farm bill expired in September.

Cattle at Hunter Haven Dairy Farm in Pearl City, Ill.
Daniel Acker | Bloomberg | Getty Images

If Congress does not pass a new bill before the end of January, the Department of Agriculture has said it will have to enforce certain decades-old dairy provisions. Already, some other agriculture programs have expired.

As part of this permanent legislation from 1949, the government would buy dairy products from producers at about twice the current market rate. Retail milk prices could jump as high as $7 to $8 a gallon.

On Wednesday, milk guzzlers turned more optimistic that these increases could be avoided when the House of Representatives passed a new farm bill. A vote in the Senate could come as early as Thursday.

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"It could take a period of weeks or a month or two for there to be a trickle-down effect at the retail level," said Chris Galen, senior vice president of communications at the National Milk Producers Federation, a group of 30 dairy cooperatives. "What happens under this permanent law, the USDA is required to basically support a much higher price to dairy farmers."

If an agreement isn't reached, "domestic demand for dairy products would fall by an estimated 9 percent, and exports, which have seen much growth over the past decade, would likely disappear as the cost of U.S. dairy products would become prohibitively expensive," the Executive Office of the President predicted in a recent report.

In order to support these higher prices, the government would have to buy and store large quantities of dairy, which would cost "at least $12 billion per year," the report forecast.

—By CNBC's Katie Little. Follow her on Twitter @KatieLittle