Sen. Charles Schumer’s Ridiculous Plan To Subsidize the Booming Greek Yogurt Industry

Commentary about business and finance.
March 21 2012 12:08 PM

Greek Yogurt, Meet American Politics

Chuck Schumer’s ridiculous plan to subsidize the booming Greek yogurt business.

Fage Greek yogurt.
In 2008 Fage, a Greek dairy company, opened its first American plant in Johnstown, N.Y.

Photograph by Fage.

The Greek economy may be collapsing, but Greek yogurt is booming in America.  Unfortunately for the Greeks, Greek yogurt isn’t like Champagne or Parmigiano-Reggiano: You can make it anywhere. America’s supply of Greek yogurt tends to come not from the fair shores of the Aegean Sea but from upstate New York.

Just a few short years ago, the viability of New York’s dairy industry was in doubt. An alarmed 2005 study by regional consulting group CITEC noted that a dairy sector is a classic business cluster phenomenon with forward and backward linkages between different elements of the supply chain. In other words, decline in one area can lead to a downward spiral. “Shrinkage in the number of dairy farms and the number of cows in the North Country has threatened the cheese-making operations in the region,” they wrote “and the reduction in the number of cheese plants operating in the North Country has had a negative impact on the dairy farmers.” Growing dairy demand from the developing world prevented things from completely falling apart during the aughts, but the global financial crisis hammered milk prices, stressing dairies across the country. Fortunately for New York, however, the state had a longstanding strong position in the relatively small yogurt subset of the dairy industry. A decade ago, New York made as much yogurt as California, while producing less than a third as much milk.

That’s why in 2008 it was natural for Fage, a Greek dairy company, to open its first American plant in Johnstown, N.Y. The area had both a yogurt-friendly ecosystem and access to the large Greek community in New York City.* Since then, the Greek yogurt industry has been growing gangbusters. Soon after Fage came to America, AgroFarma initiated a Greek-style yogurt line under the Chobani brand, also based in New York state. And Pepsi and Alpina are both building plants in the western part of the state. Total yogurt output in New York grew about 60 percent from 2007-11, with a 40 percent increase in output in 2011 alone.

Advertisement

Now that the Greek yogurt industry in New York is a huge success, the government has decided to get involved. The reason for this: Greek yogurt needs so much more milk than regular yogurt. Conventional yogurt is basically just fermented milk, leading to an approximately 1-to-1 ratio of milk inputs to yogurt outputs. Throughout the Levant, by contrast, it’s common to strain yogurt in order to produce a thicker product. In Arabic-speaking countries it’s generally known as labneh and served as a kind of dip or sandwich filling, much like hummus. In Greece, strained yogurt—traditionally made from sheep’s milk—is used as the basis for tzatziki or served as dessert. Under Fage’s stewardship, this strained yogurt has come to the mass market where it’s valued for its thick, rich texture. The straining process denudes the yogurt of carbohydrates, meaning that low-fat or no-fat Greek yogurts create an extremely protein-intensive snack with a high ratio of luxurious mouthfeel to calories. This works because you’re throwing out a lot of the fermented product, meaning you need a much higher ratio of milk to yogurt—almost four pounds of input for every pound of output.

That’s great news for local dairy farmers, but the boom’s gotten so big that New York cow owners are scrambling to grow their herds in order to meet the demand. Into the breach has stepped New York Senator Chuck Schumer, a man determined to never let any issue be too trivial as to warrant special federal involvement. Specifically he has proposed a new DAIRY Act—DAIRY, absurdly, stands for Dairy Augmentation for Increased Retail in Yogurt products—to shower tax benefits on farmers investing in new milk cows. Right now when a farmer buys a “new” cow, one not currently in use for business purposes, he’s allowed to deduct 50 percent of its price in the first year as a form of accelerated depreciation. Schumer wants to extend this benefit to farmers who’ve purchased cows from existing dairy herds as well. Schumer also wants to allow farmers to deduct the purchase price of cows that are too young to produce milk in the year of purchase rather than the year they start milking, and create a new tax-preferred savings account for farmers. Commodity producers face price fluctuations, and need to save money in fat years to help support them in lean ones. Schumer wants to let farmers stash untaxed money in special accounts during booms, so they can withdraw it later and pay the lower marginal rates associated with lower incomes in lean years.

On the merits, these proposals are all pretty ridiculous. Tweaking the tax code to incentivize savings and investment rather than consumption and pollution is a perfectly sound idea. But there’s nothing special about dairy farmers that makes them uniquely worthy of a special subsidy.

Schumer’s DAIRY Act is a great example of why corporate income tax reform is so hard even though everyone claims to be for it. In principle it’s easy to see that we should be purging the tax code of industry-specific loopholes and deductions and replacing it with lower rates across the board. In practice, politicians are either faced with declining business clusters they want to preserve or rising ones they want to encourage, making loophole proliferation all but inevitable.

Still with or without tax subsidies the outlook for the Greek yogurt industry is bright. Despite 2,500 percent sales growth since 2006, strained stuff is still only 19 percent of the overall yogurt market. A demonstrably superior product, it’s also a more expensive one thanks to the greater milk content. That’s made it in many ways an unlikely recession success story at a time when families have normally been tightening their belts in response. As recovery gathers steam, it seems likely that more and more people will be willing to give premium yogurt a try. That’s good news for dairy farmers and means investing in a cow or two might be a smart move with or without accelerated depreciation. 

Correction, March 22, 2012: This article originally misspelled the name of the town in which Fage's first American plant was located. It's Johnstown. (Return to the corrected sentence.)

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.