* Senate plan extends 2008 farm law until Sept 30
* Without fix, dairy price supports would spike to 1949 levels
* Still needs House vote to avert price hike
* Plan gives lawmakers time to finalize new 5-year farm bill
By Charles Abbott and Roberta Rampton
WASHINGTON, Jan 1 (Reuters) - A deal reached by the U.S. Senate on Tuesday to avoid the automatic tax hikes and spending cuts known as the “fiscal cliff” also includes measures to avert the “dairy cliff” - a steep increase in milk prices.
The tax agreement, which could face a vote by the U.S. House of Representatives as early as Tuesday, contains a nine-month fix for expiring farm subsidy programs by extending a 2008 farm law. That gives lawmakers time to come up with a new five-year replacement.
Unless the measure is passed by the House, the farm law will expire and dairy subsidies will revert to 1949 levels, meaning retail milk prices could double to about $7 per gallon in coming weeks or months.
Lawmakers have so far failed to finalize a new $500 billion, five-year farm bill to replace the 2008 legislation, which authorizes spending on food stamps and crop subsidies.
They had agreed to eliminate $5 billion in annual direct payments to grain, cotton and soybean growers - subsidies deemed wasteful at a time of high prices and record farm income.
The extension of the 2008 farm law would buy time for Congress to complete a new farm bill and still would allow for another round of direct payments.
However, three dozen programs in the law have no money left, including disaster relief and biofuel development as well as a soil conservation program and some rural economic development and agricultural research programs.
As the year-end deadline drew closer, farm-state lawmakers had drafted a one-year fix that would have included disaster relief money for livestock producers hurt by drought.
It also would have created a new dairy subsidy program to compensate farmers when feed costs are high and milk prices are low.
But that was nixed by Senate Republican Leader Mitch McConnell during the final hours of fiscal cliff talks, a Senate aide said.
Dairy processors said the proposed new dairy plan would have interfered too much with the market.