* Proposal adds year to expired 2008 law; Monday vote possible
* Follows rising alarm about potential milk price doubling
* Plan creates new dairy subsidy program keyed on feed cost
* Another year of costly 'direct payment' subsidy to growers
By Jim Wolf
WASHINGTON, Dec 30 (Reuters) - Farm-state lawmakers have agreed to a one-year extension of the expiring U.S. farm law that, if enacted, would head off a possible doubling of retail milk prices to $7 or more a gallon in early 2013.
The extension would end a 32-month attempt to update farm subsidies dating from the Depression era, when farmers were crushed by low prices and huge crop surpluses, to meet today's high-wire challenges of tight food supplies, high operating costs and volatile markets.
House Agriculture Committee Chairman Frank Lucas, an Oklahoma Republican, said on Sunday he hoped the legislation would be passed by Congress and signed by President Barack Obama by Tuesday to avoid higher prices for milk in grocery stores.
The bill was listed among measures that could be called for a vote on Monday in the House of Representatives although action was not guaranteed.
Despite consensus on the need to extend the farm bill, lawmakers continue to discuss how long the extension should be.
Representative Tom Cole, an Oklahoma Republican, told reporters late on Sunday a nine-month farm bill extension was being considered as part of deal being crafted in the Senate to stave off the "fiscal cliff" of automatic tax hikes and spending cuts that begin kicking in on Jan. 1.
"There's good chance that if there is a package out of the Senate, it will include something on the farm bill. The easiest thing to get done would be nine months of current law," Cole said.
A second Republican, Representative Steven LaTourette, said a nine-month extension could be part of the fiscal cliff package or could move separately if the fiscal talks fail.
House Republican leaders refused to call a vote during the fall on a full-scale, $500 billion farm bill on grounds it might fail because it did not cut spending enough.
Grain, soybean and cotton growers would get another round of the $5 billion "direct payment" subsidy that all sides agreed to kill in a new farm bill. The payments are made regardless of need. Reformers say the payments are unjustified when crop prices and farm income are at near-record levels.
DISASTER MONEY AND A NEW DAIRY PROGRAM
Also in the extension, lawmakers would revive agricultural disaster-relief programs that ran out of money a year ago and create a new dairy subsidy program. It would compensate dairy farmers whenever milk prices are low and feed prices are high. The so-called margin protection program would require farmers to limit production to avert a long run of low dairy prices.
Traditionally, the dairy program sets a minimum price for milk through government purchase of butter, cheese and dry milk. If Congress does not act, the dairy support price will revert on Tuesday to the level dictated by an outmoded 1949 law and which is roughly double the price now paid to farmers.
The potential retail milk price has been estimated at $6 to $8 a gallon versus current levels near $3.50.
Agriculture Secretary Tom Vilsack, during an interview broadcast by CNN, said higher milk prices - if it comes to that - would ripple throughout all commodities "if this thing goes on for an extended period of time."
Senator Debbie Stabenow, chairwoman of the Senate Agriculture Committee, said the "responsible short-term farm bill extension ... not only stops milk prices from spiking, but also prevents eventual damage to our entire agriculture economy."
TWO FALLBACKS IF EXTENSION FALTERS
House Republican leaders readied two alternatives, if needed, to the one-year extension. One was a one-month extension of the now-expired 2008 farm law without disaster funds or the new dairy program and the other was a one-month suspension of the dairy provisions of the 1949 law.
It was not clear which bill would be called for debate, a farm lobbyist said on Sunday. A small-farm activist said any package passed by Congress must include rural economic development funds and money for soil conservation on "working lands," the largest of USDA's conservation programs.
"If a new farm bill doesn't pass this Congress, we'll soon hold another mark-up and just keep working until one is enacted next year," said Stabenow, a Michigan Democrat.
It would be the first time on record that Congress began drafting a farm bill during a two-year session and had to carry it into the following session, congressional researchers said. Hearings on the new farm bill began April 21, 2010.
HOUSE, SENATE DISPUTE ON BIG CUTS
While dairy producers generally support the so-called margin-protection program as the answer to high feed costs, processors and foodmakers oppose it. They say it is wrong-minded in its premise of curtailing production when prices are low, and it will destroy a healthy export market for dairy products.
The rejuvenated disaster programs would cover losses from this year's widespread drought, especially for livestock producers, although tree farmers, honey bees and farm-raised fish are also covered. Maximum payment would be $100,000.
Senators passed a farm bill in June estimated to save $23 billion over 10 years, with most of the cuts in crop subsidies and conservation programs. The House Agriculture Committee approved a bill with $35 billion in cuts in July, half of it in food stamps for the poor - the biggest cut in food stamps in a generation.
Fiscally conservative House Republicans have called for larger cuts in farm subsidies and food stamps while some House Democrats opposed any food stamp cuts.