The effects of the federal programs on the U.S. dairy industry

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Virginia Polytechnic Institute and State University

Milk surplus in the U.S. dairy industry has been increasing substantially since the beginning of the 1980s. In order to analyze the surplus production situation, an interregional dairy trade model based on a spatial equilibrium framework was developed. The model included disaggregate manufactured milk markets and utilized separable programming as the solution technique.

The objective of the interregional dairy trade model was to maximize the sum of producers’ and consumers’ surplus subject to the various institutional constraints incorporating unregulated and regulated market situations. Under the regulated market situation, the institutional constraints were based on the federal milk marketing order and dairy price support programs. Utilizing the interregional dairy trade model, a comparison of simulated market results and net economic effects between unregulated and regulated markets was drawn first. Results of the simulations for market results and welfare effects under pricing policy options with regard to changes in the support and purchase prices were also analyzed. Finally, a comparison of the results of simulations for simultaneous market clearing situations in butter and nonfat dry milk markets with no government purchases of these commodities under the 1982 market situation and an increasing quota system was considered.

It was found that without considering the supply effect induced by price stabilizing regulations, the competitive manufactured milk market price would be lower than the 1982 support price level. The butter and nonfat dry milk markets would move toward a market clearing situation if the support price level was decreased by $1.00 per cwt for butter and by $2.00 per cwt for nonfat dry milk when cross price elasticity effects were included. Due to cross price elasticity effects, the butter market would clear at a higher price level (in terms of the support price) than the nonfat dry milk market. Simulations of simultaneous market clearing situations suggested that the 1982 butter price would be lower and the nonfat dry milk price would be higher than market clearing prices. Increases in import quotas would drop butter and cheese market clearing prices and raise the nonfat dry milk price relative to the actual 1982 case.