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Fixing U.S. Dairy Policy . July 15, 2011 Joseph V. Balagtas Purdue University. The Current State of U.S. Dairy Policy. G overnment interventions in dairy markets comprise multiple and varied programs and regulations patched together over a century
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Fixing U.S. Dairy Policy July 15, 2011 Joseph V. Balagtas Purdue University
The Current State of U.S. Dairy Policy • Government interventions in dairy markets comprise multiple and varied programs and regulations patched together over a century • Price supports, marketing regulations, deficiency payments, export subsidies, import barriers, competition policy, ad hoc disaster payments • Key programs are complex, costly, with mixed effects for dairy farmers
Impacts of Key Status Quo Policies • The main effect has been to transfer income to some dairy farmers at the expense of consumers, taxpayers, or other dairy farmers. • A net drag on the economy • They do so in ways that distort market signals with perverse effects on the industry • Reduce exports, encourage imports, reduce product innovation, reduce incentives to adopt private risk-management tools • They failed to protect farmers from recent market events. • Not to mention taxpayers: $290 M in disaster assistance to dairy farms in 2009
New Interest in Dairy Policy Reform • Congressman Peterson offered this week draft legislation, based largely on an NMPF proposal, that would mark significant change in U.S. dairy policy • with a push to deal with dairy before the 2012 Farm Bill • NMPF/Peterson proposes some changes that I also recommend in my paper, as well as some others about which I have serious doubts.
Ideas for Dairy Policy Reform: Dairy Price Support • NMPF/Peterson proposes termination. • Raises dairy product prices reduces exports, increases imports obstructs trade negotiations • Distorts dairy product mix, reduces incentives for product innovation (commodity milk powder vs high-value milk protein ingredients) • been largely irrelevant as real purchase prices have been allowed to fall • I agree termination is a good idea, and would add that termination also benefits: • Consumers ($300 M/year) • Taxpayers ($384 M/year) • New programs proposed by NMPF/Peterson negate the benefits of eliminating Dairy Price Support.
Ideas for Dairy Policy Reform: Milk Income Loss Contract • NMPF/Peterson proposes termination. • too focused on milk price rather than margins—e.g., did not pay out in 2008 despite tight margins • I agree that termination is a good idea, and would add that termination also benefits: • Taxpayers (almost $1 B/year) • The majority of farms for whom payment limit is binding (> 200 cows) • Again, new program proposed by NMPF/Peterson negates some of these benefits.
Ideas for Dairy Policy Reform: Marketing Orders • NMPF/Peterson recognizes some problems and proposes changes • reduce number of milk classes from 4 to 2 • Change some of the pricing formulas • These changes leave in place: • the incredible complexity of regulated pricing • price discrimination against fluid consumers • balkanized regional markets
Ideas for Dairy Policy Reform: Marketing Orders • I think marketing order reform needs to go further. • Eliminate price discrimination/revenue pooling • Cost to fluid milk consumers (~$400 M/yr) is regressive and reduces milk consumption • Inhibits risk-management • Eliminate regulated regional pricing • Producers in high-cost regions benefit ($600 M/yr) at the expense of producers in low-cost regions ($300 M/yr) • More to the point, marketing order regulation serves no clear objective. Marketing order price regulations are not serving any purpose that dairy markets—buyers and sellers of milk and dairy products—couldn’t do better.
