Duane Dailey
Agricultural Information
University of Missouri-Columbia
(573) 882-9181
FAX: (573) 882=5415
daileyf@missouri.edu
Jan. 29, 1999
Embargoed until 9 a.m. CST., Friday, Jan. 29, 1999
COLUMBIA, Mo. -- A proposal for Missouri to join a Southern Dairy Compact would help slow the steady decline in dairy production in the state, but it would come with increased milk costs for consumers and lower prices for dairy farmers outside of the compact.
Those conclusions are in an economic analysis of the dairy compact conducted by economists at the University of Missouri-Columbia. The study was requested by John Saunders, director of the Missouri Department of Agriculture, Jefferson City.
The report was delivered to Saunders Friday by representatives of the University Extension Commercial Agriculture Program and the Food and Agricultural Policy Research Institute (FAPRI), who conducted the study.
For Missouri dairy farmers to take part in a Southern Dairy Compact, which is an effort to stabilize fluid milk prices, the Missouri General Assembly must pass enabling legislation.
"Volatile milk prices and increasing production costs have forced many of Missouri's small dairy farms out of business in the last decade," said Rex Ricketts, director of the MU Commercial Agriculture Program. "The proposed dairy compact, which provides a price premium to milk producers, would enhance milk prices for family farms."
Ken Bailey, economist with Commercial Agriculture dairy focus team, said, "Our study shows an advantage to farmers in the dairy compact. But, there are clear economic tradeoffs. Consumers in the compact states would pay more and dairy farmers outside of the compact would face lower prices."
In the decade of the `90s, Missouri farms dropped milk production from 3 billion pounds in 1990 to 2.3 billion pounds in 1998. While U.S. milk production was increasing 3.7 percent from 1993 to 1997, Missouri milk production dropped 16.7 percent.
FAPRI projects, in a preliminary baseline from November, that Missouri milk production could drop another half billion pounds to 1.8 billion pounds by 2008.
"With this loss of cows and family farms, Missouri loses vital rural economic activity such as dairy plant salaries, trucking jobs, feed and supply sales, and local retail sales," according to Bailey.
Missouri director of agriculture Saunders said, "Missouri's dairy industry is a vital component of our agricultural economy, that is why we requested this study to determine if entering a compact is the appropriate action to take to help our dairy farmers remain competitive in the long-run."
Some Missouri dairy farmers and dairy organizations have proposed that the state join a dairy compact now being considered by 15 southern states, ranging from Virginia to Florida, westward through Kentucky and Alabama to Texas and Oklahoma.
The Northeast Interstate Dairy Compact, which allows states to regulate prices paid to dairy farmers by milk processors, was written into the 1996 farm bill passed by the U.S. Congress.
That Northeast Compact now regulates fluid milk pricing in six New England states. New York has passed legislation to join that compact.
Under the compact law, a premium is paid only on fluid milk, that is, milk bottled for sale to consumers. Manufacturing milk, used for cheese, butter, yogurt and other dairy products, does not receive the premium.
For their analysis of the compacts, the MU economists assumed a $2 compact premium which equals the 1997 average premium paid in the Northeast.
The MU study shows that if the southern group is formed, 27 percent of the nation's milk production would come under compact price support. Nationally, dairy farmers outside the compacts would receive lower prices than farmers within a compact. For example, Wisconsin milk sales would drop $64 million annually when the new compact goes into force.
The additional money paid under the compact, which comes from increased prices paid by consumers and not from taxpayers, would boost income to Missouri dairy farmers by an estimated 88 cents per hundredweight above a projected baseline.
The baseline 1999 price projected for Missouri farmers was $14.15 per hundredweight. That was average gross price for all milk received at the farm, before deductions or premiums.
A baseline is an economic projection of prices to be received during a specified period, under a certain set of assumptions. This study's baseline, which projects prices for 1999, assumes federal milk marketing order reform and normal weather conditions, among other assumptions. All changes resulting from the compact are compared to this baseline.
With the increased premium price, Missouri dairy farmers would respond by producing an additional 47 million pounds of milk, a 2.1 percent increase. That would reverse the current downward trend for dairy in Missouri.
For consumers, the price of bottled milk would go up, according to the report, by 15 cents to 31 cents per gallon. As price goes up, milk consumption would drop, Bailey said. Therefore, a family of four would spend an added 41 cents to 84 cents per week under the dairy compact. Total added fluid-milk costs to Missouri consumers could be $13.4 million to $26.8 million per year.
At the same time, consumer prices for manufactured dairy products would be marginally lower.
If the Southern Compact is enacted without Missouri participation, Missouri farmers could lose sales. "Missouri could break even, or lose up to $8.3 million in milk sales relative to the baseline," Bailey said.
With the steady decline in dairy farms, Missouri now imports milk. However, the state exports some milk to southeastern states.
If Missouri does not join the compact, dairy farmers would collect a premium only on the milk sold in the southeast compact states. However, southern dairy producers would likely, with their added premium, increase production, reducing the need for Missouri milk.
Out of the compact, Missouri consumers would likely see only a 2-cent drop in price of a gallon of milk at the grocery store.
To participate in the compact, the Missouri legislature must enact a state law with the exact wording of the law being adopted in other states in the Southern Compact.
So far the compact is approved in 10 states: Alabama, Arkansas, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee, Virginia and West Virginia.
The compact is being considered in Georgia, Maryland, Mississippi, Oklahoma, and Texas. According to federal regulations, all states in a compact must adjoin.
After the state legislatures approve the compact, the U.S. Congress must amend the U.S. Constitution to officially form the compact, Bailey said.
The MU study was funded by the Missouri Commercial Agriculture Program and with a $15,000 grant from the dairy processing industry.
The complete study is available on the world-wide web at http://agebb.missouri.edu/commag/dairy/bailey/compact/index.htm
Sources: Rex Ricketts (573) 882-0378; Ken Bailey (573) 882-0139
