Missouri has experienced a decline in milk production from 3 billion pounds in 1990 to 2.3 billion pounds in 1998. In recent years, Missouri has fallen behind the rest of the U.S. in terms of milk production. During the period 1993-97, U.S. milk production grew 3.7 percent whereas Missouri milk production declined 16.7 percent. The University of Missouri's Food and Agricultural Policy Research Institute (FAPRI) has projected that Missouri milk production will decline to 1.8 billion pounds by 2008 (Preliminary November 1998 Baseline).
With this loss of cows and farm families, Missouri loses vital rural economic activity like dairy plant salaries, trucking jobs, feed and supply sales, local retail sales, etc. Efforts are currently under way to reverse this trend. The Commercial Agriculture Program is committed to assisting Missouri family dairy farms.
Some Missouri farm organizations and cooperatives are interested in having Missouri join a proposed Southern Dairy Compact in order to maintain milk production and preserve jobs and infrastructure. At the request of Mr. John Saunders, Director of the Missouri Department of Agriculture, the Commercial Agriculture Program, in consultation with FAPRI, conducted a national compact study to determine the impact of Missouri joining a Southern Compact.
Objective and Methods
The objective of this study was to conduct an objective and comprehensive analysis of the economic implications of Missouri joining a proposed Southern Dairy Compact.
A multi-region U.S. dairy industry model was developed that reflects milk and dairy commodity supply, demand and prices, as well as federal and state marketing orders. A national analysis was needed to address the objectives of this study since 1) Missouri cannot form her own compact, and 2) compacts affect national dairy commodity markets. Thus dairy compacts were analyzed at the national level and then at the state level.
Assumptions and Scenarios
The results presented in this study are conditioned on the following assumptions:
The model was aligned to a baseline based on a projection of supply, demand and prices for federal orders as defined in Secretary Glickman’s federal order reform proposal. Federal order data and California data for 1997 was used as a basis for constructing a baseline for the year 1999. This baseline does not include a Northeast Interstate Dairy Compact. Alternative scenarios were developed to estimate the impact of dairy compacts relative to the model baseline.
The following scenarios were developed and simulated in the model:
Scenario 1: Northern Dairy Compact. A compact price wedge of $2 per cwt in the Northeast federal order and in the New York submodel was used. A $2 per cwt compact premium was included for Maine, which is part of the unregulated region in the baseline model. This was accomplished by using a weighted average compact premium in the unregulated region (weighted by the ratio of Maine milk production to milk production in the unregulated region).
Scenario 2: Joint Mid-Atlantic and Southeast Dairy Compact. A $2 per cwt compact premium in the Appalachia, Florida and Southeast orders was introduced. This also includes a $2 compact premium in the Missouri, Georgia, and Kentucky state submodels. For the federal order regions, $2 compact premiums were reflected in Virginia and Northern Missouri. Under Glickman’s proposal for order reform, Virginia is included in the unregulated region and northern Missouri in the Central order. Compact premiums were approximated for farmers in these two states by using a weighted compact premium in the unregulated region and in the Central order.
Scenario 3: Combined Northern, Mid-Atlantic and Southeast Dairy Compacts. This scenario reflects all of the changes in Scenarios 1 and 2 above.
Under Glickman’s proposal, Class 1 milk is used for bottling purposes, Class 2 milk is used for spoonable dairy products like yogurt and ice cream, Class 3 milk is for cheese production and Class 4 milk is for making butter and nonfat dry milk.
Note: this study reports changes (due only to regional compacts) relative to a baseline which reflects forecasted marketing conditions in 1999. These marketing conditions reflect federal order reform. The baseline also reflects things like the cost of transporting raw milk to the southeast, changes in consumer tastes and preferences, declining Missouri milk production, etc. Thus the results of this study ONLY reflect the impact of regional dairy compacts relative to the baseline. All other factors that could affect milk production, marketing and prices, are held constant.
Model Results
The model results are similar across all three scenarios, with only the magnitude of change relative to the baseline differing. Within a dairy compact region, dairy producers receive a higher effective farm price relative to the baseline due to the compact premium. They react by expanding milk production and hence milk marketings. Consumers pay more for fluid milk since the compact premium raises the cost of milk to processors relative to the baseline. Hence fluid milk consumption declines. Overall spending by consumers on fluid milk in the compact region increases. Greater milk production and less fluid milk consumption in the compact region results in more milk being used for Class 3 and 4 purposes. That results in increased production of butter, nonfat dry milk and cheese in compact regions relative to baseline levels. Those products are sold on the national market. Thus, greater production results in lower national wholesale prices for butter, nonfat dry milk and cheese.
The increase in dairy product production in the compact region relative to the baseline has an economic impact on dairy producers and consumers outside the compact region. Lower wholesale prices for butter, nonfat dry milk and cheese results in lower class prices in all federal milk marketing orders. The new formulas for class prices under order reform are linked to dairy commodity prices. Thus lower dairy commodity prices results in a lower Class 1 price mover and lower prices for class 2, 3 and 4 milk. Thus farmers in non-compact regions and states receive a lower price for their milk relative to the baseline. They respond by producing less milk. Consumers in non-compact regions and states, on the other hand, face a slightly lower price for fluid milk and expand fluid milk consumption marginally. Thus, farm milk sales decline and fluid milk consumption increases relative to the baseline in non-compact regions and states.
The results of the Combined Dairy Compact (scenario 3 above) on the proposed Southeast federal order are summarized below. Similar results are found for the Northeast, Appalachian and Florida orders.
The results for the Combined Dairy Compact scenario for Missouri, a state in the Southeast compact region, are as follows:
The impacts of the Combined Dairy Compact scenario on non-compact federal orders and California are consistent. Except for Class 3 and 4 use, the direction of change and percent change are similar across all 10 orders, unregulated regions and California.
The results for the Combined Dairy Compact scenario on a non-compact state like Wisconsin are as follows:
Conclusions
Missouri dairy farmers will benefit economically from joining a Southern Dairy Compact. The impact of a Combined Northern, Mid-Atlantic and Southern Dairy Compact raised Missouri farm-gate milk prices $0.88 per cwt and raised farm milk sales $26.6 million relative to the baseline. Consumers, however, will pay more for milk. Retail milk prices rose $0.15-$0.31 cents per gallon (depending on assumptions for the farm-to-retail markup) and retail fluid milk expenditures rose $13.4-$26.8 million relative to the baseline.
If Missouri decides not to join the proposed Southern Dairy Compact, dairy producers will face the same economic consequences as other states outside of the compact region. The model was rerun assuming a Combined Dairy Compact scenario with Missouri outside the Southern Dairy Compact. Under this scenario, Missouri dairy producers could face up to a $0.28 per cwt drop in their farm milk price relative to the baseline. Rather than increasing, Missouri milk sales could decline $8.3 million if a Southern Dairy Compact were formed and Missouri exports to the Southeast declined.
Based on this study, dairy compacts have the following impacts:
Ken Bailey is an Extension Associate Professor in the Social Science Unit, and Jose Gamboa is an undergraduate research assistant in the College of Buisness and Public Administration, University of Missouri.