Economic Impact of Missouri Joining
A Southern Dairy Compact

Missouri Dairy Situation

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 growth. 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.

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 our baseline. All other factors that could affect milk production, marketing and prices, are held constant.

A dairy compact is an agreement among states to regulate the price of milk used for fluid purposes. It affects only fluid milk sales in the compact region. About half the milk in Missouri is used for fluid purposes. The other half is for manufacturing. Thus, only half of all Missouri milk would receive the benefits of a dairy compact.

Dairy compact premiums are collected only on fluid milk (milk sold in the bottle), but compact commissions have broad authority and could decide to distribute compact dollars to manufacturing milk producers in the compact region.

Yes. The Northeast Interstate Dairy Compact (Northeast Compact) was approved by Congress in the 1996 Farm Bill. It affects fluid milk pricing in six New England states.

Interest has been growing in creating a Southern Dairy Compact among 15 states: Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia and West Virginia. The objective of the Southern Dairy Compact is (Louisiana Department of Agriculture & Forestry):

Under the Compact Clause (Article 1, Section 10) of the United States Constitution, an interstate compact must first be adopted as uniform legislation by the compact states and then approved by Congress. A memorandum from the Louisiana Department of Agriculture contains a potential bill that each of the 15 statehouses must pass as a precursor to congressional approval. This legislation must be identical in each compact state. To date, 10 states have passed this legislation: Alabama, Arkansas, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee, Virginia and West Virginia. The Southern Dairy Compact requires a minimum of three states to begin. Missouri can join this effort.

First, a Compact Commission is formed. The commission then fixes a fluid milk price above the minimum federal order price in the compact region (Class 1 price). This acts to stabilize and enhance the fluid portion of a farmer's milk check. The difference between the compact price and the Class 1 price is collected by the Compact Commission and distributed back to compact farmers (net certain deductions).

It is the price announced by the Compact Commission for all fluid milk sales in the compact region. This price essentially creates a "price floor" on all fluid milk sales in the compact region. In the Northeast Compact, the commission has maintained the compact price at $16.94 per cwt, but has the authority to change it.

It is the monthly difference between the compact price and the federal order Class 1 price. Since the Class 1 price changes each month, the compact premium is also expected to change each month. In fact, if markets are strong enough (e.g. 1998), the minimum Class 1 price can exceed the compact price. In that case, there would be no compact premium (there would still be administrative costs). This, however, would be very rare.

Processors pay the compact premium to the Compact Commission and also pay the administrative cost of running the program. Their direct costs are passed on to consumers. So consumers ultimately pay most of the cost of the program. However, fluid milk processors will face lower milk sales. Thus they lose revenue. And, farmers outside of the compact area face lower milk prices. Thus they pay for part of the cost also.

It depends on the level of the compact premium. This study assumed an annual average compact premium of $2 per cwt. If realized, Missouri dairy farmers would receive a net increase in milk price equal to $0.88 per cwt relative to the baseline. Missouri dairy farmers would respond by producing more milk (2.1 percent increase).

A dairy compact would increase the cost of raw milk to fluid processors. Fluid retailers would charge more for milk. Assuming a $2 compact premium, Missouri consumers would pay 15 cents to 31 cents more per gallon for bottled milk. Consumers would respond to the higher milk prices by reducing milk consumption 1.7 percent. A family of four drinking four gallons of milk per week would spend $0.41-$0.84 more per week due to the Dairy Compact (consumption would decline slightly due to higher fluid prices). In the course of a year, Missouri consumers would spend $13.4 - $26.8 million more on fluid milk purchases relative to the baseline.

Consumers in the compact will experience marginally lower retail costs for manufactured dairy products. And consumers outside the compact may see slightly lower retail prices for milk and dairy products.

The Compact Commission would collect funds from fluid processors. They would then "reblend" those dollars back to compact dairy producers. Fluid processors and retailers would raise the retail price of fluid milk (if they can) in order to recoup the added cost of the Compact. Since a large portion of raw milk in Missouri is sold to the southeast, most of the dollars for the Compact would be collected from out-of-state southern consumers. But Missouri consumers would pay more. Most of those dollars would go to Missouri farmers, but some would leak out to dairy producers in neighboring states (i.e. Illinois, Indiana, Kansas) who are not in the compact and who elect to market their milk in Missouri. Compact legislation cannot keep outside milk from entering our borders. Also, northern Missouri farmers who market part of their milk out of state (outside the compact) may not receive the benefit of the compact premium on those milk sales--that would depend on the regulations set forth by the Compact Commission.

Missouri can continue to export milk to the southeast if a Southern Dairy Compact is formed and Missouri elects not to join. In that case, compact revenue would be collected only on those sales. If the southeast decides to expand milk production in response to the compact, less milk will be exported from Missouri to the southeast. Missouri would then lose those sales and the compact revenue. Thus, Missouri could break even, or lose up to $8.3 million in milk sales relative to current levels.

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.