A Regional Economic Analysis of Dairy Compacts:
Implications for Missouri Dairy Producers

The model results of the dairy compact study are presented in detail in Appendix Table 2 and in the tables below. The results of the three scenarios discussed in Section IV are presented as a comparison to the baseline. This comparison is in the form of a change and percent change relative to the baseline.

The first scenario evaluates the creation of a new Northern Dairy Compact that includes the proposed Northeastern order plus Maine. The second scenario evaluates an Appalachian, Southeast and Florida Dairy Compact that encompasses the proposed Appalachian order plus Virginia, the Florida order, and the Southeast order plus Northern Missouri. The third scenario reflects a combination of the first two scenarios.

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 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. Hence fluid milk consumption declines. Overall spending by consumers on fluid milk in the compact region increases. Greater milk marketings and less fluid milk consumption in the compact region results in more milk being used for Class 3 and 4 purposes. That means increased production of butter and cheese in compact regions. 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 has an 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 directly linked to dairy commodity prices. Thus lower butter, nonfat dry milk and cheese prices will lower the Class 1 price mover and prices for Class 2, 3, and 4 milk. Thus farmers in non-compact regions and states will receive a lower price for their milk. They will then respond by producing less milk. Consumers in non-compact regions and states, on the other hand, will face a slightly lower price for fluid milk and will increase their fluid milk consumption. Thus farm milk sales will decline and fluid milk consumption will increase in non-compact regions and states.

A more detailed discussion of the economic impact of dairy compacts by regions and states under the three scenarios will follow next. Again, all of the results are for a $2 compact premium that processors are required to pay on all fluid milk sales. Also, it is assumed that existing market over-order premiums on fluid milk will not change.

This scenario looks at the economic impact of creating a new Northern Dairy Compact that impacts the proposed Northeast federal milk marketing order and the state of Maine. Recall that this Northern Dairy Compact in no way reflects the economics of the existing Northeast Interstate Dairy Compact.

The results indicate that a $2 compact premium will raise the effective farm price for milk. Farmers in the Northern Dairy Compact will get more for their milk and will respond rationally by expanding milk production. At the same time, processors that bottle fluid milk will face higher costs by having to pay the compact premium. Processors/retailers will continue to set the same farm-to-retail margin (i.e. $1.29 in New York), but the farm cost of milk (the class 1 price plus any premiums) will go up by the amount of the compact premium. On a percentage basis, processors/retailers will receive a lower margin. Consumers will face higher retail milk prices and will consume less milk under the Northern Dairy Compact scenario. Thus processors will respond by bottling less milk. Greater milk production and lower class 1 use results in more milk being processed into cheese, butter and nonfat dry milk.

The Northern Dairy Compact resulted in an increase in production of dairy commodities, which resulted in lower wholesale prices for butter, nonfat dry milk and cheese (see Table 5.1). Butter and nonfat dry milk production increased 0.4 percent and cheese production increased 0.2 percent due to increased milk production and reduced Class 1 use.

Table 5.1 Reaction of Dairy Commodity Supply, Use and Wholesale Prices to Dairy Compacts

The impact of the Northern Dairy Compact Scenario on class prices under federal and California orders is presented in Table 5.2. Lower dairy commodity prices translated into lower class prices as defined under the proposed federal orders. Thus some of the gains

Table 5.2 Impact of Dairy Compacts on Class Prices

to dairy producers in the Northern Dairy Compact region in the form of a higher compact premium on Class 1 sales were offset by a lower national class 1 price mover and lower prices for Class 2, 3 and 4 milk. California class prices were also lower due to lower dairy commodity prices.

The impact of the Northern Dairy Compact on milk marketings and Class 1 milk use by order, and on the U.S. average effective farm price is illustrated in Table 5.3. Total U.S. milk marketings rose 83 million pounds under a Northern Dairy Compact. Gains in milk marketings in the Northeast order were not entirely offset by declining marketings elsewhere. The increase in U.S. milk marketings were due to an increase in the weighted effective U.S. average farm price, which increased $0.03 per cwt due to the Compact.

Table 5.3 Impact of Dairy Compacts on Milk Marketings and Class 1 Use

Total U.S. Class 1 milk sales declined 164.5 million pounds. All of the declines in Class 1 sales were in the Northeast order and were due to the $2 compact premium.

The model results are very different for those regions and states in the compact region as compared to regions and state not in the compact. Thus the results are characterized accordingly.

Compact Areas

The impact of a Northern Dairy Compact on federal milk marketing orders and farm prices can be seen in Appendix Table 2 and in Table 5.4.

The results of a Northern Dairy Compact on the proposed Northeast federal order are summarized as follows:

• Milk marketings increased 1.6 percent due to a 4.7 percent increase in the effective farm price.
• Class 1 use fell 1.9 percent in response to a 12.1 percent increase in the cost of Class 1 milk. The Class 1 cost of milk is equal to the Class 1 price plus any market over-order and compact premiums. Retail prices for fluid milk rose $0.16 per gallon or 6.2%.
• Class 3 and 4 use increased 6.0 and 5.9 percent, respectively, due to greater milk marketings and lower Class 1 use.
• Class 1 cost of milk increased $1.91 per cwt due to the $2 compact premium and a $0.09 decline in the Class 1 price mover.
• Effective farm price rose $0.63 per cwt or 4.7 percent due to the $2 compact premium. The effective farm price is equal to the federal order blend price, plus market over-order and compact premiums on Class 1 milk sales.
• Per capita fluid milk consumption fell 3.8 pounds or 1.9 percent in response to a $0.16 per gallon or 6.2 percent increase in retail fluid milk prices.
• Retail fluid milk expenditures rose $136.9 million or 4.1 percent as total fluid milk consumption fell 1.9 percent and retail milk prices rose 6.2 percent.

The Northern Dairy Compact had impacts on individual states depending on whether these states were inside or outside the compact region (see Appendix Table 2). The results for New York, which is in the compact region, are as follows:

• Milk marketings increased 1.6 percent in New York due to a 4.8 percent increase in the effective farm price.
• Class 1 price in New York fell $0.09 per cwt due to a lower Class 1 mover.
• Federal order blend price fell $0.14 per cwt due to lower class prices.
• Effective farm price rose $0.65 per cwt. The $2 per cwt compact premium was only paid on Class 1 milk sales, which declined due to the higher cost of Class 1 milk. In addition, the $2 compact premium was offset by lower class prices due to lower commodity prices.
• Farm milk sales, which are equal to milk marketings times the effective farm price, rose $106 million, or 6.5 percent.
• Per capita fluid milk consumption fell 3.9 pounds, or 1.9 percent in response to a 6.2 percent increase in the retail price of fluid milk.
• Retail fluid milk expenditures rose $47.9 million or 4.1 percent as total fluid milk consumption fell 1.9 percent and the retail milk price rose $0.16 per gallon or 6.2 percent.

Non-compact Areas

The impacts of the Northern Dairy Compact 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, the unregulated region, and California (see Table 5.4). The following results are for all non-compact areas.

• Milk marketings fell 0.2-0.3 percent in response to a lower effective farm price.
• Class 1 use rose 0.1 percent in response to a $0.09 per cwt drop in the cost of Class 1 milk. The Class 1 cost of milk is equal to the Class 1 price plus any market over-order and compact premiums.
• Class 3 and 4 use generally fell in response to lower milk marketings and higher Class 1 use.
• Effective farm price fell $0.08-$0.09 per cwt due to the $2 compact premium. The effective farm price is equal to the federal order blend price, plus market over-order and compact premiums on Class 1 milk sales.

The Northern Dairy Compact had similar impacts on non-compact states. These changes are illustrated in Appendix Table 2. The results for a non-compact state like Wisconsin are as follows:

• Milk marketings fell 0.2 percent due to a $0.09 per cwt or 0.7 percent decline in the effective farm price.
• Class 1 price fell $0.09 per cwt due to a lower Class 1 mover.
• Federal order blend price fell $0.09 per cwt due to lower class prices.
• Effective farm price fell $0.09 per cwt due to lower class prices.
• Farm milk sales, which are equal to milk marketings times the effective farm price, fell $26.4 million, or 0.9 percent.
• Per capita fluid milk consumption rose a modest 0.1 percent in response to a penny drop or 0.3 percent decline in the retail fluid milk price.
• Retail fluid milk expenditures fell 0.2 percent as total fluid milk consumption rose 0.1 percent and the retail milk price fell 0.3 percent.

Table 5.4 Economic Impact of the Northern Dairy Compact Scenario

This scenario analyzes the impact of a $2 compact premium on a Mid-Atlantic and Southeast Dairy Compact. This compact geographically includes the Appalachian, Florida, and Southeast proposed federal milk marketing orders, as well as Virginia and Northern Missouri. The impacts can be evaluated in terms of compact and non-compact regions and states.

The impact of the Mid-Atlantic and Southeast Dairy Compact on dairy commodities is presented in Table 5.1. Butter and nonfat dry milk production did not change, and cheese production increased 0.4 percent due to increased milk production and reduced Class 1 use. There is very little butter/nonfat dry milk production facilities in these orders.

The impact of the Mid-Atlantic and Southeast Dairy Compact on federal and California class prices is presented in Table 5.2. The declines in cheese prices due to increased production resulted in lower protein prices. That resulted in lower skim milk prices for the Class 1 mover and the Class 3 price in federal orders, and the Class 1 price under the California order.

The impact of the Mid-Atlantic and Southeast Dairy Compact on milk marketings and Class 1 milk use by order, and on the U.S. average effective farm price is illustrated in Table 5.3. U.S. milk marketings rose 63.8 million pounds. The gains in marketings in the Appalachian, Florida and Southeast orders were not entirely offset by reduced marketings elsewhere. The increase in U.S. milk marketings were due to a $0.05 per cwt increase in the weighted effective U.S. average farm price. Total U.S. Class 1 milk sales declined 178 million pounds. All of the declining Class 1 sales were in the compact orders and were due to the $2 compact premium.

The model results are very different for those regions and states in the compact order as compared to regions and states not in the compact. Thus the results are characterized accordingly.

Compact Areas

The impact of a Mid-Atlantic and Southeast Dairy Compact on federal milk marketing orders and farm prices can be seen in Appendix Table 2 and in Table 5.5.

The results of a Mid-Atlantic and Southeast Dairy Compact on the proposed Southeast federal order are summarized below. Similar results are found for the Appalachian and Florida orders.

• Milk marketings increased 2.4 percent due to a 7.0 percent increase in the effective farm price.
• Class 1 use fell 1.7 percent in response to a 11.6 percent increase in the cost of Class 1 milk. The Class 1 cost of milk is equal to the Class 1 price plus any market over-order and compact premiums. Retail fluid milk prices rose $0.16 per gallon or 5.4 percent.
• Class 3 use increased 19.2 percent due to greater milk marketings.
• Class 1 cost of milk increased $1.86 due to the $2 compact premium and a $0.14 decline in the Class 1 price mover.
• Effective farm price rose $1.05 per cwt or 7.0 percent due to the $2 compact premium. The effective farm price is equal to the federal order blend price, plus market over-order and compact premiums on Class 1 milk sales.
• Per capita fluid milk consumption fell 3.2 pounds or 1.7 percent in response to a $0.16 per gallon or 5.4 percent rise in the retail price of fluid milk.
• Retail fluid milk expenditures rose $67.1 million or 3.6 percent as total fluid milk consumption fell 1.7 percent and the retail milk price rose 5.4 percent.

The Mid-Atlantic and Southeast Dairy Compact had impacts on individual states depending on whether these states were inside or outside the compact region (see Appendix Table 2). The results for Missouri, which is in the compact region, are as follows:

• Milk marketings increased 2.3 percent in Missouri due to a $0.96 per cwt or 6.8 percent increase in the effective farm price.
• Class 1 price fell $0.14 per cwt in Missouri due to the lower Class 1 mover.
• Federal order blend price fell $0.16 per cwt due to lower class prices.
• Effective farm price rose $0.96 per cwt. The $2 per cwt compact premium was only paid on Class 1 milk sales, which declined due to the higher cost of Class 1 milk. In addition, the $2 compact premium was offset by lower class prices due to lower commodity prices.
• Farm milk sales, which are equal to milk marketings times the effective farm price, rose $29 million, or 9.3 percent.
• Per capita fluid milk consumption fell 3.7 pounds, or 1.8 percent in response to a $0.16 per gallon or 5.9 percent increase in the retail price of fluid milk.
• Retail fluid milk expenditures rose $14.1 million, or 3.9 percent as total fluid milk consumption fell 1.8 percent and the retail milk price rose 5.9 percent.

Non-compact Areas

The impacts of the Mid-Atlantic and Southeast Dairy Compact 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, the unregulated region, and California (see Table 5.5). The results for the non-compact areas are as follows.

• Milk marketings fell 0.2-0.4 percent in response to a lower effective farm price.
• Class 1 use rose 0.1 percent in response to a $0.14 per cwt drop in the cost of Class 1 milk.¹⁹ The Class 1 cost of milk is equal to the Class 1 price plus any market over-order and compact premiums.
• Class 3 and 4 use generally fell in response to lower milk marketings and higher Class 1 use.
• Effective farm price generally fell $0.08-$0.12 per cwt due to the $2 compact premium. The effective farm price is equal to the federal order blend price, plus market over-order and compact premiums on Class 1 milk sales.

The Mid-Atlantic and Southeast Dairy Compact had similar impacts on non-compact states. These changes are illustrated in Appendix Table 2. The results for a non-compact state like Wisconsin are as follows:

• Milk marketings fell 76.6 million pounds or 0.3 percent due to a 1 percent decline in the effective farm price.
• Class 1 price fell $0.14 per cwt due to a lower Class 1 mover.
• Federal order blend price fell $0.12 per cwt due to lower class prices.
• Effective farm price fell $0.12 per cwt due to lower class prices.
• Farm milk sales, which are equal to milk marketings times the effective farm price, fell $37 million, or 1.3 percent.
• Per capita fluid milk consumption rose a modest 0.29 pounds in response to a penny decline in the retail fluid milk price.
• Retail fluid milk expenditures fell 0.3 percent as total fluid milk consumption rose 0.1 percent and the retail milk price fell 0.4 percent.

Table 5.5 Economic Impact of the Mid-Atlantic and Southeast Dairy Compact Scenario

This scenario analyzes the impact of a $2 compact premium on a combined Northern, Mid-Atlantic and Southeast Dairy Compact (Combined Compact). This combined compact geographically includes the Northeast, Appalachian, Florida and Southeast proposed federal milk marketing orders, as well as Maine, Virginia and Northern Missouri. The impacts can be evaluated in terms of compact and non-compact regions and states.

The impact of the Combined Dairy Compact on dairy commodities is presented in Table 5.1. Butter and nonfat dry milk production increased 0.4 percent and cheese production increased 0.6 percent due to increased milk production and reduced Class 1 use.

The impact of the Combined Dairy Compact on federal and California class prices is presented in Table 5.2 above. Declines in cheese, butter and nonfat dry milk prices due to increased production resulted in lower component prices. That resulted in lower skim milk and butterfat prices for all class prices under federal orders and the California order.

The impact of the Combined Compact on milk marketings and Class 1 milk use by order, and on the U.S. average effective farm price is illustrated in Table 5.3. U.S. milk marketings rose 151.9 million pounds. The gains in marketings in the Northeast, Appalachian, Florida and Southeast orders were not entirely offset by declining marketings elsewhere. The increase in U.S. milk marketings was due to a $0.076 per cwt increase in the weighted effective U.S. average farm price. Total U.S. Class 1 milk sales declined 343 million pounds. All of the declining Class 1 sales were in the compact orders and were due to the $2 compact premium.

Compact Areas

The impact of the Combined Dairy Compact on federal milk marketing orders and farm prices can be seen in Appendix Table 2 and in Table 5.6.

The results of the Combined Dairy Compact on the proposed Southeast federal order are summarized below. Similar results are found for the Northeast, Appalachian and Florida orders.

• Milk marketings increased 2.2 percent due to a 6.5 percent increase in the effective farm price.
• Class 1 use fell 1.6 percent in response to a 11 percent increase in the cost of Class 1 milk. The Class 1 cost of milk is equal to the Class 1 price plus any market over-order and compact premiums. Retail fluid milk prices rose $0.15 per gallon or 5.1 percent.
• Class 3 use increased 17.8 percent due to greater milk marketings.
• Class 1 cost of milk increased $1.77 due to the $2 compact premium and a $0.23 decline in the Class 1 price mover.
• Effective farm price rose $0.97 per cwt or 6.5 percent due to the $2 compact premium. The effective farm price is equal to the federal order blend price, plus market over-order and compact premiums on Class 1 milk sales.
• Per capita fluid milk consumption fell 3 pounds or 1.6 percent in response to a $0.15 per gallon or 5.1 percent increase in the retail price of fluid milk.
• Retail fluid milk expenditures rose $63.9 million or 3.4 percent as total fluid milk consumption fell 1.6 percent and the retail fluid milk price rose 5.1 percent.

The Combined Dairy Compact had impacts on individual states depending on whether these states were inside or outside the compact region (see Appendix Table 2). The results for Missouri, which is in the compact region, are as follows:

• Milk marketings increased 2.1 percent in Missouri due to a 6.2 percent increase in the effective farm price.
• Class 1 price fell $0.23 per cwt in Missouri due to the lower Class 1 mover.
• Federal order blend price fell $0.25 per cwt due to lower class prices.
• Effective farm price rose $0.88 per cwt. The $2 per cwt compact premium was only paid on Class 1 milk sales, which declined due to the higher cost of Class 1 milk. In addition, the $2 compact premium was offset by lower class prices due to lower commodity prices.
• Farm milk sales, which are equal to milk marketings times the effective farm price, rose $26.6 million, or 8.4 percent.
• Per capita fluid milk consumption fell 3.5 pounds, or 1.7 percent in response to a 5.6 percent increase in the retail price of fluid milk.
• Retail fluid milk expenditures rose $13.4 million, or 3.8 percent as total fluid milk consumption fell 1.7 percent and the retail milk price rose 5.6 percent.

Non-compact Areas

The impacts of the Combined Dairy Compact 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 (see Table 5.6).

• Milk marketings fell 0.4-0.6 percent in response to a lower effective farm price.
• Class 1 use rose 0.1-0.2 percent in response to a $0.23 per cwt drop in the cost of Class 1 milk.²⁰The Class 1 cost of milk is equal to the Class 1 price plus any market over-order and compact premiums.
• Class 3 and 4 use generally fell in response to lower milk marketings and higher Class 1 use.
• Effective farm price generally fell $0.17-$0.21 per cwt due to the $2 compact premium. The effective farm price is equal to the federal order blend price, plus market over-order and compact premiums on Class 1 milk sales.

The Combined Dairy Compact had similar impacts on non-compact states. These changes are illustrated in Appendix Table 2. The results for a non-compact state like Wisconsin are as follows:

• Milk marketings fell 132 million pounds, or 0.6 percent, due to a 1.7 percent decline in the effective farm price.
• Class 1 price fell $0.23 per cwt due to a lower Class 1 mover.
• Federal order blend price fell $0.22 per cwt due to lower class prices.
• Effective farm price fell $0.21 per cwt due to lower class prices.
• Farm milk sales, which are equal to milk marketings times the effective farm price, fell $64 million, or 2.3 percent.
• Per capita fluid milk consumption rose a modest 0.2 percent in response to a 0.7 percent decline in the retail fluid milk price.
• Retail fluid milk expenditures fell 0.5 percent as total fluid milk consumption rose 0.2 percent and the retail milk price fell 0.7 percent.

Table 5.6 Economic Impact of the Combined Dairy Compact Scenarios

Recall that a major assumption in this study is a fixed dollar farm-to-retail price margin on fluid milk. If the farm cost of milk to fluid processors is $1.20 per gallon and the retail price is $2.60, the farm-to-retail price margin is $1.40. If the farm cost of milk rises to $1.35 per gallon, the farm-to-retail margin will remain fixed at $1.40 and the retail price will rise to $2.75.

Does a fixed dollar mark up adequately describe how fluid processors and retailers set margins? This analysis shows processors and retailers will lose money under a compact scenario if they have a fixed dollar mark up and if retail sales decline. An alternative assumption is that processors and retailers may decide to increase margins in order to off set lower sales and maintain earnings. Thus, one should consider a scenario using a fixed percent mark up in the farm-to-retail margins for fluid milk.

Under a fixed percent farm-to-retail price margin, the dollar amount of the mark up will depend on the cost of milk. Assume the farm-to-retail margin is 117 percent of the cost of milk. Thus, if the milk cost is $1.20 per gallon, the farm-to-retail margin will be $1.40 and the retail price will be $2.60. If the farm cost of milk rises to $1.35 per gallon, the farm-to-retail margin will rise to $1.58 and the retail price will rise to $2.93.

Thus additional model simulations were made to test how the model results differed when the assumption of a fixed dollar mark up was changed to a fixed percentage mark up. The only changes made in the model was to redefine the farm to retail mark up.

The results of these changes can be seen in Appendix Table 3. In compact states and regions, the drop in per capita fluid milk consumption and hence total fluid milk consumption was greater than using a fixed dollar mark up. The results for Missouri are summarized in Table 5.7.

In non-compact states and regions, results were exactly the opposite of compact states. Class 1 use was slightly higher due to greater responsiveness to the lower Class 1 price mover. As a result, Class 3 and 4 use was slightly lower.

The results in Table 5.7 indicate that the change relative to the baseline in per capita fluid milk consumption for the Combined Dairy Compact was –6.85 pounds under a fixed percentage mark up compared to -3.53 pounds under a fixed dollar mark up. That's because the retail milk price increased $0.31 per gallon under the fixed percentage mark up compared to a $0.15 increase under the assumed fixed dollar mark up.

The farm-to-retail dollar mark up on fluid milk increased $0.16 per gallon when the fixed percentage mark up assumption was used. As a result, retail fluid milk expenditures in Missouri under a Combined Dairy Compact rose $26.8 million, or 7.5 percent, relative to the baseline under a fixed percentage mark up. That increase fell to $13.4 million, or 3.8 percent if a fixed dollar mark up is assumed. Thus, the assumption regarding how farm prices are marked up to retail prices can have a significant impact on the model results.

Table 5.7 Comparison of a Fixed Dollar and Fixed Percentage Farm-to-Retail Mark up for Missouri Under a Combined Dairy Compact Scenario

Dairy cooperatives can legally combine forces in the marketplace and bargain for milk prices above minimum federal order prices. For fluid milk, these higher prices are known as coop Class 1 prices. The difference between these higher fluid milk prices and minimum federal order Class 1 prices is called market over-order premiums.

Market over-order premiums from 1997 were used in this model baseline (see Appendix Tables 1 and 2). In addition, the critical assumption made in this model analysis was that these market over-order premiums would remain unchanged in all order affected by a dairy compact when the $2 compact premium was used in the model simulations.

From the models perspective, there is no difference between a market over-order premium and a dairy compact premium. Both have the same impact--raising the cost of Class 1 milk. Thus, if a compact price is set that results in a $2 compact premium and market over-order premiums are reduced by $1, the net effect is a $1 enhancement in over-order premiums. Likewise, if a $2 compact premium is imposed and market over-order premiums are reduced by $2, there is no change in the net over-order premiums.

Again, the reason market over-order premiums were not changed under all compact scenarios is to isolate the impact of an enhancement in over-order premiums due to a dairy compact. It was assumed that dairy farmers and their cooperatives are interested in dairy compacts because of its potential to enhance farm milk prices. Thus it is a safe assumption that a compact commission would set a target compact price so as to ensure that the net benefit of the compact--the compact premium and the market over-order premiums-- will be greater than current price levels.

Thus, not included in this study were a number of compact scenarios with reduced levels of market over-order premiums. The model results are divisible. For example, if a $2 compact premium was assumed and market over-order premiums reduced by $1, there would be a net increase of just $1 in Class 1 premiums. Thus the model results for this scenario would be half that of the results outlined in Appendix Table 2. Or, if the compact premium was set at $4 and market over-order premiums was maintained, the model results would be double that in Appendix Table 2. Likewise, if a $1 compact premium was set and the market over-order premium were $1, there would be no economic impact.

The results of this study are conditioned on the baseline, elasticities, model identities and the assumptions outlined in this study. What would happen to the results of this study if one of the elasticities were to change, or if the assumptions used in the analysis were altered? Would this change the conclusions?

A sensitivity analysis was conducted for this study and is presented in Table 5.8. These results are reported for Missouri only, but are reflective of the rest of the states and regions analyzed in this report. The first column of the table presents the results of the Combined Dairy Compact scenario for Missouri. Let's refer to these as the "model results." Three alternative scenarios were then run that reflect changes in the model elasticities or assumptions. These results are also presented as comparisons to the baseline. These changes can then be compared to the changes presented under the "model results."

The first scenario reduced the compact premium from $2 per cwt under the "model results" to $1. Also, the market over-order premiums were reduced in half. For Missouri, the market over-order premium for fluid milk used in the baseline was $1.55 per cwt. For this scenario, the market over-order premium was reduced by $0.78 per cwt. The results show that over-order premiums fall from $3.55 per cwt in the "model results" (market over-order premium: $1.55; Compact premium: $2.00), to $1.78 per cwt in this scenario (market over-order premium: $0.78; Compact premium: $1.00). Relative to the baseline, over-order premiums rise just $0.22 per cwt ($1.00-$0.78). The Class 1 mover falls just $0.05 per cwt, but administrative and other costs are still incurred ($0.07). Thus, the cost of fluid milk to processors rises $0.10 per cwt ($0.22-$0.05-$0.07). For farmers, the fluid portion of their milk check rises $0.10 per cwt, but the manufacturing portion declines $0.05. Given percent utilization, the effective farm price then rises $0.03 per cwt.

The second scenario evaluates the impact of reducing the retail fluid milk demand elasticity from -0.32 in the "model results" to -0.11. The results in Table 5.8 indicate that higher retail costs for fluid milk due to the compact would have a slightly lower negative impact on fluid milk sales compared to the "model results." In addition, more milk marketings would receive the higher fluid milk prices. That's because less milk would move from the higher-valued fluid sales to the lower-valued manufacturing uses. Thus the effective farm price would be slightly higher in this scenario than under the "model results."

The third scenario evaluates the impact of increasing the retail fluid milk demand elasticity from -0.32 in the "model results" to -0.54. The results are opposite those above. A higher retail elasticity means that the compact would result in a larger reduction in fluid milk consumption when compared to the "model results." In other words, slightly more milk would move from the higher-valued fluid use to the lower-valued manufacturing uses. Thus the effective farm price would be slightly lower in this scenario when compared to the "model results."

Two conclusions can be reached from this sensitivity analysis. First, if the creation of a dairy compact effectively results in a "swap" of market over-order premiums with compact premiums, the price enhancing effect of the compact on farm prices is neutralized. The only change is the administrative costs of this new program. Second, any marginal change in retail fluid milk demand elasticities does not appreciably change the results of this study.

Table 5.8 Sensitivity Analysis: Changes in Assumptions and Elasticities and the Resulting Impact for Missouri