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Marketing Order Deregulation Would Help Upper Midwest Dairy Industry, UW Analyst Says

The Upper Midwest, and other primarily manufacturing-milk regions, would gain under milk marketing order deregulation and the proposed Option 1b differentials, says a University of Wisconsin-Madison professor.

By analyzing the proposed consolidation and pricing reforms of the federal milk marketing system, Tom Cox, an agricultural economist in the College of Agricultural and Life Sciences, found that the current federal order and California pricing system increases short-run U.S. competitiveness in world dairy markets by lowering cheese and non-fat dry milk prices.

“The primarily manufacturing-milk regions pick up the tab for this increased competitiveness by experiencing lowered manufactured product prices,” said Cox.

The elimination of the dairy price support program is slated for the year 2000 and the USDA”s proposed consolidation of milk marketing orders and pricing reform deadline is April 1, 1999. To meet this deadline the USDA is preparing to make its final reform decisions this fall and then will hold a producer referendum.

Cox analyzed the reform proposal to help producer and industry groups understand the impacts the proposed changes would have on the industry. Cox used the inter-regional competition model that has been developed over the past 10 years at the College of Agricultural and Life Sciences. He separated the United States into 12 regions, similar to the proposed milk marketing orders.

Cox completed separate analyses for each of the proposed Option 1a and Option 1b Class I differentials. Option 1a establishes differentials very similar to the current Class I differentials, with an average U.S. increase of four cents per hundredweight.

“Option 1a is basically a status-quo adjustment,” said Cox. “It raises differentials slightly for the Upper Midwest and Northeast regions, while lowering them slightly for the Southwest and Arizona.”

Under Option 1b, the average U.S. Class I differential decreases 73 cents per hundredweight, but generally levels out the differentials across regions. The leveling out occurs in the central through western regions, but disparities remain in Florida, the Southeast, Northeast and Appalachia.

“The USDA prefers this option because it is more consistent with the market orientation of the 1996 Farm Bill,” said Cox. “But, the remaining disparities lead some to argue that this reform does not go far enough.”

Also, in the reform proposal the USDA uses multiple component price formulas to compute the value of milk components, in order to set minimum prices for Class III (milk used in hard cheese) and Class IV (milk used in butter and milk powders). Compared with current Class IIIa pricing, using 1995 average data, Class IV prices would increase 55 cents per hundredweight and compared with the current basic formula price, Class III prices would increase 58 cents per hundredweight.

According to Cox”s analysis, the new mover for Class I prices would be 60 cents per hundredweight higher than the BFP. This increase results from differences between calculating the BFP from the value of Grade B milk used in cheese production and calculating the mover from the proposed multiple component price formulas for Class III and Class IV milk.

Putting it all together, Cox compared the effects of Option 1a, Option 1b and full milk marketing order (MMO) deregulation, using the proposed multiple component price as the mover, on farm level price and revenue impacts and wholesale level price and revenue impacts.

Looking at the Upper Midwest, a deregulated market would increase producer prices more than with either of the proposed Option 1a or Option 1b pricing differentials. With MMO deregulation, producer prices would rise 54 cents per hundredweight in the Upper Midwest, compared with a 26 cents per hundredweight drop for the entire U.S.

Other regions that would experience increases include California, with 49 cents per hundredweight, and the Western region with 37 cents per hundredweight. In all other regions producer prices would decrease, with Florida experiencing a $2.93 per hundredweight drop, and the Southeast a $1.81 per hundredweight drop under deregulation.

However, just looking at Option 1a and Option 1b, producers in the Upper Midwest would still see a 12 cent per hundredweight increase under Option 1b versus a 1 cent per hundredweight increase under Option 1a. The U.S. producer price decreases less under Option 1a (3 cent per hundredweight) and Option 1b (8 cent per hundredweight) than under full MMO deregulation.

When looking at farm level revenues, Option 1a would increase U.S. revenues by $18 million, Option 1b decreases U.S. revenues by $69 million and deregulation decreases U.S. revenues by $422 million. The Upper Midwest would gain $4 million under Option 1a, $51 million under Option 1b and $234 million under full MMO deregulation.

“Generally, the largest manufacturing-milk regions, the Upper Midwest and California, would experience farm milk price increases under Option 1b and deregulation.” Cox said. “This is due to indirect price-induced supply/demand adjustments that would be generated by lower milk prices and production in the rest of the U.S.”

This point is illustrated by Cox”s analysis of wholesale level price and revenue impacts. Fluid milk prices and revenues would increase 36 cents per hundredweight or $167 million under Option 1a, decrease 2 cents per hundredweight or $10 million under Option 1b, and decrease $2.06 per hundredweight or $984 million under MMO deregulation. Cheese and most other manufactured product wholesale prices and revenues decrease under Option 1a, and increase under Option 1b and MMO deregulation.

Deregulation also benefits consumers. Total wholesale expenditures increase $112 million under Option 1a and $26 million under Option 1b, representing a tax on consumers. However, with the elimination of classified pricing in U.S. milk marketing orders, total wholesale expenditures would fall $538 million, a net gain to consumers.

To download a copy of Cox”s study, go to the Agricultural and Applied Economics web site at http://www.wisc.edu/aae/mpb/mpb62.pdf