The American Enterprise Institute, long a foe of government intervention in farm policy, has issued a set of papers today critiquing current and future policy.
Its critique of dairy policy, written by Joseph Balagtas, a Purdue University ag economist, says current supply management proposals are likely to increase price volatility rather than mitigate it. The reason: Timing mechanisms delay the onset of the programs and price affects in response come even later.
“Supply management policies exacerbate the problem of tight and variable margins by hampering producers’ ability to manage risk,” says Balagtas.
He also criticizes Federal Milk Marketing Orders, saying they distort prices to both producers and consumers. “Marketing Orders at one time may have served to limit market power by milk plants, but the emergence of cooperatives that control large shares and manufacturing capacity makes this justification obsolete.”
His solution: Direct payments to producers. “While direct payments are now seen as suspect, in part because they are hard to justify, they transfer income to farms with relatively little distortion.” He also urges more risk management tools be made available such as forward contracting by proprietary processors, dairy derivative markets and net-revenue insurance.
The paper, “Milking Consumers and Taxpayers, The Folly of U.S. Dairy Policy,” is available here.