Dairy Talk: Analysis Cubed

April 5, 2011 11:57 PM
Jim Dickrell

You could say this is an analysis of FAPRI’s analysis of the Informa Economics analysis of Foundation for the Future (see "Dueling Analyses".)

All analysis depends on the assumptions used. National Milk Producers Federation economists fault the Informa study because it made no attempt to estimate how much less milk would have been brought to market due to reduced milk payments in 2009. The Food and Agricultural Policy Research Institute assumed that 50% of the milk subject to excess production payment penalty would not have come to market. (In March 2009, that would have amounted to 0.85%.)

So who is right? I don’t know. You would think there would be some supply response if producers are being paid $0 for 4% of their milk. (Inversely, the payment rate is 96% for all the milk.)

Bonus Content

FAPRI report

NMPF report

Informa Economics report

What actually happened in 2009 is instructive. In January, milk prices dropped 13% to $13.80. In February, they dropped another 11% to $11.50 and remained below $12 until September. But milk production did not slow until August, even though milk prices were 25% below December prices.

Had Foundation for the Future been in effect, FAPRI economists assume, producers would have cut back 0.85% in March, when the 4% penalty kicked in. In reality, it took six months of lower prices to rein in production. Milk output finally started to decline in the last five months of 2009—when prices were rebounding. By December, the All-Milk price had climbed to $16.30 per cwt., but production still declined 0.9%.

The other piece of the analysis is the amount of cheese that would have been removed from commercial sales by the plan: 12 million pounds per month, by FAPRI’s estimate, generating three times the producer revenue than the cheese cost. Informa never considered this.

The FAPRI analysis does a better overall job than Informa’s. But each has its problems. And we really won’t know what will happen until Foundation for the Future becomes law. Can you wait?

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