Issues with Mandatory Supply Control

May 14, 2010 06:08 AM
Mandatory supply control in the form of quota or base programs have been used for years in both Canada and Europe to control milk supply. "Depressed milk prices in 2009 have renewed interest in base programs in the United States,” say Scott Brown and Ed Jesse, dairy economists with the Universities of Missouri and Wisconsin, respectively.
Brown and Jesse have prepared a Dairy Policy Brief on mandatory supply control as one of 11 different briefs in anticipation of the 2012 Farm Bill.
A version of a mandatory program, the Dairy Price Stabilization Act, was introduced in Congress just this week. In the program, each farm will be assigned a quota based on its historic milk production. Those farms who wish to expand production beyond this quota will be required to pay a market access fee for one year. Proceeds from these fees will be disbursed to non-expanding producers. After one year, the expanding farm's base is increased to reflect the higher level of milk production. The program can also require all producers to cut back milk production if surpluses are anticipated.
Mandatory supply management programs raise a number of issues:
Lower cost than voluntary programs. Quotas do not require large government outlays because there are no government purchases or direct payments to producers.
Value of quotas is capitalized and increase production costs. "When quotas succeed in stabilizing or raising prices above what they would be otherwise, the difference is capitalized into the value of the quota (if it is transferable) or to the farm to which the quota is attached,” say the economists.
Quota interfere with efficient industry changes. Mandatory supply control can impede or prevent structural change. Quotas that cannot be easily transferred can lock in herd size structure within regions and prevent inter-regional shifts that would increase industry efficiency. And programs that raise dairy product prices significantly must be accompanied by high tariffs to keep imports out. Similarly, sharply elevated prices run the risk of creating consumer resistance and the use of dairy substitutes.
Difficult to administer. Individual farm production levels must be monitored to ensure compliance. Long-term milk supply and demand estimates must be made, which is difficult and subjective.
For the complete Briefing Paper, click here.

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