Increased expansion, more imports, cheating and free riders are all potential unintended consequences of the supply management program proposed by the Holstein Association, according to analysis by two University of California-Davis (UC-Davis) economists.
"Paradoxically, the program could cause more supply expansion than would otherwise take place,” say Tina Saitone and Richard Sexton, both with UC-Davis.
The reason: "Producers contemplating expansion will either not expand at all or expand substantially to spread the fixed cost of paying the ‘market access fee' on their entire base,” they say.
• Imports could rise, exports could fall. If the supply management program is successful in raising U.S. dairy prices above world prices, it would create incentives to bring foreign dairy products into the country. At the same time, U.S. exports would decline because they would not have a price-competitive market overseas. As a result, U.S. production would have to be scaled back even more since all U.S. production would have to be consumed here.
• Free riders. Though the legislation would make participation mandatory, some groups such as organic producers "would seek and obtain exemption from the program, thereby creating a class of free riders.”
• Cheaters. The proposal regulates individual farm production through reporting by processors. However, cheating could occur before milk ever reaches the processors, with milk transshipped from a producer who is above quota to a producer who is below quota. "Black markets could also emerge, with producers selling milk outside of normal marketing channels,” says the economists.