Problems With Dairy Price Supports

May 11, 2010 06:32 AM

In its second Policy Paper on dairy issues for the 2010 Farm Bill debate, dairy economists at the Universities of Missouri and Wisconsin point out the problems with U.S. dairy price supports:
Ineffective price floor. The current Commodity Credit Corporation (CCC) purchase prices translate into $9 to $9.50/cwt Class III and IV milk prices. "This is well below the cost of producing milk given today's high input costs,” say economists Scott Brown, U of M, and Ed Jesse, UW. And because of non-standard product, packaging and payment specifications, it costs more to sell products to the CCC than to the commercial trade. So many processors are reluctant to take on these added costs, and is one reason prices fall below support levels when milk supplies are high.
Incompatible with world trade rules. Before 2008, dairy price supports were tied directly to milk prices, making them directly a contributor to the U.S. aggregate measure of support with the World Trade Organization. Under WTO rules, each country is allowed to support it farmers by only so much, and dairy support prices were contributing billions of dollars to this account. Even though dairy price supports are now tied to product price formulas and not directly to milk prices, major changes—and perhaps even termination—will be required to conform to a new WTO agreement, say Brown and Jesse.
Market distorting. Dairy price supports set a price floor for some products but not others, which can lead to price distortion. For example, there is a large market for dairy-based proteins such as milk protein concentrates (MPC) and casein. But because of the dairy price supports for nonfat dry milk, it is less risky and usually more profitable to produce nonfat dry milk rather than these other emerging dairy proteins. This, in turn, can lead to increased imports of MPCs and casein.  
For the complete Policy Briefing and background papers, click here.

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