Voluntary Supply Management Pros and Cons

May 13, 2010 06:14 AM
 
 
Three national, voluntary supply management programs have been instituted in the United States over the past 25 years or so. All have met with some level of success, but none are being viewed as permanent solutions to surplus milk.
 
Dairy economists at the Universities of Missouri (UM) and Wisconsin (UW) have analyzed the pros and cons in a Policy Briefing paper in anticipation of the 2012 Farm Bill.
 
The first program, the Milk Diversion Program, took place in 1984 and 1985. Producers were paid $10/cwt to reduce milk marketings 5% to 30%. The program cut milk production sharply in 1985, but had no long-term effect, say Scott Brown (UM) and Ed Jesse (UW).
 
In 1987, the Whole Herd Buyout was instituted, allowing dairy producers to bid in their entire herds and contractually agree to stay out of business for five years. While the Buyout was more successful in reducing milk production, it raised the ire of beef producers with the large influx of dairy cattle onto beef markets.
 
The third voluntary supply management program, the Cooperatives Working Together program, was instituted by producers themselves and is currently on-going. Again, producers bid their herds into the program for slaughter, and in the latest round, agree to remain out of business for 12 months. The CWT program also offer incentives to export dairy products.
 
Issues surrounding these programs:
 
• Adequate funding and participation. Government supply management programs such as the Milk Diversion Program and Whole Herd Buyout are funded by mandatory producer assessments and/or Federal appropriations. CWT depends on voluntary assessments. At issue is whether enough dollars can be raised for either approach to enhance and stabilize farm level milk prices over the long run, say the economists.
 
• Free riders. "Dairy farmers who don't participate in the program still receive any benefits that result from the participation of others,” say Brown and Jesse. "Some dairy farmers are likely to respond to higher and more stable prices by expanding the size of their dairy herd.”
 
• Buying air. These voluntary programs run the risk of paying dairy farmers to exit the business when they are already planning to retire. There still may be benefits if total herd slaughter is required, since the cattle won't be sold to other farmers.
 
• Export market issues. Export subsidies on dairy products, which is part of the CWT program, could be viewed by buyers as an on again/off again situation.  As a result, cooperatives offering these incentives might be viewed as less than reliable long-run sources of dairy products. "While the CWT incentives are not government subsidies, they could trigger a WTO trade inquiry if they become large,” add the economists.
 
For the complete Policy Brief on voluntary supply management, click here.
 

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