An Analytical Review of a Refundable Assessment Plan for Dairy Producers

Milk prices have been volatile for more than 100 years. Much of that volatility was sup-pressed from the mid-1940s until the end of the 1980s, but the sources of that volatility have always been present and are now in full force. Fluid milk and most dairy products have what an economist would call and “inelastic” demand and, dairy farmers exhibit an “inelastic ” supply response to changes in milk price. The term is really just a way to say that dairy farmers make relatively small changes in short-run milk production decisions when the milk price changes and con-sumers do the same thing with purchase decisions. This type of behavior can lead to volatile prices. We have always had seasonal production for milk. Milk supplies are greater in the spring than they are in the fall largely due to calving patterns and, historically production increases when cows were out of the barn and grazing on fresh grass. Grazing is less important today than many years ago, but seasonal production patterns persist. Consumers also have a seasonal pattern to their consumption. Demand for fluid milk is at its greatest in the fall when schools are back in session. Also, we have seasonally strong demand for cheese and other dairy products during the Thanksgiving through Super Bowl time period. Unfortunately, the seasonal consumption pattern is almost counter-cyclical with the pro-duction pattern. Figure 1 shows indicies of milk receipts and class I utilization in federal milk marketing orders in 2006. Given the inelastic supply and demand, milk prices used to swing by more than 150 percent from spring to fall as not enough milk was produced in the fall and more than enough produced in the spring