An Analysis of Alternatives to the Dairy Price Support Program

The U.S. dairy industry has operated under a price support program since 1949. Between 1949 and 1980, the dairy price support program generally operated without incurring large government costs and was an effective price stabilizer. However, since 1980, the dairy industry has experienced chronic excess production relative to consumption and consequently government purchases under the price support program have been excessively large (particularly in the mid-1980s). The tremendous increase in government costs of the dairy price support program and a growing dissatisfaction with the program by farmers has prompted proposals to modify or replace this program. This paper examines the potential market impacts of five different dairy policy scenarios. The five policies are: (1) a baseline price support program scenario, (2) an immediate deregulation scenario where the price support program is eliminated, (3) a gradual deregulation scenario where the support prices for dairy products are decreased by 10% per year, (4) a target price-deficiency payment program scenario, and (5) a mandatory supply control program scenario. A model of the national dairy industry is used to simulate quarterly equilibrium price and quantity values at the farm and wholesale levels for each policy over the period 1980-90. The results indicate that there are gainers and losers for each policy option. Consumers are better off under the deficiency payment program and both deregulation scenarios because prices are lower, which enables them to consume more dairy products. On the other hand, consumer are worse off under supply control where, with the exception of butter, wholesale prices are at their highest. Farmers, as a group, are better off under the control and deficiency programs. Farm milk prices and producer surplus are highest under these two policies. Producers suffer the most in the immediate deregulation scenario where both the farm price and producer surplus are at their lowest levels. Tax payers are best off under immediate deregulation and supply control, while substantially worse off under the deficiency payment program. These results suggest that the relative political weight that politicians give to consumers, farmers, and tax payers will be quite important in shaping future dairy policy legislation