A32-Lmcast«r Farming, Saturday, May 18,1985
EDITOR’S NOTE: This is the
eighth in a series of nine articles
about dairy policy options for 1985.
Compiled by Jack Kirkland and
Blair Smith, Extension ag
economists at Penn State, the
articles are written by a variety of
national authorities on dairy policy
issues.
We are printing these articles to
help you better understand and
evaluate the policies and programs
the dairy industry faces, and to
help you take a more effective
stand for the program you choose
to support as the 1985 Farm Bill is
formulated.
For further information about
these articles or about dairy
policy, contact your Extension
agent.
BY ROBERT E. JACOBSON
THE OHIO STATE UNIVERSITY
Since it began in 1949, the dairy
price support program has worked
so smoothly in most years that we
tend to forget that there are other
ways of achieving dairy policy
objectives. An alternative to
purchasing manufactured
products to support farm prices
would be a target price-deficiency
payments program.
What Is a Target
Price-Deficiency
Payments Program?
Basically, a target price
deficiency payments program is
one in which direct payments or
deficiency payments are made to
milk producers. Since there would
not be a Commodity Credit Cor
poration (CCC) purchase program
for butter, cheese, and nonfat dry
milk, wholesale product market
prices would adjust to market
clearing levels.
Producer milk prices would
quickly reflect such adjustments.
The amount of payment is the
difference between the target price
and the prevailing market price
for producer milk.
Look at an example of deficiency
payments that emphasizes the
contrast with the present CCC
purchase program. Assume that
the purchase program is in
operation, the support price for
milk is $12.31 (3.5 percent ,J)ut
terfat), and CCC purchase prices
are $1.43 per pound for butter, $1.35
per pound for cheese, and 91 cents
per pound for nonfat dry milk.
Further assume that given these
circumstances, the Mmnesota-
Wisconsin (M-W) manufacturing
milk price for a given month is
$12.40 per cwt.
If the CCC purchase program
had been replaced with a
deficiency payments program for
that same month, let us assume the
following responses would have
occurred:
1. The $12.31 support price now
becomes a $12.31 target price.
2. In the absence of CCC pur
chases, wholesale prices for (a)
butter drop 12 cents a pound, (b)
cheese drop 10 cents a pound, and
(c) nonfat dry milk drop 6 cents a
pound.
3. As a result of the price
declines in product markets, the
M-W price for the month falls to
$11.40, a full $1 lower than the
$12.41 reported under a purchase
program.
4. With the competitive market
pnce at $11.40 and a designated
target price of $12.31, a deficiency
payment of 91 cents per cwt. would
be made.
Alternative Mechanisms
for Implementing
Deficiency Payments
The target price for milk could
be identical to the support price. It
could be established by the same
procedure, whether that be parity,
dairy parity, cost of production, or
some other standard.
Deficiency payments could be
designated not just as a means of
addressing farm income problems
in the dairy sector, but also to
control milk production. In the
feed grains program, for example.
Target Price-Deficiency Payments Program
deficiency payments are used as
incentives to participate in
acreage reduction programs.
In dairy, deficiency payments 1)
could be made available only to
those producers who voluntarily
agree to reduce marketings a
certain percentage from a base, or
2) in a mandatory program could
>be refused to milk producers who
fail to limit marketings to an
amount below their base.
Some type of a deficiency
payments-supply control program
would probably allow higher target
prices than deficiency payments
without supply controls because
program costs and effects could be
controlled more tightly.
In a similar vein, deficiency
payments could be limited or
targeted to specific groups. Where
deficiency payments have been
used for other commodities, a
$50,000 payment limit per farm has
been specified. With a payment
limit, larger dairy operations with
production levels that exceed the
limit would be at a disadvantage.
As a rule of thumb, deficiency
payments of $1 per cwt. on all milk
marketed would mean a payments
ceiling of approximately 300 milk
cows per farm if a $50,000 limit was
adopted. At the same time, milk
production on smaller and possibly
less efficient dairy farms might
increase in response to the
payments.
Another possibility would be to
extend deficiency payments only
to milk used for manufacturing.
About 40 percent of the U.S. milk
supply is utilized in beverage milk
products-m Class I- so savings
would be proportional.
Class I prices could be
established by adding Class I
differentials to the target price
rather than the market clearing M-
W price. Thus, producers m fluid
milk markets would receive
deficiency payments only on Class
111 milk and would get the full
Class I price on Class I usage.
This transfers part of the cost of
farm income supports from tax-
payers to fluid milk consumers.
There could be periods when Class
I prices would be much higher than
normal relative to Class 111 prices.
Conditions Fostering Need
for Deficiency Payments
There are several reasons why
the target price-deficiency
payments approach will be
seriously considered. Easily the
most important reason is that the
market-clearing prices that are
basic to this program would be
demand sensitive, and lower
prices could provide a significant
boost to milk and dairy product
sales in the long run.
The deficiency payments
program would permit products to
move through markets on a sup
ply-demand basis, while CCC
purchase prices hold wholesale
prices up and thereby weaken
demand for manufactured
products. Also, the price ad
vantage that some substitutes for
dairy products now enjoy would be
reduced substantially.
Closely linked to the demand
stimulus that market clearing
prices might generate would be
new incentives to promote, mer
chandise, and market dairy
products. The easy option of selling
to the CCC would no longer exist.
Proprietary firms and dairy
cooperatives would be challenged
to aggressively seek sales in
competitive markets. Without an
automatic government market,
energies would be directed at
expanding demand.
The deficiency payments ap
proach would also link dairy price
policy more closely to overall
agricultural policy in the U.S.
Critics say the dairy program in
recent years has gone its own way-
-panty, purchases, no supply
discipline.
Deficiency payments have been
•airy Policy Options
a basic tool for cotton, wheat, and
feed grains since the early 19705.
By adopting deficiency payments,
the dairy sector could become an
integral part of a more unified
agricultural price-income policy.
A final consideration might be
that target prices can achieve the
price-income goals of the dairy
program more reliably than CCC
purchases. For example, in the
1981 through mid-1984 period, the
competitive M-W price was usually
below the support price by 20 to 30
cents per cwt. A deficiency
payments program would not be
subject to that kind of slippage
because the difference between the
target price and the market price
would be measured directly and
payments to farmers would be
made accordingly.
Consequences of
Deficiency Payments
In the same way that CCC
purchases rs" ”•♦- ♦-"•■Mr, Krause
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1983, the deficiency payments
approach is vulnerable on a cost
basis too. For example, if 91 cents
per cwt. payments were issued for
annual marketings of milk of 135
billion pounds, the dairy program
would cost nearly $1.25 billion.
When annual milk production is
large, market clearing prices
would be pushed to lower levels
and deficiency payments would
move to high and costly levels.
As was discussed earlier,
program costs can be reduced by
limiting payments or by tran
sferring some of the cost back to
consumers, as in the form of
higher prices for Class I milk.
A very important short-run
concern has to do with the
disruption of the manufactured
dairy products industry. The CCC
purchase program is so in
stitutionalized that processors of
cheddar cheese, butter, and nonfat
dry milk would face major ad
justments if purchases were
abruptly terminated. The nonfat
dry milk market in particular, the
butter market to a lesser degree,
and even the cheese market on
occasion have become dependent
on the CCC as a residual buyer.
Dairy cooperatives have taken
on much of the responsibility for
handling excess milk supplies in
recent years, so they would be
challenged to move products
commercially and obtain prices
for these products that would not
disadvantage their members.
If a deficiency payments
orogram was adopted, it might be
desirable to phase out CCC pur
chases or to establish some kind of
a market-wide service payment
mechanism for all dairy fanners
so that an equal cost sharing of the
adjustment away from govern
ment purchases might be effected.
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