A2O-Lancaster Fannins, Saturday, November 29,1986
Mandatory Supply Management: A Dairy Policy Option
Whv The, Current Interest In Suddlv Management
Editor’s Note: With this issue we
begin a seven-part series that
provides an overview of supply
management as a policy option.
The emphasis in the article. The
articles focus on mandatory supply
control programs due to the
current interest in this area.
BY WALTER WASSERMAN
Cornell University
Over the last six years the dairy
industry has been plagued with an
overwhelming supply-demand
imbalance. Milk production has
increased by 20 billion pounds from
1979 to 1985, while commercial
demand has increased by only half
that amount. Government pur
chases under the price support
program rose dramatically from
2.1 billion pounds of milk
equivalent in 1979 to a peak of 16.8
billion pounds in 1983, at a cost
exceeding 2.5 billion dollars for the
year.
Record production, record
USDA purchases of dairy products
and record price support ex
penditures characterized the years
from 1981 to 1983. Attempts at
discouraging milk production
during this period were centered
primarily in the area of price
support adjustments.
Then from 1983 to 1985, there was
a period of policy innovation, as
support price drops were com
bined with voluntary supply
control programs in a further
attempt to reduce government
purchases and expenditures.
Milk prices received by farmers
fell $2.12 per cwt between May 1981
and May 1986 after adjusting for
deductions. The effective all milk
price for May 1986 was $11.38 per
cwt, the lowest price in eight
years.
Dairy farmer equity has
deteriorated as well and the
question being raised is, “What
will it take to bring the dairy in
dustry back to a long-term
equilibrium condition, with milk
supply and demand in reasonable
balance and farm milk prices that
will afford a reasonable return to
labor and capital?”
Some will answer that man
datory supply controls are the only
option remaining, while others will
argue just as vehemently that
controls or quotas are not the
answer.
Dairy Policy Review
1982 to 1985
At the beginning of 1982, support
prices were established in ac
cordance with the Agriculture and
Food Act of 1981. This Act specified
a support price of $13.10, at 3.67%
fat test, through September 1982
and $13.25 from October 1982
through September 1983, unless
support purchases or expenditures
dropped to specified levels which
would trigger higher prices based
on 70 or 75 percent of parity.
The inadequacy of this policy
became obvious almost im
mediately and the search began
for an alternative.
In late August 1982, Congress
passed legislation changing
support policy under the Omnibus
Reconciliation Act This Act at
tempted to reconcile the dif
ferences between advocates of a
simple cut in the support price
teg, the administration) and
those who favored a more complex
plan involving a two-tiered base
excess pricing scheme te.g.,
National Milk Producers
Federation).
Congress froze the support price
at $13.10 through September 1984
and gave the Secretary authority
to directly assess producers up to
one dollar per hundredweight (in
two 50-cent increments), provided
projected price support purchases
did not fall below certain levels.
Opposition to this modified price
support program came from all
segments of the dairy industry and
all around the country, despite the
fact that the program reduced the
farmers’ effective price less than
most of the alternatives.
This general dissatisfaction with
the existing legislation led to
passage of the Dairy Production
and Stabilization Act in the fall of
1983. The DPSA initiated a set of
program changes and a sequence
of events without precedent. The
DPSA combined four major ac
tions.
First, it lowered the support
price by 50 cents per hun
dredweight as of December 1983,
and it authorized further reduc
tions of 50 cents per cwt in April
and July of 1985.
Second, it authorized a direct
assessment of 50 cents per cwt
against all farm marketings of
milk from Dec. 1, 1983 through
March 31,1985.
Third, it offered payments of $lO
per cwt of milk ‘diverted” to
farmers who agreed to sell less
milk in 1984 and the first quarter of
1985 than they did during a base
period.
Fourth, all farmers were
required to contribute 15 cents per
cwt of milk marketed to a National
Dairy Promotion and Research
Program, although credits of up to
10 cents per cwt were allowed for
contributions to similar regional or
statewide programs. .
The Milk Diversion Program, as
it was known, was successful in
reducing 1984 milk production by 4
billion pounds and government
purchases under the price support
program by 8 billion pounds, but its
success was short lived. Milk
production began to increase
sharply as soon as the program
terminated in March 1985,
culminating in another record
year. U.S. milk production topped
143 billion pounds in 1985, and
although commercial sales con
tinued to improve, CCC purchases
increased by 53 percent.
The 1983 farm bill expired on
Oct. 1,1985, but Congress failed to
deliver a new policy on schedule.
The House and Senate conferees
finally agreed on the provisions of
the 1985 Farm Bill on Dec. 14,1985.
The bill was approved by both the
House and the Senate the following
week and was signed into law by
the President on Dec. 23.
The “Food and Security Act of
1985” covers a period of five years,
through calendar 1990.
The major dairy provisions of
the Act include; an $11.60 support
price through December, 1986.
Price supports at $11.35 from Jan.
1 to Sept. 30,1987 and at $ll.lO on
Oct. 1, 1987. On Jan. 1, 1988 and
every January thereafter, the
support price may be reduced by
50 cents if net removals by the
government are projected to ex
ceed 5 billion pounds. In addition,
the bill authorized the Secretary of
Agriculture to initiate a Dairy
Termination Program by April 1,
1986.
The objective of the program
was to reduce milk production by
12 billion pounds Producers
submitted bids which, if accepted,
provided them with a payment in
return for ceasing milk production
for a five-year period The bill also
provided for an assessment of 40
cents per cwt on all milk as of April
1, 1986 and a reduced assessment
of 25 cents per cwt from January 1
to Sept 30, 1987 Additionally,
there were provisions that raised
Class I differentials in 35 Federal
Order markets, provided for the
establishment of a national dairy
commission, and addressed a
number of other dairy concerns.
The DTP was successful in
retiring 12.28 billion pounds or 8,7
percent of the milk marketed in
1985, thus fulfilling its primary
goal Our preluninary projections
indicate that the program will
have a positive impact in reducing
Production
Farm Use
Marketings
Beg. Comm. Stocks
Imports
TOTAL
Comm. Dis.
End. Comm. Stocks
Net Removals
TOTAL
Farm Price
All Milk
NY-NJ Blend
Avg. Annual
Assessment
Eff. Price
1986 adjusted for DTP & G-R-H (through September 30,1986)
•Projected.
••Forecast.
milk supplies and increasing farm
milk prices during the summer
and fall of 1986 and 1987. The
greatest uncertainty pertains to
the period 1988 to 1990, at which
time the current legislation falls
back on the disincentive of lower
price supports to curtail supply
demand unbalances. There seems
to be great skepticism among
some segments of the industry that
these provisions will be able to
sustain a balanced market.
The Supply-Demand-Price
Outlook
At the present time, indications
are that the current dairy policy
and market conditions are in fact
bringing supply and demand into
better balance.
In July, U.S. milk production
declined by 1 percent from year
Alternative Voluntary Supply
BY HARRY KAISER
Cornell University
This educational series is
primarily concerned with
analyzing the range of mandatory
quota programs as alternatives to
current dairy policy. However, it is
important to recognize that
mandatory quotas are not the only
type of supply management
program available for
“managing” our milk supply.
To add a broader perspective of
the concept of supply management
to this senes of publications, this
article describes the general
notion of supply management, and
several forms of voluntary supply
management programs that have
been proposed for national dairy
policy over the last several
decades.
Supply Management
Programs
Interest in supply management
almost always develops when
supply begins to outpace demand
In order to bring demand and
supply into balance, policy
prescriptions tend to emphasize
supply rather than demand ad
justments, with producer finance
promotion programs as an ex
ception to this rule.
The reason for this is simple.
Demand for milk is quite stable
easy to forecast, but difficult to
alter in the short run. It is hard to
increase demand because of the
difficulty in changing consumers’
tastes, preferences and habits.
Supply, on the other hand, can be
controlled more readily through
government programs that offer
producers economic incentives, or
disincentives, to encourage a
desired level of production. By
offering producers incentives, or
disincentives, the government can
U.S. Supply and Use of Milk
1984 1985
1983
135.4
3.1
139.7
2.4
132.3
5.2
2.7
137.3
4.6
2.6
140.2
144.5
126.7
4.9
8.6
122.5
5.2
16.8
140.2
144.5
$13.45
$13.57
$13.03
$13.23
$ .50
$ .48
$12.53
$12.75
earlier levels following increases
of up to 7 percent during the first
quarter of the year. Milk cow
numbers continued to decline for
the seventh consecutive month,
reflecting the DTP and dairy price
policy. July cow numbers were
down 2.3 percent from July, 1985.
Even more significant in the long
run is a 6 percent decline in the
number of dairy replacements on
farms on July 1. By the end of July,
642,000 dairy cattle had been
removed from farms under the
DTP.
Commercial disappearance has
continued to increase
dramatically. For the first six
months of 1986, commercial
disappearance increased 4.2
percent compared to the same
period in 1985. Lower milk
adjust production to be more in
line with consumption. In the past,
U.S. dairy policy has always
resorted to voluntary supply
management programs or ad
justments in prices to control
production.
Although the term “supply
management” has been used
frequently in recent discussions
about alternative dairy policies, it
is difficult to find a standard
definition of what this phrase
means. The term has come to
mean different things to different
people.
For example, some have used it
synonymously with specific
programs like the Milk Diversion
Program, Dairy Termination
Program or milk quotas. Others
have interpreted supply
management more generally to
mean any policy designed to
balance supply with prevailing
demand. The more popular
definition of supply management is
supply control.
An important distinction bet
ween alternative types of supply
management programs is whether
producer participation is volun
tary or compulsory.
Voluntary programs seek to
adjust total production in relation
to projected consumption by
providing economic incentives to
dairy farmers for voluntarily
cutting back or ceasing produc
tion. Because they are not com
pulsory, these programs must
make the incentives strong enough
to encourage a sufficient number
of farmers to participate in order
to bring supply into adjustment
with demand.
Mandatory programs (e.g.,
quotas) seek to limit total
production by penalizing those who
1986*
145.1
2.3
143.7
2.6
142.8
4.6
2.9
141.1
4.9
2.8
150.3
148.8
134.8
4.8
10.7
131.0
4.6
13.2
150.3
148.8
$12.25
$12.73
$11.98
$12.32
$ .36
$ .13
$11.62
$12.19
production, moderate increases in
commercial sales and sharply
lower government purchases are
forecast for 1987.
There are a number of factors,
however, that could lead to a
■ deterioration of these favorable
market conditions by 1988. Low
feed prices and, or the introduction
of bGH could stimulate greater
production increases, particularly
as milk prices strengthen while
weakness in the economy could
curtail further growth in demand.
The continuing threat of still
lower support prices leading to
further price instability and low
returns to dairymen is fueling the
interest in mandatory supply
control as a dairy policy option.
(continued next week)
Management
produce in excess of their assigned
bases. Penalties have to be severe
enough to discourage the majority
of farmers from exceeding their
quotas, ranging in severity from
receiving a lower price to no price
at all on any milk sold over one’s
quota. The effects of a quota plan
on income and production depends
on the period on which quotas are
based, how frequently they are
adjusted, and whether they are
transferable.
While voluntary programs have
been implemented in the past to
reduce milk production, a national
compulsory program has never
been established in the U.S. One
reason is that mandatory
programs would be a radical
departure from past and current
dairy policies that allow farmers
complete freedom in determining
how much to produce.
Alternative Voluntary
Programs
Over the past 20 years, several
voluntary programs have been
proposed and some adopted in an
attempt to reduce surpluses in
milk production. One common
element of all these programs is
the fact that they were designed to
work with (as opposed to being a
replacement for) the two principal
U.S. dairy programs: Price
Support Program and Federal
Milk Marketing Order Program.
Generally speaking, the PSP
indirectly supports the price of
milk through government pur
chases of butter, nonfat dry milk,
and cheese to enable manufac
turers to pay the support price for
milk purchased from farmers.
The FMMOP promotes "or
derly” marketing conditions bj
requiring milk handlers to pay
(Turn to Page A2l)
1987**
142.0
2.3
139.7
5.1
2.8
147.6
137.0
5.2
5.4
147.6
$12.30
$12.00
$ .19
$ll.Bl