Mandatory Supply Mana Components And Implications Of A U.S. Mandatory Quota System BY ROBERT P. STORY Cornell University Mandatory supply management programs involve the use of some type of production or marketing allotment or quota. The programs are mandatory because they are applied to all producers of a specified commodity and not just to those producers who in dividually elect to participate in such programs. National dairy pricing programs in the United States have never included mandatory supply con trols. Supply controls have been an important element in the debate that has surrounded the for mulation of national dairy pricing policy. In this leaflet, the features and impacts of a national quota program are investigated. Existing Dairy Price Programs Price support has been the key element of dairy price policy from its beginning in the 19205. Price support has been achieved primarily through the purchase of dairy products by the government, although voluntary supply management programs have supplemented purchase programs on several occasions. During the 19305, purchases of dairy products to support milk prices were very modest, ex ceeding one billion pounds of milk equivalent in only one year. Since 1949 purchases have been made each year to support market prices. Market prices were maintained near support levels throughout the 1950 s and 60s. Since the 19705, market prices have deviated more (both up and down from support levels) than in the earlier periods. Support purchases exceeded 10 billion pounds of milk equivalent in 1954,1962,1981,1982,1983 and 1985. These peaks in support purchases triggered legislation that modified the dairy support program and | All Of Us at EAIHRR Would Like to Thank You, Our Valued 1 10 Customers for Your Patronage During 1986 AND We Would | | f f\ Like To Extend Our Wishes for a Merry Christmas and a n I ' Prosperous New Year- ft /IrYI A 1 S 0 | HEAT LAMP BULBS 125 W 250 W Clear Clear $1.29 $1.29 ANTI- FREEZE QUAKER STATE m $2.99 KiHgi Gal. /2X 12 Pack ff/Tx Yellow Fleece r > \ f|/ CHORE U .1(1 GLOVES 511.99 stimulated debate of alternatives to the program. Mandatory supply management was an important element in the debate following each peak in support purchases, particularly in the 1960 s and 1980 s. Features of a Mandatory Supply Management Program A mandatory supply management program is a production control program in which all dairy farmers would be assigned a base, and there would be a substantial penalty price for marketings of over-base milk. Federal legislation would be necessary to adopt such a plan. Neither states nor dairy cooperatives have the ability to address the national supply demand-price issue with their own versions of base plans. There are two fundamental purposes that a national quota program would be directed to achieving: to balance supply and demand, and if possible, at a price level high enough to permit average dairy farmers to enjoy a satisfactory level of living; and to permit dairy farmers to hold onto their individual share of the total milk market and not have the expansion of other dairy farmers reduce the price level and dilute their market share. Supply management has a solid economic foundation, geared to the principle that the demand for some dairy products (particularly fluid milk products) is price inelastic. That is, consumers do not respond in any substantial measure to whether prices go up or down they still will purchase close to the same amount of dairy products. By restricting supply, milk prices caiv be increased, and yet demand will not be adversely affected in any major way. The net results is higher producer income. Mandatory supply management REDDY HEATER® High-Output Kerosene Heaters 5 Models To Choose From 35,000 BTU $149 50,000 BTU $179 70,000 BTU $219 100,000 BTU $279 150,000 BTU $329 EARLY SEASON BUYS Buy Before The New Year ( BALING TWINE i| IMBint PRODUCTS 9,000 Ft. could reduce the costs of the current price support program and alleviate problems of storage and disposition of dairy products. Given probable program costs and budget restraints, mandatory quotas may receive greater consideration in the future. Most features of the current price support program would be continued with a quota program. A target price would need to be established each year and a purchase program for dairy products would continue to be necessary. Distribution programs would be needed to utilize dairy products that were acquired under the program. Other additions to the current program would include: • Procedures for establishing a national quota and for allocating the national quota to individual dairy farmers. •An over-quota price and procedures for determining it would need to be established. • Rules for transferring and reallocating quotas would be needed. These features of a quota program could be accomplished in a variety of ways. The details of these features would affect the effectiveness and the impact of the program. The following illustrates how these features might be determined. A national milk quota might be determined by estimating the total commercial demand for milk and adding the quantity of milk needed for domestic and international distribution programs. A reserve might be added to this total. The national quota might be allocated to individual producers by relating it to the quantity of milk marketed by farmers in a designated base period. 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