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
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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
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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. This base
might be a 12-month period or the
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annual average of a longer period.
If the annual national quota was 90
percent of total marketings by
producers in the base period, the
quota allocated to individual
producers would be 90 percent of
each producer’s marketings
during the base period.
The national quotas could be
reduced gradually over a period of
years from near the base period
level to a level that would balance
milk supplied closely with total
market needs. Gradual reduction
would increase program costs.
Over-Quota Prices
For the program to be effective
in curbing the expansion of milk
production or cutting it back, the
over-quota price would need to be
low enough to discourage over
quota production. A low over-quota
price would be needed to finance
the purchase and disposition of
dairy products associated with
over-quota milk.
The penalty for over-quota milk
in the EC program is 75 percent of
the target price.
Under the Canadian program,
the over-quota price was only 11
percent of the quota price for the
1985-86 marketing year.
Quota Transfer Rules
Quotas could be freely tran
sferable or saleable with or
without geographic limitations.
Transfer could be highly
restricted as in the EC program
where transfer of quotas is per
mitted only when a farm is sold,
leased or transferred by
inheritance. Sale or lease of annual
quota rights might be permitted
without authorizing the sale of
quotas themselves.
A wide difference between quota
and over-quota price would give
quotas or annual quota rights
significant value if they were
saleable. Both the Canadian and
EC programs take back a portion
of the quota whenever quotas are
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transferred.
The acquired quota could be
allocated to new or existing farms
to facilitate expansion.
Quota rules could require
producers to fulfill a specified
percentage of their quotas mon
thly. If they failed to do so the
unfilled quota could be taken from
them and transferred to other
producers.
Permitting the sale of annual
quota rights would help to insure
that the national quota would be
filled each year and would serve to
limit over-quota sales.
Impacts of Mandatory
Supply Management
The impacts of a quota program
would depend importantly on the
details of the program and whether
it was temporary or permanent.
Since a specific program has not
been proposed, only general ob
servations can be made about the
impacts of a quota program at this
time.
Use of quotas could maintain
milk supplies in closer balance
with demand over tune. More
particularly, the periodic large
surpluses that have characterized
the dairy industry could be
avoided.
Government program costs
could be reduced in part by shifting
these costs to milk producers
through assessments and to
consumers through higher prices
for milk/dairy products.
If transfer of bases were
restricted, existing resource
patterns would be frozen, in
novation retarded and productivity
gams limited. This would not be a
serious problem if the program
was temporary and used to
eliminate an existing surplus
problem.
Quotas would have little market
value under these circumstances
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