Ag Policy, Lecture 11 Knutson, Penn, & Flinchbaugh, Chapter 7 & 5 Dairy Programs Livestock Impact Supply & Demand for Trade

Current U.S. Dairy Policy Overview Milk Price Support Program Dairy Export Incentive Program (DEIP) Federal Milk Marketing Orders Milk Income Loss Contract (MILC) Payments 14

Overview Milk is the most regulated product in the U.S. Produced in every state Milk is not all the same –Depends on sanitary conditions produced under –Grade A Eligible for fluid consumption –Grade B Only eligible for making manufactured products Represents less than 10% of total milk supply

Milk Price Support Program Authorized by 1933 Act and made permanent by 1949 Act Secretary of Ag directed to support the price of manufacturing grade milk by purchasing manufactured dairy products (cheese, butter, and Nonfat dry milk) Current support price is set at $9.90/cwt –Make allowances –Product purchase prices

Federal Milk Marketing Orders Combination of: –Classified pricing based on end use Class I – beverage milk Class II – fluid cream products, yogurt, perishable manufactured products (ice cream, cottage cheese, and others) Class III – Cream cheese and hard manufactured cheeses Class IV – Butter and milk in dried form –Market-wide revenue pooling meaning that all producers who market in a particular order receive the same minimum “blend” price –Blend prices are weighted average based on use in each category Only pertains to minimum prices for Grade A milk

Dairy Export Incentive Program (DEIP) Helps exporters of dairy products meet prevailing world prices for targeted commodities and destinations Objective: –Develop export markets where U.S. dairy products are not competitive due to the presence of subsidized exports from other countries Eligible commodities: –Nonfat dry milk, butter, and cheeses (cheddar, mozzarella, gouda, feta, cream, and processed American)

Milk Income Loss Contract (MILC) Payments Established in 2002 farm bill Set to end September 30, 2005 (3.5 year program) Scored at $3.5 million over period Counter-cyclical program –Payment rate is 45% of the difference in monthly Boston Class I price and $16.94 (target price) –Monthly payment is equal to calculated payment rate multiplied by the eligible quantity. –Annual eligible payment quantity of 2.4 million pounds

Crop Program Impacts on Livestock Price & income supports and ARPs impact feed prices Feed prices affect quantity of feed to livestock Quantity of feed affects supply of livestock Supply of livestock affect price of beef, pork, poultry

No Trade Q/yr Exporting Country Trade Importing Country $ None P0P0 P0P0 q0q0 q0q0 D D S S

International Trade Q/yr $ S S DDD TD Exporting Country Importing Country or R.O.W. Excess Demand from ROW

International Trade Q/yr $ S S DD TD Exporting Country Importing Country or R.O.W. World Price

International Trade Q/yr $ S S DD TD Exporting Country Importing Country or R.O.W. Domestic Demand Total Demand ROW Demand ROW Supply World Price

International Trade Q/yr $ S S DD TD Exporting Country Importing Country or R.O.W. Quantity Traded World Price

International Trade Q/yr $ S S DD TD Exporting Country Importing Country or R.O.W. Who are the winners and losers? Exporting Country Consumers Exporting Country Producers ROW Consumers ROW Producers World Price

International Trade Q/yr Exporting Country Trade Importing Country $ S S Excess Supply D D

International Trade Q/yr Exporting Country Trade Importing Country $ S S Excess Supply D D Excess Demand

International Trade Q/yr Exporting Country Trade Importing Country $ S S Excess Supply D D Excess Demand World Price Quantity Traded

What makes dairy policy more complicated than corn, cotton, soybeans, or wheat? Do crop programs have an impact on the livestock industry? Be able to draw the trade diagrams and identify –World price –Quantity traded –Quantity demanded in each country –Quantity supplied in each country Lecture 11, Wrap up