impact of milk supply management policies on the south

Impact o f M i l k Supp ly M a n a g e m e n t Policies on the Sou th 1

ABSTRACT

Supply management for milk is defined in this paper as any method used to at tempt to balance supply with demand. Price supports, voluntary dairy farmer programs, and mandatory programs were evaluated for the South. Partially as a result of government programs, milk production in the South increased 5% in the 1976 to 1986 while production in the United States increased 20%. Southern dairy farmers participated at a higher rate than US dairy farmers in both the milk diversion and dairy termination programs. Long-term average returns to southern dairy farmers in 1976 to 1985 were well under returns to dairy farmers in other regions, which partially explains the high participation. Southern dairy farmers indicated a poor future in dairy farming and retirement age as major reasons for dairy termination program participation.

Southern dairy farmers are expressing mixed opinions regarding supply management programs for the future. "Let the 1985 program work" is one ex- pression. Another group shows concern about low prices, adequate but not ex- cessive supplies for the fluid market, and the family dairy farm. Some prefer mandatory supply management including marketing quotas. Milk price, used alone as the supply management policy, may be a harsh adjustment method for dairy farmers and the dairy industry in the South.

Received August 31, 1987. Accepted November 2, 1987. 1Supported by state and Hatch funds a l loc a te d to

the Georgia Agricultural Experiment Station.

DALE H. CARLEY Department of Agricultural Economics

University of Georgia Agricultural Experiment Stations Georgia Station

Expe~riment 30212

INTRODUCTION

Supply management for the dairy industry, which is not new, is defined broadly as any method used in an effort to balance supply with demand. Most supply management sch- emes are directly or indirectly price oriented. Setting the price support for milk is a direct attempt to use price to bring about a balance between supply and demand. It is a price signal for dairy farmers on which they may make production decisions. Incorrect price supports that are too high result in dairy product surpluses in which the government becomes a large purchaser, as has happened in recent years.

With Commodity Credit Corporation (CCC) net removals of dairy products ranging above 5.45 billion kg milk equivalent in 1981, 1982, 1983, and 1985, pressures have been to reduce the support price, which in effect reduces prices for all milk in all regions of the United States. Support prices in 1987 are $1.75/45.4 kg of milk below support prices of 1983. Further- more, prices are scheduled to decrease in annual 50d increments from 1988 through 1990, if CCC purchases remain above 2.268 billion kg.

Government programs accompanying the support price decreases have included an assessment and rebate program in 1983, a milk diversion program in 1984 to 1985, and the whole herd buyout program in 1986 to 1987. These approaches to supply management of milk supplies were voluntary with various kinds of incentives offered for participation. These programs may be broadly defined as indirect approaches to price stabilization and income enhancement by means of supply reductions. In addition, a 15d assessment has been added for use as advertising, promotion, and product research in an attempt to affect demand pos- itively.

The longer term effect of voluntary programs to bring supply and demand into a more desirable relationship is open to debate. With

1988 J Dairy Sci 71:2315-2321 2315

2316 CARLEV

feed prices expected to remain at current low levels, the continued adoption of known cost saving management practices and technology, continued genetic improvement, and the introduction and adoption of production- stimulating hormones and feeding additivesl milk supplies may be expected to increase substantially into the decade of the 1990's. The concern, that continuing excess milk supplies will result in drastic reductions in the price support level, has led many dairy farmer groups to investigate and propose mandatory supply management programs.

The major issues in supply management center around using pricing as a tool, using voluntary programs that, with incentives, take resources out of milk production or using mandatory programs that restrict production with severe penalties for overproducing. There are advantages and disadvantages for each method regardless of the way they are designed to operate.

defined as a 13-state area encompassing Texas and Oklahoma as the western boundary and moving east to include all states to the Atlantic with Kentucky and Virginia the northern boundaries.

In the United States, milk production in 1985 to 1986 was about 20% above that of 1976. Milk production in the same period in the 13 southern states increased only about 5% (Table 1). However, within the 13-state region, production was up 4% in the 5-state Appalachia area, 24% in the Southern Plains, primarily Texas, and about 6% in Florida. Furthermore, within the 11-yr period, milk production increased quite steadily through 1983, then dropped off in 1984, but in several southern states production in 1985 and 1986 did not pick up to the earlier upward trends. In 1976, milk production in the South was 16.2% of the US production, but in 1985 and 1986 southern milk production had decreased to 14.3% of the US total.

EFFECTS OF 1980's SUPPLY M A N A G E M E N T P R O G R A M S ON S O U T H E R N MARKETS

The remainder of this discussion will view supply management programs from the pers- pective of supply and demand relationships in the southern United States. The region is

Cost and Return Factors

Studies of the cost of producing milk conducted by the US Department of Agri- culture since 1974 show reasons for differences in milk production changes in various regions of

TABLE 1. Milk production, 13 southern states, southern regions, and United States, 1976 to 1986. ~

Year Southern states Appalachia 2 Southern Plains 3 United States

(bill kg) (% of 1976) (bill kg) (% of 1976) (bill kg) (% of 1976) (bill kg) (% of 1976)

1976 8.864 100.0 4.19 100.0 1.50 100.0 54.51 100.0 1977 8.96 101.1 4.26 101.6 1.53 101.9 55.64 102.1 1978 8.77 99.0 4.12 98.2 1.56 103.7 55.09 101.1 1979 8.75 98.7 4.15 99.1 1.53 102.1 55.95 102.7 1980 9.04 101.9 4.28 102.1 1.64 109.6 58.24 106.8 1981 9.24 104.2 4.38 104.4 1.66 110.8 60.22 110.5 1982 9.40 106.0 4.47 106.6 1.71 113.9 61.46 112.7 1983 9.50 107.2 4.46 106.5 1.81 120.4 63.35 116.2 1984 8.91 100.6 4.15 99.1 1.75 116.3 61.44 112.7 1985 9.33 105.2 4.36 104.0 1.80 119.9 64.93 119.1 1986 9.34 105.4 4.35 103.9 1.85 123.6 65.35 119.9

1 Source: (5).

2 Georgia, Kentucky, North Carolina, Tennessee, and Virginia.

STexas.

4All numbers rounded to nearest hundredth of a billion kg with the percentage change determined before rounding.

Journal of Dairy Science Vol. 71, No. 8, 1988

SYMPOSIUM: MILK SUPPLY MANAGEMENT 23 17

the nation. A recent summarization of the cost information shows 10-yr average returns to risk and management ranging from $.16/45.4 kg of milk in the Corn Belt, $.92 in Appalachia, to $2.71 in the Pacific region (1, 6). Changes in milk production in the same 1976 to 1985 period range from a 4% increase in the lower return Corn Belt and Appalachia regions, 20% increase in the Southern Plains were returns averaged $2.30, and 46% increase in production in the Pacific region where returns averaged $2.71 (Table 2).

The study shows that the 10-yr average economic cost, which is a measure of total costs, were lowest in the Pacific region, about equal in the Northeast, Upper Midwest, and Southern Plains regions, and highest in the Appalachia and Corn Belt regions. Even though the prices received by dairy farmers averaged highest in the Appalachia region and lowest in the Pacific, net returns were the opposite. This indicates that dairy farmers adjust production in relation to longer term returns, including exiting from dairy farming. Thus, if through a supply management program milk prices to dairy farmers decrease more than feed prices, resulting in decreasing returns, milk production in the South will decrease over time.

Voluntary Supply Management Programs

Dairy farmer adjustments to the milk diversion program and to the dairy termination

program (DTP) in the South have been substantial but with considerable variation by areas. For analysis, the 13-state region was grouped into five areas. These five areas have been shown to have somewhat similar dairy farm characteristics (2).

Annual changes in milk production are shown for 1982 to 1986 and the first 9 mo of the DTP. From 1982 to 1983 milk production was increasing at a low rate of 1 to 2% in some states, decreasing in the four lower southern states, with only the southwest Oklahoma and Texas area showing a large increase of 4.5% (Table 3). The impact of the diversion program was substantial in the South with production down over 6% in 1984 compared with that of 1983. The mid-Atlantic states were down 4.5%, production in Florida decreased 10%, the lower South was down 6.7%, the upper South was down 8%, but the Southwest decreased only 3.7%.

Like most of the US, milk production by southern dairy farmers increased in 1985. The recovery was substantial with production in the South in 1985 up 4.6% over 1984. The increase ranged from 2.4% in the lower South, 6.7% in the mid-Atlantic, and 7.4% in Florida.

No sooner had dairy farmers adjusted their operations from the diversion plan when they faced decisions concerning the DTP. The impact of the DTP on milk production in the South shows mixed patterns. The largest decreases were in four lower South states,

TABLE 2. Relationship between regional US change in production and lO-yr average economic costs and returns, 1976 to 1985. ~

1976 to 1985 10-yr Change in Av economic Av to risk

Region production costs and management

(%) ($/45.4 kg)

Appalachia 4.0 12.60 .92 Corn Belt 4.0 12.84 .16 Northeast 18.2 11.85 1.72 Pacific 46.1 10.07 2.71 Southern Plains 19.9 11.79 2.30 Upper Midwest 19.8 11.68 1.39 United States 19.1 11.77 1.46

1 Source: (1, 6).


2318 CARLEY

TABLE 3. Percentage changes in milk production, 13 southern states, annuaIly 1982 to 1986 and three quarters of 1987.1

Jan 86-Sept 86/ State 1983/1982 1984/1983 1985/1984 1986/1985 Jan 87-Sept 87

(%)

Mid Atlantic Virginia .5 -5 .0 6.9 -0.3 -5 .9 North Carolina 1.5 --3.6 6.0 - 3.0 --8.7 South Carolina 1.1 -5 .6 7.9 -3 .3 -4 .9

Total 1.0 -4 .5 6.7 --1.8 -6 .9

Florida .2 -10.2 7.4 5.6 2.1

Lower South Georgia -1 .2 --8.7 2.0 -3 .1 --9.3 Alabama -1 .2 --6.5 2.1 -3 .3 --7.4 Mississippi -- 1.9 --4.1 3.4 -4 .6 --7.8 Louisiana -2 .2 -6 .4 2.0 --2.6 -3 .4

Total --1.6 --6.7 2.4 -3 .4 --7.2

Upper South Kentucky 2.1 --12.8 5.5 4.7 --1.2 Tennessee -- 3.3 --4.4 3.9 - . 6 -- .9 Arkansas 2.1 --4.4 5.0 - 11.0 -4 .1

Total --.2 --8.0 4.7 0 --1.5

Southwest Oklahoma 1.5 -4 .5 4.7 0.6 -3 .3 Texas 5.4 --3.4 3.1 3.0 3.3

Total 4.5 --3.7 3.5 2.5 1.8

South total 1.0 --6.2 4.6 .2 --2.4

United States minus South 3.5 -2 .5 5.9 .7 -1 .8

1 Source: (5).

ranging f rom 3.4% in Louisiana to 9.3% in Georgia during just three quarters o f 1987, compared with p roduc t ion the previous year. The mid-At lant ic states were down 6.9% in the 9 mo, the upper South was d o w n 1.5%, with Arkansas down 4.1%. Produc t ion in Flor ida increased 2.1% and Texas p roduc t ion increased 3.3% in 1987 over 1986.

Because par t ic ipat ion in the DTP was somewha t heavier in the lower South states than in o ther southern states and p roduc t ion decreases are fo l lowing those par t ic ipat ion rates, a s tudy of the reasons for dairy farmer par t ic ipat ion was under taken. A b o u t one-third of the dairy farmers indicated the reason for par t ic ipat ion was no t that they had debt or p rof i t problems, but that the fu ture was no t bright for dairy farming and they decided to qui t (3). Re t i r emen t age was the reason indicated by 27% of the farmers. A b o u t 20%

indicated lack of prof i t and high deb t as the reason, and 14% indicated a prof i table but high debt s i tuat ion. The DTP provided m a n y dairy farmers the o p p o r t u n i t y to clear ou t their debts.

The two volunta ry supply managemen t programs ef fec t ive ly reduced milk market ings in the South. As a consequence o f the 1984 to 1985 diversion program, p roducer market ings were reduced enough to cause serious milk defici ts in fall and early win te r resul t ing in higher than normal milk sh ipments f rom p roduc t ion areas to the North. In late 1984, Class I u t i l iza t ion in the South At lan t ic area ranged f rom 89 to 94%, and in the East South Central area as high as 89. In the Arkansas, Louisiana, and Mississippi markets , Class I use ranged f rom 88 to 92%. Some sou thern milk market ing coopera t ives were saddled with added t ranspor ta t ion costs to m e e t their


SYMPOSIUM: MILK SUPPLY MANAGEMENT 2319

contractual agreements for fluid milk supplies. As a result, producer members in some situ- ations received less for their milk because of the added cooperative costs for moving milk into the deficit markets.

The DTP reduced producer numbers by 2466 dairy farmers in the South and amounted to 13.7% of 1985 milk marketings compared with the US average of 8.7% of marketings. As a result of DTP participation in the South, expectat ions are for a short supply of milk in some southern markets. Nonparticipating dairy farmers are increasing their milk product ion to some extent, which will offset the decreases from the DTP.

ACCEPTABLE SUPPLY M A N A G E M E N T P R O G R A M S FOR THE FUTURE

There is an increasing concern in the South that milk supplies nationally will increase to burdensome amounts. Under current legis- lation, this means decreasing prices to dairy farmers through decreasing the support price by annual 50d increments, which can go as low as $9.60/45.4 kg by 1990.

Generally, southern dairy farmers have diverse opinions as to the direction to take for supply management. Many southern dairy farmers think price should be allowed to act as the supply management vehicle. Current thought expressed by southern milk marketing cooperatives is to allow the current government program to work. In some cases, the fact that cooperatives have been able to maintain Class I prices above the federal order minimums may influence their decisions on allowing price to be the regulator of milk supplies.

A large group of southern dairy farmers are very concerned about lower prices, sharing Class I sales returns with producers in o ther regions, maintaining adequate but not excess supplies to satisfy fluid milk product requirements, and preserving the family dairy farm. Some of this group of dairy farmers favor mandatory supply management with rather tight quota requirements. They are concerned that certain provisions be included that would account for regional differences in supplies relative to Class I sales as well as to recognize differences in the factors affecting milk production, costs, and dairy farm structure.

Another group of dairy farmers are more concerned about the price-decreasing aspects of the current program, which may decrease supplies relatively more in the South than in other regions. National government programs designed to reduce milk surpluses have and will continue to result in some serious short- term supply deficits in some areas in the South. The market for fluid milk products is expanding at 2 to 3% annually. Population growth is a large factor in the sales growth. Many forces point to continuing increases for fluid milk sales in the South. Any supply reduction creates market ing hardships and inequities among milk handlers. Moving milk from other regions, which is generally more than the cost fo supplying it locally, adds to the cost of supplying the market. This is costly to consumers and damaging to the entire dairy industry.

Southern dairy farmers in some states are familiar with the workings of a mandatory program that includes quotas for Class I sales. Dairy farmers in Alabama, Georgia, and the Carolinas have operated under such provisions, and many in Virginia still produce milk under a quota system. In many southern states, pea- nuts, tobacco, rice and sugar are produced under mandatory quota programs so farmers are familiar with the effects of quotas on production, prices, and quota values. If southern dairy farmers were to find that they may lose or need to share their relative high Class I uti l ization with other regions through a national mandatory supply management program, dissatisfaction would be considerable.

What about something in between a mandatory program with quotas and a " let price do i t" program? There is increasing interest in a plan conceived by Lakeshore Federated Dairy Cooperative, called the Lakeshore plan (4). It is called a voluntary part icipant plan, but all dairy farmers would be assessed $.55/45.4 kg of milk produced. Dairy farmers who sign up for the supply management plan would be eligible for quarter ly refunds of the assessment plus a deficiency payment ranging from $1.15 to $1.50/45.4 kg of milk, depending on the excess volume of milk they marketed relative to their production. Product ion base would be 90% of ther product ion history with excess volume to not exceed base volume by more than 5% of product ion history. An alternative proposed to


2320 CARLEY

make it more acceptable to southern dairy farmers is a provision that farmers would be exempt from paying the assessment in any market that had over 75% Class I uti l ization during the previous year. However, to receive a payment they could not increase milk production annually. When the surplus situation is corrected, the plan ceases. Therefore, bases do not acquire value to be bought and sold.

CONSEQUENCES OF M I L K SUPPLY M A N A G E M E N T PROGRAMS ON THE

SOUTH

Supply management programs that decrease price could be quite damaging to dairy farmers in some areas of the South. As shown earlier, the longer term average returns have been low in the southeast relative to other regions. Thus, if milk prices received by dairy farmers decrease without offsetting decreases in product ion costs, returns will be even lower in the South, resulting in low earnings and forcing dairy farmers out of businesss. Thus, the milk supplies needed to satisfy fluid milk product requirements will be reduced to the point that supplies will need to be shipped in from more distant supply areas. Eventually someone will be required to pay the addit ional costs of transportation. However, many southern dairy farmers will continue to produce milk since they are efficient enough to survive the consequences of decreasing prices.

The Lakeshore plan, since it would be voluntary, would have varying impacts on southern milk markets. In a market with high Class I uti l ization tending toward a tight supply situation, high part icipation in the plan would exacerbate the supply and demand balance. The plan is designed to reduce product ion with no ties to fluid milk requirements in a market. With the assessment exempted, southern producers who participated would have the oppor tuni ty to gain up to $1.50/45.4 kg milk, which may be enough to draw high participation. Regional inequities could become serious under the Lakeshore plan. A part icipant in a high util ization market could recieve as much as 2.05/45.4 kg more for milk than a nonpart icipant in a lower than 75% Class I utilization market. A part icipant in a low utilization market would have $.55/45.4 kg assessed monthly, whereas a part icipant in the

75% plus uti l ization market would not be assessed. There may be an incentive for milk marketing cooperatives to move milk among markets to the benefit of their producer members relative to Class I utilizations. High utilization market producers would say "don ' t move milk into our marke t" if it means a loss of the 55¢/45.4 kg assessment advantage. Also, regional cooperatives could pool milk dif- ferently to take advantage of price inventives for all their producer members. In addit ion, a deficit market si tuation leading to long distance hauling of milk could result in higher trans- por ta t ion costs that may need to be paid for part ial ly by producer cooperative members.

A mandatory plan, including quotas that are tied to fluid milk sales, may be more appealing in reducing supplies in some regions while maintaining adequate supplies in the higher Class I markets. A plan could be designed with provisions providing flexibil i ty in the quota system which could reduce the problem of the quota attaining a high value. Such a plan could be designed to maintain the Class I share of sales in markets. In markets with Class I sales expanding faster than the national average, producers supplying those markets historically could benefit by having quotas adjusted in proport ion to the increases. However, under a mandatory plan, it is more difficult to balance markets that are growing faster than average.

A mandatory supply management plan with quotas may increase milk prices to consumers. One of the objectives of the plan is to stabilize prices received by dairy farmers, if not, in fact, to enhance prices over time. Restrictions through a marketing quota would no doubt acquire value for the quota. By making quotas freely transferable, such value could be mini- mized. Quota value could be eliminated by making it t emporary based on the supply and demand balance or by making quota non- transferable under any condit ions except within the immediate family or moving by the producer to another location.

S U M M A R Y

The future indicates that with increased adopt ion of current technology and adopt ion of new technologies that will soon be available, there will be continuing pressures on maintaining a supply and demand balance for milk


SYMPOSIUM: MILK SUPPLY MANAGEMENT 2321

that does not require the high government costs of the past. Price may be used as the balancing mechanism, but it can be a harsh adjustment vehicle. However, it would force dairy farmers to look at their efficiency in production and to adopt management practices and technologies that lower costs of production.

A supply management plan that induces incentives for producing milk for the com-

mercial market may be the answer. Milk prices may be stabilize,d and in turn provide farmers with incentives and rewards for managing their production or for exiting dairy farming. As long as incentives are created and the long-term average returns that have occurred in the South continue, higher than average participation may be expected by southern dairy farmers. In designing national dairy programs, recognition should be given to regional differences in milk production, cost, prices, and types of markets. The geographic size of a fluid milk market is different from that for the manufactured product market. It remains less

expensive to produce milk needs for nearby fluid market than to transport milk f rom distant sources when transportation and hand- ling costs are included for long distant move- men ts.

REFERENCES

I Betts, C. 1987. Costs of producing milk, 1975 to 1984. Econ. Res. Serv., USDA, Rep. No. 569.

2 Carley, D. H. 1986. Characteristics of dairy farms in the South in 1983. Univ. Georgia Coll. Agric. Exp. Stn., S. Coop. Ser. Bull. 322.

3 Carley, D. H., W. A. Thomas, W. M. Gauthier, C. E. Powe, and L. E. Wilson. 1987. An evaluation of characteristics of participants in the dairy termination program in the deep south. Univ. Georgia Coll. Agric. Exp. Stn., S. Coop. Ser. Bull. 328.

4 Graf, T. F. 1986. New supply management pro- posal is voluntary. Hoard's Dairyman 131:865.

5 US Department of Agriculture. 1976-1987 Milk production, final estimates. Stat. Rep. Serv., February and March issues.

6 US Department of Agriculture. 1986. Economic indicators of the farm sector, cost of production, 1985. Econ. Res. Rep. ECIFS 5-1:148.


impact of milk supply management policies on the south

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