An Economic Analysis of the U.S. Dairy Price Support Program and Alternative Policies
Novakovic, Andrew M.; Babb, Emerson M.
A spatial model of the U.S. dairy sector is used to analyze support prices at 75 and 80 percent of parity, supports based on the cost of production, a policy of minimal or non-support, and the possibility of increasing dairy imports. Results indicate that the current program of parity based price supports could lead to large and increasing federal expenditures on dairy products over a five year period, whereas support prices based on the full cost of production would imply much lower expenditures. In fact, it is likely that support prices based on the full cost of production would be below market prices by 1980. Under those conditions, it would be possible to increase imports, perhaps as much as four times their level in 1976 by 1981, without requiring abnormally large federal expenditures. This would provide an opportunity to enhance U.S. bargaining power at the multilateral trade negotiations. The results of the analysis follow from the expectation that the parity price will increase much more sharply than the cost of milk production. The divergence between parity and cost is in large part due to the different weightings assigned to inputs in the two measures, feed inputs in particular. Furthermore, productivity gains are taken into account in the cost of production but not in the parity price. Actual results will differ from projections, particularly if production costs would increase more sharply than projected due to weather, exports, or government feed grains programs, for example.
Charles H. Dyson School of Applied Economics and Management, Cornell University