Any opinions, findings, or conclusions expressed in this publication are those of the authors and do not necessarily reflect the views of the U.S. Department of Agriculture or The Texas A&M University System.
Four policy options studies in this report with a brief summary of the results include:
This report consolidates the dairy-specific results of several studies that have been completed by the Food and Agricultural Policy Research Institute (FAPRI) and the Agricultural and Food Policy Center (AFPC) for the 1995 Farm Bill that included impacts on the dairy industry. These studies, however, have not analyzed dairy impacts singularly but have examined the cross commodity impacts of policy changes for all major program crops. This report has its origin in an Agriculture Committee request that asked FAPRI/AFPC to analyze a set of policy options ranging from elimination of the Dairy Price Support Program (DPSP) to elimination of Federal Milk Marketing Orders (FMMOs). Some of the results in this report previously appeared in the following FAPRI and AFPC publications:
A summary description of the four policy options reported in this publication follows:
The price declines range from $0.50 to $0.70, $1.00 to $1.20, and $1.20 to $1.50 per cwt lower respectively, under the three alternatives than under the Baseline. These results suggest that the support program on milk, combined with the effects of the crop price and income support programs contributes about $0.50 - $0.70 per cwt to the price of milk. By subtracting the $0.10 lower feed cost due to the elimination of price and income supports on crops, this analysis suggests that the dairy price support program itself contributes about $0.40 - $0.60 per cwt to the price of milk. DEIP contributes $0.50 - 0.60 to the price of milk ($1.00 - $0.50 = 0.50, $1.20 - $0.60 = $0.60). Orders contribute $0.20 - $0.30 per cwt ($1.20 - $1.00 = $0.20, $1.50 - $1.20 = $0.30, although the regional effects of order elimination differ markedly.
Table 3 indicates the changes in regional cow numbers associated with each of the policy alternatives. By year 2000, in all but the Upper Midwest, regional cow numbers are lowest under the No Program, No Orders alternative. This result is not surprising as prices in the Upper Midwest region are not as adversely affected by order elimination as by support price and DEIP elimination. This is the case because of lower fluid utilization and a smaller Class I differential in the Upper Midwest.
The farm panels provide an extensive amount of data for what they judge to be a farm representative of dairy operations of their size in their production area. This data generally includes:
As an aid to making sure the farm described by the panel accurately represents a dairy farm located in their area, the results of the initial simulations are sent to each panel member and discussed with them via a conference call. Adjustments invariably result from these conference calls as the panel identifies problem areas and suggests solutions. After each adjustment of panel farm input data, another conference call is held until the panel agrees that the results are representative of the farm they initially developed and described. There have been only a few instances where the panel never comes to an agreement. Updating proceeds with the same process -- directly involving the producer panel in the discussions of what adjustments need to be made to keep the farm representative of current conditions in the area.
The major assumptions impacting the dairy results include:
Tables 4, 5, and 6 provide a description of some of the important characteristics of the 22 panel dairy farms. Space limitation makes it necessary to abbreviate the name of each dairy. The dairies are ordered from west to east, across the United States. The first two letters in the abbreviated name are the standard abbreviation for the state where the farm is located. If there is more than one dairy location in the state, the third letter indicates where the dairy is located, such as E stands for east or C for central. If there is not more than one dairy location in the state, the third letter (D) indicates it is a dairy farm. The numbers indicate the number of cows on the farm. The following are the abbreviations used, with a brief description of each farm:
WAD175 a 175-cow Northern Washington (Whatcom County) moderate size dairy farm that had a herd average of 24,800 pounds of milk per cow. The farm grew 114 acres of silage and generated about 92 percent of its revenue from milk sales.
WAD850 an 850-cow Northern Washington (Whatcom County) large dairy farm that had a herd average of 25,600 pounds of milk per cow. The farm grew 385 acres of silage and generated about 93 percent of its revenue from milk sales.
CAD2150 a 2,150-cow Central California (Tulare County) large dairy farm that had a herd average of 23,800 pounds of milk per cow. The farm grew no feed and generated about 88 percent of its revenue from milk sales.
NMD2000 a 2,000-cow Southern New Mexico (Dona Anna County) large dairy farm that had a herd average of 22,400 pounds of milk per cow. The farm grew 180 acres of silage and generated about 92 percent of its revenue from milk sales.
TXCD300 a 300-cow Central Texas (Erath County) moderate size dairy farm that had a herd average of 17,000 pounds of milk per cow. The farm grew 303 acres of hay and silage, and generated about 91 percent of its revenue from milk sales.
TXCD720 a 720-cow Central Texas (Erath County) large dairy farm that had a herd average of 20,300 pounds of milk per cow. The farm grew 380 acres of silage and produced about 91 percent of its receipts from milk sales.
TXED200 a 200-cow Eastern Texas (Hopkins County) moderate size dairy farm that had a herd average of 17,300 pounds of milk per cow. By double cropping, the farm grew 450 acres of hay and generated about 87 percent of its receipts from milk sales.
TXED812 an 812-cow Eastern Texas (Hopkins County) large dairy farm that had a herd average of 19,200 pounds of milk per cow. The farm grew 790 acres of hay, silage, and coastal pasture. The farm generated about 91 percent of its receipts from milk sales.
WID55 a 55-cow Eastern Wisconsin (Winnebago County) moderate size dairy farm that averaged 20,300 pounds of milk per cow, generating about 82 percent of its total revenue from milk sales. The farm grew 20 acres of silage, 43 acres of hay, 72 acres of haylage, 40 acres of corn for grain, and 15 acres of soybeans.
WID190 a 190-cow Eastern Wisconsin (Winnebago County) large dairy farm that averaged 21,600 pounds of milk per cow. The farm grew 90 acres of silage, 120 acres of hay, 242 acres of haylage, 144 acres of corn for grain, and 87 acres of soybeans. The farm generated about 87 percent of its revenue from milk sales.
NYWD600 a 600-cow Western New York (Wyoming County) moderate size dairy farm that averaged 21,500 pounds of milk per cow. The farm grew 470 acres of silage and 405 acres of haylage. About 90 percent of the farm revenue came from milk sales.
NYWD1000 a 1,000-cow Western New York (Wyoming County) large dairy farm that averaged 21,500 pounds of milk per cow, generating about 90 percent of its total receipts from milk sales. The farm grew 850 acres of silage and 660 acres of haylage.
NYCD110 a 110-cow Central New York (Cayuga County) moderate size dairy farm that averaged 21,600 pounds of milk per cow. The farm grew 88 acres of hay, 80 acres of silage, 77 acres of haylage, and 120 acres of corn for grain. About 90 percent of the farm's gross receipts came from milk sales.
NYCD225 a 225-cow Central New York (Cayuga County) large dairy that averaged 21,500 pounds of milk per cow. The farm grew 99 acres of silage, 99 acres of hay, 128 acres of haylage, and 89 acres of corn for grain. The farm generated about 92 percent of its total receipts from milk sales.
VTD70 a 70-cow Vermont (Washington County) moderate size dairy farm that averaged 22,400 pounds of milk per cow, generating about 87 percent of its revenue from milk sales. The farm grew 32 acres of hay, 50 acres of silage, and 56 acres of haylage.
VTD186 a 186-cow Vermont (Washington County) large dairy farm that averaged 20,800 pounds of milk per cow, generating about 90 percent of its total revenue from milk sales. The farm grew 67 acres of hay, 117 acres of silage, and 100 acres of haylage.
MOD77 a 77-cow Southwestern Missouri (Christian County) moderate size dairy farm that had a herd average of 20,900 pounds of milk per cow. The farm grew 161 acres of hay and generated about 87 percent of its revenue from milk sales.
MOD220 a 220-cow Southwestern Missouri (Christian County) large dairy farm that had a herd average of 21,600 pounds of milk per cow. The farm grew 452 acres of hay, 160 acres of silage, and 40 acres of alfalfa haylage. About 87 percent of the farm's revenue came from milk sales.
GAD160 a 160-cow Central Georgia (Putnam County) moderate size dairy farm that had a herd average of 19,800 pounds of milk per cow. The farm grew 150 acres of improved pasture. The farm generated about 92 percent of the total revenue from milk sales.
GAD600 a 600-cow Southern Georgia (Spalding County) large size dairy farm that had a herd average of 21,300 pounds of milk per cow. The farm grew 150 acres of hay, 400 acres of silage, and 150 acres of improved pasture. About 91 percent of the farm's revenue came from milk sales.
FLD375 a 375-cow North Florida (Lafayette County) moderate size dairy farm that had a herd average of 17,800 pounds of milk per cow. The farm grew 590 acres of hay and generated about 93 percent of its revenue from milk sales.
FLD1500 a 1,500-cow South Central Florida (Okeechobee County) large dairy farm that had a herd average of 18,400 pounds of milk per cow. The farm grew 300 acres of hay and 800 acres of improved pasture. About 92 percent of the farm's total revenue came from milk sales.
Aside from differences in the size of farm and in output per cow, it is important to note that some farms produce significant quantities of inputs (crops) for milk production while others produce no crops -- buy all their feed. Moreover, some utilize pasture for milking cows while others operate as a drylot dairy. For example, the East Texas, Georgia, and Florida dairies as well as the large Missouri dairy make extensive use of pasture. Most of the other representative dairies utilize very little pasture as a major component of their ration.
In all cases, the largest changes in net cash farm income occurs in the first few years. The gradual increase in net cash farm income later in the period results from higher prices. The higher prices result from a reduction supply as producers exit the industry due to lower incomes.
Under a continuation of the current program with a $10.10 per cwt price support 10 of the 22 dairies lose equity. Of these 10 farms, 7 are moderate size operations. Those losing equity are primarily located in the East and South, although the 55 cow Wisconsin farm also loses equity. Two moderate size Texas farms go out of business under the Baseline.
No Program With DEIP
This option eliminates all price and income supports, including the dairy purchase program, but keeps DEIP. This option reduces the milk price by $0.50 - $0.70 per cwt of which $0.10 is due to removal of crop price and income supports including the release of about 10 million acres of CRP lands.
Equity losses due to this option were mostly from about 5-11 percentage points. Without a price support program, but in the presence of DEIP, 12 of the 22 farms lose equity.
No Program, No DEIP
With no program and no DEIP, milk prices drop by $1.00 - $1.20 per cwt, $0.50 - $0.60 of which is due to DEIP alone. In other words, dropping DEIP has approximately the same impact as dropping the price support program.
Equity losses due to eliminating DEIP results in an incremental loss in equity of 2-10 percentage points on most farms. Of the 22 representative farms, 14 are now losing equity. Even otherwise highly profitable farms like the New Mexico 2000 cow operation loses equity under this option.
No Program, No Orders
This option eliminates all dairy programs, and incrementally eliminates orders compared with the previous option. The option reduces the price of milk by $1.20 - $1.50 per cwt, $0.20 - $0.30 of which is due to the dropping of orders. The order impact is complex because the distance differential maintains prices at a higher level as distance from Eau Clair, Wisconsin increases. Eliminating orders increase prices relatively more (or drop them relatively less) closer to Wisconsin.
Incrementally, dropping orders alone increases equity for the Wisconsin farms by 1-2 percentage points. It decreases equity for all other farms by 1-31 percentage points. The largest incremental reduction occurs on the New Mexico 2000 cow farm.
Under this option 17 of the 22 farms are losing equity. The only farms that continue to gain equity are the California 2150 cows farm, the Central Texas 720 cow operation, the Wisconsin 190 cow farm, and the two Western New York farms (600 and 1000 cows).
None of these options are the most probable options for the 1995 farm bill. However, the incremental changes in the price of milk that result from the options are instructive in terms of some of the options that are being discussed which do indeed affect the existence of price supports and the level of exports. For example, the elimination of price supports can be anticipated to reduce the price of milk by $0.40 - $0.60 per cwt. DEIP which removes about 2 billion pounds of milk from the domestic market raises the price of milk by $0.50 - $0.60 per cwt. Federal milk marketing orders keep the price of milk $0.20 - $0.30 per cwt higher but with substantial regional differences.
The study also indicates that the most resilient areas for milk production by larger scale farms continues to be geographically dispersed in California, Central Texas, Western New York, and Wisconsin. The results provide some indication why it has been impossible for the dairy industry to reach a consensus on dairy policy. The differential regional impacts make it almost impossible to develop a dairy policy that treats all farmers across the United States equally.