Academic journal article The Journal of Consumer Affairs

Consumer and Welfare Losses from Milk Marketing Orders

Academic journal article The Journal of Consumer Affairs

Consumer and Welfare Losses from Milk Marketing Orders

Article excerpt

Consumer and Welfare Losses from Milk Marketing Orders

The regulation of the U.S. dairy industry has two major components. First, a Federal milk marketing order system exists that regulates the markets for Grade A fresh fluid milk. This system has been in effect since the passage of the Agricultural Adjustment Act of 1937. Second, there is a price support program under which the Commodity Credit Corporation (CCC) purchases butter, cheese, and nonfat dry milk at announced support prices, and the government stores and distributes stocks of these products. This program supports the price of Grade B milk, which m ay only be used for manufactured milk products, and surplus Grade A milk.

Under the Federal Milk marketing order system, Grade A milk is priced according to its use and a higher price is charged for milk used for fluid consumption than for milk used for manufactured milk products. Individual prices are set for various regions of the United States. The regulations that set prices for specific regions are called milk marketing orders. They establish minimum prices for 80 percent of the Grade A milk sold in the United States and also establish the methods by which farmers are reimbursed for Grade A milk. Farmers receive a "blend price," which is a weighted average of prices paid for different classes of milk in their region.

The milk marketing system is further restricted by policies for reconstituted milk. Although the technology for reconstituting milk has been available since the 1953s, reconstituted milk is used in only a few areas because of USDA policies that make it more expensive than fresh milk.

The purpose of this study is to measure the consumer and welfare losses from milk marketing orders in 1985. Losses are based on potential changes in prices and quantities when milk marketing orders are eliminated and replaced by a competitive system. There are no changes in the dairy price support program. In addition, consideration is given to the impact of marketing orders on the sale of reconstituted milk and the effects of existing reconstituted milk policies on consumers. The results of this study should be of interest to consumer educators and consumer policy analysts who are concerned with the impact of regulations on consumers and the economy as a whole.

BACKGROUND: MILK MARKETING ORDERS

A Federal milk order is a regulation promulgated by the Secretary of Agriculture, published in the Federal Register and codified in the Code of Regulations. It defines a particular geographic region that is subject to government regulation (MacAvoy 1977, p. 2).

Milk marketing orders apply only to Grade A milk. Grade A milk is milk that meets local sanitary and health requirements so that it may be used for fluid consumption. Ungraded or Grade B milk is milk that is not subject to local health regulations and can only be used in the production of manufactured milk products. Grade A milk that is produced in excess of fluid milk requirements can also be used in the production of manufactured milk products. Approximately 85 percent of all milk produced is Grade A and of this only 45 percent is used for fresh fluid milk products. The remainder is diverted into manufactured uses (USDA 1984, p. 24).

In markets where producers (farmers) have chosen to be covered by Federal orders, milk marketing orders establish the minimum prices that handlers must pay for raw Grade A milk and the prices that are received by the producers of milk. Milk handlers pay classified prices that are determined by use (class) to which the handler ultimately puts the milk. Milk marketing orders may have two or three classes of milk established. Class 1 milk products include fluid forms such as fresh whole milk, skim milk, and buttermilk. Class 2 products include soft manufactured products such as sour cream and cottage cheese. CLass 3 products are more solid manufactured products such as cheese, butter, and milk powders. …

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