Dairy compacts are bad public policy, experts say

As Congress considers enlarging interstate dairy compacts, a new study by three UW–Madison agricultural economists labeled the compacts “bad public policy.”

“For decades the United States has been moving towards agricultural policies that apply to all the country’s farmers,” according to Will Hughes, one of the study’s authors. “Compacts protect a small segment of dairy farmers in one region at the expense of dairy farmers in other regions. This flies in the face of efforts to develop national dairy policies that work for everyone in an equitable manner.”

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Six New England states have operated an interstate dairy compact since 1996. That compact is scheduled to expire in October with implementation of federal milk marketing reform. However, members of Congress from the Northeast and South want to create new dairy compacts for their regions in order to circumvent federal milk pricing reforms and the scheduled elimination of dairy price supports next January.

If the USDA phases out its 62-year-old system of supporting milk prices, and both regions established new interstate dairy compacts, the UW–Madison study predicts the following results.

• Dairy farmers in the nine Northeastern states and 16 Southern states expected to make up the two compacts will receive an additional $495 million per year for their milk.
• Consumers in the compact states who drink milk will pay $326 million a year more for fluid milk.
• Dairy farmers in states not part of the compact will lose $340 million a year, with farmers in the Upper Midwest and California bearing most of the losses.
• Consumers across the country will see prices drop for cheese and powdered milk.

Those are among the findings of the report on how the interstate dairy compacts will affect the prices farmers receive and those consumers must pay for dairy products across the country. The report was written by economists Tom Cox, Bob Cropp and Hughes of the College of Agricultural and Life Sciences at the UW–Madison.

The reason for the projected impacts, according to Hughes, is that compacts distort regional and national markets.

“Compacts are promoted on the basis that they will increase farm milk prices in a region and help keep farmers in business,” Hughes says. “An interstate compact raises the price of fluid milk within those states in order to enhance the income of dairy farmers in the region who produce milk for drinking.”

The down side of compacts, according to Hughes, is that by increasing the price of milk for drinking, compacts decrease fluid milk consumption in the region while encouraging dairies to produce more milk. That combination of events results in more milk that is turned into cheese, butter and other manufactured dairy products. Because these products are marketed nationally, the additional supplies drive down prices for manufactured dairy products and, in turn, the prices farmers in other regions receive for their milk.

The UW–Madison results are based on a computer model developed to address milk pricing issues. The model evaluates specific changes that affect milk and dairy product supply and demand on regional prices, production, consumption, and trade flows in 12 regions of the United States.

The UW–Madison economists analyzed three scenarios. The first scenario assumed that nine Northeastern states would form an interstate dairy compact. The second assumed that 16 Southern states would form a compact. The third assume that both groups would form compacts.

The results highlighted above are for the third scenario. If the Northeastern states alone form a compact, losses to dairy farmers outside that region would be $146 million a year. If Southern states alone formed a compact, losses to dairy farmers outside that region would be $259 million, according to the report.

For a complete copy of the report: “Interregional Analysis of Interstate Dairy Compacts,” paper number 69, contact Cindy Munn at (608) 262-7348. The report is available on the internet at http://www.aae.wisc.edu/future under industry news.

The research was supported by state funding to the UW–Madison College of Agricultural and Life Sciences, and the UW-Extension; and grants from the Minnesota Department of Agriculture, and the Wisconsin Department of Agriculture, Trade and Consumer Protection.