Dairy Marketing Dr. Roger Ginder Econ 338a Fall 2009 Lecture # 13

THE FOCUS OF FEDERAL DAIRY POLICY FROM DEPRESSION RELIEF FOCUS INCOME ENHANCEMENT FOCUS BUDGETARY AND SUPPLY MANAGEMENT FOCUS MARKET ORIENTED FOCUS PRESENT Focus for Next Farm Bill and beyond???

CHANGES IN AGRICULTURE AND RURAL DEMOGRAPHIGS Farm population a % of total25%2% Labor force in agriculture40%NA Agriculture’s contribution to 7%1.5% Gross Domestic Product Farm household income 30% of nonfarmRoughly equal Percent of farms producing60%26% corn Percent of farms producing 40% > 7% milk

FOUNDATION LEGISLATION FOR FARM PROGRAMS ARE BASED IN DEPRESSION/WWII ERA “Permanent” Farm Policy Legislation Agricultural Adjustment Act 1938 Commodity Credit Corporation Agricultural Act of 1949 These laws establish the basis for subsequent farm bills from 1949 to When existing farm bills expire, policy typically reverts to foundation 1949 legislation.

AGRICULTURAL ADJUSTMENT ACT 1938 Authorizes price support program Directs secretary to support price of manufacturing milk Use CCC to purchase dairy products Set price at level where milk supply is “adequate” No specified price level or rules (to be governed by farm bill in effect)

AGRICULTURAL ACT OF 1949 Required 75-90% of parity Pegged prices to relationship Note: Parity was intended to give fair treatment to agriculture in relation to the rest of the economy A parity price for a commodity is intended to give a unit of the commodity the same purchasing power as it had in Parity does not really imply fairness or equality +Freezes relationships at a prior point in time +Mechanical calculation - not market forces +Ignores relative changes in productivity and changes in other relationships between farm/nonfarm sector +It ignores changes in the types of goods and services purchased by farm families

1973 AMENDMENT TO AGRICULTURE ADJUSTMENT ACT Raised the minimum support level from to 75-80% of parity Required semi-annual adjustment April 1 and October 1 Adjustments reflect changes in index of all prices paid for purchased inputs - not just dairy inputs alone Note: Dairy feed costs were falling but other other purchased inputs were rising Net Result - Unusually high milk-feed price ratio and an unprecedented expansion in production occurred

PARITY EXAMPLE 1992 Jan Dec year average price received of all wholesale _______________________ X Current index of prices paid ( Base) 10 year average index of prices received ( ) base

PARITY EXAMPLE 1992 Jan Dec year average price receivedCurrent index of prices of all wholesalepaid ( ) base $ _______________________ X 10 year average index of prices received ( ) base 648 $13.00 __________ X 1321= $

100% of parity=$ % of parity= % of parity= % of parity= % of parity= % of parity= % of parity= % of parity= 9.90

PARITY PRICES FOR VARIOUS COMMODITIES 1991 Wheat$8.07/bu Soybeans$12.30/bu Corn$5.73/bu Barley$4.98/bu Hay$151.00/ton Milk$26.60/cwt