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Market Update: Policy Reform Must Aid, Not Hinder, Industry Growth

Sep 24, 2010

By Bob Yonkers, Ph.D., IDFA Chief Economist

A new report by the Food and Agricultural Policy Research Institute at the University of Missouri (FAPRI-MU) analyzes an old dairy policy idea: requiring that all fluid milk products marketed in the United States increase the content of nonfat solids they contain. However, unlike in the past when this topic was seemingly debated every farm bill year and sometimes in between, dairy market conditions are far different today.

Technically, the policy proposal would require the national adoption of higher nonfat-solids standards for fluid milks, which have been required under California state law for decades. Table 1from the FAPRI-MU report shows the differences in both milkfat and solids nonfat standards for California and the rest of the United States. In past farm bill debates, this was seen as a means to reduce the purchases and subsequent inventories of nonfat dry milk that the U.S. Department of Agriculture accumulated under the Dairy Product Price Support Program. However, today's dairy marketplace is very different; the report notes that "Uncommitted inventories of nonfat dry milk are virtually non-existent in the current FAPRI-MU baseline, and exports of skim milk powder are important."

One key conclusion of the report is that such a policy change would result in an average increase of 17 cents per gallon in the retail price of fluid milk products due to the added cost of the additional nonfat solids. In fact, the report notes that other costs, which were not part of the FAPRI-MU analysis, would likely be incurred by fluid milk processors. "Fluid milk processors will have additional capital costs for storage tanks and other equipment that will be necessary to handle the increased need for nonfat solids," the report stated.

In addition, the analysis did not consider the cost of transporting the nonfat milk solids, most likely to be in the form of condensed skim milk, to fluid plants. According to the report, "There may be some issues regarding the regional availability of condensed skim..."

The higher retail fluid milk price and an estimated higher nonfat dry milk wholesale price would be partially offset by lower wholesale prices for butter and cheese in the marketplace. Since the wholesale prices of butter, nonfat dry milk, cheese and dry whey are directly used by USDA to set federal order minimum farm milk prices, the sum of all these changes are reflected in estimates of the impact on farm milk prices. FAPRI estimates that in the first year of such a policy (assumed in the analysis to be 2010) the all-milk price paid to dairy farmers would increase 27 cents per hundredweight above the baseline. However, it would fall to only 10 cents above the baseline by year six and to only 9 cents in years seven through ten (9 cents per hundredweight of farm milk is about a 0.8- cents-per-gallon change in the farm milk price).

Dairy policy proposals like this, which would result in reduced fluid milk product consumption and increased costs of processing, as well as reduced exports (in this case, skim milk powders), are not the answer for the future of the U.S. dairy industry. Dairy policy reform instead must focus on ways to make our industry more competitive, both with respect to other beverage choices in our domestic markets and with respect to promoting exports in the growing world market for dairy products.

Read the full report, "The Effect of Adopting California Fluid Milk Standards in the United States."

Table 1: Comparison of California and U.S. Fluid Milk Standards

Source: Food and Agricultural Policy Research Institute at the University of Missouri (FAPRI-MU), August 2010.