The Value of Dairy Quota under a Commercial Export Milk Program

This paper argues that under a commercial export milk program, the market value of quota will be determined by the spread between the domestic market price and the export price, rather than the conventional wisdom that it is determined by the spread between the domestic milk price and the marginal cost of production. Under this new economy, it is argued that ultimately the market price of dairy quota will be priced independently of firm marginal costs, which implies that low-cost (or high-margin) producers will not hold an economic advantage in bidding for quota over higher-cost producers. Regression results are consistent with the hypothesized positive relationship between quota values and the difference between domestic and export milk price. The average export price has generally increased over time and is approximately equal to the marginal cost for an average producer. The results have implications for a World Trade Organization (WTO) challenge. New Zealand and the United States feel the domestic program acts as an export subsidy by cross-subsidizing production of commercial export milk. The results here suggest that the prices for the filled export contracts are approximately the marginal cost of production for the average producer and not lower, as suggested by the challenge. Export contracts were found to have higher price risk than domestically produced milk. The risk is compounded by the short-term nature of most export contracts. The increase in risk for the commercial export milk program (CEM) implies that it is unlikely many farmers will greatly diversify into CEM contracts unless the uncertainty is reduced.     

EU Reform of the Sugar Beet Regime: Implications for UK Agriculture

The purpose of this article is to discuss possible scenarios for UK sugar beet production after the reform of the sugar regime. The analysis is built on an evaluation undertaken by the University of Cambridge and The Royal Agricultural College of the impact that reforming the EU sugar regime may have on UK agriculture. The analysis focuses on the implications of reductions in quota and the support price and on the possible reactions by British Sugar, as the final outcome in terms of production will depend on the interaction between British Sugar and sugar beet farmers. The analysis indicates that British Sugar strategies such as reallocating the available quota to the more efficient producers or paying higher beet prices might mitigate the impacts of the reform. The key factor in limiting the overall impact on production is the extent that the industry can restructure and reduce its cost base. For example, following a 40 per cent reduction in the sugar beet price we estimate that if farmers could reduce their average costs by 20 per cent, about 52 per cent of UK beet production would still be viable, compared to less than 20 per cent if costs were not altered.     

Food scares, market power and price transmission: the UK BSE crisis

This paper is concerned with the impact of food scares, principallythe BSE crisis in the UK, and focuses on price transmissionin vertically related markets. We show that if market powerhas an effect on the farm–retail margin, this determinesthe specification of the cointegrating relationship and thusprovides a test of market power. The results for the UK beefchain suggest that we cannot reject the importance of marketpower. The impact of the BSE crisis on farm prices is foundto be more than double that on retail prices, thus corroboratingpublic concerns regarding a differential impact of food scareson retailers and producers.     

A MODIFIED LEONTIEF MODEL FOR ANALYSING THE IMPACT OF MILK QUOTAS ON THE WIDER ECONOMY

The paper estimates the impact of milk quotas on the UK economy using a modified SAM-based Leontief model. Since milk quotas involve the control of gross output as opposed to final demand, it is argued that the traditional form of a Leontief model needs to be adapted so as to make the output of dairy producers exogenous to the system. Modifications to both the demand-driven and supply-driven Leontief model are suggested thus allowing the estimation of both the backward and forward linkage effects of quotas. The results suggest that, in total, the backward linkage effects of milk quotas are more significant than the forward linkage effects, with the magnitude of the latter constrained by the pattern of milk marketing. Taking both types of linkages into account, it is estimated that the potential 3 per cent further reduction in quota levels being discussed in the context of CAP reform threatens a total of 11,000 jobs in the economy.     

The Simple Analytics of Transferable Production Quota: Implications for the Marginal Cost of Ontario Milk Production

Using a competitive dynamic optimization model, the difference between unused and used industrial milk quota values is shown to give an exact measure of the annual rental rate of production quota. Knowledge of the rental rate of production quota and output price can be used to impute the marginal cost of industrial milk production. However, if there is a transfer tax on production quota sales, the imputation of the equilibrium rental value of quota depends on the elasticity of demand and supply for quota as well as the level of the transfer assessment. The marginal cost of Ontario milk production is estimated for each year from 1980–81 to 1994–95, based on unused and used quota values. However, the imputed marginal cost estimates are not totally satisfactory. The results suggest that caution should be exercised in using the difference between unused and used quota prices as a measure of the rental rate of industrial milk production quota.     

TWO-TIER PRICING FOR MILK: A RE-EXAMINATION

Principal objections to two-tier pricing have centred on administrative complexities and the ‘transparent’ nature of its cost. However, the credibility of two-tier pricing for milk within the European Community is now enhanced by the existence of a quota scheme and by recent levels of budgetary expenditure. Potential features of two-tier pricing are that farm support can be more readily directed at selected recipients and that lowering of market prices for milk relieves consumers from some of the burden of this support. A major attraction is that the existing quota system allows for an immediate ready-made transition. In this paper, two applications are developed. Both allow varying combinations of quota level and support price, but differ in their impact on producers' incomes. Some degree of national flexibility within the Community is also explored.     

Explaining Differences in Milk Quota Values: The Role of Economic Efficiency

This article explores the relationship between milk quota values and economic efficiency in order to analyze government interventions in quota allocations among producers. For this purpose, we estimate quota values using a panel of Spanish dairy farms. Quota values are then decomposed into economic efficiency, price, and scale effects in order to assess the relative influence of these factors. We find that efficiency is important in explaining quota values but is uncorrelated with observable farm characteristics. This casts doubts on the government's ability to allocate quotas to efficient farms.     

INSURANCE MILK

Where the production of milk for sale on the fresh milk market at 'controlled' prices is subject to nontransferable quotas the holders of quota who wish to maximise profits have a motive to maintain production above the quota level to insure against variations in demand for over-quota sales and yield. The concept of 'production of milk as insurance' is used to clarify the way in which such behaviour gives rise to social costs which could be avoided in a competitive market, by a permissive attitude to arbitrage, or where quotas can be traded.     

The Swiss payment for milk processed into cheese: ex post and ex ante analysis

We make use of both an ex post and an ex ante evaluation to analyze the Swiss payment for milk processed into cheese. This payment for each kilogram of raw milk processed into cheese is issued to milk producers through dairy processors. In the ex post evaluation, by applying a vector autoregressive model, we estimate the effects of reductions of the payment for prices of raw milk used to produce Emmentaler, Gruyère, and industrial cheese. Past declines in the payment have only been partially transmitted to raw milk prices. The rate of transmission is higher for milk used for the production of industrial cheese than for artisan cheeses. In the ex ante impact evaluation, we use a partial equilibrium model and develop a counterfactual scenario in which the payment is removed. The payment for milk processed into cheese is found to have effects on cheese production and exports but also has important indirect effects on other dairy products. Our findings suggest that about two‐thirds of the payment are benefiting milk producers. At the same time, the overall welfare losses resulting from the elimination of the aid are smaller than the budget allocated to this measure, suggesting a net welfare gain from elimination.     

The Impact of Cereal Prices and Policy on Crop Rotations and Supply Response

The impact of cereal prices on rotational decisions and farm‐level and industry cereal supply is considered. It is argued that with the voluntary 50 per cent set‐aside option for cereal producers, there is a large financial incentive to adopt a 50 per cent set‐aside cropping plan as cereal prices fall below an individual producer's ‘indifference’price. For a typical 210‐hectare UK combinable crop farm, adopting a 50 per cent set‐aside cropping plan is optimal when the price of cereals is below £62/tonne (98.50/tonne). If widely adopted, 50 per cent set‐aside will lead to a substantial fall in the supply of cereals and would lead the industry supply curve for cereals to move leftward and become more elastic over a certain price range. The level of reduced cereal supply will be greater than would be predicted from an estimate of industry level supply response that ignored rotational and farm‐level financial incentives.     

Supply and demand for commodity components: implications of free trade versus the AUSFTA for the US dairy industry*

During the negotiations on the Australia–US free trade agreement (AUSFTA), the US dairy industry vigorously opposed opening the US market to imports of Australian dairy products on the grounds that the US industry would be devastated. Subsequently, the agreement signed in February 2004 made an exception for dairy, providing for only limited quota expansion and no free trade, even at the end of the long implementation period. This paper presents a simulation model of world dairy markets, represented by supply and demand equations for fat and non‐fat components of milk and manufactured dairy products. We use the model to analyse the effects on US milk markets of both a hypothetical agreement, allowing free bilateral trade in dairy products, and the actual AUSFTA. An important contribution to the literature is the derivation of explicit supply and demand relationships for milk components. The components model allows an analysis of long‐term production, consumption, and trade patterns that is not tied to specific, fungible products. Simulations indicate that increased imports from Australia resulting from bilateral trade liberalisation would have resulted in small reductions in US milk prices and production. The much smaller increases in Australian access to the US market under the actual AUSFTA will have even smaller, almost negligible, impacts.     

Regional‐Level Analysis of Oligopsony Power in the Ukrainian Dairy Industry

Transition was characterized by massive structural changes in most economic sectors in Ukraine. This is especially true for the dairy sector. Several countervailing developments took place under transition that affected the dairy industry. Interregional trade became feasible, the importance of milk delivered by households increased significantly, and most dairies became investor‐owned companies. The latter point and the fact that the Antimonopoly Committee of Ukraine detected several price cartels in the industry lead us to offer that after transition, dairies were able to exercise oligopsony power toward dairy producers at the regional level. This paper estimates market structure models for raw milk in Ukraine using a translog production function for the processing sector at the national and regional level. The results suggest the existence of oligopsony power in three of 25 administrative regions in Ukraine, coupled with a potential deviation of procurement prices for raw milk from the value marginal product of raw milk ranging from 24.6% to 49.4%.     

Political Market Power Reflected in Milk Pricing Regulations

We investigate revealed political market power reflected in the pattern of price discrimination by end use that is the hallmark of U.S. milk marketing orders. We show that the pattern of prices that would maximize producer profits, if producers operated a cartel with monopoly power in a regional market, is far above actual government-set price differentials between milk used for fluid products and that used for manufactured products. The pattern of actual price differentials is consistent with political welfare weights for producers relative to consumers that are small compared to the weights that would yield maximum producer profits.     

Cow-calf profitability and leptin genotyping

Profitability of cow-calf production is determined largely by market prices, calf weaning weights, and cow productive life. While producers individually have no effect on prices, weaning weights and productive life have genetic influences and hence can be altered by selection programs implemented by producers. We investigate the impact of a mutation in the leptin gene (exon 2; single nucleotide polymorphism [SNP] 305) on cow-calf profitability. Prior research shows that this mutation has effects on performance and traits of fed cattle and milk production in dairy cows. Using data from a teaching-research herd, we find that it is also associated with calf weaning weights and cow productive life. A bio-economic stochastic simulation demonstrates that the mutation has statistically positive impacts on profits, suggesting that producers can profitably make use of this information.     

Price Ceilings on Milk Production Quota Values: Future or Folly?

Since the inception of supply management in Canada during the 1970s, milk production quota has been used to regulate output and participation in the dairy industry. In recent years, milk quota values have increased dramatically, almost tripling in value since the mid 1980s. This led to the Dairy Farmers of Ontario intervening on the milk production quota exchange on two occasions: first, in November 2006 with a progressive transfer assessment and then in July 2009, replacing the former policy with a firm price ceiling—fixing the unit price of quota at $25,000. These policies represent a significant redistribution of economic benefits from milk producers selling their quota to those remaining in the industry. The objective of this study is to first explore the reasons for the increase in production quota values; and second, to assess the welfare and distributional effects of each of the two quota policy schemes. Our results suggest that the increase in quota values were driven by basic economic factors and that the efficiency losses from intervention in the quota exchange are nontrivial. We conclude by suggesting there are several alternative policy options that could minimize efficiency losses while moderating the escalation in quota values. Depuis la mise en place du système de gestion de l’offre au Canada dans les années 1970, les quotas laitiers sont utilisés pour régulariser la production et la participation dans l’industrie laitière. Au cours des dernières années, la valeur des quotas laitiers a fait un bond considérable et a pratiquement triplé depuis le milieu des années 1980. Cette situation a amené la Dairy Farmers of Ontario à intervenir à deux reprises dans le système d’échange de quotas laitiers : en novembre 2006, en imposant l’établissement d’un transfert progressif et en juillet 2009, en remplaçant la politique précédente par l’établissement d’un prix plafond ferme fixéà 25 000 $. Ces politiques permettent une importante redistribution des avantages économiques lorsque des producteurs de lait vendent leurs quotas à des producteurs qui demeurent dans le secteur. La présente étude visait d’abord à examiner les raisons qui sous‐tendent l’augmentation de la valeur des quotas de production et ensuite àévaluer le bien‐être et les effets distributifs de chaque plan de quotas. Les résultats de notre étude autorisent à penser que l’augmentation de la valeur des quotas a été motivée par des facteurs économiques fondamentaux et que les pertes d’efficacité découlant de l’intervention dans les échanges de quotas n’étaient pas sans importance. En conclusion, nous estimons qu’il existe plusieurs politiques de rechange qui pourraient minimiser les pertes d’efficacité tout en modérant l’escalade de la valeur des quotas.     

Quota prices as indicators of comparative advantage in supply‐managed industries

The Canadian dairy, egg, broiler, and turkey industries operate under supply management, a policy regime that sets product prices and allocates production among provinces and ultimately among farms through quotas. The Canadian Farm Products Agencies Act requires that comparative advantage be used to guide the allocation of new quota when increases in consumer demand necessitate increased production. This requirement, however, has not been met in practice. We develop a proposal by Meilke to use quota prices as measures of comparative advantage. We evaluate the quota price approach and other proposed methods, from a Hayekian and Coasean market process perspective. We conclude that quota prices offer an economically justifiable indicator of provincial comparative advantage. We develop an individual‐level general equilibrium model of quota exchange to illustrate the informational content of quota prices as indicators of comparative advantage. We also discuss potential practical challenges of using quota prices as indicators of comparative advantage.     

Quota Transfer Assessments and Efficiency

In order to fund production/marketing quota redistributions or reduce the amount of quota outstanding, regulators often tax quota asset market trades. This assessment is shown to impede the transfer of quota to more efficient producers if rental markets are prohibited. Inefficient producers will produce too much, and the magnitude of cost inefficiencies will increase with the size of the assessment tax. Possible remedies to the problem are also discussed.     

MARKETING BOARDS AND QUOTA POLICIES FOR CANADIAN FARM PRODUCTS: AN APPRAISAL OF PERFORMANCE*

Since the great economic Depression, Canadian farm operators have always emphasized the need to strengthen their bargaining position in the market place. Basically, farm operators believe that the individual farmer is in no position to bargain effectively in a product market with a few large firms.
Legislators have responded to the wishes of farm operators by enacting legislation which provides for the formation of compulsory marketing boards controlled by producers. An ever-increasing number of these boards are now in operation. The granting of exclusive powers to sell particular farm products, however, is one which involves the public interest and the public is, therefore, vitally interested.
This paper focuses attention on the exercise of the powers vested in these marketing boards through their use of quotas, and their limitations to entry of new producers into particular sectors of the agricultural industry. The paper indicates that there are some positive features to the quota policies pursued by marketing boards. Some economic security has been afforded farm operators with short-term stability engendered in particular sectors of agriculture. There are certain negative consequences of these quota policies, which affect the location of production and also impair the competitive strength of particular sectors of agriculture to which they are applied. They have also interfered with the most rational utilization of resources in associated industries. These aspects of the quota policies are, therefore, inconsistent with the public interest. The study outlines principles that should form the basis of a revitalized marketing policy that may be more consistent with the public interest.     

THE WELFARE IMPLICATIONS OF NITROGEN LIMITATION POLICIES

The effects of nitrogen limitation policies on the UK fertiliser market are considered. Using a simulation model which incorporates some structural aspects of the UK fertiliser industry, the extent and distribution of the welfare effects of nitrogen tax and quota policies are estimated. The results show that, while farmers lose from both policies, the main fertiliser manufacturers may gain in the short run from a quota policy, while profits would be reduced with a nitrogen tax policy.     

Hidden action,risk aversion and variable fines in agri‐environmental schemes*

This note analyses the design of agri‐environmental schemes for risk‐averse producers whose input usage is only observable by costly monitoring. The scheme penalises producers in proportion to input use in excess of a quota. A striking result is that if the scheme is designed in such a way that producers always comply with the quota, risk aversion is not relevant in determining the level of input use.