Milk Marketing Policy Options for the Dairy Industry in New England

Abstract

New England dairy farmers are under intense price pressure resulting from important growth in milk production from lower cost of production Southwest states as well as by retailers’ market power. Agricultural officials and legislative bodies in New England and in other Northeast US states are aware of these pressures and have been reacting with emergency dairy farm aid, following a very low 2006 milk price, and with state legislations in an attempt to address perceived excess retailing margins for fluid milk. In this paper, we suggest that a sigmoid demand relationship exists for fluid milk. This demand relationship would explain fluid milk asymmetric price transmission, high-low pricing, and the creation of a large retailing margin (chain surplus) often observed for fluid milk. It is also argued that a sigmoid demand relationship offers an opportunity for state legislators to help Northeast dairy farmers capturing a larger share of the dollar of the consumers through various policy options. Therefore, 5 milk market channel regulatory mechanisms (status quo, price gouging, supply control, fair share policy, and chain surplus return) are discussed and compared. The supply control mechanism was found the most effective at redistributing the chain surplus, associated with the sigmoid demand relationship for fluid milk, to dairy farmers. However, this option is unlikely to be politically acceptable in the United States. Second-best options for increasing dairy farmers’ share of the consumers’ dollar are the fair price policy and the chain surplus return. The former mechanism would distribute the chain surplus between retailers, processors, and farmers, whereas the latter would distribute it between consumers, retailers, and farmers. Remaining mechanisms would either transfer the chain surplus to retailers (status quo) or to consumers (price gouging).