The Effects of FMMOs Pricing Regimes on Milk Price Behavior and Dairy Farm Profitability

Abstract

This research evaluates the effects of the key changes that took place in the design of Class III milk pricing within Federal Milk Marketing Orders (FMMOs) on milk price behavior and dairy farm profitability over three milk pricing regimes: Minnesota-Wisconsin price series (1960s – 1995), Basic Formula Price (1995-1999) and Multiple Component Pricing (2000-present). An autoregressive conditional heteroscedasticity (ARCH) model is estimated to evaluate the effects of changes in the dairy industry institutional environment on the Class III milk price level and volatility over the analyzed period of time. The empirical evidence presented in the paper indicates that changes in the level of Class III milk price were rather minor in magnitude. However, changes in the milk price volatility were dramatic. There is empirical evidence indicating that the private Exchange spot cheese price is the main determinant of the Class III milk price, which is consistent with the design of Class III milk pricing during the analyzed FMMOs milk pricing regimes.