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Ag Policy, Lecture 11 Knutson, Penn, & Flinchbaugh, Chapter 7 & 5

Ag Policy, Lecture 11 Knutson, Penn, & Flinchbaugh, Chapter 7 & 5. Dairy Programs Livestock Impact Supply & Demand for Trade. Current U.S. Dairy Policy. Overview Milk Price Support Program Dairy Export Incentive Program (DEIP) Federal Milk Marketing Orders

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Ag Policy, Lecture 11 Knutson, Penn, & Flinchbaugh, Chapter 7 & 5

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  1. Ag Policy, Lecture 11Knutson, Penn, & Flinchbaugh, Chapter 7 & 5 • Dairy Programs • Livestock Impact • Supply & Demand for Trade

  2. Current U.S. Dairy Policy • Overview • Milk Price Support Program • Dairy Export Incentive Program (DEIP) • Federal Milk Marketing Orders • Milk Income Loss Contract (MILC) Payments 14

  3. Overview • Milk is the most regulated product in the U.S. • Produced in every state • Milk is not all the same • Depends on sanitary conditions produced under • Grade A • Eligible for fluid consumption • Grade B • Only eligible for making manufactured products • Represents less than 10% of total milk supply

  4. Milk Price Support Program • Authorized by 1933 Act and made permanent by 1949 Act • Secretary of Ag directed to support the price of manufacturing grade milk by purchasing manufactured dairy products (cheese, butter, and Nonfat dry milk) • Current support price is set at $9.90/cwt • Make allowances • Product purchase prices

  5. Federal Milk Marketing Orders • Combination of: • Classified pricing based on end use • Class I – beverage milk • Class II – fluid cream products, yogurt, perishable manufactured products (ice cream, cottage cheese, and others) • Class III – Cream cheese and hard manufactured cheeses • Class IV – Butter and milk in dried form • Market-wide revenue pooling meaning that all producers who market in a particular order receive the same minimum “blend” price • Blend prices are weighted average based on use in each category • Only pertains to minimum prices for Grade A milk

  6. Dairy Export Incentive Program (DEIP) • Helps exporters of dairy products meet prevailing world prices for targeted commodities and destinations • Objective: • Develop export markets where U.S. dairy products are not competitive due to the presence of subsidized exports from other countries • Eligible commodities: • Nonfat dry milk, butter, and cheeses (cheddar, mozzarella, gouda, feta, cream, and processed American)

  7. Milk Income Loss Contract (MILC) Payments • Established in 2002 farm bill • Set to end September 30, 2005 (3.5 year program) • Scored at $3.5 million over 2002-2005 period • Counter-cyclical program • Payment rate is 45% of the difference in monthly Boston Class I price and $16.94 (target price) • Monthly payment is equal to calculated payment rate multiplied by the eligible quantity. • Annual eligible payment quantity of 2.4 million pounds

  8. Crop Program Impacts on Livestock • Price & income supports and ARPs impact feed prices • Feed prices affect quantity of feed to livestock • Quantity of feed affects supply of livestock • Supply of livestock affect price of beef, pork, poultry

  9. No Trade $ S S P0 None P0 D D q0 q0 Q/yr Exporting Country Trade Importing Country

  10. International Trade Exporting Country Importing Country or R.O.W. $ S S TD DD D Q/yr Excess Demand from ROW

  11. International Trade Exporting Country Importing Country or R.O.W. $ S S World Price TD D D Q/yr

  12. International Trade Exporting Country Importing Country or R.O.W. $ S S World Price TD D D Q/yr Domestic Demand ROW Supply ROW Demand Total Demand

  13. International Trade Exporting Country Importing Country or R.O.W. $ S S World Price TD D D Q/yr Quantity Traded

  14. International Trade Exporting Country Importing Country or R.O.W. $ S S World Price TD D D Q/yr Who are the winners and losers? Exporting Country Consumers Exporting Country Producers ROW Consumers ROW Producers

  15. International Trade Exporting Country Trade Importing Country $ S Excess Supply S D D Q/yr

  16. International Trade Exporting Country Trade Importing Country $ S Excess Supply S Excess Demand D D Q/yr

  17. International Trade Exporting Country Trade Importing Country $ S Excess Supply S World Price Excess Demand D D Q/yr Quantity Traded

  18. Lecture 11, Wrap up • What makes dairy policy more complicated than corn, cotton, soybeans, or wheat? • Do crop programs have an impact on the livestock industry? • Be able to draw the trade diagrams and identify • World price • Quantity traded • Quantity demanded in each country • Quantity supplied in each country

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