Projects Funded for Tristan Hanon
Effects of Federal Milk Marketing Orders on U.S. Imports and Exports of Dairy Products
Daniel A. Sumner and Tristan Hanon
Specific Objectives of the Project
Production of a dissertation investigating the effects of the Federal Milk Marketing Orders on international trade in dairy products.
Summary of Results
This project is investigating the effects of the U.S. Federal Milk Marketing Orders (FMMOs) on trade in dairy products. The FMMOs implement price discrimination in the beverage milk market and redistribute gains to milk producers through blend pricing. Higher returns for dairy farmers increase the quantity of milk supplied to the market, while high prices in the beverage milk market reduce quantity demanded, leading to increased quantity in the dairy product manufacturing sector. Over the past two decades the U.S. has become a net exporter of dairy products, and this project investigates the role played by the marketing orders in that transition.
The research funded by this grant focused on the movement of farm milk and trade in dairy products within the United States. The marketing orders set regional prices for beverage milk, influencing the price received by milk producers in that region. This paper uses recent developments in the trade literature to model the process by which milk is delivered to different regions across the U.S and how dairy products are distributed to buyers. The dairy product market will include domestic demand from across the U.S. as well as demand facing the U.S. from the international market. We use simulations to compare a baseline scenario with the FMMOs in play to counterfactual scenarios that remove the regional price discrimination and revenue pooling.
The model of interstate trade will be supported by a second paper focused on empirical estimation of dairy product demand. Whether U.S. dairy policies have an impact on the international dairy product market depends on whether the U.S. faces a downward sloping world demand curve for tradable dairy products. This paper will use an econometric model of U.S. net exports and exogenous shifts in marketing order policies to estimates the world demand curves for tradable dairy products.
This research will be extended to an international scope to investigate the impacts of FMMO policies on international trade more broadly. While the model of interstate trade allows dairy product manufacturers to export products to the international market, the impacts of the FMMOs on that market are not explicitly modeled. The international trade model with consider U.S. imports and exports in the context of the global market for dairy products. This paper will focus on the U.S. shift from net importer to net exporter of dairy products and the extent to which changes in FMMO policies caused that shift.
Alongside the main goals of this project, it was a natural extension to study the impacts of the COVID-19 pandemic on the dairy industry. In the early stages of the pandemic school and restaurant closures impacted demand for dairy products, and milk producers reacted to falling prices by reducing production. Milk and dairy product prices were volatile throughout 2020. We initially focused on explaining these impacts in the western states for a publication in the Western Economic Forum. We outlined the government response to the pandemic and payments received by the dairy industry in 2020. This study was expanded to use forecasting methods to evaluate the magnitude of the impacts relative to historical data. There are outstanding questions to investigate, such as the impact of government purchasing programs on the market for dairy products, so we are developing a follow-up project to study these questions.