Effects of U.S. Dairy Policies on

Markets for Milk and Dairy Products

Abstract

This report examines the economic effects of the principal programs authorized under the Farm Security and

Rural Investment Act of 2002 that influence the U.S.

dairy sector. The analytical results presented in this

study were used as input to a broader study mandated

by Congress, which required an evaluation of the

economic impacts of Federal milk marketing orders,

direct payments to producers, price supports, and export

programs. This study examines the effects of dairy

policies on prices, program payments, and other variables under different scenarios. The results are

compared to a baseline set of estimates over the 2002-

07 period. The findings show that gross income in the

U.S. dairy sector would be $7.2 billion below baseline

levels over the course of this period if the programs

were discontinued. Over the same period, cumulative

Government outlays for these programs would be

approximately $5.5 billion below baseline levels. 

Keywords: Farm Security and Rural Investment Act of

2002, Milk Price Support Program, Dairy Export Incentive Program (DEIP), Federal Milk Marketing Order

(FMMO) system, Milk Income Loss Contract (MILC)

Program, Food and Agricultural Policy Simulator

(FAPSIM).

J. Michael Price

* J. Michael Price in an economist with the Market and Trade Economics Division, Economic Research

Service, USDA.

United States

Department

of Agriculture

www.ers.usda.gov

Electronic Report from the Economic Research Service

Technical

Bulletin

Number 1910

May 2004
Government programs have been an integral part of

the U.S. dairy sector for nearly 70 years. To understand how these programs influence the sector, it is

necessary to examine how the sector might react if

these programs were eliminated. This study provides

a basis for understanding the effects of these policies.

It presents estimates of the impacts of eliminating the

principal programs affecting the dairy sector by examining their effect on prices, production, use, farm

income, and budgetary costs.

The study also serves a second purpose. The Farm

Security and Rural Investment Act of 2002 (2002 Act)

required the Secretary of Agriculture to prepare a

study that evaluates national dairy policy. As part of

this mandate, the Congress required an evaluation of

the economic impacts of Federal milk marketing

orders, direct payments to producers, price supports,

and export programs. The results in this study were

used in this broader study mandated by Congress

(USDA, forthcoming). 

2 • Economic Research Service, USDA Effects of U.S. Dairy Policies • TB-1910

Introduction
Many of the existing Federal dairy programs date back

to the 1930s and 1940s. Although their basic structure

has remained the same through the present, these programs have been continually modified over time in

response to changing market conditions. Since the

1940s, additional programs have been either introduced or discontinued in reaction to new concerns that

emerged as the dairy industry evolved.1

Prior to the 2002 Act, the major national programs

affecting dairy were the Milk Price Support Program,

the Dairy Export Incentive Program, the Federal Milk

Marketing Order system, and the Dairy Market Loss

Assistance Program. The 2002 Act did not make any

substantive changes to the first three of these programs. However, it replaced the Dairy Market Loss

Assistance Program with the Milk Income Loss

Contract Program.

Milk Price Support Program (MPSP)

Under the MPSP, the Commodity Credit Corporation

(CCC) stands ready to purchase all the cheese, butter,

and nonfat dry milk that are offered for sale at specified prices. The program therefore indirectly provides

a price floor on all milk that is marketed domestically

by supporting the price of these manufactured dairy

products. 

The 2002 Act set the support price for milk at $9.90

per hundredweight over the life of the legislation

(2002-07). The support prices for individual dairy

products are based on the support price of milk and on

the costs of converting raw milk into cheese, butter,

and nonfat dry milk. The price formulas are designed

to enable manufacturers of average efficiency to pay

producers a price that is no lower than the support

price for milk.

Dairy Export Incentive Program (DEIP)

DEIP enhances the total demand for U.S. dairy products. The program subsidizes the export of selected

dairy products (primarily cheese, butter, and nonfat dry

milk) in targeted foreign markets. Under this program,

USDA pays cash bonuses to private U.S. exporters of

dairy products purchased from domestic commercial

sources. This allows the exporters to sell these products at prices that are potentially below their acquisition costs. Both the total quantities exported and the

total budgetary expenditures under this program are

subject to limits imposed by commitments with the

World Trade Organization (USDA, 2003a).

Milk Income Loss Contract (MILC) Program 

The MILC Program provides dairy producers with a

degree of income protection from price volatility. The

payment rate for the program is established on a

monthly basis. It is 45 percent of the difference

between $16.94 and the Boston Class I price per hundredweight established by the Federal Milk Marketing

Order system (if this difference is positive). All producers receive the same payment rate for a given

month, and payments must be made within 60 days of

the last day of the month in which payments are triggered (USDA, 2002b).

Producers need only enroll in the program to qualify

for payments. However, the MILC Program established a cap on the production for each farm operation

that is eligible for program benefits. MILC participants may receive payments on at most 2.4 million

pounds of the total milk marketed in a given fiscal

year.

Under the provisions of the 2002 Act, the MILC

Program is authorized through September 30, 2005.

Thus, the program is relatively short-term.

Federal Milk Marketing Order (FMMO) System

The FMMO system regulates milk markets by setting

regional minimum prices of milk for four different

classes of use, and pooling revenues so that producers

are paid a minimum weighted average or uniform

blend price (Manchester and Blayney, 2001).

Competitive market prices of dairy products—butter,

nonfat dry milk, cheese, and whey—are used to establish monthly minimum prices for milk used in butter

and nonfat dry milk (Class IV) and for milk used in

cheese (Class III). Minimum prices for milk in fluid

Effects of U.S. Dairy Policies • TB-1910 Economic Research Service, USDA • 3

National Dairy Programs

1 Manchester (1983), USDA (1984), Fallert, Blayney, and Miller

(1990), and Blayney, Miller, and Stillman (1995) describe the history of U.S. dairy policy.
use (Class I) are determined monthly by adding a fixed

differential to the higher of an advanced calculation of

the Class III and Class IV prices. The differentials

range between $1.60 and $4.30, averaging about $2.69

per hundredweight. For milk used in soft manufactured products (Class II), a differential of $0.70 per

hundredweight is added to the Class IV price. Thus,

to the extent that the minimum order price is binding

for a particular class of milk, producers receive a premium on that milk over the market price that would be

in effect in the absence of the FMMO system.

However, in many markets, prices are generally driven

above Federal order minimums by market forces.

All similarly located producers within a Federal order

region receive the same uniform blend price for their

milk. The blend price is a weighted average of the

individual class prices, where the weights are determined by the proportion of milk utilized in each class

by milk processors regulated under the order. As a

result, the program may reduce price differences

among producers within a Federal order region. 

4 • Economic Research Service, USDA Effects of U.S. Dairy Policies • TB-1910
Some dairy programs were designed to operate in concert with each other. Nevertheless, it is useful to analyze the incremental effects of each of these programs

on the dairy sector. 

The approach used in this analysis is to remove the

programs sequentially. The order in which the programs were removed reflects how interconnected they

are. For example, the payment rate associated with the

MILC Program is based on the formula that is used to

establish the FMMO price for Class I milk in Boston.

Therefore, the FMMO system cannot be eliminated

while maintaining the MILC Program. Such considerations dictate the order in which these programs are

eliminated.

The scenarios are defined as follows:

(1) Elimination of the MPSP;

(2) Elimination of the MPSP, and DEIP;

(3) Elimination of the MPSP, DEIP, and MILC; 

(4) Elimination of the MPSP, DEIP, MILC, and

FMMO system.

The analysis examines the 2002-07 period (the duration of 2002 Act). All of the impacts were estimated

using the Food and Agricultural Policy Simulator

(FAPSIM).2 Within the context of this modeling

framework, the programs were eliminated sequentially

based on the following set of assumptions.

Scenario 1

The MPSP was terminated in this analysis by setting

all CCC purchases under this program to zero over the

2002-07 period for cheese, butter, and nonfat dry milk.

This assumption essentially removes any price-enhancing aspects associated with the MPSP. As such, CCC

purchase prices no longer act as a price floor for any

of these commodities.

Furthermore, CCC beginning stock levels for these

commodities were frozen at their 2002 levels over the

entire 2002-07 period. This assumption was used to

isolate existing CCC stocks from the market. If the

CCC reduced its stocks over the period by disposing

of them in commercial markets, the effect would be to

depress dairy prices. The assumption used in this

analysis neutralizes the effects of current stocks on the

market.

Scenario 2

DEIP was terminated by setting all exports under this

program to zero. The analysis assumes that the DEIP

does not displace any commercial exports of dairy

products. In other words, each unit of product exported under this program increases total dairy exports by

the same amount.

Scenario 3

The MILC Program was terminated in this analysis by

setting the program target price of $16.94 per hundredweight to zero over the 2002-05 period. This

effectively removes all income-enhancing aspects of

the program.

Scenario 4 

FAPSIM approximates the operation of the FMMO system by incorporating the formulas that are used to set

the minimum order price for each class of milk (USDA,

2002a). The Class I price equals the Class I differential

plus the higher of the Class III or Class IV price. The

average Class I differential that has been in effect since

2000 is $2.69 per hundredweight. This analysis

assumes that $1.30 of this price differential is due to

transportation costs and other factors. In other words,

this portion of the Class I differential would exist even

in the absence of the FMMO system. To model the

effects of eliminating the program, the Class I differential was therefore set at $1.30 per hundredweight to

obtain estimates of the impact of this program.3

Effects of U.S. Dairy Policies • TB-1910 Economic Research Service, USDA • 5

Scenario Descriptions and Assumptions 

2 Appendix B contains a brief summary of the model.

3 Because the FMMO system has been an integral part of the pricing system for milk since the 1930s, it is difficult to determine how

the sector would react if the program were to be abolished. The

assumption that the Class I differential would be $1.30 per hundredwieght in the absence of the FMMO system was based primarily on the analysis by Pratt, Bishop, Erba, Novakovic, and

Stephenson (1998).
All of the scenarios are examined by comparing their

impacts against a set of baseline estimates over the

2002-07 period. The results are conditioned by the

baseline chosen for this analysis. For example, if the

underlying baseline exhibited high prices throughout

the period of analysis, most of the scenarios would

show little or no impacts associated with eliminating

the programs. 

The set of baseline projections used for this analysis

closely approximates the official USDA baseline

(USDA, 2003b). This particular baseline generally

exhibits lower prices in the initial years and higher

prices in the final years of the analysis. This means

that we should expect the impacts associated with all

of the scenarios to be larger in the initial years.

For each scenario, the analysis traces the movements

in prices, utilization, and production for all of the

major dairy products. The analysis also includes some

aggregate indicators, such as cash receipts from farm

marketings of dairy products and Federal outlays on

dairy programs.

Scenario 1

Given the baseline used for this analysis, the elimination of the MPSP primarily affects the market for nonfat dry milk. Although price supports are in effect for

cheese and butter, the baseline market prices for these

products are high in relation to their respective support

prices. As a consequence, there are little or no CCC

purchases of these dairy products in the baseline.

Thus, the elimination of the program does not directly

affect the product markets for cheese or butter.

The situation for nonfat dry milk is different. Given

the baseline prices, the CCC is expected to purchase

nonfat dry milk over the entire 2002-07 period. In the

baseline, CCC purchases average approximately 17

percent of total production of nonfat dry milk. The

elimination of the MPSP reduces the effective demand

for this product by reducing CCC purchases to zero.

As a consequence, the wholesale price of nonfat dry

milk declines by 15 to 20 percent below the baseline

in the first 2 years of the analysis. Over the 2002-07

period, the price is approximately 10 percent below

baseline levels (table 1, see p. 12).4

The decline in nonfat dry milk price leads to a decline

in the profitability of using milk to manufacture nonfat

dry milk and butter relative to other uses for milk. As

a result, milk production is diverted to alternative uses

under this scenario (tables 7, 8, and 9).5

Increased market supplies generally lead to lower

prices for alternative uses for milk. The wholesale

cheese price and the Class I price for milk both

decline by approximately 2 percent below the baseline,

on average, over the period (tables 3 and 4).6

Butter is an exception. Butter is produced as a

coproduct with nonfat dry milk. Because nonfat dry

milk prices decline, less milk is used to produce both

nonfat dry milk and butter. Butter prices consequently

increase by 14 percent above baseline levels over

2002-07 (table 2). 

The price declines for nonfat dry milk and cheese lead

to a decline in the price of milk used for manufacturing purposes (table 5). This, in turn, leads to a overall

decline in the price received by farmers for all milk

(table 6). In the initial years of the analysis (2002-03),

the farm price of milk is 5 to 7 percent below baseline

levels.

Producers respond to the lower prices by reducing production (table 10), which mitigates the impacts associated with eliminating the MPSP in the latter years of

the analysis. By the final years of the analysis, the

farm price is less than 1 percent below baseline levels.

6 • Economic Research Service, USDA Effects of U.S. Dairy Policies • TB-1910

Model Results 

4 The baseline used for this analysis assumes that the support

price for nonfat dry milk is $1.01 per pound over the 2002-07 period. The support price for nonfat dry milk has subsequently been

adjusted downward to $0.80 per pound. Thus, the results probably overstate the price effects that elimination of MPSP would

have on the sector.

5 In particular, milk would be diverted to fluid use or to the production of cheese.

6 The Class I price increases above baseline levels in 2004. This is

due to the specification used in FAPSIM to estimate the demand

for fluid milk. The equation contains a long-run response coefficient. As a result, consumers responding to the relatively large

price adjustments in the first 2 years of the analysis do not adjust

instantaneously as market conditions change. Thus, due to the

lagged response, fluid use demand increases above baseline levels

in 2004, even though the Class I price is above baseline levels.
Cash receipts decline for the dairy sector due to both

lower prices and lower production. Cumulative cash

receipts from farm marketings are approximately $3.5

billion below the baseline over the 2002-07 period

(table 11). However, part of this decline in market

receipts is offset by an increase in payments under the

MILC Program. Due to the lower prices, cumulative

payments associated with the MILC Program are $0.6

billion above baseline levels (table 12).

Despite increased MILC Program payments, there are

savings in Federal outlays associated with eliminating

the MPSP (table 13). Cumulative CCC expenditures

are approximately $1.0 billion below baseline levels

over the 2002-07 period. Furthermore, expenditures

declined in all years except one, fiscal year 2003. 

All of these results should be interpreted as representing upper bounds on the impacts to the dairy sector of

eliminating the MPSP. The modeling framework used

for this analysis treats the commercial export demand

for dairy products exogenously. This means that commercial exports of the products do not change as product prices change in FAPSIM. This is an especially

important consideration for nonfat dry milk. Because

nonfat dry milk prices decline by 10 percent on average over 2002-07, commercial exports of nonfat dry

milk could potentially increase under the scenario. If

this occurred, the price impacts associated with nonfat

dry milk would be smaller. This would reduce the

magnitude of the impacts associated with other dairy

products as well.

Scenario 2

Historically, DEIP has been used to reduce the CCC

expenditures associated with supporting the price of

milk. If the CCC purchases a particular commodity,

the CCC is more inclined to authorize DEIP subsidies

for that commodity. By increasing the quantity that is

sold on foreign markets, the CCC is less likely to incur

costs in acquiring the commodity to support its price

domestically.

The baseline used for this analysis reflects this interrelationship between the MPSP and DEIP. The baseline

assumes that all DEIP payments are made for nonfat

dry milk so as to reduce the budgetary costs of the

MPSP. This means that, directionally, the impacts

associated with eliminating both the MPSP and DEIP

are identical to those already discussed in Scenario 1.

Eliminating DEIP essentially implies a further reduction in the aggregate demand for nonfat dry milk.

Thus, the main distinction between the two scenarios

is that the impacts are larger (in absolute terms) for

Scenario 2.

Exports under DEIP account for approximately 9 percent of the total production of nonfat dry milk, on

average, in the baseline. Due to the reduction in the

demand for nonfat dry milk caused by the elimination

of DEIP, the wholesale price declines by approximately 15 percent below the baseline levels in this case,

versus 10 percent in Scenario 1 (table 1). A similar

pattern exists among relative size of the impacts associated with the remaining prices. FAPSIM estimates

that all the price impacts in Scenario 1, measured as a

percentage change from the baseline, are approximately 50 percent larger in Scenario 2 (tables 2-6).

Cumulative cash receipts from farm marketings decline

approximately $5.3 billion below the baseline over

2002-07 for Scenario 2 due to the larger price and quantity adjustments (table 11). Under Scenario 2, cumulative MILC payments increase by approximately $0.9

billion above baseline levels over 2002-07 (table 12).

There is virtually no difference in the Federal budgetary savings between Scenarios 1 and 2. All of the

additional savings associated with eliminating DEIP in

Scenario 2 are offset by additional costs associated

with the MILC Program.

Scenario 3

The MILC Program has the largest influence on the

baseline estimates during the initial years of the analysis for three reasons. First, the program is due to terminate on October 1, 2005. Thus, the program is irrelevant over the final 2 years of the analysis. Second,

because prices strengthen over time in the baseline, the

MILC Program becomes progressively less important

as an income-enhancing mechanism for the sector.

Finally, the proportion of milk marketings that are eligible for program payments diminishes as the industry

shifts to larger and more efficient operations. Thus,

over time, more production becomes subject to the

2.4-million-pound limitation on the quantity of milk

that is eligible for payments on each dairy operation.7

Effects of U.S. Dairy Policies • TB-1910 Economic Research Service, USDA • 7

7 In FAPSIM, 52.0 percent of total milk production is estimated to

be eligible for payments in 2002. This estimate declines steadily

over time to 44.5 percent in 2005. Price, Stillman, and Seeley

(2003) provide a detailed description of the procedure used to

obtain these estimates.
Despite the cap on the marketings that are eligible for

MILC payments, the program influences production

decisions by providing income support payments on a

portion of total production. Thus, the program acts to

mute the production response to lower market prices.

Eliminating MPSP, DEIP, and MILC simultaneously

therefore reduces milk production below the levels in

Scenario 2 (table 10). Lower milk production causes

prices for all of the dairy products to be higher in

Scenario 3 than in Scenario 2 (tables 1-6). 

With the exception of butter, all the prices tend to be

below baseline levels under Scenario 3. On average,

the all-milk price declines 1.5 percent below baseline

levels over 2002-07. This is less than the percentage

decline under either Scenarios 1 or 2 (table 6).

The change in cash receipts from farm marketings is

similar to Scenario 1. Cumulative cash receipts fall by

$3.8 billion below baseline levels over 2002-07 (table

11). This reflects the lower production and marketings

under Scenario 3 relative to Scenario 2.

Unlike the previous scenarios, farmers do not receive

government payments under the MILC Program to

compensate them for market losses. The budgetary

savings under Scenario 3 total more than $5.5 billion

over 2002-07 (table 13).

Scenario 4

By assumption, eliminating the FMMO system

reduces the Class I price differential, thereby reducing

the price that consumers pay for fluid milk (table 4).

Fluid prices decline almost 8 percent below baseline

levels, on average, over 2002-07. This compares with

a 1.6-percent decline under Scenario 3.

Consumers respond to this price change by increasing

their demand for fluid milk by approximately 2 percent

above the baseline over the 2002-07 period (table 9).

Lower milk production coupled with increased fluid

milk use reduces the supply of milk available for manufactured dairy products, leading to higher manufactured milk prices (table 5). Thus, despite the reduction

in the demand for nonfat dry milk due to the elimination of the MPSP and DEIP, the overall manufactured

milk price increases by over 2 percent above the baseline, on average, over the 2002-07 period (table 5).

The overall price of milk is a weighted average of the

prices of milk sold for fluid use and for manufacturing

purposes. Because these two prices move in opposite

directions, the change in the all-milk price is very similar to that under Scenario 3 (table 6). As a result, the

cumulative changes in cash receipts and in CCC outlays are virtually identical for Scenarios 3 and 4.

8 • Economic Research Service, USDA Effects of U.S. Dairy Policies • TB-1910
All the scenarios share some common characteristics.

The impacts of eliminating the dairy programs are

larger during the initial years of the analysis. This

stems primarily from the fact that the baseline exhibits

lower prices in the early years. Thus, the programs

have a larger influence on the sector during the initial

years of the analysis (figs. 1, 3). 

The production response is also an important factor

influencing this result. Once producers are given time

to adjust herd sizes in response to the initial price

changes, the impacts in the latter years of the analysis

become muted due to lower milk supplies.

Figures 1 through 3 summarize the impacts for some of

the key indicators for the sector. For the reasons

already cited, the largest impacts on most variables

occur in the initial 2 years of the analysis for all scenarios. In absolute terms, the percentage change in farm

price is almost 10 times as large as the percentage

change in production in 2002 for each of the scenarios

(figs. 1, 2). This is due to the inability of producers to

adjust production significantly in the short run.

Gross income depicted in figure 3 is the sum of cash

receipts from farm marketings and from government

payments associated with the MILC Program.

Because production declines under each of the scenarios, total production expenses also decline. Thus, the

decrease in net farm income experienced by dairy producers would be less than the decrease in gross farm

income indicated by the figure.

The national farm income accounts do not break out

production expenses by type of farm operation.

Without this detailed information, it is impossible to

determine how the elimination of the programs would

affect net farm income for dairy producers directly.

However, figure 4 indicates how farm income for the

entire agricultural sector changes when the programs

are eliminated. Because these income changes primarily reflect adjustments in the dairy sector, they can be

used as a crude approximation of the adjustments in

net farm income for dairy producers.8 Over 2002-07,

the cumulative effects on net farm income for the agricultural sector are roughly half as large as effects on

gross income for dairy producers (tables 14-15).

The largest aggregate sector impacts are associated

with Scenarios 3 and 4. Producers bear the largest

declines in gross income because both cash receipts

from farm marketings and government income support

payments decline under each of these scenarios.

Of the four scenarios, the least confidence should be

placed in the results associated with Scenario 4.

Although the FMMO system is an integral part of the

FAPSIM dairy model, the specification may not adequately capture the full importance of the order system

on the sector.

A further concern is the assumption used to implement

the scenario. The FMMO system has underpinned the

pricing mechanism for milk since its inception over 60

years ago. If the program is terminated, it is difficult

to predict how the markets would adjust to this new

environment. The assumption that the Class I differential would be $1.30 per hundredweight in the

absence of the program is therefore debatable.

Effects of U.S. Dairy Policies • TB-1910 Economic Research Service, USDA • 9

Summary

8 The adjustments in the dairy sector affect the net farm income

associated with a large number of commodities. For example,

lower milk production leads to lower feed demand. As a result,

grain prices are lower under each of the scenarios. This, in turn,

leads to lower crop production. Thus, cash receipts for feed grains

also decline below baseline levels for each of the scenarios.

Production expenses for these crops decline as well.
10 • Economic Research Service, USDA Effects of U.S. Dairy Policies • TB-1910

Figure 2

Milk production: Percentage change from 

the baseline

Percent

Scenario 1 Scenario 2 Scenario 3 Scenario 4

2002 2003 2004 2005 2006 2007

-12

-10

-8

-6

-4

-2

0

2

4

6

Figure 3

Gross income for dairy: Change from 

the baseline 

$ billion

Scenario 1 Scenario 2 Scenario 3 Scenario 4

2002 2003 2004 2005 2006 2007

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0

0.5

1.0

Figure 4

Net farm income for the agricultural sector: 

Change from baseline

$ billion

Scenario 1 Scenario 2 Scenario 3 Scenario 4

2002 2003 2004 2005 2006 2007

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0

0.5

1.0

Figure 1

Producer price of all milk: Percentage change 

from the baseline

2002 2003 2004 2005 2006 2007

-12

-10

-8

-6

-4

-2

0

2

4

6

Percent

Scenario 1 Scenario 2 Scenario 3 Scenario 4

Note: Scenario 1 = Elimination of the MPSP; Scenario 2 = Elimination of the MPSP and DEIP; Scenario 3 = Elimination of the MPSP,

DEIP, and MILC; Scenario 4 = Elimination of the MPSP, DEIP, MILC, and FMMO system.
Blayney, Don P., James J. Miller, and Richard P.

Stillman. Dairy: Background for the 1995 Farm

Legislation. U.S. Department of Agriculture,

Economic Research Service, AER-705, 1995.

Fallert, Richard F., Don P. Blayney, and James J.

Miller. Dairy: Background for the 1990 Farm

Legislation. U.S. Department of Agriculture,

Economic Research Service, Staff Report AGES

9020, 1990.

Gadson, Kenneth E., J. Michael Price, and Larry E.

Salathe. The Food and Agricultural Policy

Simulator (FAPSIM). U.S. Department of

Agriculture, Economic Research Service, ERS/NED

Staff Report AGES-820506, 1982.

Haavelmo, Trygve. “The Probability Approach to

Econometrics,” Econometrica, Supplement:1-144,

1944.

Hildebrand, F.B. Introduction to Numerical Analysis.

Dover Publications, Inc., New York, second edition,

1974.

Manchester, Alden C. The Public Role in the Dairy

Economy: Why and How Governments Intervene in

the Milk Business. Westview Press, Boulder, CO,

1983.

Manchester, Alden C., and Don P. Blayney. Milk

Pricing in the United States. U.S. Department of

Agriculture, Economic Research Service, AIB-761,

2001.

Pratt, James E., Phillip M. Bishop, Eric M. Erba,

Andrew M. Novakovic, and Mark W. Stephenson.

Normative Estimates of Class I Prices Across U.S.

Milk Markets. Cornell Program on Dairy Markets

and Policy, R.B. 98-05, 1998.

Price, J. Michael, Richard P. Stillman, and Ralph

Seeley. “The Food and Agricultural Policy

Simulator: Implementation of the Milk Income Loss

Contract Program.” U.S. Department of Agriculture,

Economic Research Service, 2003.

Salathe, Larry E., J. Michael Price, and Kenneth E.

Gadson. “The Food and Agricultural Policy

Simulator,” Agricultural Economics Research

34(2):1-15, 1982.

United States Department of Agriculture, Agricultural

Marketing Service. Milk Marketing Order Statistics:

Federal Milk Order Price Information, Price

Formulas - 2002. www.ams.usda.gov/dyfmos/mib/

price_form_2002.htm. 2002a. 

United States Department of Agriculture, Economic

Research Service. An Analysis of the Economic

Effects of U.S. Dairy Policy and An Analysis of an

Alternative Milk Pricing Approach, Report Prepared

for the Senate Committee on Agriculture, Nutrition

and Forestry and the House Committee on

Agriculture. 

United States Department of Agriculture, Economic

Research Service. Dairy: Background for the 1985

Farm Legislation. AIB-474, 1984.

United States Department of Agriculture, Farm Service

Agency. Fact Sheet: Milk Income Loss Contract

Program. November 2002b.

United States Department of Agriculture, Foreign

Agricultural Service. Fact Sheet: Dairy Export

Incentive Program. www.usda.bov/info/factsheets

/deip/html. 2003a. 

United States Department of Agriculture, Office of the

Chief Economist. USDA Agricultural Baseline

Projections to 2012. WAOB 2003-1, 2003b.

Effects of U.S. Dairy Policies • TB-1910 Economic Research Service, USDA • 11

References 
12 • Economic Research Service, USDA Effects of U.S. Dairy Policies • TB-1910

Appendix A: Impacts of Eliminating National Dairy Programs 

Table 1—Wholesale price, nonfat dry milk

Calendar year Average

Item 2002 2003 2004 2005 2006 2007

Cents per pound

Scenario 1 88.4 82.7 100.2 97.0 96.6 95.6

Baseline 103.9 102.6 103.5 103.9 103.9 103.8

Difference -15.6 -19.9 -3.3 -6.9 -7.3 -8.1 -10.2

Percentage difference -15.0 -19.4 -3.2 -6.6 -7.0 -7.8 -9.8

Scenario 2 76.9 78.6 95.6 92.3 92.1 91.1

Baseline 103.9 102.6 103.5 103.9 103.9 103.8

Difference -27.0 -24.0 -7.9 -11.6 -11.8 -12.7 -15.8

Percentage difference -26.0 -23.4 -7.6 -11.1 -11.3 -12.2 -15.3

Scenario 3 78.9 82.5 98.6 94.1 92.9 91.5

Baseline 103.9 102.6 103.5 103.9 103.9 103.8

Difference -25.0 -20.1 -4.9 -9.7 -11.0 -12.3 -13.8

Percentage difference -24.1 -19.6 -4.7 -9.4 -10.6 -11.8 -13.4

Scenario 4 82.9 87.1 102.8 98.0 96.6 95.0

Baseline 103.9 102.6 103.5 103.9 103.9 103.8

Difference -21.0 -15.5 -0.7 -5.8 -7.3 -8.8 -9.8

Percentage difference -20.2 -15.1 -0.6 -5.6 -7.1 -8.4 -9.5

Note: Scenario 1 = Elimination of the MPSP; Scenario 2 = Elimination of the MPSP and DEIP; Scenario 3 = Elimination of the MPSP, DEIP, and

MILC; Scenario 4 = Elimination of the MPSP, DEIP, MILC, and FMMO system.

Table 2—Wholesale price, butter

Calendar year Average

Item 2002 2003 2004 2005 2006 2007

Cents per pound

Scenario 1 99.1 90.9 104.7 111.5 117.9 126.3

Baseline 88.5 73.3 91.6 100.1 106.6 113.8

Difference 10.7 17.6 13.1 11.3 11.3 12.4 12.7

Percentage difference 12.1 24.0 14.2 11.3 10.6 10.9 13.9

Scenario 2 107.0 97.9 111.7 118.5 125.0 133.6

Baseline 88.5 73.3 91.6 100.1 106.6 113.8

Difference 18.6 24.6 20.1 18.3 18.4 19.7 19.9

Percentage difference 21.0 33.6 21.9 18.3 17.3 17.3 21.6

Scenario 3 107.4 98.9 113.0 119.6 125.8 134.2

Baseline 88.5 73.3 91.6 100.1 106.6 113.8

Difference 19.0 25.6 21.3 19.5 19.3 20.4 20.8

Percentage difference 21.4 35.0 23.2 19.5 18.1 17.9 22.5

Scenario 4 110.1 103.0 117.7 124.9 131.3 139.9

Baseline 88.5 73.3 91.6 100.1 106.6 113.8

Difference 21.6 29.7 26.1 24.7 24.8 26.0 25.5

Percentage difference 24.5 40.6 28.5 24.7 23.2 22.9 27.4

Note: Scenario 1 = Elimination of the MPSP; Scenario 2 = Elimination of the MPSP and DEIP; Scenario 3 = Elimination of the MPSP, DEIP, and

MILC; Scenario 4 = Elimination of the MPSP, DEIP, MILC, and FMMO system.
Effects of U.S. Dairy Policies • TB-1910 Economic Research Service, USDA • 13

Table 3—Wholesale price, American cheese

Calendar year Average

Item 2002 2003 2004 2005 2006 2007

Cents per pound

Scenario 1 113.6 107.2 131.4 131.7 133.9 136.7

Baseline 120.4 116.7 128.8 132.5 135.0 138.0

Difference -6.8 -9.6 2.6 -0.8 -1.1 -1.3 -2.8

Percentage difference -5.6 -8.2 2.0 -0.6 -0.8 -1.0 -2.4

Scenario 2 108.7 106.1 130.6 130.9 133.2 136.0

Baseline 120.4 116.7 128.8 132.5 135.0 138.0

Difference -11.7 -10.7 1.8 -1.6 -1.8 -1.9 -4.3

Percentage difference -9.7 -9.1 1.4 -1.2 -1.3 -1.4 -3.6

Scenario 3 110.2 109.3 133.6 133.0 134.3 136.7

Baseline 120.4 116.7 128.8 132.5 135.0 138.0

Difference -10.3 -7.4 4.8 0.5 -0.6 -1.2 -2.4

Percentage difference -8.5 -6.4 3.7 0.4 -0.5 -0.9 -2.0

Scenario 4 113.8 114.5 139.0 138.3 139.6 141.9

Baseline 120.4 116.7 128.8 132.5 135.0 138.0

Difference -6.6 -2.3 10.2 5.9 4.7 4.0 2.6

Percentage difference -5.5 -1.9 7.9 4.4 3.5 2.9 1.9

Note: Scenario 1 = Elimination of the MPSP; Scenario 2 = Elimination of the MPSP and DEIP; Scenario 3 = Elimination of the MPSP, DEIP, and

MILC; Scenario 4 = Elimination of the MPSP, DEIP, MILC, and FMMO system.

Table 4—Effective Class I price of milk

Calendar year Average

Item 2002 2003 2004 2005 2006 2007

Dollars per hundredweight

Scenario 1 13.97 13.09 15.26 15.29 15.55 15.85

Baseline 14.83 14.01 14.94 15.36 15.67 15.99

Difference -0.86 -0.92 0.32 -0.08 -0.11 -0.13 -0.3

Percentage difference -5.8 -6.6 2.1 -0.5 -0.7 -0.8 -2.0

Scenario 2 13.34 13.06 15.18 15.21 15.49 15.80

Baseline 14.83 14.01 14.94 15.36 15.67 15.99

Difference -1.49 -0.95 0.24 -0.16 -0.17 -0.19 -0.45

Percentage difference -10.0 -6.8 1.6 -1.0 -1.1 -1.2 -3.1

Scenario 3 13.53 13.45 15.50 15.42 15.60 15.86

Baseline 14.83 14.01 14.94 15.36 15.67 15.99

Difference -1.30 -0.57 0.56 0.06 -0.07 -0.12 -0.24

Percentage difference -8.8 -4.0 3.8 0.4 -0.4 -0.8 -1.6

Scenario 4 12.49 12.53 14.57 14.48 14.66 14.92

Baseline 14.83 14.01 14.94 15.36 15.67 15.99

Difference -2.34 -1.49 -0.36 -0.88 -1.01 -1.07 -1.19

Percentage difference -15.8 -10.6 -2.4 -5.7 -6.4 -6.7 -7.9

Note: Scenario 1 = Elimination of the MPSP; Scenario 2 = Elimination of the MPSP and DEIP; Scenario 3 = Elimination of the MPSP, DEIP, and

MILC; Scenario 4 = Elimination of the MPSP, DEIP, MILC, and FMMO system.
14 • Economic Research Service, USDA Effects of U.S. Dairy Policies • TB-1910

Table 5—Producer price of manufacturing milk

Calendar year Average

Item 2002 2003 2004 2005 2006 2007

Dollars per hundredweight

Scenario 1 10.31 9.64 11.70 11.73 11.95 12.21

Baseline 10.96 10.45 11.43 11.78 12.03 12.32

Difference -0.66 -0.81 0.27 -0.05 -0.09 -0.10 -0.24

Percentage difference -6.0 -7.8 2.3 -0.5 -0.7 -0.8 -2.2

Scenario 2 9.83 9.58 11.63 11.67 11.90 12.17

Baseline 10.96 10.45 11.43 11.78 12.03 12.32

Difference -1.14 -0.87 0.21 -0.12 -0.13 -0.15 -0.37

Percentage difference -10.4 -8.3 1.8 -1.0 -1.1 -1.2 -3.4

Scenario 3 9.97 9.89 11.91 11.86 12.00 12.23

Baseline 10.96 10.45 11.43 11.78 12.03 12.32

Difference -0.99 -0.56 0.48 0.07 -0.04 -0.09 -0.19

Percentage difference -9.0 -5.4 4.2 0.6 -0.3 -0.7 -1.8

Scenario 4 10.34 10.38 12.41 12.35 12.49 12.72

Baseline 10.96 10.45 11.43 11.78 12.03 12.32

Difference -0.62 -0.07 0.98 0.57 0.46 0.40 0.29

Percentage difference -5.7 -0.6 8.6 4.8 3.8 3.2 2.4

Note: Scenario 1 = Elimination of the MPSP; Scenario 2 = Elimination of the MPSP and DEIP; Scenario 3 = Elimination of the MPSP, DEIP, and

MILC; Scenario 4 = Elimination of the MPSP, DEIP, MILC, and FMMO system.

Table 6—Producer price of all milk

Calendar year Average

Item 2002 2003 2004 2005 2006 2007

Dollars per hundredweight

Scenario 1 11.76 11.02 13.09 13.10 13.32 13.57

Baseline 12.47 11.84 12.79 13.15 13.40 13.67

Difference -0.71 -0.82 0.30 -0.05 -0.08 -0.10 -0.24

Percentage difference -5.7 -7.0 2.4 -0.4 -0.6 -0.7 -2.0

Scenario 2 11.24 10.98 13.03 13.04 13.27 13.53

Baseline 12.47 11.84 12.79 13.15 13.40 13.67

Difference -1.23 -0.86 0.24 -0.11 -0.13 -0.14 -0.37

Percentage difference -9.9 -7.3 1.9 -0.8 -0.9 -1.0 -3.0

Scenario 3 11.40 11.31 13.32 13.24 13.37 13.59

Baseline 12.47 11.84 12.79 13.15 13.40 13.67

Difference -1.07 -0.53 0.53 0.09 -0.03 -0.08 -0.18

Percentage difference -8.6 -4.5 4.2 0.7 -0.2 -0.6 -1.5

Scenario 4 11.30 11.34 13.36 13.28 13.42 13.64

Baseline 12.47 11.84 12.79 13.15 13.40 13.67

Difference -1.17 -0.50 0.57 0.13 0.02 -0.03 -0.16

Percentage difference -9.4 -4.2 4.5 1.0 0.2 -0.2 -1.4

Note: Scenario 1 = Elimination of the MPSP; Scenario 2 = Elimination of the MPSP and DEIP; Scenario 3 = Elimination of the MPSP, DEIP, and

MILC; Scenario 4 = Elimination of the MPSP, DEIP, MILC, and FMMO system.
Effects of U.S. Dairy Policies • TB-1910 Economic Research Service, USDA • 15

Table 7—Milk used for butter production

Calendar year Average

Item 2002 2003 2004 2005 2006 2007

Billion pounds (milk equivalent)

Scenario 1 25.4 26.2 26.6 27.2 27.8 28.4

Baseline 26.9 28.6 28.5 28.7 29.3 30.0

Difference -1.5 -2.3 -1.9 -1.5 -1.5 -1.6 -1.7

Percentage difference -5.5 -8.2 -6.5 -5.3 -5.1 -5.3 -6.0

Scenario 2 24.4 25.3 25.7 26.3 26.9 27.5

Baseline 26.9 28.6 28.5 28.7 29.3 30.0

Difference -2.6 -3.3 -2.8 -2.5 -2.4 -2.5 -2.7

Percentage difference -9.6 -11.6 -9.9 -8.6 -8.3 -8.4 -9.4

Scenario 3 24.3 25.1 25.4 26.1 26.7 27.4

Baseline 26.9 28.6 28.5 28.7 29.3 30.0

Difference -2.7 -3.5 -3.0 -2.7 -2.6 -2.6 -2.8

Percentage difference -9.9 -12.3 -10.6 -9.2 -8.8 -8.8 -9.9

Scenario 4 23.9 24.5 24.8 25.4 26.1 26.7

Baseline 26.9 28.6 28.5 28.7 29.3 30.0

Difference -3.0 -4.0 -3.6 -3.3 -3.2 -3.3 -3.4

Percentage difference -11.1 -14.1 -12.8 -11.5 -11.1 -11.0 -11.9

Note: Scenario 1 = Elimination of the MPSP; Scenario 2 = Elimination of the MPSP and DEIP; Scenario 3 = Elimination of the MPSP, DEIP, and

MILC; Scenario 4 = Elimination of the MPSP, DEIP, MILC, and FMMO system.

Table 8—Milk used for cheese production

Calendar year Average

Item 2002 2003 2004 2005 2006 2007

Billion pounds (milk equivalent)

Scenario 1 61.6 61.8 63.4 65.0 66.5 68.1

Baseline 61.2 61.7 63.4 65.0 66.5 68.0

Difference 0.4 0.1 0.0 0.0 0.1 0.1 0.1

Percentage difference 0.7 0.2 0.1 0.1 0.1 0.1 0.2

Scenario 2 61.9 61.8 63.4 65.1 66.6 68.1

Baseline 61.2 61.7 63.4 65.0 66.5 68.0

Difference 0.7 0.2 0.1 0.1 0.1 0.1 0.2

Percentage difference 1.2 0.3 0.1 0.1 0.1 0.1 0.3

Scenario 3 61.8 61.7 63.3 64.9 66.5 68.1

Baseline 61.2 61.7 63.4 65.0 66.5 68.0

Difference 0.6 0.0 -0.1 0.0 0.0 0.1 0.1

Percentage difference 1.0 0.0 -0.1 0.0 0.1 0.1 0.2

Scenario 4 61.5 61.4 63.0 64.6 66.2 67.8

Baseline 61.2 61.7 63.4 65.0 66.5 68.0

Difference 0.4 -0.3 -0.4 -0.3 -0.2 -0.2 -0.2

Percentage difference 0.6 -0.5 -0.6 -0.5 -0.4 -0.3 -0.3

Note: Scenario 1 = Elimination of the MPSP; Scenario 2 = Elimination of the MPSP and DEIP; Scenario 3 = Elimination of the MPSP, DEIP, and

MILC; Scenario 4 = Elimination of the MPSP, DEIP, MILC, and FMMO system.
16 • Economic Research Service, USDA Effects of U.S. Dairy Policies • TB-1910

Table 9—Milk, fluid use

Calendar year Average

Item 2002 2003 2004 2005 2006 2007

Billion pounds (milk equivalent)

Scenario 1 55.1 55.5 54.8 54.3 53.8 53.2

Baseline 54.8 54.9 54.5 54.0 53.5 53.0

Difference 0.3 0.6 0.3 0.3 0.2 0.2 0.3

Percentage difference 0.6 1.1 0.6 0.5 0.4 0.4 0.6

Scenario 2 55.4 55.7 55.0 54.5 53.9 53.3

Baseline 54.8 54.9 54.5 54.0 53.5 53.0

Difference 0.6 0.8 0.5 0.4 0.4 0.3 0.5

Percentage difference 1.1 1.5 0.9 0.8 0.7 0.6 0.9

Scenario 3 55.3 55.5 54.7 54.2 53.7 53.1

Baseline 54.8 54.9 54.5 54.0 53.5 53.0

Difference 0.5 0.6 0.2 0.1 0.1 0.1 0.3

Percentage difference 1.0 1.1 0.4 0.3 0.2 0.3 0.5

Scenario 4 55.7 56.2 55.6 55.2 54.7 54.2

Baseline 54.8 54.9 54.5 54.0 53.5 53.0

Difference 1.0 1.3 1.1 1.1 1.2 1.3 1.2

Percentage difference 1.7 2.4 2.0 2.1 2.2 2.4 2.1

Note: Scenario 1 = Elimination of the MPSP; Scenario 2 = Elimination of the MPSP and DEIP; Scenario 3 = Elimination of the MPSP, DEIP, and

MILC; Scenario 4 = Elimination of the MPSP, DEIP, MILC, and FMMO system.

Table 10—Milk production

Calendar year Average

Item 2002 2003 2004 2005 2006 2007

Billion pounds (milk equivalent)

Scenario 1 168.4 170.1 171.7 173.6 175.4 177.2

Baseline 169.2 171.8 173.2 174.9 176.7 178.6

Difference -0.8 -1.7 -1.6 -1.3 -1.3 -1.4 -1.3

Percentage difference -0.5 -1.0 -0.9 -0.7 -0.7 -0.8 -0.8

Scenario 2 167.9 169.3 170.9 172.8 174.6 176.4

Baseline 169.2 171.8 173.2 174.9 176.7 178.6

Difference -1.3 -2.4 -2.3 -2.1 -2.1 -2.2 -2.1

Percentage difference -0.8 -1.4 -1.4 -1.2 -1.2 -1.2 -1.2

Scenario 3 167.6 168.7 170.2 172.2 174.1 176.0

Baseline 169.2 171.8 173.2 174.9 176.7 178.6

Difference -1.6 -3.1 -3.0 -2.7 -2.5 -2.6 -2.6

Percentage difference -0.9 -1.8 -1.8 -1.5 -1.4 -1.4 -1.5

Scenario 4 167.5 168.6 170.1 172.2 174.2 176.2

Baseline 169.2 171.8 173.2 174.9 176.7 178.6

Difference -1.7 -3.2 -3.1 -2.7 -2.4 -2.4 -2.6

Percentage difference -1.0 -1.9 -1.8 -1.5 -1.4 -1.3 -1.5

Note: Scenario 1 = Elimination of the MPSP; Scenario 2 = Elimination of the MPSP and DEIP; Scenario 3 = Elimination of the MPSP, DEIP, and

MILC; Scenario 4 = Elimination of the MPSP, DEIP, MILC, and FMMO system.
Effects of U.S. Dairy Policies • TB-1910 Economic Research Service, USDA • 17

Table 11—Cash receipts from marketings of dairy products

Calendar year Cumulative

Item 2002 2003 2004 2005 2006 2007 sum

Billion dollars

Scenario 1 17.8 17.3 21.5 21.8 22.4 23.1

Baseline 19.1 18.9 21.2 22.0 22.7 23.5

Difference -1.3 -1.6 0.3 -0.2 -0.3 -0.4 -3.5

Scenario 2 16.9 17.1 21.3 21.6 22.2 22.9

Baseline 19.1 18.9 21.2 22.0 22.7 23.5

Difference -2.2 -1.7 0.1 -0.5 -0.5 -0.5 -5.3

Scenario 3 17.1 17.6 21.7 21.8 22.3 23.0

Baseline 19.1 18.9 21.2 22.0 22.7 23.5

Difference -2.0 -1.2 0.5 -0.2 -0.4 -0.5 -3.8

Scenario 4 17.0 17.7 21.8 21.9 22.4 23.1

Baseline 19.1 18.9 21.2 22.0 22.7 23.5

Difference -2.1 -1.2 0.6 -0.1 -0.3 -0.4 -3.6

Note: Scenario 1 = Elimination of the MPSP; Scenario 2 = Elimination of the MPSP and DEIP; Scenario 3 = Elimination of the MPSP, DEIP, and

MILC; Scenario 4 = Elimination of the MPSP, DEIP, MILC, and FMMO system.

Table 12—MILC payments

Calendar year Cumulative

Item 2002 2003 2004 2005 2006 2007 sum

Billion dollars

Scenario 1 1.2 1.5 0.8 0.6 0.0 0.0

Baseline 0.9 1.2 0.9 0.6 0.0 0.0

Difference 0.3 0.3 -0.1 0.0 0.0 0.0 0.6

Scenario 2 1.5 1.6 0.8 0.6 0.0 0.0

Baseline 0.9 1.2 0.9 0.6 0.0 0.0

Difference 0.5 0.4 -0.1 0.0 0.0 0.0 0.9

Scenario 3 0.0 0.0 0.0 0.0 0.0 0.0

Baseline 0.9 1.2 0.9 0.6 0.0 0.0

Difference -0.9 -1.2 -0.9 -0.6 0.0 0.0 -3.6

Scenario 4 0.0 0.0 0.0 0.0 0.0 0.0

Baseline 0.9 1.2 0.9 0.6 0.0 0.0

Difference -0.9 -1.2 -0.9 -0.6 0.0 0.0 -3.6

Note: Scenario 1 = Elimination of the MPSP; Scenario 2 = Elimination of the MPSP and DEIP; Scenario 3 = Elimination of the MPSP, DEIP, and

MILC; Scenario 4 = Elimination of the MPSP, DEIP, MILC, and FMMO system.
18 • Economic Research Service, USDA Effects of U.S. Dairy Policies • TB-1910

Table 13—CCC dairy net expenditures

Fiscal year Cumulative

Item 2002 2003 2004 2005 2006 2007 sum

Million dollars

Scenario 1 65.6 2,565.9 971.1 758.5 88.8 56.0

Baseline 240.0 2,353.6 1,284.6 1,021.0 342.8 320.6

Difference -174.4 212.3 -313.5 -262.5 -254.0 -264.6 -1,056.8

Scenario 2 50.2 2,776.5 935.4 723.5 30.9 -2.8

Baseline 240.0 2,353.6 1,284.6 1,021.0 342.8 320.6

Difference -189.8 422.8 -349.2 -297.4 -311.9 -323.5 -1,049.0

Scenario 3 50.2 -2.8 -2.8 -2.8 -2.8 -2.8

Baseline 240.0 2,353.6 1,284.6 1,021.0 342.8 320.6

Difference -189.8 -2,356.5 -1,287.4 -1,023.8 -345.6 -323.5 -5,526.6

Scenario 4 50.2 -2.8 -2.8 -2.8 -2.8 -2.8

Baseline 240.0 2,353.6 1,284.6 1,021.0 342.8 320.6

Difference -189.8 -2,356.5 -1,287.4 -1,023.8 -345.6 -323.5 -5,526.6

Note: Scenario 1 = Elimination of the MPSP; Scenario 2 = Elimination of the MPSP and DEIP; Scenario 3 = Elimination of the MPSP, DEIP, and

MILC; Scenario 4 = Elimination of the MPSP, DEIP, MILC, and FMMO system.

Table 14—Gross receipts by dairy producers

Calendar year Cumulative

Item 2002 2003 2004 2005 2006 2007 sum

Billion dollars

Scenario 1 19.1 18.8 22.3 22.4 22.4 23.1

Baseline 20.0 20.1 22.1 22.6 22.7 23.5

Difference -1.0 -1.2 0.2 -0.2 -0.3 -0.4 -2.9

Scenario 2 18.4 18.7 22.1 22.2 22.2 22.9

Baseline 20.0 20.1 22.1 22.6 22.7 23.5

Difference -1.7 -1.4 0.0 -0.4 -0.5 -0.5 -4.5

Scenario 3 17.1 17.6 21.7 21.8 22.3 23.0

Baseline 20.0 20.1 22.1 22.6 22.7 23.5

Difference -2.9 -2.5 -0.4 -0.8 -0.4 -0.5 -7.4

Scenario 4 17.0 17.7 21.8 21.9 22.4 23.1

Baseline 20.0 20.1 22.1 22.6 22.7 23.5

Difference -3.1 -2.4 -0.3 -0.7 -0.3 -0.4 -7.2

Note: Scenario 1 = Elimination of the MPSP; Scenario 2 = Elimination of the MPSP and DEIP; Scenario 3 = Elimination of the MPSP, DEIP, and

MILC; Scenario 4 = Elimination of the MPSP, DEIP, MILC, and FMMO system.
Effects of U.S. Dairy Policies • TB-1910 Economic Research Service, USDA • 19

Table 15—Net farm income for the agricultural sector

Calendar year Cumulative

Item 2002 2003 2004 2005 2006 2007 sum

Billion dollars

Scenario 1 36.0 51.0 54.0 51.6 50.8 48.1

Baseline 37.0 51.9 53.4 51.6 50.8 48.1

Difference -0.9 -0.9 0.6 -0.1 0.0 -0.1 -1.4

Scenario 2 35.3 51.1 53.9 51.5 50.8 48.1

Baseline 37.0 51.9 53.4 51.6 50.8 48.1

Difference -1.6 -0.8 0.5 -0.1 0.0 0.0 -2.1

Scenario 3 34.3 50.3 53.6 51.3 51.1 48.2

Baseline 37.0 51.9 53.4 51.6 50.8 48.1

Difference -2.7 -1.6 0.3 -0.3 0.2 0.1 -4.0

Scenario 4 34.1 50.3 53.7 51.4 51.2 48.3

Baseline 37.0 51.9 53.4 51.6 50.8 48.1

Difference -2.8 -1.6 0.3 -0.2 0.3 0.2 -3.8

Note: Scenario 1 = Elimination of the MPSP; Scenario 2 = Elimination of the MPSP and DEIP; Scenario 3 = Elimination of the MPSP, DEIP, and

MILC; Scenario 4 = Elimination of the MPSP, DEIP, MILC, and FMMO system.
The Food and Agricultural Policy Simulator (FAPSIM)

is an annual, dynamic econometric model of the U.S.

agricultural sector. The model was originally developed at the U.S. Department of Agriculture during the

early 1980s (Salathe, Price, and Gadson, 1982;

Gadson, Price, and Salathe, 1982). Since that time,

FAPSIM has been continually reestimated and respecified to reflect changes in the structure of the U.S. food

and agricultural sector.

Model Structure

The model contains four broad types of relationships:

definitional, institutional, behavioral, and temporal.1

Definitional equations include identities that reflect

mathematical relationships that must hold among the

data in the model. For example, total demand must

equal total supply for a commodity at any point in

time. The model constrains solutions to satisfy all

identities of this type.

Institutional equations involve relationships between

variables that reflect certain institutional arrangements

in the sector. As an example, the 2002 Act established

countercyclical payments for producers of certain crops

and the Milk Income Loss Contract Program for dairy

producers. Both programs are designed to provide

government payments to producers in order to augment

their income when commodity prices are low. The

payment rates for both of these programs are determined by institutional equations in FAPSIM that reflect

the payment formulas established by the legislation.

The two preceding types of equations reflect known

relationships that necessarily hold among the variables

in the model. Behavioral equations are quite different

because the exact relationship is not known and must

be estimated. Economic theory is used to determine

the types of variables to include in behavioral equations, but theory does not indicate precisely how the

variables should be related to each other. Examples of

behavioral relationships in FAPSIM are the acreage

equations for different field crops. Economic theory

indicates that production should be positively related

to the price received for the commodity and negatively

related to prices of inputs required in the production

process. Producer net returns are used in the FAPSIM

acreage equations to capture these economic effects.

The net returns measures also include policy features,

such as marketing loan provisions, that can influence

planting choices. Additionally, net returns for other

crops that compete with each other for land use are

included in the acreage equations.

For the most part, a linear relationship is used to

approximate the general functional form for each

behavioral relationship. Generally, the parameters in

the linear behavioral relationships were estimated by

single equation regression methods. The large size of

the model precludes the use of econometric methods

designed for systems of equations. Ordinary least

squares was used to estimate the majority of the equations. If statistical tests indicated the presence of

either autocorrelation or heteroscedasticity in the error

structure of an equation, maximum likelihood methods

or weighted least squares were used.

Temporal relationships are empirical equations that

describe the interrelationships between variables measured using different units of time. For example, not all

the variables in FAPSIM are measured using the same

concept of a year. Commodity data are reported on a

marketing year basis; budgetary data are reported on a

fiscal year basis; and farm income data are reported on

a calendar year basis. As a result, empirical equations

are sometimes needed to establish relationships among

variables in these different categories. For example,

cash receipts from soybeans are reported on a calendar

year basis. FAPSIM estimates farm prices and production of soybeans on a marketing year basis. If cash

receipts were reported on a marketing year basis, the

product of farm price and production could be used to

estimate receipts. Because cash receipts are reported

on a calendar year basis, an empirical equation is used

to estimate cash receipts using information from both

marketing years that overlap the calendar year.

Model Content

20 • Economic Research Service, USDA Effects of U.S. Dairy Policies • TB-1910

Appendix B—Food and Agricultural Policy Simulator: 

Model Overview

1 The first three types of relationship are essentially those

described by Haavelmo (1944, p. 203).
The commodities included in FAPSIM are corn,

sorghum, barley, oats, wheat, rice, soybeans, soybean

meal, soybean oil, upland cotton, cattle, hogs, broilers,

turkeys, eggs, and dairy. The dairy model contains

submodels for fluid milk, evaporated and condensed

milk, frozen dairy products, cheese, butter, and nonfat

dry milk. Each commodity submodel contains equations to estimate production, prices, and the different

demand components. FAPSIM also includes submodels to estimate the value of exports, net farm income,

government outlays on farm programs, retail food

prices, and consumer expenditures on food. All of the

submodels are linked together through the variables

that they share in common with one another.

The solution algorithm used for the model is based on

the Gauss-Seidel procedure (Hildebrand, 1974). FAPSIM computes the set of market prices that equilibrate

supply and demand in all of the commodity markets

simultaneously, given any set of exogenous conditions. 

Effects of U.S. Dairy Policies • TB-1910 Economic Research Service, USDA • 21

National Agricultural Library Cataloging Record:

Price, J. Michael

Effects of U.S. dairy policies on markets for milk

and dairy products.

(Technical bulletin (United States. Dept. of

Agriculture) ; no. 1910)

1. Dairying--Government policy--United States.

2. Dairy products industry--United States.

I. United States. Dept. of Agriculture. Economic

Research Service.

II. Title.

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