Report to the Honorable Herbert Kohl,

U.S. Senate

United States General Accounting Office

GAO

September 2001 DAIRY INDUSTRY

Estimated Economic

Impacts of Dairy

Compacts

GAO-01-866
Page i GAO-01-866 Impacts of Dairy Compacts

Letter 1

Results in Brief 4

Background 6

Isolating the Intraregional Impacts of the NEDC Is Difficult 11

The NEDC Has Not Increased Net Federal Costs for the Milk Price

Support Program, but Its Impact on a Major Nutrition Assistance

Program Is Less Certain 16

Estimated 1999 Interregional Impacts of Various Compact

Alternatives Increased as Compacts Grew in Size 19

Concluding Observations 31

Agency Comments and Our Response 32

Appendix I Objectives, Scope, and Methodology 34

NEDC’s Intraregional Impacts 34

NEDC’s Impacts on Federal Programs 37

Compacts’ Interregional Impacts 37

Appendix II Methodology for Estimating the Interregional

Impacts of Dairy Compacts 40

IRCM Structure 40

Data Used in the Model 48

1999 Baseline Calibration 49

Compact Scenarios 52

Parameter Values for Our Baseline and Initial Estimates 54

Sensitivity Analyses 56

IRCM Limitations 60

Appendix III NEDC’s Intraregional Impacts 61

Retail Milk Prices Increased in the NEDC States, but It Is Difficult

to Determine the Amount Attributable to the Compact 61

Limited Data Are Available to Estimate the Potential Impacts of the

Compact on Producer Income 69

The NEDC’s Impacts on Farm Structure, Milk Production, and Milk

Consumption Are Difficult to Determine 76

Appendix IV NEDC’s Impacts on Federal Program Costs 85

Federal Net Costs for the Milk Price Support Program Have Not

Increased 85

Contents
Page ii GAO-01-866 Impacts of Dairy Compacts

It Is Unclear Whether Federal Net Costs for Nutrition Assistance

Programs Have Increased 86

Two Studies of the NEDC’s Impact on Nutrition Assistance

Programs Provide Inconclusive Results 92

Appendix V Interregional Impacts of Three Compact Alternatives

in 1999 94

Range of Estimates Obtained Across Different Compact Scenarios 95

The Economic Impacts of the NEDC in 1999 98

The Economic Impacts of an Expanded NEDC in 1999 105

The Economic Impacts of an Expanded NEDC in Conjunction With

a Southern Compact in 1999 112

The Economic Impacts of an Expanded NEDC in Conjunction With

a Southern Compact Using a More Restrictive Fluid Milk Trade

Assumption 119

Appendix VI Interregional Impacts of Three Compact Alternatives

in 2000 127

Appendix VII Studies of the Interregional Economic Impacts of

Various Dairy Compact Alternatives 132

USDA (1999)—A Study Using an Annual, Time-Series Dairy Sector

Model 132

Cox et al. (1999)–A Study Using a Spatial Market Equilibrium

Model 135

Bailey (2000)–A Study Using a Regional Economic Simulation

Model 138

Balagtas and Sumner (2001)–A Study Using a Price Discrimination

Framework 140

Rosenfeld (2001)–A Study Using an Economic Model of Classified

Pricing 142

Comparison of Studies Reviewed 144

Appendix VIII Comments From the Executive Director, NEDC 146

Appendix IX GAO Contact and Staff Acknowledgments 155
Page iii GAO-01-866 Impacts of Dairy Compacts

Related GAO Products 156

Tables

Table 1: Reduction in 1999 Farm-Level Revenue in the Upper

Midwest Under Three Compact Alternatives 5

Table 2: USDA’s Milk Classes Used for Setting Milk Prices 8

Table 3: Estimated Reduction in 1999 Farm-Level Milk Revenue in

Noncompact Regions as a Result of the NEDC 22

Table 4: Estimated Reduction in 1999 Farm-Level Milk Revenue in

Noncompact Regions as a Result of an Expanded NEDC 23

Table 5: Estimated Reduction in 1999 Farm-Level Milk Revenue in

Noncompact Regions as a Result of an Expanded NEDC

Combined With a Southern Compact 25

Table 6: Estimated Reduction in 1999 Farm-Level Milk Revenue in

Noncompact Regions as a Result of an Expanded NEDC

Combined With a Southern Compact Under a More

Restrictive Fluid Milk Trade Assumption 27

Table 7: Estimated Reduction in 2000 Farm-Level Milk Revenue in

the Upper Midwest and in All Noncompact Regions Under

the Compact Scenarios 29

Table 8: USDA's Marketing Orders Before January 2000, States in

the IRCM99 Regions, and States That Had Authorized

Entry Into a Compact by February 2001 42

Table 9: IRCM99 Dairy Product Fixed Component Composition 45

Table 10: IRCM99 Farm-Level Price Calibration 50

Table 11: IRCM99 Farm-Level Production Calibration 50

Table 12: IRCM99 Aggregate Wholesale Commodity Price

Calibration 51

Table 13: IRCM99 Aggregate Wholesale Commodity Production

Calibration 52

Table 14: Medium-Term Wholesale Demand Elasticities Used in

Initial Estimates 54

Table 15: Medium-Term Regional Supply Elasticities Used in Initial

Estimates 55

Table 16: Long-Term Wholesale Demand Elasticities Used in the

Sensitivity Analyses 56

Table 17: Long-Term Regional Supply Elasticities Used in the

Sensitivity Analyses 56
Page iv GAO-01-866 Impacts of Dairy Compacts

Table 18: USDA’s Classified Prices, and the Difference Between

These Prices and the Price for Cheese (USDA's Class III or

California’s Class 4b) in 2000 59

Table 19: California's Classified Prices, and the Difference Between

These Prices and the Price for Cheese (USDA's Class III or

California’s Class 4b) in 2000 59

Table 20: IRCM00 Classified Component Price Premiums in

Federal Milk Marketing Orders and California 60

Table 21: Retail Prices for a Gallon of Milk in NEDC States Before

and Immediately Following the NEDC’s Establishment 62

Table 22: Average Annual NEDC Over-Order Payment Received by

a Dairy Farmer Located in the Six NEDC States 71

Table 23: Estimated Impact on Food Stamp, WIC, and School

Feeding Program Participants if Retail Milk Prices

Increase 10, 15, or 20 Cents per Gallon Under an Expanded

NEDC and a Southern Compact 92

Table 24: Range of Estimated Impacts on 1999 Farm-Level Prices

Across Different Compact Scenarios 95

Table 25: Range of Estimated Impacts on 1999 Farm-Level

Production Across Different Compact Scenarios 95

Table 26: Range of Estimated Impacts on 1999 Farm-Level Revenue

Across Different Compact Scenarios 96

Table 27: Range of Estimated Impacts on 1999 National Average

Wholesale-Level Prices Across Different Compact

Scenarios 97

Table 28: Range of Estimated Impacts on 1999 Wholesale-Level

Production Across Different Compact Scenarios 97

Table 29: Range of Estimated Impacts on 1999 Wholesale-Level

Expenditures Across Different Compact Scenarios 98

Table 30: Initial Estimates of the NEDC’s Impacts on 1999 FarmLevel Indicators 99

Table 31: Initial Estimates of the NEDC’s Impacts on 1999

Wholesale-Level Indicators 100

Table 32: Estimated Change in 1999 Farm-Level Prices Using

Different Assumptions Under the NEDC Scenario 101

Table 33: Estimated Change in 1999 Farm-Level Production Using

Different Assumptions Under the NEDC Scenario 101

Table 34: Estimated Change in 1999 Farm-Level Revenue Using

Different Assumptions Under the NEDC Scenario 102

Table 35: Estimated Change in 1999 National Average WholesaleLevel Prices Using Different Assumptions Under the

NEDC Scenario 102
Page v GAO-01-866 Impacts of Dairy Compacts

Table 36: Estimated Change in 1999 Wholesale-Level Production

Using Different Assumptions Under the NEDC Scenario 103

Table 37: Estimated Change in 1999 Wholesale-Level Expenditures

Using Different Assumptions Under the NEDC Scenario 104

Table 38: Summary of Estimated Changes in 1999 Farm-Level

Indicators Using Our Initial and Subsequent Sets of

Assumptions Under the NEDC Scenario 104

Table 39: Summary of Estimated Changes in 1999 Wholesale-Level

Indicators Using Our Initial and Subsequent Sets of

Assumptions Under the NEDC Scenario 105

Table 40: Initial Estimates of an Expanded NEDC’s Impacts on

1999 Farm-Level Indicators 106

Table 41: Initial Estimates of an Expanded NEDC’s Impacts on

1999 Wholesale-Level Indicators 106

Table 42: Estimated Change in 1999 Farm-Level Prices Using

Different Assumptions Under an Expanded NEDC

Scenario 107

Table 43: Estimated Change in 1999 Farm-Level Production Using

Different Assumptions Under an Expanded NEDC

Scenario 108

Table 44: Estimated Change in 1999 Farm-Level Revenue Using

Different Assumptions Under an Expanded NEDC

Scenario 108

Table 45: Estimated Change in 1999 National Average WholesaleLevel Prices Using Different Assumptions Under an

Expanded NEDC Scenario 109

Table 46: Estimated Change in 1999 Wholesale-Level Production

Using Different Assumptions Under an Expanded NEDC

Scenario 109

Table 47: Estimated Change in 1999 Wholesale-Level Expenditures

Using Different Assumptions Under an Expanded NEDC

Scenario 110

Table 48: Summary of Estimated Changes in Farm-Level Indicators

Using Our Initial and Subsequent Sets of Assumptions

Under an Expanded NEDC Scenario 111

Table 49: Summary of Estimated Changes in 1999 Wholesale-Level

Indicators Using Our Initial and Subsequent Sets of

Assumptions Under an Expanded NEDC Scenario 111

Table 50: Initial Estimates of the Impacts of the Expanded NEDC in

Conjunction With a Southern Compact on 1999 Farm-Level

Indicators 113
Page vi GAO-01-866 Impacts of Dairy Compacts

Table 51: Initial Estimates of the Impacts of the Expanded NEDC in

Conjunction With a Southern Compact on 1999 WholesaleLevel Indicators 113

Table 52: Estimated Change in 1999 Farm-Level Prices Using

Different Assumptions Under an Expanded NEDC in

Conjunction With a Southern Compact Scenario 114

Table 53: Estimated Change in 1999 Farm-Level Production Using

Different Assumptions Under an Expanded NEDC in

Conjunction With a Southern Compact Scenario 115

Table 54: Estimated Change in 1999 Farm-Level Revenue Using

Different Assumptions Under an Expanded NEDC in

Conjunction With a Southern Compact Scenario 115

Table 55: Estimated Change in 1999 National Average WholesaleLevel Prices Using Different Assumptions Under an

Expanded NEDC in Conjunction With a Southern Compact

Scenario 116

Table 56: Estimated Change in 1999 Wholesale-Level Production

Using Different Assumptions Under an Expanded NEDC in

Conjunction With a Southern Compact Scenario 117

Table 57: Estimated Change in 1999 Wholesale-Level Expenditures

Using Different Assumptions Under an Expanded NEDC in

Conjunction With a Southern Compact Scenario 117

Table 58: Summary of Range of Estimated Changes in Farm-Level

Indicators Using Our Initial and Subsequent Sets of

Assumptions Under an Expanded NEDC in Conjunction

With a Southern Compact Scenario 118

Table 59: Summary of Range of Estimated Changes in 1999

Wholesale-Level Indicators Using Our Initial and

Subsequent Sets of Assumptions Under an Expanded

NEDC in Conjunction With a Southern Compact Scenario 119

Table 60: Initial Estimates of 1999 Regional Farm-Level Indicators

Using a More Restrictive Fluid Milk Trade Assumption

Under an Expanded NEDC in Conjunction With a Southern

Compact Scenario 119

Table 61: Initial Estimates of 1999 Wholesale-Level Indicators

Using a More Restrictive Fluid Milk Trade Assumption

Under an Expanded NEDC in Conjunction With a Southern

Compact Scenario 120

Table 62: Change in 1999 Farm-Level Prices Using Different

Assumptions and a More Restrictive Fluid Milk Trade

Assumption Under an Expanded NEDC in Conjunction

With a Southern Compact Scenario 121
Page vii GAO-01-866 Impacts of Dairy Compacts

Table 63: Change in 1999 Farm-Level Production Using Different

Assumptions and a More Restrictive Fluid Milk Trade

Assumption Under an Expanded NEDC in Conjunction

With a Southern Compact Scenario 121

Table 64: Change in 1999 Farm-Level Revenue Using Different

Assumptions and a More Restrictive Fluid Milk Trade

Assumption Under an Expanded NEDC in Conjunction

With a Southern Compact Scenario 122

Table 65: Change in 1999 National Average Wholesale-Level Prices

Using Different Assumptions and a More Restrictive Fluid

Milk Trade Assumption Under an Expanded NEDC in

Conjunction With a Southern Compact Scenario 123

Table 66: Change in 1999 Wholesale-Level Production Using

Different Assumptions and a More Restrictive Fluid Milk

Trade Assumption Under an Expanded NEDC in

Conjunction With a Southern Compact Scenario 123

Table 67: Change in 1999 Wholesale-Level Expenditures Using

Different Assumptions and a More Restrictive Fluid Milk

Trade Assumption Under an Expanded NEDC in

Conjunction With a Southern Compact Scenario 124

Table 68: Summary of Estimated Changes in 1999 Farm-Level

Indicators Using Our Initial and Subsequent Sets of

Assumptions and a More Restrictive Fluid Milk Trade

Assumption Under an Expanded NEDC in Conjunction

With a Southern Compact Scenario 125

Table 69: Summary of Estimated Changes in 1999 Wholesale-Level

Indicators Using Our Initial and Subsequent Sets of

Assumptions and a More Restrictive Fluid Milk Trade

Assumption Under an Expanded NEDC in Conjunction

With a Southern Compact Scenario 125

Table 70: Range of Estimated Impacts on 2000 Farm-Level Prices

Across Different Compact Scenarios 128

Table 71: Range of Estimated Impacts on 2000 Farm-Level

Production Across Different Compact Scenarios 129

Table 72: Range of Estimated Impacts on 2000 Farm-Level Revenue

Across Different Compact Scenarios 129

Table 73: Range of Estimated Impacts on 2000 National Average

Wholesale-Level Prices Across Different Compact

Scenarios 130

Table 74: Range of Estimated Impacts on 2000 Wholesale-Level

Production Across Different Compact Scenarios 130
Page viii GAO-01-866 Impacts of Dairy Compacts

Table 75: Range of Estimated Impacts on 2000 Wholesale-Level

Expenditures Across Different Compact Scenarios 131

Table 76: USDA Estimates of the NEDC’s Interregional Impacts on

Average Annual Production Levels and Farm-Level Prices

and Revenue, 2000-05 133

Table 77: Cox et al. Estimates of the Interregional Impacts of

Compacts on Farm-Level Prices and Revenue in 1997 137

Table 78: Cox et al. Estimates of the Interregional Impacts of

Compacts on Commodity Prices and Expenditures in 1997 137

Table 79: Bailey’s Estimates of the Interregional Impacts of a

Multiregional Compact on Farm-Level Prices, Revenue,

and Production in 2000 139

Table 80: Balagtas and Sumner’s Estimates of the Interregional

Impacts of the NEDC and an Expanded NEDC on FarmLevel Prices and Production in 1999 141

Table 81: Rosenfeld’s Estimates of the Interregional Impacts of

Compacts on Farm-Level Revenue in 2000 143

Table 82: Summary of Characteristics of Studies That Estimate the

Interregional Economic Impacts of Dairy Compact

Alternatives 144

Figures

Figure 1: USDA’s Milk Marketing Orders 44

Figure 2: Comparison of the Average Retail Price of a Gallon of

Milk in Boston and in the United States, November 1996-

September 2000 64

Figure 3: Comparison of the Average Retail Price of a Gallon of

Milk in Boston and the USDA Class I or NEDC Price,

November 1996-September 2000 66

Figure 4: Net Farm Income of a Representative Dairy Farmer in the

Northeastern Region and in Other U.S. Regions, 1991-99 73

Figure 5: Comparison of the Percentage of Dairy Farms Having

Favorable Solvency in the Northeastern Region With the

Percentage in Other Regions, 1991-99 74

Figure 6: Decline in the Number of Licensed Dairy Farms in the

NEDC States and in the Rest of the United States, 1992-

2000 77

Figure 7: Average Number of Cows per Farm in the NEDC States

and in the Rest of the United States, 1992-2000 78

Figure 8: Pounds of Milk Produced per Cow in the NEDC States

and in the Rest of the United States, 1993-2000 80
Page ix GAO-01-866 Impacts of Dairy Compacts

Figure 9: Per Capita Fluid Milk Consumption in the New England

Milk Marketing Order and in All Other Milk Marketing

Orders, 1993-99 83

Abbreviations

IRCM97 Dairy Sector Interregional Competition Model for 1997

IRCM99 Dairy Sector Interregional Competition Model for 1999

IRCM00 Dairy Sector Interregional Competition Model for 2000

NEDC Northeast Interstate Dairy Compact

OMB Office of Management and Budget

USDA U.S. Department of Agriculture

WIC Special Supplemental Nutrition Program for Women,

 Infants, and Children
Page 1 GAO-01-866 Impacts of Dairy Compacts

September 14, 2001

The Honorable Herbert Kohl

United States Senate

Dear Senator Kohl:

U.S. dairy farmers produced about 167.7 billion pounds of unprocessed,

raw farm milk in 2000. The amount of raw milk produced is influenced by

federal and state dairy programs that affect minimum prices processors of

dairy products must pay farmers for raw milk. These programs were

established because of concern that dairy farmers lack the market power

to substantially influence the prices that they are paid for raw milk,

compared with the market power of processors and manufacturers of

dairy products and retailers that sell these products to consumers.

Minimum prices are based on, and vary according to, how the raw milk is

to be used; minimum prices set for raw milk to be used for making

drinking milk (fluid milk) are higher than those for milk used for

manufacturing cheese, butter, and other dairy products. About 70 percent

of the raw milk produced in the United States is regulated under the U.S.

Department of Agriculture’s (USDA) federal milk marketing order

program. Some states, such as California and Maine, and portions of other

states are not covered by the federal program but instead by state

programs.

The 1996 farm bill established another pricing program—the Northeast

Interstate Dairy Compact (NEDC)—which is administered by a

commission that sets a minimum price for raw milk to be used for and sold

as fluid milk in the six New England states—Connecticut, Maine,

Massachusetts, New Hampshire, Rhode Island, and Vermont.1

 The NEDC

works in conjunction with federal and state dairy programs to establish an

alternative minimum price for raw milk to be used for and sold as fluid

milk in the Compact states. When the monthly NEDC minimum price

exceeds the federal marketing order or state minimum price, the NEDC

price becomes the minimum price. When the monthly federal marketing

order or state minimum price exceeds the NEDC price, the federal or state

 1

The Federal Agriculture Improvement and Reform Act of 1996 (P.L. 104-127, Apr. 4, 1996).

The act conditioned the six states' implementation of the Compact on the Secretary of

USDA's finding that there was a compelling public interest in the Compact region to

establish the Compact. This finding was made on August 8, 1996.

United States General Accounting Office

Washington, DC 20548
Page 2 GAO-01-866 Impacts of Dairy Compacts

price becomes the relevant minimum price. The NEDC's minimum pricing

requirement became effective in July 1997, when the Compact commission

set $16.94 as the minimum price for a hundredweight of raw milk used for

and sold as fluid milk.2

 Since then, the NEDC's price has usually been

higher than the federal price. Proponents of the NEDC assert that the

Compact is necessary to ensure the continued viability of dairy farming in

New England and, thus, an adequate local supply of fluid milk. However,

opponents counter that the NEDC causes retail prices in the Compact

states to increase, harming consumers in those states. They also counter

that the NEDC leads to lower milk prices paid to dairy farmers in other

regions, harming those farmers.

Legislation authorizing the NEDC is scheduled to expire at the end of

September 2001, and the Congress is currently considering proposed

legislation that would not only reauthorize and expand the NEDC but also

establish additional interstate dairy compacts.3

 Consequently, you asked

us to provide information on the potential economic impacts of different

compact alternatives. Specifically, you asked for information on

• the intraregional impacts (that is, the impacts within the six NEDC states)

of the NEDC on dairy sector indicators such as (1) retail milk prices, (2)

milk producer income, (3) dairy farm structure, (4) milk production, and

(5) milk consumption;

• the impact of the NEDC on the costs to the federal government of its milk

price support and nutrition assistance programs;4

 and

• the interregional impacts (that is, impacts on other milk-producing

regions) of the current NEDC, an expanded NEDC, and an expanded

 2

A hundredweight of milk is 100 pounds of milk, which equates to approximately 11.6

gallons. Thus, the Compact’s price of $16.94 per hundredweight equates to about $1.46 per

gallon of milk.

3

The Dairy Consumers and Producers Protection Act of 2001 (H.R. 1827, May 14, 2001, and

S. 1157, June 29, 2001) would authorize 6 additional states to join the NEDC; establish a

southern compact consisting of 17 states; and establish a Pacific Northwest compact and

an Intermountain compact, each consisting of 3 states. Had these compacts existed in 2000,

about 61 percent of the raw milk produced in the country would have been produced in

states belonging to one of these compacts.

4

The milk price support program, administered by the USDA’s Commodity Credit

Corporation, indirectly ensures a minimum price for milk by purchasing cheese, nonfat dry

milk, and butter from manufacturers at specified prices. The nutrition assistance programs,

administered by USDA’s Food and Nutrition Service, include the Food Stamp Program; the

Special Supplemental Nutrition Program for Women, Infants, and Children; and the School

Breakfast and Lunch Programs.
Page 3 GAO-01-866 Impacts of Dairy Compacts

NEDC in conjunction with a southern compact on selected farm-level and

wholesale-level indicators, such as prices, production, and revenue.5

To address the first objective, we sought, but did not find, a

comprehensive economic model to estimate the Compact’s intraregional

impacts while holding constant other factors that affect the indicators.

Further, time and resource constraints limited our ability to develop our

own model or series of models to address the Compact's impact on some

or all of the indicators. As a result, we analyzed federal, state, and other

data on these indicators, covering a period of time before and after the

NEDC’s minimum pricing requirement became effective, to determine any

changes in historic trends. We also reviewed available studies regarding

the NEDC’s potential intraregional impacts on these indicators. For the

second objective, we analyzed information from USDA, the NEDC

commission, and the six NEDC states. To address the third objective, we

used an interregional dairy competition model developed by economists at

the University of Wisconsin-Madison. This economic model is useful for

estimating the impacts of different dairy policy options, such as compacts,

on such indicators as milk production, farm revenue, and wholesale

commodity prices in various regions of the country. In employing this

model, we used 1999 data on such indicators as milk production, demand,

and prices because they were the most recent, final data available at the

time of our review. Using preliminary data for 2000, we also conducted

some limited modeling to estimate the impacts of compacts in that year. In

addition, we consulted with leading dairy economists from across the

country and USDA officials on our use of the model and related

assumptions, such as how milk production and purchases of different

dairy products respond to price changes. Finally, we reviewed available

studies of the potential interregional impacts of dairy compacts. Appendix

I provides more detail on our scope and methodology. Appendix II

provides information on the University of Wisconsin-Madison dairy model

and the related assumptions that we used.

 5

For purposes of our analysis, the expanded NEDC includes the Compact’s current member

states plus Delaware, Maryland, New Jersey, New York, and Pennsylvania. The southern

compact includes Alabama, Arkansas, Georgia, Kansas, Kentucky, Louisiana, Missouri,

Mississippi, North Carolina, South Carolina, Tennessee, and Virginia. As of the end of

February 2001, these states had enacted laws authorizing their entry into such compacts

should the Congress establish them. While West Virginia has also enacted such a law, we

did not include that state in our analysis because of modeling difficulties. These difficulties

are discussed in app. II.
Page 4 GAO-01-866 Impacts of Dairy Compacts

It is likely that the Northeast Compact has affected dairy sector indicators

within the six New England states, but determining the extent to which it

has done so is difficult. Dairy sector indicators changed to varying degrees

after July 1997, when the Compact commission’s price became effective.

Retail milk prices in selected cities and towns within New England

increased by as much as 20 cents per gallon in July 1997. Although there is

general agreement that the Compact was a factor in these increases, there

is disagreement over what portions of the increases can be attributed to

the Compact because other factors, such as consumer demand and the

costs of processing and marketing fluid milk, also affect retail prices.

Regarding milk producer income, according to the Compact commission,

farmers supplying raw milk to be used for and sold as fluid milk in the

NEDC states were paid about $146 million from July 1997 through June

2001. This figure represents the difference between the Compact price and

the minimum federal price. Some portion of this amount is likely

attributable to the Compact, but it is also likely that dairy farmers would

have received some portion even without the Compact because,

depending on market conditions, wholesale milk processors often pay

more than the minimum federal or state prices to purchase raw milk.

Finally, for the remaining indicators that we examined, there was little

difference in historic trends before and after the Compact’s minimum

price was established: The number of farms continued to decline, milk

production continued to increase, and fluid milk consumption continued

to decline. The data showed similar trends for the rest of the United

States.

According to USDA, while the Northeast Compact has not increased the

federal government’s net costs for its milk price support program, it may

have increased the government’s costs for one of its nutrition assistance

programs—the Food Stamp Program. The 1996 farm bill requires that the

Compact commission compensate USDA for any increased costs to the

milk price support program resulting from the Compact. As of the end of

fiscal year 2000, the Compact had compensated USDA a total of about $3.2

million. Regarding nutrition assistance programs, USDA is not certain

whether the Compact’s impact on increased retail milk prices in the six

Compact states was sufficiently large to cause national retail milk prices

to increase, which could raise Food Stamp Program benefit levels, thus

increasing the federal government's costs. Concerning USDA’s other major

nutrition assistance programs, the Compact commission directly

reimburses the six NEDC states for the estimated cost of increased milk

purchased under some of these programs. At the end of fiscal year 2000,

this compensation totaled about $4.5 million, including about $3.8 million

Results in Brief
Page 5 GAO-01-866 Impacts of Dairy Compacts

to cover the estimated increased costs to the Special Supplemental

Nutrition Program for Women, Infants, and Children.

We estimate that for 1999 the impacts of different dairy compact

alternatives on farm-level prices, production, and revenue in other regions

of the country would have increased as compacts increased in size and

accounted for a greater portion of the nation’s milk supply. The Northeast

Compact, which accounts for about 3 percent of the nation’s milk supply,

had a minimal impact on farm-level prices, production, and revenue in

1999. An expanded Northeast Compact would have accounted for

approximately 18 percent of the nation’s milk supply in 1999, and we

estimate that the interregional impacts of this Compact would have been a

little larger but still small in that year. An expanded Northeast Compact in

conjunction with a southern compact would have accounted for about 27

percent of the nation’s milk supply, and its impacts would have been

somewhat larger. The estimated impacts vary from region to region, and

greater impacts are estimated to occur in those regions with higher levels

of milk production and a larger share of raw milk being used to

manufacture products such as butter and cheese. This is the case in the

Upper Midwest (which includes most of Minnesota and Wisconsin and

portions of five other states), where 80 percent of the milk produced is

used for manufactured dairy products. For example, we estimate that the

three dairy compact alternatives mentioned above would have reduced

1999 farm-level revenue in the Upper Midwest, which we estimate would

have been about $4.5 billion in the absence of any dairy compact, by

between $4 million and $133 million. Table 1 summarizes our estimates of

how this revenue would have been affected by the three compact

alternatives.

Table 1: Reduction in 1999 Farm-Level Revenue in the Upper Midwest Under Three

Compact Alternatives

Dollars in millions

Reduction in 1999 farm-level revenue

Compact alternative Dollars Percentage

Northeast Compact $4 to 9 0.09 to 0.20

Expanded Northeast Compact 13 to 24 0.29 to 0.53

Expanded Northeast Compact

and a southern compact 26 to 133 0.57 to 2.93

Source: GAO's analysis using the University of Wisconsin-Madison dairy model.
Page 6 GAO-01-866 Impacts of Dairy Compacts

In 2000, national average farm-level milk prices were lower than they were

in 1999, resulting in a larger difference between the NEDC's and USDA's

minimum prices. Consequently, one would expect that the NEDC would

have greater economic impacts than in years when USDA's minimum

prices were high. Nevertheless, using preliminary data available for 2000,

our estimates of the impacts of the three compact alternatives are similar

to those in 1999. In addition, our review of the available studies of the

interregional impact of dairy compacts indicated that our estimates are

comparable to those estimated by other agricultural economists.

We provided a draft of this report to USDA officials and the Executive

Director of the Northeast Compact commission to obtain their comments.

In general, these officials stated that we conducted a comprehensive

assessment of the impacts of dairy compacts. However, the Executive

Director expressed some concern about the model we used to estimate

interregional impacts.

Of the approximately 167.7 billion pounds of raw milk produced in the

United States in 2000, about 55.5 billion pounds were processed into fluid

milk products—such as whole, 2-percent, 1-percent, and skim milk;

flavored milks; and buttermilk—that yielded approximately $22 billion in

retail sales. The rest of the raw milk was used to produce manufactured

products, such as butter, cheese, ice cream, powdered milk, and yogurt. In

the United States, a complex pricing system has evolved that affects prices

paid for raw milk used to produce processed milk (fluid drinking milk)

and manufactured dairy products, such as cheese and butter. Various milk

regulators—USDA, some states, and the Northeast Dairy Compact—

establish minimum prices that must be paid for raw milk to help stabilize

the milk supply. In addition to USDA, the states, and the NEDC, other

entities affect milk prices, including cooperatives, which may provide

services to farmers such as collecting farmers’ milk; milk processors,

which convert raw milk to fluid milk; manufacturers of dairy products; and

retailers, which stock and sell dairy products to consumers. Each of these

groups contributes to the value of fluid milk and dairy products sold at the

retail level, and each receives a portion of the difference between the

prices that farmers receive and the retail price.

USDA's milk marketing and milk price support programs, as well as some

states' dairy programs, are intended to ensure an adequate supply of milk

by establishing milk prices and other milk marketing rules, which, in turn,

are intended to stabilize milk marketing conditions and thus assist

Background

Federal and State Dairy

Programs
Page 7 GAO-01-866 Impacts of Dairy Compacts

individual farmers as well as consumers. In effect, these programs ensure

that farm prices do not fall below a minimum level and provide a safety net

for individual farmers who lack the market power of other entities, such as

wholesale milk processors.

Currently, about 70 percent of the milk produced in the United States is

regulated under the federal milk marketing order program created in 1937

and administered by USDA. Under this program, on the basis of national

dairy market information, USDA sets the minimum prices that must be

paid by processors for raw fluid grade milk in specified marketing areas,

or orders.6

 These prices vary by the type of dairy product for which the

milk is used; the minimum price for raw milk used for fluid drinking

purposes also varies by location. Even though USDA sets minimum prices

for raw milk, buyers of milk can and sometimes do pay farmers prices in

excess of the established minimums—prices known as “over-order

premiums.” Market forces play a role in determining any such premiums.

Under the federal milk marketing order program, USDA has a classified

pricing system for setting minimum prices, on a monthly basis, for milk

that is based upon its intended use, as shown in table 2.7

 Federal milk

marketing order class prices are determined by using product price

formulas that compute milk component values based on wholesale dairy

product prices. For example, Class III formulas use monthly average

butter, cheese, and dry whey prices to determine values for butterfat,

protein, and other solids, respectively. Class IV formulas use monthly

average butter and nonfat dry milk prices to determine values for butterfat

and nonfat solids, respectively. The Class II price is determined by adding

an amount—a Class II differential—to the Class IV price, while the Class I

price is determined by adding a Class I differential to the higher of the

Class III or IV price. Class I prices can vary from one milk marketing order

to another.

 6

The federal milk marketing order program currently in place consists of 11 geographic

orders, each covering multiple states or portions of states. For example, the Northeast

order includes the following states or portions thereof: Connecticut, Delaware,

Massachusetts, Maryland, New Hampshire, New Jersey, New York, Pennsylvania, Rhode

Island, Vermont, and Virginia. It also includes the District of Columbia. Maine is not part of

the order. Instead, Maine has its own commission that regulates milk prices.

7

The 1996 farm bill required USDA to revise its milk marketing order program. Among

other things, USDA collapsed its 31 orders into 11, increased the number of milk classes

from three to four, and changed its formulas for setting minimum prices. These changes

took effect in January 2000.
Page 8 GAO-01-866 Impacts of Dairy Compacts

Table 2: USDA’s Milk Classes Used for Setting Milk Prices

Class Usage

Class I Fluid milk for drinking purposes

Class II Soft manufactured products, such as cream products, cottage

cheese, ice cream, and yogurt

Class III Cream cheese, other spreadable cheeses, and hard cheese

Class IV Butter and dried milk products such as nonfat dry milk

Source: USDA.

Dairy farmers selling raw milk within a federal milk marketing order

receive an average, or “blend,” price that is the weighted average of the

prices of Class I through IV milk, with the weights determined by the

amount of milk sold for each class of use in each marketing order. The

average price farmers receive, therefore, depends in part on the extent to

which the total raw milk supply in a specific order is used to make fluid

milk as opposed to the three classes of manufactured products.

Dairy farmers located in one milk marketing order sometimes ship their

milk to another order to obtain a higher price. Depending on the amount

of milk shipped, a producer may qualify for a receiving order’s blend price.

If the producer meets the receiving milk marketing order's blend price

requirements, not only can the milk shipped qualify for the blend price—

all of that producer's milk can qualify for the blend price. However,

farmers must consider whether the cost of transporting a sufficient

amount of milk to qualify for the receiving order's blend price outweighs

the benefit of receiving a higher blend price.

Some states, such as California, Maine, Nevada, New York, Pennsylvania,

and Virginia, have established their own minimum farm-level milk pricing

programs that cover all or portions of their states. These states have

established commissions or boards to perform functions similar to those

of USDA. For example, Virginia’s milk commission, created in 1934,

establishes monthly producer prices to ensure dairy farmers an adequate

return on their investment and to preserve market stability. Similarly,

Nevada’s dairy commission, established in 1955, sets minimum prices for

raw milk sold to processing facilities located within that state.

The federal milk price support program, established in 1949, also

influences farm-level prices. This program supports farm-level prices by

providing a standing offer from USDA to purchase butter, cheese, and

nonfat dry milk at specified prices. The prices offered for these dairy

products are intended to provide sufficient revenue so that dairy product

manufacturers can pay farmers, on average, a legislatively mandated
Page 9 GAO-01-866 Impacts of Dairy Compacts

support price. This program is intended to make the support price a floor

price for raw milk used for manufacturing purposes, and it is unlikely that

manufactured product prices will fall below the floor for very long.

Because the price for raw milk used for fluid purposes is based, in part, on

the price of raw milk used for manufacturing purposes, the price support

program influences the price that farmers receive for raw milk used for

fluid purposes as well.

In addition to the federal and state milk marketing order programs that set

minimum milk prices, in 1996, the Congress authorized the Northeast

Interstate Dairy Compact for the six New England states. The Compact

supplements the federal milk marketing order and state programs by

setting the monthly minimum price to be paid for raw milk used for fluid

milk marketed in the six-state area.8

 In July 1997, the Compact set a

minimum price of $16.94 per hundredweight for raw milk used for Class I,

or fluid milk, and that minimum price has not changed. In months when

the federally set minimum price for Class I milk for the Northeast Milk

Marketing Order falls below the Compact price, the Compact price takes

effect.9

 In other months, when the federally set Class I price is higher than

the Compact Class I price, the federally set Class I price takes effect. Since

the Compact was established, federally set minimum prices for the area of

the Compact that is subject to federal milk marketing regulation have

ranged from $13.50 to $20.50 per hundredweight but have usually been

below the Compact price of $16.94 per hundredweight.

In those months when the Compact Class I price is higher than the

federally set Class I price, processors having sales of fluid milk in the six

NEDC states are required to pay a monthly over-order obligation per

hundredweight equal to the difference between $16.94 and the federally

set Class I price. Processors multiply the monthly over-order obligation by

the volume of their total fluid milk sales in the six NEDC states in

 8

Raw milk sold in the Compact states for manufacturing purposes is not eligible for the

minimum price set by the Compact commission.

9

Prior to January 2000, USDA’s New England Milk Marketing Order established the

minimum federal milk prices in those New England areas that fell under federal milk

marketing regulations. In January 2000, USDA reorganized its milk marketing orders,

collapsing the then-existing 31 orders into 11. The new Northeast Milk Marketing Order

assumed responsibility for setting minimum milk prices in those New England areas that

fall under federal milk marketing regulations.

Dairy Compacts
Page 10 GAO-01-866 Impacts of Dairy Compacts

hundredweight by this difference and pay this amount to the commission

that administers the Compact. After deducting administrative fees and

other expenses, the commission distributes the balance of the proceeds in

accordance with the amount of milk produced that was actually used for

fluid milk, as opposed to cheese or other manufactured products. The

commission makes disbursements to farmer cooperatives and milk

handlers, located both within and outside the NEDC states, who then

make individual payments to farmers based on their production. Thus,

dairy farmers from other states, such as New York, that supply raw milk

used to make fluid milk that is sold in the Compact states also benefit from

the Compact’s minimum prices.

The 1996 farm bill provided the Compact with considerable flexibility to

establish regulations to carry out its intended purpose. The legislation

authorized the establishment of a commission composed of delegates from

the six NEDC states to administer the Compact. The state delegates are

appointed by each of their respective states and include farmer, milk

processor, and consumer representatives. In addition to being empowered

to establish Compact prices, the commission may investigate costs

associated with producing and selling milk; examine the economic forces

affecting producers, including trends in production, consumption, and the

financial conditions of dairy farmers; and prepare and provide periodic

reports to the states regarding its efforts. While the commission is required

to report annually to USDA, USDA is not required to investigate or report

on the commission’s efforts.

States in other regions of the country, including some southern states, are

considering the adoption of similar compact arrangements. The proposed

Dairy Consumers and Producers Protection Act, a bill that was introduced

in the Congress in May 2001, if enacted, would reauthorize the NEDC. The

bill would also allow additional states to enter the NEDC.10 In addition, it

would establish a southern dairy compact consisting of 17 states, as well

as a Pacific Northwest dairy compact and an Intermountain dairy

compact, each consisting of 3 states.11 The proposed bill, like the 1996 farm

 10The proposed expanded NEDC would also include Delaware, Maryland, New Jersey, New

York, Ohio, and Pennsylvania.

11The proposed southern compact would include Alabama, Arkansas, Florida, Georgia,

Kansas, Kentucky, Louisiana, Mississippi, Missouri, Nebraska, North Carolina, Oklahoma,

South Carolina, Tennessee, Texas, Virginia, and West Virginia. The proposed Pacific

Northwest compact would include California, Oregon, and Washington. The proposed

Intermountain compact would include Colorado, Nevada, and Utah.
Page 11 GAO-01-866 Impacts of Dairy Compacts

bill, would provide the compact commissions with broad flexibility to

carry out their objective of ensuring the continued viability of the dairy

industry in their states. Therefore, it cannot be known in advance whether

commissions for these new compacts would regulate milk pricing in their

respective states in a manner similar to the way that the NEDC

commission has regulated milk pricing.

In addition to federal and state programs and the NEDC, other entities

affect prices paid for milk at the wholesale and retail levels. For example,

about 83 percent of all raw milk produced in the United States is marketed

through dairy cooperatives that are owned by farmer-members.

Cooperatives perform services for their members and buyers of milk such

as (1) transporting milk among different milk producing areas, (2)

scheduling milk deliveries, (3) testing milk, and (4) paying members for

their marketings.12 Costs for these services are paid by processors and

dairy product manufacturers that purchase milk from the cooperatives at

prices above federally specified minimum prices and then process or

manufacture, package, and distribute fluid milk and manufactured dairy

products to retailers. The costs that processors and manufacturers incur in

purchasing raw milk from farmers or cooperatives and in processing or

manufacturing, packaging, and distributing fluid milk and manufactured

dairy products are included in prices charged to retailers for these

products. Finally, the prices that retailers set for selling milk and dairy

products are affected by the retailers’ operating costs, such as labor, rent,

and utilities; their strategies for pricing milk and manufactured dairy

products; and the demand for those products.13

Although dairy sector indicators that we examined changed after the

NEDC’s milk pricing regulations took effect in July 1997, it is difficult to

determine how much of the change is attributable to the Compact. Such a

determination is difficult because the Compact’s impact on these

indicators cannot be easily isolated from the effects of other factors. For

example, while retail milk prices increased by 15 to 20 cents per gallon in

July 1997, and there is general agreement that the Compact contributed to

these increases, the lack of an economic model that fully accounts for the

 12Some cooperatives also process milk and sell the products directly to retailers or

consumers.

13A detailed discussion of factors affecting milk prices is included in our report entitled

Dairy Industry: Information on Milk Prices and Changing Market Structure (GAO-01-

561, June 15, 2001).

Other Factors Affecting

Milk Prices

Isolating the

Intraregional Impacts

of the NEDC Is

Difficult
Page 12 GAO-01-866 Impacts of Dairy Compacts

influences of other factors, such as costs for processing fluid milk, makes

it difficult to determine how much of that price increase can be attributed

to the NEDC. Similarly, while the Compact has resulted in payments being

made to dairy farmers that reflect the difference between USDA’s

marketing order minimum prices and the NEDC’s minimum price, it is

difficult to determine whether some portion or all of these payments

would have been made to dairy farmers anyway, depending on market

conditions. Although economic reasoning suggests that the Compact

would be likely to cause increased milk production and reduced fluid milk

consumption in the six NEDC states, analyses of relevant data on dairy

farm structure, milk production, and milk consumption show little change

in historic trends after the Compact’s implementation.

Retail milk prices increased by as much as 20 cents per gallon immediately

following the NEDC’s establishment—which is an amount comparable to

the immediate increase in the minimum farm-level price for raw milk to be

used for and sold as fluid milk in the six New England states when the

NEDC’s price regulations became effective. For example, the NEDC

minimum price of $1.46 per gallon was 18 cents higher than USDA’s June

1997 Class I price for Boston of $1.28 per gallon and 26 cents higher than

USDA’s July 1997 Class I price of $1.20 per gallon. While this might appear

to be a substantial increase, when compared with USDA’s average Class I

price of $1.41 per gallon during the prior year, the NEDC price did not

actually represent such a large increase. However, without a model of

farm-to-retail price transmission that accounts for how quickly and how

fully farm-level price changes are passed on to wholesale and retail levels,

we cannot estimate how much of the retail price change was due to the

Compact.

Furthermore, while retail milk prices in Boston and other selected cities in

the NEDC states remain at the higher levels experienced since the

Compact took effect, national average retail prices have also increased,

but at rates lower than in the NEDC states. Even so, it is not certain what

portion of the retail price increase in the NEDC states is attributable to the

Compact, given that both the retail and farm-level prices for milk have

fluctuated since July 1997. Some portion of the price increase could also

be due to other factors, such as changes in the costs for processing or

retailing milk, marketing strategies, or consumer demand. In addition, it is

difficult to estimate the extent to which fluid milk processors would have

paid more than the minimum farm-level price for milk without the NEDC;

that is, we do not know the extent to which the NEDC price substituted

for market-driven over-order premiums. Several studies analyzing the

NEDC’s impact on retail milk prices concluded that the NEDC has
Page 13 GAO-01-866 Impacts of Dairy Compacts

increased prices.14 However, the amount of the increase attributed to the

NEDC varies from study to study, depending on assumptions made by the

different researchers and the time periods that they examined. For

example, estimates ranged from a low of 2.7 cents to as much as 20 cents

per gallon.

Data on farm income are limited, and while dairy farmers have received

NEDC payments,15 it is unclear to what extent these payments replaced

market-driven over-order premiums that farmers might have been paid in

the absence of the Compact. We estimate that through calendar year 2000,

the NEDC payments made to dairy farmers in the six NEDC states totaled

about $99 million, assuming that all dairy farmers located in these states

had their milk processed at fully regulated NEDC plants.16 The NEDC

payments that an average dairy farmer in one of the six states would have

received would have fluctuated widely from month to month and from

year to year, however, depending on the difference between USDA’s Class

I price and the Compact price of $16.94 per hundredweight and the

percentage of milk used for fluid milk in the NEDC states. For example, in

1998 the average NEDC over-order producer price payment was 67 cents

per hundredweight. This would have provided dairy farmers supplying raw

milk used to produce fluid milk sold in the NEDC states about 25 cents per

hundredweight, based on the percentage of raw milk used for fluid milk.

We estimate that these payments provided the average dairy farmer in the

six NEDC states about $3,892 above the minimum amount that the farmer

would have received in 1998 had USDA’s Class I price of $16.78 been in

 14Office of Management and Budget, The Economic Effects of the Northeast Interstate

Dairy Compact, Feb. 1998; Daniel A. Lass, Mawunyo Adanu, and P. Geoffrey Allen,

“Impacts of the Compact on Fluid Milk Retail Prices," The Northeast Interstate Dairy

Compact: Milk Market Impacts, Research Report 73, Agricultural Experiment Station,

University of Vermont, Mar. 2000; Kenneth Bailey, “Report on the Operation and

Performance of the Northeast Interstate Dairy Compact,” Department of Agricultural

Economics and Rural Sociology, Pennsylvania State University, July 2000; testimony by

Ronald W. Cotterill on The Impact of the Northeast Dairy Compact and Market Channel

Pricing Strategies on the Performance of the New England Dairy Industry, before the

U.S. Senate Committee on the Judiciary, July 25, 2001; and Ronald W. Cotterill and Andrew

W. Franklin, The Public Interest and Private Economic Power: A Case Study of the

Northeast Dairy Compact, Food Marketing Policy Center, Department of Agricultural and

Resource Economics, University of Connecticut, May 2, 2001.

15An NEDC payment is the payment attributable to the difference between USDA’s

minimum Class I price and the Compact price.

16A fully regulated NEDC plant is one that is physically located within one of the six NEDC

states and that receives, processes, or packages milk or dairy products.
Page 14 GAO-01-866 Impacts of Dairy Compacts

effect.17 In 2000, the average NEDC over-order producer price payment

was $2.14 per hundredweight. This amount would have provided a farmer

supplying raw milk used to produce fluid milk sold in the NEDC states

about 91 cents per hundredweight, based on the percentage of raw milk

used for fluid milk. These payments provided an average dairy farmer in

the six NEDC states about $15,301 above the minimum amount that the

farmer would have received in 2000 had USDA’s Class I price of $14.80

been in effect. These estimates are comparable to data developed by the

Compact commission, which indicate that dairy farmers in the six NEDC

states and New York received over-order payments totaling about $146

million from July 1997 through June 2001. In particular, the NEDC data

indicate that about 4,200 dairy farmers, including 1,300 in New York,

received average annual payments of about $9,800. Whether these

payments were sufficient to alter the financial health of dairy farmers

supplying raw milk used to produce fluid milk sold in the NEDC states is

difficult to determine, however. USDA data are inconclusive as to whether

the Compact had a positive impact on NEDC dairy farmer income, while

NEDC analyses conclude that the Compact stabilized and enhanced

farmer income.

A limited number of studies have been conducted on the Compact’s

impact on farm income. In its 1998 report, the Office of Management and

Budget (OMB) estimated a 6- to 8-percent increase in farm income from

July through December 1997. In addition, an economist at the University of

Vermont modeled the effect on Vermont dairy farmers of establishing a

floor for Class I prices and concluded that stabilizing prices by having a

price floor could have a positive impact on dairy farmer income.18

The NEDC’s impact on farm structure is unclear. The number of dairy

farms decreased, and the average size of herds increased, both prior to and

following the NEDC’s establishment in both the Compact states and the

rest of the country. For example, the number of licensed dairy farms in the

six NEDC states decreased by 32 percent between 1992 and 2000, from

4,079 to 2,772, while the number of licensed dairy farms in the rest of the

 17USDA’s Class I price was greater than the NEDC price in 4 months of 1998. In calculating

the average annul NEDC over-order payment for 1998, the NEDC payment for those

months was zero. Therefore, the difference between the average annual NEDC and USDA

price s is not equal to the average annual NEDC over-order payment.

18Rick W. Wackernagel, “Potential Economic Impacts of the Northeast Interstate Dairy

Compact on Vermont Dairy Farms,” Agricultural and Resource Economics Review, Apr.

1998.
Page 15 GAO-01-866 Impacts of Dairy Compacts

country decreased by 37 percent during the same period, from 127,456 to

80,253. Regarding herd size, the average herd in the six NEDC states

increased 36 percent, from 58 to 79 milk cows, between 1992 and 2000. In

the rest of the United States, the average herd increased 57 percent during

the same period, from 56 to 88 milk cows. According to USDA, this decline

in the number of farms, along with the increase in herd size, most likely

reflects fundamental changes in dairy farming caused by such factors as

technological and genetic advances.

Although economic reasoning suggests that higher farm-level milk prices

would result in increased raw milk production, we have no basis on which

to estimate the specific impact that the Compact has had on milk

production in the six NEDC states. Data on milk production show an

increase in total milk produced and milk produced per dairy cow, but

these trends began prior to the Compact’s establishment, making it

difficult to estimate the specific impact of the NEDC. Farmers in the

NEDC states increased their total milk production by 2.9 percent, from 4.5

billion pounds in 1993 to 4.7 billion pounds in 2000, while farmers in the

rest of the nation increased production by 10.3 percent, from 148 billion

pounds to 163.3 billion pounds during the same period. The average

amount of milk produced per cow in the NEDC states increased by about

11.6 percent during the same period, from 15,633 pounds to 17,440 pounds.

Milk production per cow in the rest of the United States increased by

about 15.9 percent during this period, from 15,726 pounds to 18,226

pounds. Studies of the NEDC’s impact on milk production, including

OMB’s study and an analysis by researchers at the University of Vermont,

estimated that the Compact has resulted in a slight increase in milk

production in the NEDC states.19

We cannot estimate the specific impact that the Compact has had on fluid

milk consumption in the six NEDC states, in part because we cannot

estimate how much of the retail price change since July 1997 has been due

to the Compact. Data on fluid milk consumption show a decrease in per

capita milk consumption, which reflects trends both within the NEDC

states and in the rest of the country that began prior to the NEDC’s

establishment. Per capita consumption of fluid milk was higher in USDA’s

New England Milk Marketing Order than in some other USDA marketing

 19Charles F. Nicholson, Budy P. Resosudarmo, and Rick W. Wackernagel, “Impacts of the

Compact on New England Milk Supply,” The Northeast Interstate Dairy Compact: Milk

Market Impacts, Research Report 73, Agricultural Experiment Station, University of

Vermont, Mar. 2000.
Page 16 GAO-01-866 Impacts of Dairy Compacts

orders prior to the Compact. Even so, consumption of fluid milk had been

slowly declining, both in that marketing order and in the rest of the

country, as the consumption of other fluid beverages increased and as the

population aged. For example, annual per capita milk consumption for the

New England Milk Marketing Order declined by 4 percent from 1993 to

1999, or from about 233 to 223 pounds. Similarly, annual per capita milk

consumption for all the other USDA marketing orders declined 6 percent

from 1993 to 1999, or from about 214 to 202 pounds. In its 1998 study,

OMB’s analysis of the NEDC’s impact on fluid milk consumption during

the last half of calendar year 1997 showed a 0.5-percent decline; while in a

July 2000 study, an economist at Pennsylvania State University estimated

that the NEDC had no appreciable impact from mid-1997 through 1999.20

Additional details about the intraregional impacts of the NEDC are

included in appendix III.

According to USDA, the NEDC has not resulted in a net increase in the

federal government’s costs for its milk price support program, while it is

not certain whether it has affected federal costs for one of its major

nutrition assistance programs. The Compact commission must, by law,

compensate USDA for any estimated increase in costs to its price support

program that are caused by the Compact, and the NEDC commission has

done so. Regarding its nutrition assistance programs, USDA estimates that

federal costs to its largest nutrition assistance program—the Food Stamp

Program—could have increased but federal costs for its other nutrition

assistance programs have likely not increased.

As required by the 1996 farm bill, when the rate of increase in milk

production in the NEDC states exceeds the rate of increase in national

milk production, the Compact commission must compensate USDA for

any additional costs to the milk price support program that result, and the

commission has done so.21 According to USDA officials, the NEDC did not

result in a rate of increase in production greater than the national rate of

 20OMB’s Feb. 1998 study; and Kenneth Bailey, Report on the Operation and Performance of

the Northeast Interstate Dairy Compact, Pennsylvania State University, Department of

Agricultural Economics and Rural Sociology, July 2000.

21Neither the NEDC commission nor USDA must determine if the increase in the rate is

attributable to the NEDC.

The NEDC Has Not

Increased Net Federal

Costs for the Milk

Price Support

Program, but Its

Impact on a Major

Nutrition Assistance

Program Is Less

Certain
Page 17 GAO-01-866 Impacts of Dairy Compacts

increase in 1997, during the first 6 months of the Compact. USDA

calculated that in 1998, milk production in the NEDC states was

1.8 percent greater than the average of the prior 2 years, compared with a

national increase of 1.3 percent. The NEDC compensated USDA

$1.8 million for this higher rate of increase in production. USDA calculated

that in 1999, milk production in the six states was 3.6 percent greater than

the average of the prior 2 years, compared with a national increase of

3.2 percent. The NEDC compensated USDA $1.4 million for this higher rate

of increase in production. USDA calculated that milk production in the six

NEDC states increased by 0.1 percent in 2000, compared with a national

increase of 5.1 percent. Thus, compensation was not required.

USDA is not certain whether the Compact has affected federal costs for

the Food Stamp Program, which is USDA’s largest nutrition assistance

program. According to USDA, if (1) retail milk prices in the NEDC states

increased sufficiently to increase national average retail milk prices, and

(2) the Compact was the cause of the full amount of the price increases in

the NEDC states, then the Compact might have increased federal Food

Stamp Program costs because program benefits are sensitive to the

national average retail milk price.22 Benefit levels and federal Food Stamp

Program funding have increased since July 1997, because of, among other

things, increased national average retail milk prices. However, according

to USDA, it is difficult to establish the Compact’s impact on retail milk

prices in the six NEDC states, and thus it is difficult to establish the

Compact's role in affecting national average retail milk prices. If the

Compact would have caused benefit levels to increase to the next dollar,

USDA estimates that the Compact increased annual federal program costs

by about $60 million. If the Compact did not cause benefit levels to

increase to the next dollar, any increased retail milk prices caused by the

Compact would have been absorbed by program participants in the NEDC

states.

Regarding USDA’s other major nutrition assistance programs, such as the

Special Supplemental Nutrition Program for Women, Infants, and Children

(WIC), and the National School Breakfast and Lunch Programs, USDA has

concluded that federal costs have not increased as a result of the NEDC.

Federal WIC program costs have not increased because WIC is a

 22Food Stamp Program benefits are indexed to the cost of the Thrifty Food Plan—a

nutritious low-cost model diet plan. Milk represents about 10 percent of the value of the

plan. Maximum program benefit levels are rounded down to the nearest dollar of the plan’s

value.
Page 18 GAO-01-866 Impacts of Dairy Compacts

discretionary grant program. Federal school breakfast and lunch program

costs have not increased because the level of federal reimbursements is

based on the average price of a large variety of food items, which is

relatively insensitive to changes in the retail price of milk.23 Because

federal funding for WIC and school breakfast and lunch programs have not

increased, those state or local agencies or organizations that provide

program benefits or program participants have had to absorb any increase

in retail milk prices caused by the NEDC. Although the 1996 farm bill does

not require the Compact to do so, the commission compensates the six

states for the increased milk costs incurred by the WIC and school

programs that are estimated to be attributable to the NEDC. Through

December 2000, the NEDC provided state WIC programs a total of $3.8

million, and the schools a total of $662,606.

Should compacts be expanded to include additional states, smaller

increases in retail milk prices within the compact states would be

necessary to increase the national average retail milk price and, hence the

level of Food Stamp Program benefits and federal funding. For example,

USDA estimates that should retail milk prices increase by about 20 cents

per gallon—an amount similar to the immediate increase in the NEDC

states when the commission established an NEDC price—within a

compact of states that represents 50 percent of the nation’s fluid milk

sales, monthly food stamp allotments would be forced up by, on average,

$1 to $2. USDA estimates that these increases in monthly food stamp

allotments would increase annual Food Stamp Program costs by $60 to

$120 million. Nonfederal costs to its other major nutrition assistance

programs, including WIC and the school programs, could also increase

should compacts be expanded. While two studies analyzed the NEDC’s

impact on USDA’s nutrition assistance programs, the studies relied on a

limited amount of data on retail milk prices in the six NEDC states, and

their results are inconclusive.24

Additional details about the NEDC’s impact on USDA’s milk price support

and nutrition assistance programs are included in appendix IV.

 23National School Lunch Program and School Breakfast Program reimbursements are

indexed to the consumer price index for food-away-from-home for urban consumers.

24OMB’s Feb. 1998 study; and Qingbin Wang, Zooyob Anne, Catherine Halbrendt, Charles

Nicholson, and Jaimie Sung, “Impacts of the Compact on the WIC Program: Evidence From

Boston and Hartford,” The Northeast Interstate Dairy Compact: Milk Market Impacts,

Research Report 73, Agricultural Experiment Station, University of Vermont, Mar. 2000.
Page 19 GAO-01-866 Impacts of Dairy Compacts

Our estimates of the interregional impacts of dairy compacts in 1999 on

such measures as farm-level prices, milk production, and farm revenue

range from minimal to somewhat larger, depending on the size of the

compact and the assumptions that we used to run the economic model.

The NEDC states account for only about 3 percent of the milk produced in

the nation, and we estimate that in 1999 it had little to no impact in other

regions of the country on farm-level prices or milk production and, hence,

on farm revenue. An expanded NEDC would account for approximately 18

percent of the milk produced in the nation, and we estimate that in 1999 it

would have had a larger but still relatively small impact on farm-level

prices, milk production, and farm revenue in other regions of the country.

An expanded NEDC, in conjunction with a southern compact, would

account for approximately 27 percent of the quantity of milk produced in

the nation, and we estimate that in 1999 it would have had a somewhat

larger impact on farm-level prices, milk production, and revenue in other

regions of the country. These estimates are comparable to other

economists’ estimates of the interregional impacts of dairy compacts of

different sizes.

In general, if dairy farmers located within a compact region received

higher farm-level milk prices than they would otherwise have received,

they would respond by increasing their raw milk production. Moreover,

these higher farm-level milk prices would likely lead to higher fluid milk

retail prices in the compact region—prices that would lower consumer

purchases of fluid milk in that region. These two effects in the compact

region—greater raw milk production and lower consumer fluid milk

purchases—would increase the national supply of raw milk that was

available for the manufacture of other dairy products, such as cheese,

butter, and nonfat dry milk. In turn, this increase in the national supply of

milk for manufacturing purposes would result in lower farm-level prices

for raw milk to be used for manufacturing purposes. Because minimum

Class I prices are based on the prices paid for raw milk to be used for

manufacturing purposes, farmers in noncompact regions would receive

lower farm-level prices for all classes of milk and, thus, lower blend prices.

Other things being equal, dairy farmers in noncompact regions would

respond to lower farm-level prices by reducing their milk production.25

These two effects in noncompact regions—lower farm-level prices and

reduced production—would cause farm revenue there to fall. This impact

 25This reduction in production by dairy farmers in noncompact regions would keep the

farm-level price for milk from falling further.

Estimated 1999

Interregional Impacts

of Various Compact

Alternatives Increased

as Compacts Grew in

Size
Page 20 GAO-01-866 Impacts of Dairy Compacts

would be particularly significant for dairy farmers in regions such as the

Upper Midwest, where most milk is used for manufacturing purposes.

Farmers in noncompact regions who ship their milk to compact regions

may be eligible to receive the compact region’s farm-level price for that

milk, which could offset the loss in revenue associated with lower farmlevel prices for milk. If the compact price is sufficiently high, any

increased transportation or shipping costs could be offset.

To assess the likely interregional impacts of each compact alternative or

scenario, we derived an initial set of estimates that represents the impact

of that alternative in 1999, given an initial set of assumptions.26 We then

changed key assumptions to analyze how sensitive our initial estimates

were to such changes. In general, these sensitivity analyses demonstrated

that our initial estimates were not very sensitive to changes in the key

assumptions. (For a more detailed description of our initial and

subsequent sets of assumptions, see app. II.) Accordingly, we present our

estimates of the impacts of the different compact scenarios as ranges that

include our initial set of estimates and the results of our sensitivity

analyses. In addition, we present these estimates as changes from our 1999

baseline estimates, which represent the estimated values of farm-level and

wholesale-level dairy indicators in that year in the absence of any dairy

compact—our “no-compact scenario.”

Our estimates apply only to 1999, and they may not represent the

interregional impacts of compacts in all years. In particular, these

estimates are based on data for the period prior to USDA’s milk marketing

order regulatory reforms in January 2000, which have affected some dairy

sector indicators, such as farm-level milk prices. Furthermore, farm-level

milk prices in 1999 were higher than they were in some other years, and

we anticipate that, other things being equal, compacts have less of an

impact in years when farm-level prices are relatively high.27 In addition,

 26These assumptions pertain to the (1) responsiveness of milk production to changes in

farm-level milk prices, (2) responsiveness of demand to changes in wholesale-level dairy

commodity prices, (3) level of market-driven over-order premiums, (4) ability of milk to be

shipped between regions, (5) amount of the compact over-order producer price payment,

and (6) amount of transportation costs.

27We included data from 2000 as one of our sensitivity analyses; however, we did not use

2000 as a base year for estimating the interregional impacts because complete data for that

year are not yet available. Furthermore, modeling the impacts of compacts using 2000 data

could produce estimates that are less reliable than estimates derived from 1999 data

because the dairy industry was in the process of adjusting to USDA’s January 2000 milk

marketing order reforms.
Page 21 GAO-01-866 Impacts of Dairy Compacts

although our estimated impacts of compacts on noncompact regions for

both 1999 and 2000 are relatively small, the impacts on some individual

dairy farmers, such as small producers with marginal profitability, in

noncompact regions could be significant.

Finally, as in any modeling effort, there is some uncertainty about a

model's structure and the data and assumptions used. In addition, the

model that we used was limited in its ability to distinguish between

shipments of bulk raw milk and packaged fluid milk into regions that

import milk to meet their demand because the model is an annual model,

and such shipments are frequently seasonal. (See app. II for a discussion

of this as well as other modeling limitations.) Despite this uncertainty and

limitation, we believe that the process for developing our estimates was

rigorous and that the model is comprehensive and sound. Given these

conditions, our estimates should be interpreted as indicative of the order

of magnitude of changes in farm and wholesale economic values, rather

than as precise estimates.

Appendix V provides more detailed information about our estimates of the

impacts of the three compact alternatives on 1999 farm-level prices,

production, and revenue in noncompact regions, as well as on national

average wholesale-level prices and national wholesale-level production

and expenditures.

We estimate that the NEDC resulted in small economic impacts in

noncompact regions in 1999. Specifically, we estimate that the largest

reductions in farm-level revenue under the NEDC compared with the nocompact scenario occurred in California and the Upper Midwest region:

from $4 million to $11 million and from $4 million to $9 million,

respectively.28 Table 3 provides our estimates of the extent to which the

NEDC reduced farm-level revenue—that is, the value of all milk sold by

 28In the University of Wisconsin-Madison dairy sector model, the Upper Midwest region is

represented as Minnesota, North Dakota, and Wisconsin.

Interregional Impacts of

the NEDC in 1999 Were

Small
Page 22 GAO-01-866 Impacts of Dairy Compacts

dairy farmers—in these two regions and in all noncompact regions

combined.29

Table 3: Estimated Reduction in 1999 Farm-Level Milk Revenue in Noncompact

Regions as a Result of the NEDC

Dollars in millions

Estimated revenue

reduction with the NEDC

Region

Estimated farm-level

revenue under the nocompact scenario Dollars Percentage

California $3,954 $4 to 11 0.10 to 0.28

Upper Midwest 4,533 4 to 9 0.09 to 0.20

All noncompact

regions 18,513 11 to 29 0.06 to 0.16

Source: GAO analysis using the University of Wisconsin-Madison dairy model.

These estimated impacts on farm-level revenue were small because dairy

farmers in the NEDC states produced only about 3 percent of the nation’s

milk supply. As a result, any increased supply of milk that was available

for manufacturing purposes in 1999 from NEDC farmers was small

compared with the nation’s total milk supply for manufacturing purposes.

Therefore, the impact on farm-level prices and milk production, and hence

on farm revenue, for producers outside the compact region was also small.

For example, we estimate that, as a result of the NEDC, farm-level prices

in all noncompact regions remained unchanged or fell by no more than

2 cents per hundredweight, or less than 0.20 percent, while milk

production for all noncompact regions combined fell by less than 0.06

percent.

We estimate that, in 1999, the NEDC’s impact on the national average

wholesale prices of manufactured dairy products was also minimal. For

 29For modeling purposes, the NEDC compact scenario is represented as being part of the

University of Wisconsin-Madison dairy sector model’s northeast region. This region

includes Connecticut, Delaware, the District of Columbia, Maine, Maryland, Massachusetts,

New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, and Vermont. If the

northeast region states that are not part of the NEDC were modeled as being in a

noncompact region, our estimate of the NEDC’s impact on all noncompact regions

combined would be a little larger than we report, except to the extent that NEDC payments

to New York farmers who sell raw milk used for and sold as fluid milk to processors in

New England affect the lower prices that non-NEDC producers in the northeast region

receive for the remainder of their milk.
Page 23 GAO-01-866 Impacts of Dairy Compacts

example, we estimate that the wholesale prices per hundredweight for

American cheese were 3 to 9 cents lower and for butter about 3 to

23 cents lower than they would have been under the no-compact

scenario.30 These estimated differences, even at the upper ends of these

ranges, represent about 0.06 and 0.19 percent, respectively, of our

estimated 1999 wholesale American cheese and butter prices under the nocompact scenario.

We estimate that, in 1999, the interregional impacts of an expanded NEDC

that included five additional states would have been a little larger than the

impacts of the NEDC, but still small. Specifically, we estimate that,

compared with our analyses using the no-compact scenario, dairy farm

revenue in 1999 would have been reduced the most in the Upper Midwest

region—by $13 million to $24 million.31 Table 4 provides our estimates of

the extent to which an expanded Northeast Compact would have reduced

farm-level revenue in the Upper Midwest and in all noncompact regions

combined.32

Table 4: Estimated Reduction in 1999 Farm-Level Milk Revenue in Noncompact

Regions as a Result of an Expanded NEDC

Dollars in millions

Estimated revenue reduction in farmlevel revenue with an expanded NEDC

Region

Estimated farm-level

revenue under the

no-compact scenario Dollars Percentage

Upper Midwest $4,533 $13 to 24 0.29 to 0.53

All noncompact

regions 18,513 30 to 96 0.16 to 0.52

Source: GAO analysis using the University of Wisconsin-Madison dairy model.

 30This equates to 0.03 to 0.09 cents per pound lower for American cheese and 0.03 to 0.23

cents per pound lower for butter.

31In one of the sensitivity analyses, farm-level revenue in California decreased by $33

million, or by 0.8 percent. In general, however, our estimated impacts were smaller in

California than in the Upper Midwest region.

32For modeling purposes, the expanded NEDC is represented as being the University of

Wisconsin-Madison dairy sector model’s northeast region, which is roughly comparable to

USDA’s Northeast Milk Marketing Order.

Interregional Impacts of an

Expanded NEDC in 1999

Would Also Have Been

Relatively Small
Page 24 GAO-01-866 Impacts of Dairy Compacts

As under the NEDC scenario, we estimate that the impact of an expanded

NEDC would have been relatively small because dairy farmers in the 11

states included in the expanded Compact produced only about 18 percent

of the nation’s milk supply. As a result, any increased supply of milk that

would have been available for manufacturing in 1999 from those farmers,

although a little larger than with the NEDC, would have still been small

compared with the nation’s total milk supply for manufacturing.

Therefore, the impact on farm-level prices and milk production, and hence

on farm revenues, for producers outside the expanded Compact region

would have been small. For example, under the expanded NEDC scenario

we estimate that, compared with our no-compact scenario, farm-level

prices in noncompact regions would have fallen by no more than 6 cents

per hundredweight or less than 0.5 percent, while milk production for all

noncompact regions combined would have been lower by about 0.21

percent or less.

We estimate that, in 1999, the impact of an expanded NEDC on the

national average wholesale prices of manufactured dairy products would

have been a little larger than the impact of the NEDC, but still relatively

small. For example, we estimate that the wholesale prices per

hundredweight for American cheese would have been about 18 to 41 cents

lower and for butter 46 to 88 cents lower than under our no-compact

scenario.33 These differences, even at the upper ends of these ranges,

represent less than 0.3 and 0.7 percent, respectively, of our estimated 1999

wholesale American cheese and butter prices under the no-compact

scenario.

We estimate that, in 1999, the interregional impacts of an expanded NEDC

in conjunction with a southern compact—a total of 23 states—would have

been somewhat larger than the impact of our other compact scenarios.

Specifically, under this scenario and using the same assumption about

fluid milk trade between regions as used in the previous scenarios,

compared with our no-compact scenario we estimate that dairy farm

revenue in 1999 would have been reduced the most in California and in the

Upper Midwest and Mideast regions: $26 million to $118 million,

$26 million to $63 million, and $21 to $43 million, respectively.34,35 Table 5

 33This equates to about 0.18 to 0.41 cents per pound lower for American cheese and 0.46 to

0.88 cents per pound lower for butter.

34In the University of Wisconsin-Madison dairy sector model, the Mideast region is

represented as Indiana, Michigan, Ohio, and West Virginia.

Interregional Impacts of an

Expanded NEDC

Combined With a Southern

Compact in 1999 Would

Have Been Somewhat

Larger
Page 25 GAO-01-866 Impacts of Dairy Compacts

provides our estimates of the extent to which an expanded NEDC in

conjunction with a southern compact would have reduced farm-level

revenue for milk in these regions and for all noncompact regions

combined, in 1999.36

Table 5: Estimated Reduction in 1999 Farm-Level Milk Revenue in Noncompact

Regions as a Result of an Expanded NEDC Combined With a Southern Compact

Dollars in millions

Estimated revenue reduction

with an expanded NEDC and

a southern compact

Region

Estimated farm-level

revenue under the nocompact scenario Dollars Percentage

California $3,954 $26 to 118 0.66 to 2.98

Upper Midwest 4,533 26 to 63 0.57 to 1.39

Mideast 1,792 21 to 43 1.17 to 2.40

All noncompact

regions 14,805 124 to 268 0.84 to 1.81

Source: GAO analysis using the University of Wisconsin-Madison dairy model.

The estimated impact of the expanded NEDC in conjunction with a

southern compact is relatively larger because dairy farmers in the states

included in these compacts produced about 27 percent of the nation’s milk

supply. As a result, any increased supply of milk that would have been

available for manufacturing purposes in 1999 from farmers in these states

would have been somewhat larger than under the previous scenarios.

Therefore, the impact on farm-level prices and milk production, and hence

on farm revenues, for producers outside the compact regions would have

 35For one sensitivity analysis, in which we increased transportation costs for milk by

25 percent, our model produced an anomalous result: an increase in dairy farm revenue in

California. Because our initial estimate and the results of all the other sensitivity analyses

show farm revenue losses in California, we are omitting this result in reporting that

California was one of the regions with the largest estimated declines in farm-level revenue.

36For modeling purposes, the expanded NEDC in conjunction with a southern compact is

represented as being part of the University of Wisconsin-Madison dairy sector model’s

Northeast, Appalachia, Southeast and Central regions. The Central region includes seven

states, two of which are compact and five of which are noncompact states. If the five

noncompact states in the Central region were modeled as being part of a noncompact

region, our estimate of the impact of an expanded NEDC in conjunction with a southern

compact on noncompact regions would be a little larger than we report, except to the

extent that producers in these states might receive compact payments from selling raw

milk used for and sold as fluid milk to processors in compact states that might offset the

lower prices that producers in these states would receive for the rest of their milk.

Noncompact regions include the remaining eight IRCM regions.
Page 26 GAO-01-866 Impacts of Dairy Compacts

been somewhat larger. For example, we estimate that farm-level prices in

noncompact regions could have fallen by as much as 36 cents per

hundredweight or about 2.6 percent compared with our no-compact

scenario, while milk production for all noncompact regions combined

could have fallen by as much as 0.75 percent.

We estimate that, in 1999, the impacts of an expanded NEDC in

conjunction with a southern compact on the national average wholesale

prices of manufactured dairy products would have been somewhat larger

than the impacts of our other scenarios. For example, compared with the

estimated wholesale prices under our no-compact scenario, we estimate

that the prices per hundredweight would have been about 62 cents to $1.41

lower for American cheese and between 21 cents higher and $6.53 lower

for butter.37 At the upper end of these ranges, these differences represent

about 1.0 percent and 5.5 percent, respectively, of our estimated 1999

wholesale American cheese and butter prices under our no-compact

scenario.

For the expanded NEDC plus a southern compact scenario, we found that

our estimates of interregional impacts were sensitive to our assumption

about how much milk can be shipped between noncompact and compact

regions. In particular, our estimated impacts for 1999 of an expanded

NEDC in conjunction with a southern compact on noncompact regions

would have been greater if we had used a more restrictive assumption that

limits the amount of milk that can be shipped from noncompact into

compact regions.38 Specifically, we estimate that using a more restrictive

 37This equates to about 0.62 cents to 1.41 cents per pound lower for American cheese and

between 6.53 cents per pound lower and 0.21 cents per pound higher for butter.

38In our initial estimates, we assumed that USDA milk marketing order regulations apply to

milk movements between noncompact and compact regions. This assumption allows milk

to move between compact and noncompact regions with relatively few restrictions, subject

to USDA and compact requirements regarding when, and under what circumstances,

processors must pay exporting as opposed to importing marketing order or compact

minimum blend prices. In this sensitivity analysis, we used a more restrictive trade

assumption. Under this assumption, we restricted the amount of milk that can move into a

compact region to the amount of milk produced within a 100-mile radius surrounding a

compact region. We performed this analysis because our data are aggregated at the

regional level as opposed to being at the milk plant or dairy farm level. Therefore, our data

on transportation costs of shipping milk are average cost data and do not apply to

individual shipments. As a result, initial results may allow for more movement of milk

between noncompact and compact regions than would actually occur. This sensitivity

analysis shows the extent to which our estimates would be different if the movement of

milk was more restricted.
Page 27 GAO-01-866 Impacts of Dairy Compacts

assumption increases our estimate of how much farm-level prices, milk

production, and farm revenues in noncompact regions would have fallen

in 1999 under this scenario compared with under our no-compact

scenario. Table 6 shows our estimated reductions in farm revenues for raw

milk in California and the Upper Midwest and Mideast regions, and all

noncompact regions combined under our restricted fluid milk trade

assumption compared with under our no-compact scenario.39

Table 6: Estimated Reduction in 1999 Farm-Level Milk Revenue in Noncompact

Regions as a Result of an Expanded NEDC Combined With a Southern Compact

Under a More Restrictive Fluid Milk Trade Assumption

Dollars in millions

Reduction in revenue as a result of

an expanded NEDC and a southern

compact using a more restrictive

fluid milk trade assumption

Region

Estimated farm-level

revenue under a nocompact scenario Dollars Percentage

California $3,954 $70 to 145 1.77 to 3.67

Upper Midwest 4,533 103 to 133 2.27 to 2.93

Mideast 1,792 34 to 45 1.90 to 2.51

All noncompact

regions 14,805 257 to 374 1.74 to 2.53

Source: GAO analysis using the University of Wisconsin-Madison dairy model.

We also estimate that the impact in 1999 of an expanded NEDC in

conjunction with a southern compact on the national average wholesale

prices of some manufactured dairy products would have been greater

under the more restrictive fluid milk trade assumption than without that

restrictive trade assumption. For example, under the more restrictive

trade assumption, we estimate that the price per hundredweight for

American cheese would have been about $1.27 to $1.86 lower than under

our no-compact scenario.40 However, for butter we estimate that the

impact with the restrictive trade assumption would have been smaller than

the estimated impact without the restrictive trade assumption. Under the

 39We present our estimates of the interregional impacts under a more restrictive trade

assumption only for the expanded NEDC in conjunction with a southern compact scenario

because this more restrictive trade assumption had no effect on our estimates under our

other compact scenarios.

40This equates to about 1.27 to 1.86 cents per pound lower for American cheese.
Page 28 GAO-01-866 Impacts of Dairy Compacts

restrictive trade assumption, we estimate that the price per hundredweight

for butter would have changed from 7 cents higher to $2.80 lower than

under our no-compact scenario.41 At the upper end of these ranges, these

differences represent about 1.3 and 2.3 percent, respectively, of our

estimated 1999 wholesale prices for American cheese and butter under our

no-compact scenario.

As noted previously, the farm-level prices that we used in our model can

affect our estimates of the impacts of compacts on dairy sector indicators

such as farm-level revenue. In 1999, the national average blend price was

$14.09 per hundredweight of milk; in 2000, the national average blend

price was $12.11 per hundredweight of milk. With lower farm-level prices

in 2000 than in 1999, the difference between a compact price in our model

and the federal milk marketing order Class I minimum price was larger in

2000 than in 1999.42 As a result, the increase in milk production and

decrease in fluid milk purchases that would have likely occurred within a

compact region in 2000 would be expected to be greater than when farmlevel prices were higher, as they were in 1999. This situation, in turn,

would imply a greater increase in the supply of milk available for

manufacturing dairy products in 2000, which, other things being equal,

would lead to lower farm-level prices, reduced milk production, and lower

farm-level revenue in noncompact regions.

However, on the basis of preliminary data for 2000, we estimate that the

impacts of our three compact scenarios, which are based on our initial set

of assumptions, are generally similar to our initial estimates for each

scenario in 1999. Even though our estimates are generally similar, when

we impose our more restrictive fluid milk trade assumption on our

scenario of an expanded NEDC in conjunction with a southern compact,

our estimates of the impact on the Upper Midwest are slightly greater for

2000 than for 1999. The similarities between our 2000 and 1999 estimates

suggest that other factors may be affecting our estimates for 2000.

 41This equates to about 0.07 cents per pound higher to about 2.8 cents per pound lower for

butter.

42That is, the difference will be larger as long as the compact price is expressed as a fixed

amount per hundredweight, such as $16.94 per hundredweight of milk as used by the

NEDC, rather than as a fixed amount above any USDA milk marketing order Class I price.

Using Farm-Level Prices

for 2000 as Opposed to

1999 Has a Limited

Influence on the Estimated

Impacts of Compacts
Page 29 GAO-01-866 Impacts of Dairy Compacts

In those years when noncompact farm-level prices are lower than compact

farm-level prices, a factor offsetting the potentially larger interregional

impacts of compacts is the ability to market noncompact region milk in

compact regions for use as fluid milk. Farmers in noncompact regions

whose milk is marketed in compact regions for use as fluid milk may be

eligible to receive the compact regions’ farm-level blend price for that

milk. When noncompact region farm-level blend prices are low, the gain to

farmers from shipping milk to compact regions is greater than when

noncompact region prices are high. This gain can partially offset the larger

negative impact that compacts can have on revenue in noncompact

regions when farm-level prices are low because of the increased supply of

milk available for manufacturing purposes. Table 7 provides our estimates

of the impacts of the compact scenarios on 2000 farm-level revenue in the

Upper Midwest region and all noncompact regions.43

Table 7: Estimated Reduction in 2000 Farm-Level Milk Revenue in the Upper Midwest and in All Noncompact Regions Under

the Compact Scenarios

Dollars in millions

Estimated reduction in 2000 farm-level revenue

Upper Midwest All noncompact regions

Compact scenario Dollars Percentage Dollars Percentage

NEDC $5 0.13 $15 0.09

Expanded NEDC 17 0.44 67 0.41

Expanded NEDC and a southern compact 18 0.46 111 0.84

Expanded NEDC and a southern compact using a more restrictive fluid milk

trade assumption 185 4.74 307 2.33

Source: GAO analysis using the University of Wisconsin-Madison dairy model.

Appendix VI contains our estimates of the interregional impacts of

compacts on 2000 farm-level and wholesale-level dairy sector indicators.

 43We did not conduct sensitivity analyses on our 2000 estimates because of the preliminary

nature of the 2000 data used to develop the estimates and because of potential data

unreliability caused by dairy industry reactions to USDA’s milk marketing order regulatory

reforms.
Page 30 GAO-01-866 Impacts of Dairy Compacts

We reviewed other studies of the interregional impacts of the NEDC and

larger dairy compacts and found that the results are comparable with ours,

even though they used different methodologies. In a 1999 analysis, USDA

estimated that the impact of the NEDC on farm-level prices and dairy farm

revenue in noncompact regions during the years 2000 through 2005 would

have been minimal.44 For example, USDA estimated that in 2000 the NEDC

would either have no impact on producer prices in noncompact regions or

reduce producer prices by about 1 cent per hundredweight of milk, or by

about 0.07 percent, depending on the noncompact region of the country.

An analysis conducted by researchers at the University of California,

Davis, also estimated that the NEDC reduced producer prices in

noncompact regions by about 2 cents per hundredweight of milk, or by

about 0.15 percent, on the basis of 1999 data.45 The researchers concluded

that the NEDC had such a small impact because the NEDC states

produced such a small portion of the nation’s milk supply. They also

estimated that if the Compact had been expanded to include additional

states that produced 9 percent of the nation’s milk supply, producer prices

in noncompact regions would have fallen by about 5 cents per

hundredweight, or by about 0.35 percent. An analysis conducted by a

researcher at Pennsylvania State University of an expanded NEDC in

conjunction with a southern compact that produced 27 percent of the U.S.

milk supply also concluded that compacts have a relatively small impact.46

Using a range of assumptions about milk prices and data for 1997, the

researcher projected that in 2000, the compact would decrease producer

prices in noncompact regions by 4 to 14 cents per hundredweight, or by

about 0.3 to 1 percent. Researchers at the University of WisconsinMadison, using a 1997 version of the Interregional Dairy Competition

Model that we used in our analysis, also estimated that the NEDC had a

 44USDA Agricultural Marketing Service analysis provided to the Subcommittee on

Livestock and Horticulture, Committee on Agriculture, U.S. House of Representatives,

June 14, 1999.

45Joseph V. Balagtas and Daniel A. Sumner, “The Effect of the Northeast Dairy Compact on

Producers and Consumers, with Implications of Compact Contagion,” Department of

Agricultural and Resource Economics, University of California, Davis, 200l.

46Kenneth W. Bailey, “Evaluating the Economic Impacts of Regional Milk Pricing

Authorities: The Case of Dairy Compacts,” Agricultural and Resource Economics Review,

Vol. 29, No. 2, Oct. 2000, pp. 208-219.

Other Economic Analyses

of Interregional Dairy

Compacts Have Produced

Similar Estimates
Page 31 GAO-01-866 Impacts of Dairy Compacts

small impact on producer prices.47 This analysis estimated that farm-level

prices would fall from 5 to 10 cents per hundredweight under an expanded

NEDC scenario; 13 to 15 cents per hundredweight under a southern

compact scenario; and 14 to 28 cents per hundredweight under a

combined expanded NEDC and southern compact scenario. In an analysis

of the impact of compacts prepared for the International Dairy Foods

Association, one researcher estimated that the NEDC reduced farm-level

revenue in noncompact regions in 2000 by about $29 million, while an

expanded 29-state compact would reduce farm-level revenue in

noncompact regions by about $374 million.48

A more detailed discussion of these studies is included in appendix VII.

By affecting the minimum prices that dairy farmers within the Compact

region receive for their raw milk, the NEDC may have enhanced dairy

farmer income in the six NEDC states, and other states such as New York,

that supply raw milk used for and sold as fluid milk in the NEDC states. It

is not certain, however, whether the NEDC will help ensure the continued

vitality of dairy farming in the New England dairy region. Data indicate

that the number of dairy farms in the six states continued to decrease

following the NEDC's establishment in July 1997. With regard to retail

prices, the NEDC contributed to increased retail fluid milk prices within

the six states, although the extent of its contribution is uncertain. Even so,

available evidence and analyses indicate that the NEDC has had little

impact on dairy farmers or consumers in noncompact regions.

Proposals are pending before the Congress for larger compacts. Our

analysis shows that as the share of the U.S. milk supply covered by

compacts increases, the estimated interregional impacts on farm-level

prices and revenue increase as well. Furthermore, these estimated impacts

could be different under new marketing conditions. Our estimates of the

interregional impacts of compacts are based primarily on data from before

January 2000, when USDA’s regulatory reforms took effect. Data since

 47Tom Cox, Bob Cropp, and Will Hughes, “Interregional Analysis of Interstate Dairy

Compacts,” Department of Agricultural and Applied Economics, College of Agricultural

and Life Sciences, University of Wisconsin-Madison, Marketing and Policy Briefing Paper

No. 69, July 1999.

48Allen Rosenfeld, The Impacts of the Proposed Expansion of Dairy Compacts on Dairy

Farm Revenue in Noncompact States, M&R Strategic Services, Washington, D.C., May

2001. The International Dairy Foods Association represents dairy food manufacturers.

Concluding

Observations
Page 32 GAO-01-866 Impacts of Dairy Compacts

January 2000 indicate that the dairy industry is in the process of adjusting

to these substantial changes. Equally as important, our estimates of the

interregional impacts are based on three compact scenarios, the largest of

which includes fewer than the number of states currently being

considered for inclusion in dairy compacts. A thorough understanding of

the impacts of these other potential compacts on dairy sector indicators

cannot be developed until sufficient data become available following the

dairy industry’s adjustment to regulatory reform.

We provided USDA and the Executive Director of the NEDC with a draft

of this report for review and comment. On September 5, 2001, we met with

USDA's Chief Economist, Dairy Programs, Agricultural Marketing Service,

and other officials from USDA's Agricultural Marketing Service, Economic

Research Service, Farm Service Agency, Food and Nutrition Service,

National Agricultural Statistics Service, and the Department's Office of the

Chief Economist to obtain their oral comments. USDA officials stated that

they recognized the difficulty of undertaking a study of this nature and

said that our work represents a reasonable effort to estimate the

intraregional and interregional impacts of dairy compacts. They provided a

number of technical corrections and suggestions, which we incorporated

as appropriate.

We also discussed the draft report with the NEDC Executive Director, who

stated that we had dealt with the issues in a constructive and

comprehensive manner. The NEDC Executive Director also provided us

with written comments. While concurring with our estimate of the

interregional impacts of the NEDC, the Executive Director expressed

concern that the University of Wisconsin-Madison dairy model did not

measure the benefits that New York dairy farmers receive when they

supply milk to the NEDC states. We concur that the model does not

measure the impacts of compacts on noncompact states that are within

the same region as compact states. As the model is designed, New York

and the NEDC states, as well as several other states, are included in the

same (Northeast) region. The NEDC Executive Director's written

comments and our detailed responses appear in appendix VIII.

We performed our work between September 2000 and September 2001 in

accordance with generally accepted government auditing standards.

Appendix I contains a detailed description of our scope and methodology.

Agency Comments

and Our Response
Page 33 GAO-01-866 Impacts of Dairy Compacts

We are sending copies of this report to the Senate Committee on

Agriculture, Nutrition, and Forestry; the House Committee on Agriculture;

other appropriate congressional committees; the Secretary of Agriculture;

the Executive Director of the NEDC; the Director, OMB; and other

interested parties. We will also make copies available to others upon

request.

Please contact me at (202) 512-3841 if you or your staff have any questions

about this report. Another GAO contact and key contributors to this report

are listed in appendix IX.

Sincerely yours,

Lawrence J. Dyckman

Director, Natural Resources

 and Environment
Appendix I: Objectives, Scope, and

Methodology

Page 34 GAO-01-866 Impacts of Dairy Compacts

In May 2000, Senator Herbert Kohl requested that we examine the

economic impacts of the Northeast Interstate Dairy Compact (NEDC) and

other potential compacts on a variety of dairy sector indicators.

Specifically, because legislation authorizing the Compact is to expire on

September 30, 2001, and the Congress is considering legislative

alternatives for reauthorizing the NEDC and authorizing other states to

enter into such compact arrangements, Senator Kohl asked us to provide

information on

• the intraregional impacts of the NEDC (that is, within the six NEDC states

of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and

Vermont) on dairy sector indicators such as (1) retail milk prices, (2) milk

producer income, (3) dairy farm structure, (4) milk production, and (5)

milk consumption;

• the impact of the NEDC on the costs to the federal government of its milk

price support and nutrition assistance programs;1

 and

• the interregional impacts of the NEDC, an expanded NEDC, and an

expanded NEDC in conjunction with a southern compact (that is, on

noncompact milk-producing regions) on selected indicators such as farmlevel and wholesale-level indicators such as prices, production, and

revenue.2

To determine the intraregional impacts of the NEDC, we sought, but did

not find, a readily usable economic model that comprehensively estimates

these impacts while holding constant other factors that also affect the

selected dairy sector indicators. Further, due to time and resource

constraints, we were not able to develop a model or series of models to

estimate these impacts. As a result, we analyzed federal, state, and other

 1

The U.S. Department of Agriculture’s (USDA) milk price support program indirectly

ensures a minimum price for milk. Under the program, USDA offers to purchase cheddar

cheese, nonfat dry milk, and butter at specified prices. USDA’s nutrition assistance

programs include the Special Supplemental Nutrition Program for Women, Infants, and

Children; the School Breakfast and Lunch Programs; and the Food Stamp Program.

2

For purposes of our analysis, the expanded NEDC includes the Compact’s current member

states plus Delaware, Maryland, New Jersey, New York, and Pennsylvania. The southern

compact would include Alabama, Arkansas, Georgia, Kansas, Kentucky, Louisiana,

Missouri, Mississippi, North Carolina, South Carolina, Tennessee, and Virginia. As of the

end of February 2001, these states had enacted laws authorizing their entry into such

compacts should the Congress establish them. While West Virginia has also enacted such a

law, we did not include that state in our analysis because of modeling difficulties. App. II

provides a discussion of our model.

Appendix I: Objectives, Scope, and

Methodology

NEDC’s Intraregional

Impacts
Appendix I: Objectives, Scope, and

Methodology

Page 35 GAO-01-866 Impacts of Dairy Compacts

data on these indicators, for a period of time before and after the NEDC’s

minimum pricing regulations became effective, to determine any changes

in historic trends in the NEDC states. In each case, we also obtained these

data for the rest of the United States so that we could compare trends in

New England with those in the rest of the country. We also reviewed

available studies on the NEDC’s potential impacts on the indicators.

Specifically, to determine the impacts on retail milk prices, we obtained

and analyzed retail milk price data from (1) A.C. Nielsen, a private data

collection and analysis company, for the Boston market as well as for

other major U.S. cities for November 1996 through September 2000;3

 (2)

the departments of agriculture in Connecticut, Maine, and New Hampshire

for November 1996 through October 2000; and (3) the International

Association of Milk Control Agencies for those states that have

independent milk pricing agencies for January 1994 through November

2000. We also reviewed available economic analyses of the NEDC’s impact

on retail milk prices and interviewed USDA’s Agricultural Marketing

Service and NEDC officials to obtain their views on the NEDC’s impact on

retail milk prices.

To examine the intraregional impacts of the NEDC on milk producer

income, we compared USDA’s Economic Research Service balance sheet

and income statement data from 1991 through 1999 for a representative

composite dairy farmer in the Service’s northeastern region with data for a

farmer located outside the northeastern region. The Economic Research

Service’s northeastern region includes Connecticut, Delaware,

Massachusetts, Maryland, Maine, New Hampshire, New Jersey, New York,

Pennsylvania, Rhode Island, and Vermont. States outside the northeastern

region include all states with the exception of these 11 states and Alaska

and Hawaii. The Service was not able to provide data for a representative

composite farmer in the six NEDC states alone because the sample size

was not sufficiently large to produce reliable balance sheet and income

data. The Economic Research Service develops these data through surveys

of sampled farm operations. It collects data on operating costs—such as

feed, equipment purchases, and product distribution—as well as data on

returns, such as income received from sales of field crops and livestock.

The Service uses information obtained from sampled farms to estimate the

 3

We obtained these data in the course of our work on Dairy Industry: Information on

Prices for Fluid Milk and the Factors That Influence Them (GAO/RCED-99-4, Oct. 8, 1998)

and Dairy Industry: Information on Milk Prices and Changing Market Structure (GAO01-561, June 15, 2001).
Appendix I: Objectives, Scope, and

Methodology

Page 36 GAO-01-866 Impacts of Dairy Compacts

average costs of milk production in the United States and in various

regions in the country. Costs can vary significantly from farm to farm

because of differences in farm location, size, and production practices. As

a result, the costs and returns for an individual farm can vary considerably

from the average. In addition to using Economic Research Service data to

estimate the impact of the NEDC on farm income, we also estimated the

average payment a licensed dairy farmer in one of the six NEDC states

may have received between July 1997 and the end of calendar year 2000 as

a result of the NEDC. To do this, we used (1) monthly NEDC balance

sheets that reflect the total amount of milk eligible for the NEDC milk

price and NEDC over-order producer price payment amounts available for

dairy farmers, (2) USDA’s National Agricultural Statistics Service milk

production data for the six NEDC states, and (3) American Farm Bureau

Federation data on the number of licensed dairies in the six states. To

determine the average payment, we estimated what proportion of the milk

eligible for the NEDC milk price could be attributed to a licensed NEDC

dairy farmer’s milk. We also reviewed available economic analyses of the

potential impacts of the NEDC on dairy farmer income. Last, we obtained

data developed by the NEDC commission on amounts distributed to

farmers as a result of the Compact, and its assessment of the Compact's

impact on farmer income.

To determine the intraregional impacts of the NEDC on dairy farm

structure, we obtained National Agricultural Statistics Service data on the

total number of cows in the NEDC and the rest of the United States, as

well as state-by-state data on the number of farms having at least one milk

cow between 1992 and 2000. We obtained data from the American Farm

Bureau Federation on the number of licensed dairies in the United States,

by state, between 1992 and 2000. We also reviewed information on factors

that affect the structure of dairy farms, and interviewed officials from the

Agricultural Marketing Service, the Economic Research Service, the

National Agricultural Statistics Service, and the NEDC commission to

obtain their views of the Compact’s impacts on farm structure.

To determine the intraregional impacts of the NEDC on milk production,

we reviewed National Agricultural Statistics Service data on the average

amount of milk produced by state and the average amount of milk

produced per dairy cow between 1993 and 2000. We also reviewed

available economic analyses of the impacts that the NEDC may have had

on milk production. In addition, we interviewed officials from the

Agricultural Marketing Service, the National Agricultural Statistics Service,

and the NEDC to obtain their views on the NEDC’s impact on milk

production.
Appendix I: Objectives, Scope, and

Methodology

Page 37 GAO-01-866 Impacts of Dairy Compacts

To examine the intraregional impacts of the NEDC on milk consumption,

we reviewed Agricultural Marketing Service data on the total amount of

sales of packaged fluid milk products in federal milk marketing orders and

California between 1996 and 1999. Such sales are representative of the

consumption of fluid milk products and account for about 93 percent of

fluid milk sales in the United States. In addition, we reviewed data on

factors affecting milk consumption and available economic studies of the

NEDC’s impact on milk consumption.

To examine the impacts of the NEDC on the costs of the federal

government’s milk price support program, we reviewed USDA Farm

Service Agency analyses of estimated amounts of milk production in the

six NEDC states compared with the rest of the United States. We also

reviewed USDA and Compact data on payments made to USDA by the

NEDC. In addition, we interviewed Farm Service Agency and NEDC

officials to obtain information on payments made by the NEDC. To

examine the intraregional impacts on nutrition assistance programs, we

interviewed USDA Food and Nutrition Service officials and obtained that

agency’s analyses of the potential impact of the NEDC on its programs. We

also interviewed officials responsible for each of the six states’ Special

Supplemental Nutrition Program for Women, Infants and Children and

school nutrition programs. Finally, we reviewed available economic

analyses of the estimated impact of the NEDC on nutrition assistance

programs.

To examine the interregional impacts—that is, the economic impacts in

other regions of the country—of the NEDC, an expanded NEDC, and an

expanded NEDC in conjunction with a southern compact, we conducted

policy simulations using the University of Wisconsin-Madison’s Dairy

Sector Interregional Competition Model calibrated to reflect the dairy

industry in 1999 (IRCM99). We contracted with the University to have Dr.

Thomas L. Cox, Professor of Agricultural and Applied Economics and a

primary developer of the model, conduct the policy simulations. Working

with Dr. Cox and consulting with other prominent dairy economists from

different regions of the country, we developed a set of parameters for use

in simulating different compacts’ impacts on dairy sector indicators.

We modeled three different compacts—the NEDC, an expanded NEDC,

and an expanded NEDC in conjunction with a southern compact—

consisting of an increasing number of states. The states in the NEDC are

Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and

NEDC’s Impacts on

Federal Programs

Compacts’

Interregional Impacts
Appendix I: Objectives, Scope, and

Methodology

Page 38 GAO-01-866 Impacts of Dairy Compacts

Vermont. The states that we assumed to be included in the expanded

NEDC are these six states and Delaware, Maryland, New Jersey, New

York, and Pennsylvania. The states that we assumed to be included in the

expanded NEDC in conjunction with a southern compact are the above 11

states and Alabama, Arkansas, Georgia, Kansas, Kentucky, Louisiana,

Missouri, Mississippi, North Carolina, South Carolina, Tennessee, and

Virginia. The above states included in an expanded NEDC and a southern

compact were selected because they had enacted legislation, as of the end

of February 2001, that authorized their entry into a dairy compact should

the Congress establish one. While West Virginia had also enacted such

legislation as of the end of February 2001, we did not include that state in

a southern compact for the purposes of our analysis because of the

difficulties associated with accounting for that state’s milk production in

compact versus noncompact regions of the country. Furthermore, because

West Virginia produces a relatively small amount of milk in comparison

with other states included in compact regions, the effect of excluding West

Virginia is negligible.

The agricultural economists and other dairy experts with whom we

consulted concerning model specifications and assumptions include the

following:

• Kenneth W. Bailey, Associate Professor, Department of Agricultural

Economics and Rural Sociology, the Pennsylvania State University;

• Joseph V. Balagtas, Research Assistant, Department of Agricultural and

Resource Economics, University of California, Davis;

• Scott Brown, Research Assistant Professor, Food and Agricultural Policy

Research Institute, the University of Missouri;

• Harold M. Harris, Jr., Professor, Department of Agricultural and Applied

Economics, Clemson University;

• Harry Kaiser, Professor, Department of Applied Economics and

Management, Cornell University;

• Richard L. Kilmer, Professor, Food and Resource Economics, the

University of Florida;

• Leigh Maynard, Assistant Professor, Department of Agricultural

Economics, the University of Kentucky;

• Neil Pelsue, Extension Associate Professor, Department of Community

Development and Applied Economics, the University of Vermont;

• William A. Schiek, Economist, Dairy Institute of California;

• Mark Stephenson, Senior Extension Associate, Department of Applied

Economics and Management, Cornell University;

• Daniel Sumner, Professor, Agricultural and Resource Economics

Department, University of California at Davis;
Appendix I: Objectives, Scope, and

Methodology

Page 39 GAO-01-866 Impacts of Dairy Compacts

• Cameron S. Thraen, Associate Professor, Agricultural, Environmental, and

Development Economics, the Ohio State University; and

• Christopher Wolf, Assistant Professor, Department of Agricultural

Economics, Michigan State University.

In addition, we consulted with several agricultural economists at USDA,

including economists in the Office of the Chief Economist and the

Economic Research Service.

Our process for developing the assumptions that we used to model the

interregional impacts of dairy compacts included reviewing economic

literature to identify estimates of (1) regional supply elasticities, (2)

wholesale demand elasticities, (3) and transportation costs. We also

obtained data on market over-order premiums and compact over-order

producer prices. Finally, we interviewed USDA and other officials to

obtain information on regulations governing milk shipments among

federal marketing orders and noncompact and compact regions.

After identifying assumptions for modeling the three different compact

scenarios, we developed an initial estimate of the economic impacts of the

different compacts. We then conducted sensitivity analyses by varying the

values of our key assumptions. We provided our preliminary estimates to

several agricultural economists to obtain their views, and incorporated

many of their comments in subsequent modeling before developing our

final range of estimates. Our final estimates of the impacts of the different

compact scenarios are presented as ranges that include our initial

estimates as well as estimates from our sensitivity analyses. (A detailed

discussion of the model and assumptions, data, and data sources used is

included in app. II.)

In addition to modeling the interregional impacts of the different compact

scenarios, we reviewed economic analyses that have been conducted on

the potential interregional impacts of dairy compacts. We present these

reviews in appendix VII.
Appendix II: Methodology for Estimating the

Interregional Impacts of Dairy Compacts

Page 40 GAO-01-866 Impacts of Dairy Compacts

This appendix describes our methodology for estimating the interregional

impacts of three compact scenarios: the six-state NEDC, an expanded

NEDC, and an expanded NEDC in conjunction with a southern compact.

To estimate the interregional impacts, we contracted with the University

of Wisconsin-Madison to use the Dairy Sector Interregional Competition

Model (IRCM), which is an interregional spatial market equilibrium model

of the U.S. dairy sector. This model is useful in estimating the impacts of

different dairy policy options, such as dairy compacts. Dr. Thomas L. Cox,

Professor of Agricultural and Applied Economics at the university and a

primary developer of the model, conducted the policy simulations for us.

This appendix describes

• the structure of the IRCM and how it estimates the interregional impacts

of dairy compacts,

• data and data sources used for conducting policy simulations of different

compact scenarios,

• how we calibrated a baseline for 1999,

• details of each scenario that we modeled,

• parameter values for our baseline and initial estimates,

• how we varied key assumptions to test the sensitivity of our initial

estimates, and

• the limitations of the model.

The results of our different policy simulations and sensitivity analyses are

presented in appendixes V and VI.

The IRCM is a hedonic spatial equilibrium model of the U.S. dairy sector

that can be used to estimate the impacts of policy or program changes,

such as the establishment of compacts.1

 The model allocates the

production and consumption of raw milk and nine other different dairy

commodities among 12 regions of the country and solves for the trade

flows of these commodities among those regions to achieve a spatial

equilibrium. Using nonlinear programming techniques, the model solves to

ensure an efficient regional distribution of the different dairy commodity

 1

A hedonic model is one that separates products, such as farm milk, fluid milk, and

manufactured dairy commodities, into their components or characteristics. Milk and dairy

commodities are composed of different amounts of milk fat, protein, and carbohydrates.

The IRCM incorporates these components using a vertical markets approach that

transforms the primary product—raw milk—into fluid milk and manufactured dairy

commodities.

Appendix II: Methodology for Estimating the

Interregional Impacts of Dairy Compacts

IRCM Structure
Appendix II: Methodology for Estimating the

Interregional Impacts of Dairy Compacts

Page 41 GAO-01-866 Impacts of Dairy Compacts

resources, given the demand for and supply of those resources at various

prices.

On a more technical basis, the model solution maximizes the sum of

producer and consumer welfare minus processing, transportation, and

U.S. Department of Treasury costs.2

 The model defines aggregate

wholesale dairy product demand and farm-level milk supply functions as

follows:

(1a) Di = ∑ = ∫

ik z

0

d

ik

K

k 1 p (q)dq

and

(1b) Si = ∫

wi

0

p (q)dq s

i

where pi

s

(wi) is the price-dependent supply function for milk in the i-th

region, with ∂pi

/∂wi > 0, i = 1, ..., J, and pik

d

 (zik) is the price-dependent

demand function for the k-th dairy product consumed in the i-th region,

with ∂pik

d

/∂zik < 0, i = 1, ..., J, k = 1, ..., K. Equation (1a) is the sum of the

areas under the K demand curves in the i-th region. This can be interpreted

as a measure of consumer benefits generated by the K commodities in the

i-th region. Equation (1b) is the area under the supply curve, a measure of

milk production cost in the i-th region. The term (Di – Si

), consumer

benefits minus total production costs in the i-th region, minus

transportation costs, is a measure of net social benefits to farmers and

consumers in each region. Federal government costs are then subtracted.3

Two steps are used to create an IRCM that models the impact of compacts

in 1999: IRCM99. First, the model is calibrated to 1999 data so that baseline

estimates of key dairy sector measures of prices, production,

 2

These last costs are incurred by the federal government through USDA’s milk price

support program. Under this program, USDA purchases manufactured dairy

commodities—such as cheese, butter, and nonfat dry milk—at specified prices, thereby

indirectly supporting farm-level prices of milk used to manufacture these commodities.

3

For a more complete technical description of the optimization process, see T.L. Cox and

J.P. Chavas, “An Interregional Analysis of Price Discrimination and Domestic Policy

Reform in the U.S. Dairy Sector,” American Journal of Agricultural Economics, 83 (1): 89-

106.
Appendix II: Methodology for Estimating the

Interregional Impacts of Dairy Compacts

Page 42 GAO-01-866 Impacts of Dairy Compacts

consumption, and trade flows can be obtained on a regional basis. Second,

simulation analyses are performed to estimate the impacts of the different

compact scenarios.

In the IRCM99, milk production and dairy product consumption in the

country are divided into 12 regions that are based on the current 11 USDA

federal milk marketing orders and California. In addition, the IRCM99

accounts for net private stocks, net government stocks/removals, and U.S.

imports and exports.4

 Table 8 compares the IRCM99 regions, the

corresponding USDA marketing orders or states before January 2000,

states included in the IRCM99 regions, and states that had enacted

legislation as of February 2001 authorizing entry into any congressionally

authorized dairy compact.5

Table 8: USDA's Marketing Orders Before January 2000, States in the IRCM99 Regions, and States That Had Authorized Entry

Into a Compact by February 2001

IRCM99 regions (and pricing

points)

Federal milk marketing

orders before January 2000

States included in the

IRCM99 regions

States that had enacted

legislation authorizing entry

into a compact as of February

2001

Northeast (Boston) New England, New York-New

Jersey, Mid-Atlantic

Connecticut, Delaware, the

District of Columbia, Maine,

Maryland, Massachusetts, New

Hampshire, New Jersey, New

York, Pennsylvania, Rhode

Island, Vermont

Connecticut, Delaware, Maine,

Maryland, Massachusetts, New

Hampshire, New Jersey, New

York, Pennsylvania, Rhode

Island, Vermont

Appalachia (Charlotte) Carolina, Tennessee Valley,

Louisville-Lexington-Evansville

Kentucky, North Carolina,

South Carolina, Tennessee,

Virginia

Kentucky, North Carolina,

South Carolina, Tennessee,

Virginia

Florida (Tampa) Upper Florida, Tampa Bay,

Southeast Florida

Florida a

Southeast (Atlanta) Southeast Alabama, Arkansas, Georgia,

Louisiana, Mississippi

Alabama, Arkansas, Georgia,

Louisiana, Mississippi

 4

U.S. dairy exports are assumed to face a perfectly elastic demand schedule at 1999 world

prices; that is, the model assumes that the United States exhibits “small country effects”

with respect to world dairy exports. This assumption is made because U.S. exports are a

small share of world dairy trade.

5

In January 2000, USDA reorganized its milk marketing orders and reconfigured the thenexisting 31 orders into 11. The significance of this is that much of the dairy sector indicator

data compiled before January 2000 are organized into these 31 orders, which do not

necessarily correspond to the 11 orders. USDA also revised its formulas for setting the

minimum prices that processors must pay for milk.
Appendix II: Methodology for Estimating the

Interregional Impacts of Dairy Compacts

Page 43 GAO-01-866 Impacts of Dairy Compacts

IRCM99 regions (and pricing

points)

Federal milk marketing

orders before January 2000

States included in the

IRCM99 regions

States that had enacted

legislation authorizing entry

into a compact as of February

2001

Mideast (Cleveland) Michigan Upper Peninsula,

southern Michigan, East OhioWest Pennsylvania, Ohio

Valley, Indiana

Indiana, Michigan, Ohio, West

Virginia

West Virginia

Upper Midwest (Chicago) Chicago Regional, Upper

Midwest

Minnesota, North Dakota,

Wisconsin

a

Central (Kansas City) Iowa, Nebraska-West Iowa,

Eastern South Dakota, Central

Illinois, Southern Illinois, East

Missouri, Southwest Plains,

Eastern Colorado, Greater

Kansas City

Colorado, Illinois, Kansas,

Missouri, Nebraska, Oklahoma,

South Dakota

Kansas, Missouri

Southwest (Dallas) Texas, New Mexico-West

Texas

New Mexico, Texas a

Western (Salt Lake City) Southwest Idaho-Eastern

Oregon, Great Basin, Western

Colorado

Idaho, Montana, Nevada, Utah,

Wyoming

a

Pacific Northwest (Seattle) Pacific Northwest Oregon, Washington a

Arizona-Las Vegas (Phoenix) Central Arizona Arizona a

California (San Francisco) bCalifornia a

a

No states in this region had enacted legislation as of Feb. 2001 authorizing entry into a compact.

b

California’s milk is not regulated under a USDA milk marketing order. Rather, the state regulates milk

processed and sold in that state.

Source: University of Wisconsin-Madison.

Figure 1 shows USDA’s marketing orders, the corresponding IRCM99

regions, the corresponding states included in the IRCM 99 regions, and

states that had enacted legislation authorizing entry into a compact as of

February 2001. With respect to modeling the impact of compacts, the

states that have enacted legislation are part of four different federal milk

marketing orders and their corresponding IRCM99 regions. Because of

this, both compact and noncompact states are included in some IRCM99

regions when modeling some compact alternatives. This can influence the

interpretation of modeled results. For example, some states that have

enacted legislation authorizing entry into a dairy compact, such as West

Virginia, which is part of the Mideast Marketing Order, produce only a

small portion of the milk produced by dairy farmers in that marketing

order and hence, estimating the effect of West Virginia’s participation in a

compact, would be difficult.
Appendix II: Methodology for Estimating the

Interregional Impacts of Dairy Compacts

Page 44 GAO-01-866 Impacts of Dairy Compacts

Figure 1: USDA’s Milk Marketing Orders

Source: USDA’s Agricultural Marketing Service.

IRCM99 solves for regional prices and production levels for farm-level raw

milk on the basis of three milk components: milk fat, protein, and

carbohydrates (primarily lactose). The model also solves for regional

wholesale-level price, supply, demand, and trade flows for the following

dairy products: (1) fluid milk, (2) soft dairy products, (3) American cheese,

(4) Italian cheese, (5) other cheese, (6) butter, (7) frozen dairy products,
Appendix II: Methodology for Estimating the

Interregional Impacts of Dairy Compacts

Page 45 GAO-01-866 Impacts of Dairy Compacts

(8) other manufactured dairy products (a residual product category), and

(9) nonfat dry milk. The model uses a fixed component composition that

converts farm milk into fluid milk and different types of manufactured

dairy commodities, as shown in table 9.

Table 9: IRCM99 Dairy Product Fixed Component Composition

Milk component

Dairy commodity

Milk fat

(percentage)

Protein

(percentage)

Carbohydrates

(percentage)

Fluid milk 2.0 3.3 4.7

Soft dairy products 11.4 4.9 4.2

American cheese 33.2 24.6 1.5

Italian cheese 22.7 20.8 2.4

Other cheese 28.1 25.7 2.4

Butter 81.1 0.9 0.1

Frozen dairy products 9.5 3.5 4.9

Other manufactured

products 0.5 12.1 52.0

Nonfat dry milk 0.7 35.6 52.1

Source: University of Wisconsin-Madison.

The regional supply of milk components (milk fat, protein, and

carbohydrates) must be greater than or equal to the regional utilization of

these milk components by the processing sector to ensure regional

component supply/demand balance. The marginal value of this restriction

(given by the corresponding Lagrange multiplier) measures the shadow

value of each milk component in each region.6

 The model subsequently

generates empirical estimates of regional shadow prices for each milk

 6

One approach for solving a constrained optimization problem is the Lagrange-multiplier

method. This technique involves finding the maximum or minimum value of an objective

function (such as utility maximization) subject to another expression that defines a

constraint (i.e., a budget constraint). In general, given the objective function z = f(x,y)

subject to the constraint, g(x,y) = c, the Lagrangean function is defined as Z = f(x,y) + λ [c –

g(x,y)]. This augmented expression includes a variable called the Lagrange multiplier, λ.

This method has many comparative static properties, including the fact that the Lagrange

multiplier, λ, provides a measure of the sensitivity of Z, the objective function, to changes

or shifts in the magnitude of the constraint. In a linear programming context, the Lagrange

multiplier can be interpreted as a shadow price, or imputed price, the maximum amount

that someone would be willing to pay for the next unit of an input. In the current analysis,

the model solution is characterized as the saddle point of a Lagrangean function, in which

the Lagrange multipliers correspond to trade flow constraints across regions (See footnote

3 in this appendix).
Appendix II: Methodology for Estimating the

Interregional Impacts of Dairy Compacts

Page 46 GAO-01-866 Impacts of Dairy Compacts

component. The model also generates market prices that are consistent

with milk component pricing for each commodity in each region.

The basic structure of the IRCM99 is consistent with a competitive market

equilibrium, where, at the optimum, the market price equals the marginal

cost of each commodity. However, USDA and California use a system of

classified pricing for milk that influences pricing in ways that differ from

the competitive outcome. Therefore, to incorporate the classified pricing

system, price wedges are used in the model to represent the difference

between the minimum price of milk in a particular class and the minimum

price of milk in a reference class. In the model, the reference class for

USDA’s milk marketing orders is Class III, and the reference class for

California is 4b.7,8

 For example, the price wedge for raw milk used for fluid

milk is the difference between the price for milk used for Class I (fluid)

and the price for milk used for Class III (cheese), plus potential over-order

premiums.9

 For USDA’s milk marketing orders in 1999, we calculated the

price of raw milk used for manufacturing (Classes II, III, and IV) as the

implicit price of milk used for Class II and Class III in the Upper Midwest

Milk Marketing Order (portions of Illinois, Iowa, Michigan, Minnesota,

North Dakota, South Dakota, and Wisconsin). USDA milk marketing order

prices for nonfat dry milk and butterfat differentials are computed by

using USDA formulas and wholesale commodity prices. California milk

prices are calculated for milk used in fluid products (Class 1); milk used

for heavy cream, cottage cheese, yogurt, and sterilized products (Class 2);

milk used in ice cream and other frozen dairy products (Class 3); milk

used in butter and nonfat dry milk (Class 4a); and milk used in cheese

 7

The reference class 4b is comparable to USDA’s Class III, which is the classification for

milk used for manufacturing hard cheese.

8

California’s Class 4a is for milk used to manufacture butter and nonfat dry milk and

corresponds to USDA’s Class IV.

9

When reviewing and commenting on our draft report, USDA officials suggested that a

different method of calculating the Class I mover that took into account lags would be

more consistent with the method that USDA uses. We did not use that method originally

because the IRCM99 is an annual, not monthly, model. However, as a result of USDA

officials' comments, we re-ran some specifications of the model using a method for

calculating the Class I mover that more closely resembles USDA's method. The estimates of

the impacts of the different compact scenarios that we obtained using 1999 and 2000 data

were very similar to the estimates in our draft report and, therefore, we did not change the

estimates in preparing our final report. In both sets of model runs, we used a consistent

method for measuring the Class I mover in our baseline and in our compact scenarios. The

choice of method for measuring the Class I mover, therefore, did not have a large impact

because we are estimating the impacts of compacts by estimating deviations from a

baseline.

Modeling Classified

Pricing
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other than cottage cheese (Class 4b). We computed California price

wedges by using administered formulas for the fat and solids-not-fat

component prices by class. These component prices are computed from

wholesale commodity prices for butter, nonfat dry milk, and cheese that

are endogenous to the model. Because Class 4a prices were lower than

Class 4b prices in 1999, this method implies a negative price wedge in

California for Class 4a. Finally, because dairy farmers are paid blend

prices based on USDA and California’s classified pricing systems, we

incorporated price wedges that represent these blend prices in each of the

respective modeled regions.

We took into account pooling regulations for both USDA and the NEDC in

modeling “producer settlement pools.”

10 The first step in this calculation is

to compute total revenues from regional milk production under the

assumption that all raw milk is pooled in the region where it is produced.

This is done in each region by multiplying the price wedge for each

commodity by the quantity of raw milk used to produce that commodity.

However, by shipping some of their milk to another order, producers can

sometimes become eligible to receive the minimum prices in the

destination order for their milk, which might be higher than the minimum

prices in their "home" order. As a result, in estimating how the proceeds

from raw milk sales are distributed to producers, through producer

settlement pools, the model can adjust its initial estimate to take into

account that not all raw milk is pooled in the order where it is produced.

When we estimated the impacts of the compact scenarios, no such

adjustments were necessary because the model's solutions did not yield

 10"Producer settlement pool" is the amount of money available for payment to producers.

Processors pay into the pool amounts based on the class of product for which they use the

milk. Producers draw from the pool an amount that is based on the blend price for milk

within each marketing order. The blend price is the monthly weighted average of the prices

of milk used in the different classes in that marketing order, with the weights determined

by the amount of milk sold for each class of use. A producer's milk is qualified to be pooled

on a particular federal milk marketing order by its association with a pool plant that is

regulated by the order. Once a producer's milk is qualified to be pooled on the order, it is

not necessary for all of that producer's milk to be delivered to a plant regulated by that

specific order in order to qualify for the blend price. Each marketing order has its own

regulations establishing the amount of milk that must be delivered to a regulated pool plant

in order to qualify for the marketing order's blend price. The NEDC also regulates the

amount of milk that must be delivered to plants within the six states and to plants outside

the six states that ship milk to the NEDC states in order for the processors to qualify for

the NEDC price.

Modeling Producer

Settlement Pools
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any pooling of raw milk outside any home order. As a result, before taking

into account further adjustments described below, the revenue received

from milk sales from farmers in any order were the same as they would

have been had no adjustment been made and all producers' receipts from

milk sales were based on the prices in their home order. We recognize that

some milk is pooled outside the order in which it is produced. However,

we did not have data on shipments of raw milk by individual farmers or

shipments of fluid milk or other dairy commodities by individual

processing plants, which limited the model's ability to estimate raw milk

movements across orders.11 Instead, the model solution includes

substantial movement of packaged fluid milk to balance supply and

demand across orders. If enough packaged fluid milk moves out of an

order, the model's structure allows for further adjustments to be made in

the producer settlement pools, but there was no region affected in this

way.12

However, the producer settlement pools were adjusted for the movement

of packaged fluid milk into compact regions under the various scenarios

that we analyzed. These adjustments were made because processors in

exporting regions shipping packaged fluid milk into compact regions are

required to pay a compact premium on this milk. Similarly, these

processors can return to their producers an amount equal to the compact

premium multiplied by the percentage of the compact region's raw milk

that is sold for Class I use.

We obtained data for our analysis from several sources, including USDA,

the state of California, academia, and research institutes. We obtained

most of the price and production data from USDA and the California

Department of Food and Agriculture. In particular, we obtained farm-level

milk data from USDA’s Milk Production, Disposition and Income—1999

Summary, and commodity production data from USDA’s Dairy Products—

1999 Summary. We obtained commodity price, stock, import, export, and

 11Since we are estimating the impacts of compacts by estimating deviations from a baseline

that include the same limitation, it is not clear that this limitation has much of an effect on

our estimates.

12The model requires an adjustment to be made if more than 40 percent of the milk

packaged in an order is exported to another region. This threshold was chosen as a proxy

for the requirement that an adjustment be made if a plurality of an order's packaged milk

was sold in another region.

Data Used in the

Model
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government utilization data from monthly USDA Economic Research

Service “Livestock, Dairy, and Poultry” reports. We obtained federal milk

marketing order data from USDA’s Agricultural Marketing Service Federal

Market Order Milk Statistics—1999 Annual Summary. In addition, we

obtained data on price support levels from USDA’s Commodity Credit

Corporation.

We obtained regional projections of wholesale dairy product demand by

using aggregate wholesale demand functions for the United States and

regional population data. We obtained component yields—the amount of

milk fat, protein, and carbohydrates per unit of milk and wholesale dairy

product—from a component accounting exercise that fully allocates 1999

aggregate milk and dairy product production.13 We obtained regional farmlevel milk supply elasticities from the Food and Agricultural Policy

Research Institute and product demand elasticities from research

conducted by Cox et al.14 and USDA’s Economic Research Service.15 These

demand elasticities were estimated using USDA aggregate national time

series data on commercial disappearance and wholesale prices. The

estimates are consistent with a complete demand system specification

covering all major food groups and products. We obtained data on

refrigerated and nonrefrigerated transportation and assembly costs for

farm milk from dairy researchers at Cornell University.16 We used USDA

estimates of dairy manufacturing costs to incorporate processing costs

into our analysis.

We calibrated the model to yield solutions that are close to the observed

1999 data for farm-level and wholesale-level measures of prices and

production and to link key regional prices to commodity reference prices

used by USDA and California, such as those reported by the Chicago

 13R. Selinsky, T.L. Cox, and E.V. Jesse, “Estimation of U.S. Dairy Product Component

Yields.” University of Wisconsin-Madison, Agricultural Economics Staff Paper No. 355,

Sept. 1992.

14T.L. Cox, D. Lewis, and R. Selenski, Estimation of Wholesale Demand for U.S. Dairy

Products, University of Wiscons-Madison, Department of Agricultural Economics Mimeo,

1992.

15K.S. Huang, A Complete System of U.S. Demand for Food, USDA, Economic Research

Service, Technical Bulletin No. 1821, Sept. 1993.

16The methodology used to generate these cost estimates is documented at

http://cpdmp.cornell.edu/CPDMP/Pages/Publications/Pubs/rb9709.pdf.

1999 Baseline

Calibration
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Mercantile Exchange and USDA’s National Agricultural Statistics Service.

Tables 10 through 13 compare the 1999 model solutions with actual 1999

data for farm-level prices, farm-level production, wholesale commodity

prices, and wholesale commodity production, respectively. At the farm

level, the simulated values calibrate closely with the actual data—all

discrepancies are 0.5 percent or less, except for the farm-level price in

California, for which the discrepancy is about 1 percent. At the wholesale

level, the price discrepancies for major products (fluid milk, American and

Italian cheeses, butter, and nonfat dry milk) are less than about 3 percent,

while production discrepancies are 3.5 percent or less.

Table 10: IRCM99 Farm-Level Price Calibration

Farm-level prices in 1999

(dollars per hundredweight)

Difference between actual and

modeled 1999 farm-level prices

IRCM99 region Actual Modeled

Dollars per

hundredweight Percentage

Northeast $15.21 $15.15 $(0.06) (0.4)

Appalachia 16.02 15.96 (0.06) (0.4)

Florida 17.20 17.13 (0.07) (0.4)

Southeast 16.07 16.00 (0.07) (0.4)

Mideast 14.70 14.64 (0.06) (0.4)

Upper Midwest 13.88 13.81 (0.07) (0.5)

Central 14.27 14.21 (0.06) (0.4)

Southwest 14.54 14.48 (0.06) (0.4)

West 13.23 13.17 (0.06) (0.5)

Northwest 14.90 14.84 (0.06) (0.4)

California 13.12 12.97 (0.15) (1.1)

Arizona 13.80 13.75 (0.05) (0.4)

United States 14.27 14.23 (0.04) (0.3)

Note: Numbers in parentheses are negative.

Source: University of Wisconsin-Madison.

Table 11: IRCM99 Farm-Level Production Calibration

Farm-level production in 1999

(pounds in millions)

Difference between actual and

modeled 1999 farm-level

production

IRCM99

region Actual Modeled

Pounds in

millions Percentage

Northeast 29,205 29,178 (27) (0.1)

Appalachia 6,450 6,435 (15) (0.2)

Florida 2,393 2,389 (4) (0.2)

Southeast 3,553 3,547 (6) (0.2)
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Farm-level production in 1999

(pounds in millions)

Difference between actual and

modeled 1999 farm-level

production

IRCM99

region Actual Modeled

Pounds in

millions Percentage

Mideast 12,253 12,237 (16) (0.1)

Upper Midwest 32,848 32,798 (50) (0.2)

Central 14,879 14,852 (27) (0.2)

Southwest 10,292 10,276 (16) (0.2)

West 8,869 8,853 (16) (0.2)

Northwest 7,145 7,133 (12) (0.2)

California 30,408 30,451 (43) (0.1)

Arizona 2,918 2,914 (4) (0.1)

United States 161,213 161,063 (150) (0.1)

Note: Numbers in parentheses are negative.

Source: University of Wisconsin-Madison.

Table 12: IRCM99 Aggregate Wholesale Commodity Price Calibration

Wholesale commodity price

in 1999

(dollars per hundredweight)

Difference between actual and

modeled 1999 commodity prices

Dairy commodity Actual Modeled

Dollars per

hundredweight Percentage

Fluid milk $15.07 $15.09 $0.02 0.1

Soft dairy

products

27.30 27.29 (0.01) 0

American cheese 139.84 139.20 (0.64) (0.5)

Italian cheese 93.48 93.20 (0.28) (0.3)

Other cheese 115.68 115.49 (0.19) (0.2)

Butter 122.94 119.38 (3.56) (2.9)

Frozen dairy

products 21.41 21.38 (0.03) (0.1)

Other

manufactured

products 27.36 27.68 0.32 1.2

Nonfat dry milk 101.78 102.63 0.85 0.8

Note: Numbers in parentheses are negative.

Source: University of Wisconsin-Madison.
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Table 13: IRCM99 Aggregate Wholesale Commodity Production Calibration

Level of production in 1999

(pounds in millions)

Difference between actual and

modeled 1999 levels of

production

Dairy commodity Actual Modeled

Pounds in

millions Percentage

Fluid milk 55,039 55,020 (19) 0

Soft dairy products 6,068 5,986 (82) (1.4)

American cheese 3,577 3,539 (38) (1.1)

Italian cheese 3,143 3,176 33 1.0

Other cheese 578 598 20 3.5

Butter 1,275 1,274 (1) (0.1)

Frozen dairy

products 12,166 12,134 (32) (0.3)

Other

manufactured

products 4,351 4,270 (81) (1.9)

Nonfat dry milk 1,383 1,399 16 1.1

Note: Numbers in parentheses are negative.

Source: University of Wisconsin-Madison.

Because our baseline was calibrated to actual 1999 data, our original

baseline values represented estimates for a time when the Compact was in

place. As a result, we used the IRCM99 to estimate the impact of the NEDC

by simulating the year 1999 without the NEDC and comparing those

results with those obtained in our original baseline. That is, the estimated

impacts of removing the Compact from our original baseline are

interpreted as the estimated impacts of adding the Compact to a nocompact baseline, with the signs reversed. For each subsequent compact

scenario, we used the IRCM99 to estimate the interregional impact of

compacts. That is, we compared our estimates of farm-level and

wholesale-level prices, production, and revenue in 1999 under each

compact scenario with our estimates of what they would have been in that

year without any compact. In effect, the no-compact scenario became our

new baseline for comparison.

We developed three compact scenarios: the NEDC, which includes

Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and

Vermont; an expanded NEDC that also includes Delaware, Maryland, New

Jersey, New York, and Pennsylvania; and an expanded NEDC in

conjunction with a southern compact that includes Alabama, Arkansas,

Georgia, Kansas, Kentucky, Louisiana, Missouri, Mississippi, North

Compact Scenarios
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Carolina, South Carolina, Tennessee, and Virginia. These states were

included in the expanded NEDC and the southern compact on the basis

that they had enacted legislation as of the end of February 2001 that would

allow them to enter into a dairy compact, should the Congress enact

legislation allowing them to do so. While West Virginia had also enacted

such legislation as of the end of February 2001, we did not include it in our

analysis of an expanded NEDC in conjunction with a southern compact

because of the difficulty of modeling West Virginia as part of a southern

compact, given that it would have been the only state in USDA’s Mideast

Marketing Order whose milk would fall under compact regulation. Since

West Virginia produced less than 0.2 percent of the nation’s milk supply in

2000, we do not believe that its omission significantly affects our estimates

of the impact of the southern compact.

The IRCM99, as discussed previously, models different regions of the

country based, in part, on USDA's milk marketing orders and California.

Because of this, the states in the NEDC are incorporated as part of the

IRCM99 Northeast region. This region encompasses the following states:

Connecticut, Delaware, Maine, Massachusetts, Maryland, New Hampshire,

New Jersey, New York, Pennsylvania, Rhode Island, and Vermont (and the

District of Columbia). To account for the NEDC, we calculated the amount

of milk produced by the six NEDC states as a percentage of the total

amount of milk produced within the Northeast Milk Marketing Order.

Therefore, while we are able to estimate the impact of the NEDC on other

noncompact regions of the country that do not contain any compact

states, we could not estimate the NEDC's impacts on other noncompact

states within the Northeast region. Further, because we defined the

impacts of the NEDC scenario to be based on the amount of milk

produced by the six NEDC states, the impacts of this scenario do not

account for milk that noncompact states, such as New York, may ship into

the NEDC states. Further, reductions in revenue in noncompact states are

also not accounted for. Thus, our estimate of the NEDC's impact on

noncompact regions is a little smaller than would be expected had we

been able to isolate the effects of noncompact and compact states within

the same region.

Similarly, in our scenario of an expanded NEDC in conjunction with a

southern compact, the IRCM99 has the compact region extending into four

regions: the Appalachian, Central, Northeast, and Southeast. While this

compact scenario fully includes the majority or all of the states

encompassed by three of the four regions, one region—the Central—is not

fully encompassed. The Central region includes the following seven states:

Colorado, Illinois, Kansas, Missouri, Nebraska, Oklahoma, and South
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Dakota. However, only two of these states—Kansas and Missouri—are

assumed as part of a compact. As with our modeling of the NEDC, we

calculated the amount of milk produced by the two states as a percentage

of the total amount of milk produced within the Central region. Therefore,

while we are able to estimate the impact of the expanded NEDC in

conjunction with a southern compact on noncompact regions of the

country that do not contain any compact states, we could not estimate this

compact scenario's impact on the Central region. Similarly, under this

compact scenario, we do not take into account the amount of milk that

may be shipped into the compact states by bordering noncompact states in

the Central region. Further, reductions in noncompact producer revenue

in these noncompact states was also not accounted for. Thus, our estimate

of the expanded NEDC in conjunction with a southern compact's impact

on all noncompact regions combined is a little smaller than would be

expected had we been able to isolate the effects of noncompact and

compact states within the Central region.

We used specific parameter values to arrive at our baseline, or nocompact, scenario and initial estimates of the impacts of the different

compact scenarios. We also used key assumptions regarding the amount

of market-driven over-order premiums, compact producer price payment

levels, and transportation costs, and the ability of milk to move from

region to region.

Specifically, we used a milk price support payment amount, or price floor,

of $9.90 per hundredweight of milk, which equates to $1.10 per pound for

American cheese, 65 cents per pound for butter, and $1.01 per pound for

nonfat dry milk. In addition, we assumed medium-term, or 5-year,

wholesale demand elasticities for fluid milk and other dairy products, as

shown in table 14.

Table 14: Medium-Term Wholesale Demand Elasticities Used in Initial Estimates

Dairy commodity Medium-term demand elasticity

Fluid milk -0.144

Soft dairy products -0.42

American cheese -0.16

Italian cheese -0.251

Other cheese -0.477

Butter -0.243

Frozen dairy products -0.327

Parameter Values for

Our Baseline and

Initial Estimates
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Dairy commodity Medium-term demand elasticity

Other manufactured products -0.276

Nonfat dry milk -0.449

Source: Cox et al., 1992, and USDA’s Economic Research Service.

We also assumed medium-term regional supply elasticities as shown in

table 15.

Table 15: Medium-Term Regional Supply Elasticities Used in Initial Estimates

IRCM99 region Medium-term supply elasticity

Northeast 0.258

Appalachia 0.641

Florida 0.408

Southeast 0.396

Mideast 0.317

Upper Midwest 0.312

Central 0.430

Southwest 0.388

West 0.424

Northwest 0.430

California 0.433

Arizona 0.389

Source: Food and Agricultural Policy Research Institute.

We also assumed that within a compact region, there was no marketdriven over-order premium above the compact minimum price. This initial

assumption represents a lower bound, and assumes that compact overorder producer price payments may have replaced, or become a substitute

for, much of the market-driven over-order premiums in the compact

region. We also assumed that the Class I price in a compact region, or the

compact price, was $16.94 per hundredweight of milk.

To better model the effect of pooling and to account for milk shipments

from region to region and from noncompact to compact regions, we

assumed that no more than 40 percent of any one region’s packaged fluid

milk could be shipped to another region without being pooled in the

receiving region. We also assumed that a processor had to pay the

compact over-order producer price into a compact pool for milk shipped

into a compact region in order to receive a compact blend price for these

fluid shipments. With these assumptions, we did not restrict milk flows

from region to region or from noncompact to compact regions. We also

used transportation costs as developed by researchers at Cornell

University, with no adjustment.
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Following our initial analyses, we conducted additional analyses of the

impacts of compacts by varying our initial parameter values or

assumptions to determine how sensitive our initial estimates were to

changes in key values or assumptions. Specifically, with respect to

wholesale demand elasticities, we changed the medium-term elasticities

used in our initial analyses to long-term, as shown in table 16, to determine

what impact higher elasticities would have on our initial estimates.

Table 16: Long-Term Wholesale Demand Elasticities Used in the Sensitivity

Analyses

Dairy commodity Long-term demand elasticity

Fluid milk -0.30

Soft dairy products -0.907

American cheese -0.625

Italian cheese -0.741

Other cheese -0.477

Butter -0.42

Frozen dairy products -0.42

Other manufactured products -0.45

Nonfat dry milk -0.60

Source: GAO, based on an analysis of pertinent agricultural economics literature.

In a separate analysis, we changed our regional supply elasticities to longterm, as shown in table 17, to determine if changes in long-term supply

elasticities would affect our initial estimates.

Table 17: Long-Term Regional Supply Elasticities Used in the Sensitivity Analyses

IRCM99 region Long-term supply elasticity

Northeast 0.431

Appalachia 0.951

Florida 0.674

Southeast 0.629

Mideast 0.517

Upper Midwest 0.514

Central 0.666

Southwest 0.614

West 0.727

Northwest 0.748

California 0.793

Arizona 0.605

Source: Food and Agricultural Policy Research Institute.

Sensitivity Analyses
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In a separate analysis, we changed our assumption regarding the lack of

any market-driven over-order premium within compact regions and added

a 50-cent-per-hundredweight over-order premium above the compact's

minimum price to determine what impact this would have on our initial

estimates. We then simultaneously used long-term supply and demand

elasticities in conjunction with the 50-cent over-order premium in compact

regions to determine what combined effect these three changes taken

together would have on our initial estimates.

In a separate analysis, we inflated transportation costs that we obtained

from Cornell University by 25 percent within each of the IRCM99 regions

to determine what effect increased transportation costs would have on our

initial estimates.

In addition, we conducted a separate sensitivity analysis specific to the

expanded Northeast Compact in conjunction with a southern compact

scenario. In this analysis, we varied the assumption regarding the Class I

minimum price, or compact price, in the compact region. We increased the

minimum price from $16.94 to $18.00 per hundredweight in the southern

compact but retained the $16.94 minimum price in the expanded Northeast

Compact. We conducted this analysis because data on cooperative pay

prices in selected cities in USDA’s Appalachia, Southeast, and Central milk

marketing orders were about a dollar higher in 1999 than in the Northeast

Milk Marketing Order.17

We also analyzed how sensitive the model was to trade limitations across

regions. Our initial estimates and previous sensitivity analyses assumed

that milk flowed relatively freely between noncompact and compact

regions. We revised this assumption by limiting the amount of milk that

could flow into a compact region from a noncompact region to that

amount of milk produced within 100 miles of a compact region’s border.

Although we recognize that there are no regulations establishing such a

limit, we performed this particular analysis to reflect the fact that the

IRCM99 uses average transportation costs, on a regional basis, because of

the lack of specific data on the location of processing plants for 1999. This

limitation may lead to a model solution with unrealistically high

interregional milk trade. We then compared the estimated impacts of the

 17Each month, cooperative associations announce cooperative pay prices. A cooperative

pay price is based on a blend price—a weighted-average value based on milk usage—plus

the costs of services performed by the cooperative association and cooperative

membership dues, and other costs such as the national advertising and promotion program.
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different compact scenarios with the impacts of the no-compact scenario

using this revised trade assumption. We also conducted the same

sensitivity analyses discussed above to determine how sensitive these new

estimates were to changes in key values and assumptions.

We also conducted an analysis of how sensitive our initial estimates were

to the magnitude of the difference between USDA and compact prices. We

derived our initial estimates and our sensitivity analyses using 1999 pricing

data because 1999 was the most recent year for which complete data were

available. During 1999, the national average blend price of milk, or the

average weighted minimum farm-level price, was $14.09 per

hundredweight, which was higher than the prices observed in some other

years, including 2000. For example, the national average blend price of

milk in 2000 was $12.11 per hundredweight. To determine how sensitive

our 1999 estimates were, we used preliminary milk pricing data for 2000 to

determine what impact this difference may have had. This required a new

baseline for assessing the magnitude of change that compacts made, given

the relative magnitude of change in compact and USDA prices. We did not,

however, conduct a full range of sensitivity analyses regarding this change

in assumptions because of the preliminary nature of the 2000 pricing data.

Further, the 2000 pricing data reflected regulatory reform measures

implemented by USDA in January 2000, which posed potential data

reliability concerns.

We calibrated the model using dairy sector data for 2000 to simulate the

impact of compacts during that year. The method used to develop the

IRCM00 was similar to the method used to develop the IRCM99, with two

exceptions:

• We used data on 2000 regional farm production and milk prices; aggregate

commodity supply/demand balance (commodity production, imports,

exports, and stocks) and prices; and component balance (using 2000

disaggregate commodity production data) to develop the base model.

• We incorporated revised January 2000 USDA milk marketing order pricing

regulations into the model. These revisions include a methodology for

computing (1) classified prices based on USDA’s “Final Rule” multiple

component pricing, (2) Class I prices based on the higher of the Class III

or Class IV multiple component price, and (3) minimum Class II prices

based on adding a 70-cent-per-hundredweight premium to Class IV prices.

As in the IRCM99, all classified pricing commodity wedges are computed

relative to Class III prices, so that if Class IV prices are higher than Class

III prices, additional classified pricing premiums are added to Class I, II,
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and IV prices. Tables 18 and 19 summarize the additional classified pricing

premiums for USDA and California.

Table 18: USDA’s Classified Prices, and the Difference Between These Prices and

the Price for Cheese (USDA's Class III or California’s Class 4b) in 2000

Dollars per hundredweight

Class USDA's class price

Difference between

USDA's class price

and USDA’s Class III

price of $9.74

Difference between

USDA's class price and

California’s Class 4b

price of $9.69

I minimum $14.03 $4.29 $4.34

I actual 15.31 5.57 5.62

II 12.53 2.79 2.84

III 9.74 0 0.05

IV 11.83 2.09 2.14

Source: USDA’s Agricultural Marketing Service.

Table 19: California's Classified Prices, and the Difference Between These Prices

and the Price for Cheese (USDA's Class III or California’s Class 4b) in 2000

Dollars per hundredweight

Class

California's milk

marketing

program price

Difference between

California's milk

marketing program price

and USDA’s Class III

price of $9.74

Difference between

California's milk

marketing program

price and California’s

Class 4b price of $9.69

1 $13.38 $3.64 $3.69

2 12.34 2.60 2.65

3 12.20 2.46 2.51

4b 9.69 (0.05) 0

4a 11.82 2.08 2.13

Note: Numbers in parentheses are negative.

Source: USDA’s Agricultural Marketing Service.

USDA’s revised pricing regulations result in larger Class I and II premiums

over Class III milk than occur under California’s pricing regulations, as

shown in table 20.
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Table 20: IRCM00 Classified Component Price Premiums in Federal Milk Marketing

Orders and California

Dollars per hundredweight

Commodity premium

Dairy commodity (Class)

California

Federal marketing

order

Fluid milk (I or 1) $3.92 $4.35

Soft dairy products (II or 2) 2.59 2.54

Frozen dairy products (II or 3) 2.32 2.36

Butter (IV or 4a) 0.71 0.73

Nonfat dry milk (IV or 4a) 22.37 23.02

Residual (IV or 4a) 17.51 18.02

Source: University of Wisconsin-Madison.

USDA Class I and II premiums are also higher in 2000 than in 1999 because

of lower Class III prices in 2000 relative to 1999, and the impact that Class

IV prices had on Class I and II. Also, in modeling the impacts of compacts

in 2000, we computed commodity premiums in producer price settlement

pools on the basis of fat and skim-not-fat commodity components, using

revised classified fat and skim-not-fat prices.

As with any modeling exercise, the IRCM has certain limitations. These

limitations include: (1) the model cannot identify individual shipments of

raw milk from one milk marketing order to another because we do not

have data on shipments of raw milk and packaged fluid milk by individual

farmers and processors, respectively, (2) the model is static and does not

take into account dynamic adjustments, (3) the model ignores some

institutional and/or historical rigidities and capacity constraints (other

than for the milk marketing orders and component flow constraints), (4)

the model assumes the absence of farmer, processor, and/or retailer

market power, and (5) the model takes exports and imports as being

exogenous to the model.

IRCM Limitations
Appendix III: NEDC’s Intraregional Impacts

Page 61 GAO-01-866 Impacts of Dairy Compacts

The intraregional impacts of the NEDC on (1) retail milk prices, (2) milk

producer income, (3) dairy farm structure, (4) milk production, and (5)

milk consumption are difficult to determine. Data indicate that retail milk

prices increased when the NEDC’s alternative minimum pricing

requirement took effect in July 1997, and prices continue to remain

relatively high compared with retail milk prices in the rest of the country.

However, because many factors affect retail milk prices, we were unable

to determine what portion of the retail price increases in the NEDC states

was due to the NEDC as opposed to other factors. With regard to milk

producer income, when the NEDC price has been higher than the Class I

price, dairy farmers have received payments that reflect the NEDC price—

that is, the Class I price plus the difference between the Class I price and

the NEDC price. (This difference is called an over-order payment.)

However, it is likely that farmers would have received some portion of the

difference even without the Compact in the form of market-driven overorder premiums. Data on the structure of dairy farms, milk production,

and fluid milk consumption in the six NEDC states and data for the rest of

the United States show similar trends, suggesting little or no change in the

NEDC states following the Compact’s establishment.

Retail milk prices increased in the NEDC states in July 1997, when the

Compact’s alternative minimum price for raw milk to be used for and sold

as fluid milk in the six states took effect, but not in the rest of the country.

Data indicate that since July 1997, retail prices in Boston and other

selected cities and towns in New England have remained relatively high,

compared with prices in other major cities in the country. It is difficult to

determine, however, what portion of the retail price increase can be

attributed to the NEDC’s alternative minimum price as opposed to other

factors that affect retail milk prices. Economic analyses of the NEDC’s

impact on retail milk prices have concluded that retail milk prices

increased following the Compact’s establishment, but the estimated

amount attributable to the Compact’s higher alternative minimum price

varies among the different studies.

The retail price of milk in the New England states increased sharply during

July 1997, when the NEDC began setting minimum prices that processors

must pay for raw milk used for and sold as fluid milk—milk used for

drinking purposes—in the NEDC states, but comparable increases did not

occur in most other locations in the United States. In that month, the

NEDC price—$1.46 per gallon—was 26 cents higher than USDA’s milk

marketing order Class I price of $1.20 per gallon. This 26-cent per gallon

Appendix III: NEDC’s Intraregional Impacts

Retail Milk Prices

Increased in the

NEDC States, but It Is

Difficult to Determine

the Amount

Attributable to the

Compact

Retail Milk Prices

Increased in July 1997 in

New England but Not in

the Rest of the Country
Appendix III: NEDC’s Intraregional Impacts

Page 62 GAO-01-866 Impacts of Dairy Compacts

(or 22 percent) price increase appears to have been passed on to

consumers at the retail level on fluid milk prices during the same month.

Table 21 shows the increase in retail prices according to data collected by

the departments of agriculture in Connecticut, Maine, and New

Hampshire; the International Association of Milk Control Agencies;1

 and

A.C. Nielsen.2

Table 21: Retail Prices for a Gallon of Milk in NEDC States Before and Immediately

Following the NEDC’s Establishment

Organization collecting the data June 1997 July 1997

Connecticut, Maine, and New Hampshire departments of

agriculture

$2.43 $2.58

International Association of Milk Control Agenciesa2.49 2.66

A.C. Nielsenb2.40 2.60

a

Association data are an average for five cities or towns in Maine; Boston, Massachusetts; and three

cities or towns in Vermont.

b

A.C. Nielsen data for Boston, Massachusetts, which we selected to represent the NEDC.

Source: GAO analysis of data from Connecticut, Maine, and New Hampshire departments of

agriculture; the International Association of Milk Control Agencies; and A.C. Nielsen.

Data from the International Association of Milk Control Agencies indicate

that between June and July 1997, the average retail price of a gallon of

milk increased by about an average of 7 percent in nine cities in Maine,

Massachusetts, and Vermont. A.C. Nielsen data for Boston indicate that

retail milk prices increased by an average of about 8 percent during the

same period.

Our review of data for the rest of the United States indicates few increases

in the retail price of milk in July 1997 that were comparable to what

occurred in the New England states. For example, data from the

International Association of Milk Control Agencies for 42 cities and

regions outside the NEDC states indicate that only two of those cities or

regions experienced retail price increases comparable to or larger than

those observed in selected cities in Maine, Massachusetts, and Vermont in

July 1997: Eastern Virginia had a 31-cent increase and Reno, Nevada had a

 1

The International Association of Milk Control Agencies is an organization whose members

represent states and territories that regulate milk prices within their jurisdictions. Among

other things, members collect data on retail milk prices for milk sold in selected cities

within their jurisdictions.

2

A.C. Nielsen is a private data collection and analysis company.
Appendix III: NEDC’s Intraregional Impacts

Page 63 GAO-01-866 Impacts of Dairy Compacts

10-cent increase between June and July 1997. Moreover, data from A.C.

Nielsen for 13 major cities outside the NEDC states show an increase in

retail milk prices in only one city between June and July 1997: in Seattle,

the price of milk rose from $2.91 to $3.01 a gallon. Elsewhere, retail milk

prices declined, for example, in Cincinnati, from $1.43 to $1.35 per gallon

between June and July 1997 and in Washington, D.C., from $2.47 to

$2.44 per gallon.

In the longer term, between July 1997 and September 2000, retail milk

prices in most of the United States did not increase as much as they did in

the NEDC states, according to A.C. Nielsen data, as shown in figure 2.3

 The

average retail milk price in Boston increased by 18 percent between June

1997 and September 2000, from $2.40 to $2.84 per gallon. The national

average retail price of milk increased by 8 percent during the same period,

from $2.49 to $2.68 per gallon.

 3

We are using A.C. Nielsen data for Boston to represent the NEDC states.

From July 1997 to

September 2000, Retail

Milk Prices in the Rest of

the Country Have

Increased Less Than in the

NEDC
Appendix III: NEDC’s Intraregional Impacts

Page 64 GAO-01-866 Impacts of Dairy Compacts

Figure 2: Comparison of the Average Retail Price of a Gallon of Milk in Boston and in the United States, November 1996-

September 2000

Source: GAO analysis of data from A.C. Nielsen.

A.C. Nielsen data for 13 major cities outside the NEDC indicate that retail

milk prices increased between June 1997 and September 2000 in 10 of

those cities as well. For example, retail prices increased by 3 percent in

Phoenix, or from $2.21 to $2.27 per gallon; by 12 percent in Seattle, or from

$2.91 to $3.26 per gallon; by 17 percent in New Orleans, from $2.58 to

$3.03 per gallon. Data for one city—Cincinnati—show a greater price

increase than in Boston: prices increased by 80 percent, from $1.43 to

$2.57 per gallon, between June 1997 and September 2000. However, data

for Cincinnati indicate that between March 1997 and May 1998, retail milk

prices were considerably lower than those in other major cities. In

contrast to retail milk prices in cities such as Boston and Cincinnati, prices

fell in Dallas, Denver, and San Diego.

Data from the International Association of Milk Control Agencies also

indicate that retail milk prices increased from June 1997 to November 2000

in the NEDC states and the rest of the country. For example, retail prices

increased by 17 percent, from $2.59 to $3.04 in Burlington, Vermont; and
Appendix III: NEDC’s Intraregional Impacts

Page 65 GAO-01-866 Impacts of Dairy Compacts

by 10 percent, from $2.18 to $2.39 in Augusta, Maine, from June 1997 to

November 2000. In the rest of the country, of the 29 cities or regions for

which the Association had June 1997 and November 2000 data, retail milk

prices increased in 21 of them. For example, retail milk prices increased

by 4 percent, from $2.76 to $2.88 per gallon in Philadelphia, Pennsylvania;

and by 20 percent, from $2.55 to $3.05, in Salem, Oregon.

Even though it is likely that the Compact caused some portion of the retail

milk price increase in the NEDC states, it is difficult to determine the size

of that portion. In part, this is because retail milk prices vary considerably

in relation to the minimum farm-level price for raw milk. For example,

after retail prices increased by about 20 cents per gallon in July 1997, they

fell by about 5 to 7 cents per gallon for a period of several months. In

addition, even though the NEDC price remained stable at $1.46 per gallon

between July 1997 and August 1998, data on retail milk prices for Boston

indicate that retail prices fluctuated during that period from a high of $2.60

to a low of $2.53 per gallon. Figure 3 shows the relationship between the

Class I or NEDC price and the average retail price of milk sold in Boston.
Appendix III: NEDC’s Intraregional Impacts

Page 66 GAO-01-866 Impacts of Dairy Compacts

Figure 3: Comparison of the Average Retail Price of a Gallon of Milk in Boston and the USDA Class I or NEDC Price,

November 1996-September 2000

Note: The NEDC price took effect beginning in July 1997. The NEDC price per gallon is the higher of

either USDA’s Class I price or the NEDC floor price of $1.46 per gallon.

Source: GAO analysis of data from A.C. Nielsen, USDA’s Agricultural Marketing Service, and the

NEDC.

Between July 1997 and September 2000, the retail price in Boston varied

between $2.53 and $2.90 per gallon. In September 1998 when the NEDC

price increased by 9 cents, from $1.46 to $1.55 per gallon, the retail price

increased by only 1 cent, from $2.55 to $2.56. As figure 3 shows, retail

prices increased in early calendar year 1999 and again in late calendar year

1999. In November 1999, the retail price of milk reached a high of $2.90,

when the NEDC price was $1.68 per gallon.

One of the reasons that there is not a close relationship between the

NEDC price for milk and the retail price is that many factors affect the

retail price of milk, including wholesalers’ costs, state regulations,
Appendix III: NEDC’s Intraregional Impacts

Page 67 GAO-01-866 Impacts of Dairy Compacts

consumer demand, and retailers’ pricing strategies.4 More specifically, the

retail price of milk is affected by wholesalers’ costs of acquiring and

processing raw milk and packaging and distributing processed fluid milk

to retail outlets. The retail price can also be affected by state regulations

that, for example, dictate how and where milk can be distributed. Another

factor is consumers’ shrinking demand for milk products, as opposed to

other beverages. This shrinking demand has created a need to advertise

and improve products, which has increased retail costs. Finally, retail milk

prices are affected by retail pricing strategies involving such factors as

retail costs, competitor pricing, if and how milk prices are used to attract

customers, shopping convenience, the image a store may want to project

regarding quality or low prices, and the extent to which retailers exercise

market power.

Four studies have estimated the Compact’s impact on retail milk prices,

and each has concluded that the NEDC has resulted in increased retail

prices. Each study provides a different estimate of the amount that the

NEDC has caused retail prices to increase, however, largely because of the

different methodologies used and the time frames analyzed. The Office of

Management and Budget (OMB) issued a study in 1998 that analyzed retail

milk price data for the first 6 months that the NEDC was in effect.5

 OMB

estimated that the Compact could have had a small impact (an increase of

5 to 10 cents per gallon), a medium impact (an increase of 10 to 15 cents

per gallon), or a large impact (an increase of 15 to 20 cents per gallon) on

retail prices, depending on the extent to which costs were passed on from

the farm to the retail level, and the extent to which wholesalers and

retailers absorbed or passed on any increased costs. However, OMB

cautioned that its study was completed too soon after the Compact began

operating in July 1997 to determine its economic impacts and implications

with confidence or precision. OMB further cautioned that U.S. dairy

industry economics are complex, and that producer, wholesale, and retail

prices are affected by numerous proprietary, regional, and national

factors. OMB concluded that retail price patterns have fluctuated in recent

years and provide no definitive indication of the retail price levels that

would have occurred without the Compact.

 4

A detailed discussion of these various factors is included in our report entitled Dairy

Industry: Information on Milk Prices and Changing Market Structure (GAO-01-561, June

15, 2001).

5

OMB’s The Economic Effects of the Northeast Interstate Dairy Compact, Feb. 1998.

Other Studies Estimate

That the NEDC Has

Increased Retail Prices
Appendix III: NEDC’s Intraregional Impacts

Page 68 GAO-01-866 Impacts of Dairy Compacts

In 2000, economists (Lass et al.) at the University of Massachusetts issued

a study that analyzed the NEDC’s impact on retail milk prices during the

first year of the Compact.6 For this study, which was conducted for the

NEDC, Lass et al. used data from January 1982 through June 1996 to

develop a model of farm-to-retail price behavior in two markets: Boston

and Hartford. They then used data from an 18-month period—July 1996

through December 1997—to predict what the retail price for milk would

have been without the Compact and to compare those predicted effects

with the effects that actually occurred in New England. Lass et al.

concluded that the NEDC caused an average retail milk price increase of

about 7 cents per gallon in the Boston market and about 6 cents per gallon

in the Hartford market. They also concluded that because this estimated

retail price increase was less than the NEDC increase in costs to fluid milk

processors (the over-order amount due to the NEDC), an amount less than

the NEDC over-order amount was being passed on to consumers. The

authors cautioned, however, that the model did not capture changes that

may have occurred in the farm-to-retail price relationship from July

through December 1997.

A third study, issued in 2000 by an economist (Bailey) at Pennsylvania

State University, analyzed the farm-to-retail markup for fluid milk over the

period January 1996 through December 1999.7

 Using a simple but direct

markup model to evaluate the impact of the NEDC on retail fluid milk

prices in Boston and Hartford, Bailey concluded that the retail price of

milk increased after the Compact established its minimum price in July

1997. Specifically, Bailey concluded that the retail price of milk rose

24 cents per gallon from July 1997 to December 1999 over the average

price in effect from January 1996 to June 1997. According to Bailey, the

majority of this 24-cent per gallon increase—17 cents per gallon—was

attributable to the Compact, while the rest was attributable to other

factors.8

 Finally, studies issued in 2001 by economists (Cotterill and

Franklin) at the University of Connecticut examined specific factors that

 6

Daniel A. Lass, Mawunyo Adanu, and P. Geoffrey Allen, “Impacts of the Compact on Fluid

Milk Retail Prices,” The Northeast Interstate Dairy Compact: Milk Market Impacts,

Research Report 73, Agricultural Experiment Station, University of Vermont, Mar. 2000.

7

Kenneth Bailey, Report on the Operation and Performance of the Northeast Interstate

Dairy Compact, Department of Agricultural Economics and Rural Sociology, Pennsylvania

State University, July 2000.

8

The increase in the retail price of milk was partially offset by a 3-cent-per-gallon decline in

the retail price of milk due to the reduction in the cooperative market over-order premium.
Appendix III: NEDC’s Intraregional Impacts

Page 69 GAO-01-866 Impacts of Dairy Compacts

may have increased retail milk prices in four New England marketing

areas—Boston, Providence, Hartford/Springfield, and Northern New

England—following the Compact’s establishment in July 1997.9 Cotterill

and Franklin compared retail price data from February 1996 through early

July 1997 with retail price data from July 1997 through August 1998. The

authors separated out retail price increases as caused by four factors:

(1) the increased farm price of milk caused by the NEDC; (2) the increased

farm price of milk caused by strong raw milk markets when the farm price

spiked above the NEDC price; (3) nonmilk costs, such as increased

processing costs other than costs for purchasing raw milk and increased

distribution costs; and (4) changes in pricing at the wholesale and retail

levels. Using this methodology, Cotterill and Franklin concluded that of

the 29-cent increase in the retail price of a gallon of milk, on average, 2.7

cents per gallon were caused by the NEDC and 6.5 cents per gallon were

caused by strong milk markets.10

While it is likely that the NEDC has stabilized producer income, it is

difficult to determine how large of an impact it has had on producer

income because of uncertainty about what dairy farmers in the six NEDC

states would have been paid for their milk in the absence of the Compact.

This uncertainty arises because NEDC payments made to dairy farmers

may be, in part, substitutes for market-driven over-order premium

payments. Even so, the NEDC commission has concluded that the

Compact has had a positive effect on the financial status of dairy farmers

in the six NEDC states and New York. USDA data on dairy farm income do

not clearly indicate whether the improved financial status of an average

dairy farmer in the NEDC states resulted from the NEDC. Finally, while

two studies of the NEDC’s impact on farm income concluded that the

NEDC could have a positive impact on farm income, they provide no

definitive estimate of the size of this impact.

 9

Testimony by Ronald W. Cotterill on The Impact of the Northeast Dairy Compact and

Market Channel Pricing Strategies on the Performance of the New England Dairy

Industry before the U.S. Senate Committee on the Judiciary, July 25, 2001; and Ronald W.

Cotterill and Andrew W. Franklin, The Public Interest and Private Economic Power: A

Case Study of the Northeast Dairy Compact, Food Marketing Policy Center, Department

of Agricultural and Resource Economics, University of Connecticut, May 2, 2001.

10Cotterill and Franklin, in their May 2001 study, attributed 4.5 cents of the 29-cent per

gallon milk price increase to the NEDC. They revised this estimate to 2.7 cents in the July

2001 study. The 1.8 cents-per-gallon reduction in the amount attributable to the NEDC was

caused by a reduction in cooperative premiums.

Limited Data Are

Available to Estimate

the Potential Impacts

of the Compact on

Producer Income
Appendix III: NEDC’s Intraregional Impacts

Page 70 GAO-01-866 Impacts of Dairy Compacts

We cannot determine how much impact the NEDC has had on dairy

farmer income because we do not know what dairy farmers’ incomes

would have been from July 1997 to the present in the absence of the

NEDC. While farmers would have received at least the minimum federal

marketing order or state prices, in some cases it is likely that they would

have received an amount greater than these prices even in the absence of

the NEDC. According to USDA officials, dairy farmers in the NEDC states

had received some market-driven over-order premiums prior to the

NEDC’s establishment. For example, in 1996, the over-order Class I

premium in the New England order averaged 76 cents per

hundredweight.11 Research conducted by economists at Cornell University

indicates that after the compact began, producers receiving NEDC

payments received no over-order premiums above the amount needed to

compensate them for cooperative services. In one survey conducted in

August 2000, dairy farmers in New York who received NEDC payments

were receiving no market-driven over order premiums, while producers

not shipping milk into the NEDC states received about 60 cents per

hundredweight in market-driven over-order premiums. USDA officials

concurred with this assessment. According to one USDA official, overorder charges decreased about 50 cents per hundredweight after the

NEDC began setting its price for Class I milk, and were at levels indicative

of the costs of services provided by cooperatives for handlers.

We estimate, however, that dairy farmers supplying raw milk for use as

fluid milk sold in the NEDC states have received revenue as a result of the

Compact. We estimate that an average licensed dairy farmer located in one

of the six NEDC states received annual payments of between $3,892 and

$15,301 since the NEDC regulations took effect in July 1997 through

December 2000, as shown in table 22.

 11The difference between the price actually paid for Class I milk and the Federal order

minimum Class I price, called the "over-order premium," is negotiated between dairy

cooperatives (which sell milk produced by their farmer members) and fluid milk

processors. The over-order premium includes the price for cooperative services and any

additional price that fluid milk processors must pay to obtain needed supplies that are

driven by market forces (that is, supply and demand for Class I milk).

NEDC Payments May Be,

in Part, Substitutes for

Market-Driven Premium

Payments
Appendix III: NEDC’s Intraregional Impacts

Page 71 GAO-01-866 Impacts of Dairy Compacts

Table 22: Average Annual NEDC Over-Order Payment Received by a Dairy Farmer Located in the Six NEDC States

Calendar year

Number of dairy farms in

the NEDC states

Milk produced within the

NEDC states (pounds in

millions)

Average NEDC net

producer price (dollars

per hundredweight)

Average annual dairy

farm payment as a

result of the NEDC

(dollars per licensee)

Last half of 1997 3,237 2,272.2 $.93 $6,582

1998 3,049 4,663.0 .25 3,892

1999 2,964 4,691.0 .49 7,931

2000 2,772 4,664.2 .91 15,301

Source: GAO analysis of data from USDA and the NEDC.

As table 22 shows, the dairy farm payment resulting from the difference

between the USDA Class I price and the NEDC price (the over-order

producer price payment) increased significantly in 2000, when the USDA

Class I price was low—$14.80 per hundredweightative to the NEDC price

of $16.94.12

Although we are unable to determine how much of an impact the NEDC

has had on dairy farmer income in the six NEDC states, dairy farmers

supplying milk and receiving over-order producer price payments have

likely benefited from the NEDC. At a minimum, the NEDC has had a

stabilizing impact on the prices paid to farmers for milk, irrespective of the

amount of additional income it may have generated, because the $16.94

NEDC price per hundredweight has protected dairy farmer income when

the minimum federal marketing order price has fallen below the NEDC

price. This occurred in 35 of the 46 months between July 1997 and March

2001.

NEDC commission data indicate that the difference between the Compact

Class I price and the USDA minimum Class I price from July 1997 through

June 2001, minus fees for administering the NEDC, totaled about $146

million. This amount was provided to 4,217 farms supplying the New

England market, of which 1,300 are estimated to be located in New York.

According to the NEDC, between July 1997 and June 2001, the NEDC

resulted in annual payments of between $3,900 and $14,700, to these

 12The amounts available in the form of payments to farmers exclude fees collected by the

NEDC commission for paying commission staff salaries, legal costs, and costs for

compensating USDA and the states for estimated increased costs to milk price support and

selected nutrition assistance programs.

NEDC Data Indicate a

Positive Impact on Net

Farm Income, but USDA

Data Are Less Clear
Appendix III: NEDC’s Intraregional Impacts

Page 72 GAO-01-866 Impacts of Dairy Compacts

farms, depending on herd size. The average annual payment was $9,812

per farm. According to the NEDC commission, this additional income

helped stabilize and enhance farm-level prices for farmers in the six NEDC

states as well as New York, some of whom have historically been part of

the New England milk shed.

Similarly, NEDC data indicate that net farm earnings improved as a result

of the Compact. For example, the NEDC commission estimated that in

1997, the Compact increased net farm earnings of those supplying the New

England milk shed by about $6,800, from about $11,000 to about $17,800.

The NEDC commission estimated that in 2000, the Compact increased net

earnings by about $15,200, from about $8,100 to about $23,300. The NEDC

commission also estimated that in 2000, the percentage of dairy farms that

experienced financial stress was 20 percent lower than it would have been

in the absence of the Compact: About 50 percent of farms experienced

some degree of financial stress, compared with 70 percent that would have

experienced some degree of financial stress without the NEDC. These

figures led the NEDC commission to conclude that the overall reduction in

financial stress resulted in a significant reduction in the likely net loss of

dairy operations in the Northeast.

While USDA data indicate that the net farm income of an average dairy

farmer in the northeastern region has increased slightly more than the net

income of an average farmer in other regions between 1991 and 1999, the

data also indicate that net farm income in the northeastern region was

lower than that of farmers in other regions during the same time period.13,14

Figure 4 shows that the net farm income of average dairy farmers in the

northeastern region and other regions in the country has increased

between 1991 and 1999, but that the trend increased at a lower rate in the

northeastern region than in other regions in the country. Regarding the

northeastern region, the data indicate that an average dairy farmer’s net

farm income increased by 36 percent, from $34,064 in 1996 to $46,415 in

1999. In the rest of the United States, an average dairy farmer’s net farm

income increased by 61 percent, from $45,650 in 1996 to $73,486 in 1999. It

 13USDA’s Economic Research Service defines net farm income as total accrual receipts

minus total accrual expenses when cash income is adjusted for changes in crop and

livestock inventories.

14The northeastern region includes Connecticut, Delaware, Maine, Maryland,

Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, and

Vermont.
Appendix III: NEDC’s Intraregional Impacts

Page 73 GAO-01-866 Impacts of Dairy Compacts

is difficult to determine, however, the specific impact of the NEDC,

because many factors influence dairy farm income, and USDA’s

northeastern region includes other states in addition to the six NEDC

states.

Figure 4: Net Farm Income of a Representative Dairy Farmer in the Northeastern

Region and in Other U.S. Regions, 1991-99

Notes: The northeastern region includes Connecticut, Delaware, Maine, Maryland, Massachusetts,

New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, and Vermont. The other U.S.

regions exclude these 11 states, Alaska, and Hawaii.

Net farm income is in 1999 constant dollars.

Source: GAO analysis of data from USDA’s Economic Research Service.

USDA data also indicate that between 1991 and 1999, the percentage of

northeastern dairy farms having favorable solvency15 grew more than the

percentage of dairy farms with favorable solvency in other regions of the

 15Dairy farms having a favorable solvency have debt-to-asset ratios of less than 0.40 and

positive net farm incomes.
Appendix III: NEDC’s Intraregional Impacts

Page 74 GAO-01-866 Impacts of Dairy Compacts

country.16 Figure 5 shows that the percentage of dairy farms having

favorable solvency in other regions of the country remained relatively

constant.

Figure 5: Comparison of the Percentage of Dairy Farms Having Favorable Solvency

in the Northeastern Region With the Percentage in Other Regions, 1991-99

Note: The northeastern region includes Connecticut, Delaware, Maine, Maryland, Massachusetts,

New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, and Vermont. The other U.S.

regions exclude these 11 states, Alaska, and Hawaii.

Source: GAO analysis of data from USDA’s Economic Research Service.

About 61 percent of the dairy farms in the northeastern region had

favorable solvency in 1991, in comparison with about 69 percent of the

dairy farms in the rest of the U.S. regions. About 82 percent of the dairy

farms in the northeastern region had favorable solvency in 1999, in

 16USDA’s Economic Research Service uses favorable solvency as an indicator of the

financial position of a farm business based on a combination of income (net farm income)

and solvency (debt/asset ratio) measures.
Appendix III: NEDC’s Intraregional Impacts

Page 75 GAO-01-866 Impacts of Dairy Compacts

comparison with about 73 percent of the dairy farms in the rest of the U.S.

regions. Whether the NEDC caused the percentage of dairy farms in the

northeastern region having a favorable solvency to grow faster is difficult

to determine because, as noted previously, the six NEDC states form only

a portion of the northeastern region.

Two studies have analyzed the NEDC’s impact on dairy farmer income and

concluded that the Compact has the potential to improve farmer finances.

OMB’s 1998 analysis was limited by the fact that the Compact had been in

effect for only about 6 months when OMB conducted its study.17 To

estimate the NEDC’s impact on farm income, OMB developed two

alternative scenarios of what milk prices would have been had the

Compact not been established. Under the first scenario, OMB assumed

that the Class I price would have averaged $15.92 per hundredweight in

1997; under the second scenario, OMB assumed that the Class I price

would have been $16.10 per hundredweight, taking into account the

decline in the market-driven over-order premium when the NEDC took

effect. OMB then compared these prices with a minimum NEDC price of

$16.94 per hundredweight. Using $16.94 as a basis for calculating a blend

price, OMB estimated that in 1997, the NEDC generated an average

increase in gross farm income of $5,650 under the first scenario and $4,770

under the second scenario. Regarding the NEDC's overall impact on dairy

farmers' income, OMB concluded that, if other factors affecting dairy

farmers were held constant, higher milk prices would not be expected to

greatly alter the long-term trend toward fewer, but larger and more

efficient dairy operations in New England.

In 1998, an economist (Wackernagel) at the University of Vermont issued a

study on the potential impact of the dairy Compact that used computer

models to simulate characteristics of Vermont dairy farms under different

milk pricing policies.18 The models varied with respect to factors such as

farm size, farm profitability, productivity growth rate, and milk prices.

Although no one model specifically simulated the impact of the NEDC,

Wackernagel concluded that using his compact scenarios, the impact of

 17OMB, Feb. 1998.

18Rick W. Wackernagel, “Potential Economic Impacts of the Northeast Interstate Dairy

Compact on Vermont Dairy Farms,” Agricultural and Resource Economics Review, Apr.

1998.

Two Studies Provide

Limited Information on the

NEDC’s Impact on Income
Appendix III: NEDC’s Intraregional Impacts

Page 76 GAO-01-866 Impacts of Dairy Compacts

stabilizing prices could increase farmer cash reserves and net worth, but

he estimated that such gains would be more limited than those that would

be achieved by having a higher farm-level price that varied from month to

month. Wackernagel also concluded that gains associated with price

stabilization would be limited unless a Compact’s policies recognized the

impact of inflation as well as the variability and level of milk prices.

Data on the number of farms and herd size show similar trends in the

NEDC and other states before and after the NEDC was established,

suggesting little or no change in the NEDC states due to the Compact.

Moreover, the data suggest that the trends are caused by other factors,

such as major technological advancements in dairy farming.

The number of dairy farms in the NEDC and the rest of the United States

has been decreasing, as measured by both the number of farms having at

least one dairy cow and the number of licensed dairies. In the NEDC

states, the number of farms having at least one milk cow decreased by 33

percent between 1992 and 2000, from 5,050 to 3,370. In the rest of the

United States, the number of farms having at least one milk cow decreased

by 39 percent in that same period, from 166,510 to 101,880. Given that

some of the farms with at least one milk cow may not produce milk for

sale to dairy processors, we also looked at the number of farms licensed to

sell milk to dairy processors. Between 1992 and 2000, the number of

licensed dairy farms in the six NEDC states decreased by 32 percent, or

from 4,079 to 2,772, while the number of licensed dairy farms in the rest of

the country decreased by 37 percent during that same time period, or from

127,456 to 80,253 (see fig. 6). From 1992 to 1998, the percentage decrease

in the number of licensed dairy farms in the NEDC states was greater each

year than in the rest of the United States; in 1998, the percentage decrease

in the rest of the United States became greater each year. With respect to

the change from 1997 to 2000, the number of licensed dairy farms

The NEDC’s Impacts

on Farm Structure,

Milk Production, and

Milk Consumption

Are Difficult to

Determine

The Number of Farms Has

Continued to Decline as

Herd Size Has Increased
Appendix III: NEDC’s Intraregional Impacts

Page 77 GAO-01-866 Impacts of Dairy Compacts

decreased by 14 percent in the NEDC states, or from 3,237 to 2,772 farms;

while the number of licensed dairy farms decreased by 17 percent in the

rest of the country, or from 96,176 to 80,253 farms. It is not known whether

this change in trends was caused by the NEDC or some other factors.

Figure 6: Decline in the Number of Licensed Dairy Farms in the NEDC States and in

the Rest of the United States, 1992-2000

Source: GAO analysis of data from the American Farm Bureau Federation.

Between 1992 and 2000, the average herd size in the NEDC states

increased by 36 percent, from 58 to 79 milk cows, while in the rest of the

United States, average herd size increased by 57 percent, from 56 to 88

milk cows. As shown in figure 7, although average herd size has increased

in the NEDC states, this increase consistently lagged behind the increases

in the rest of the United States.
Appendix III: NEDC’s Intraregional Impacts

Page 78 GAO-01-866 Impacts of Dairy Compacts

Figure 7: Average Number of Cows per Farm in the NEDC States and in the Rest of

the United States, 1992-2000

Source: GAO analysis of data from USDA’s National Agricultural Statistics Service.

One of the reasons for the declines in herd size is that over the past 50

years, technological developments have significantly altered both dairy

farming itself and the way farm products are processed and distributed.

Farming has changed from an operation that was historically dependent

on human and animal labor to one in which most operations are

mechanized. As a result, at every level, economies of scale (the lower cost

of large-scale versus small-scale operations) have led to fewer and larger

farms. The number of farms in general, and dairy farms in particular, has

been shrinking since the Depression. While dairy farms with 100 cows

were considered large in 1950, today dairy farms as large as 1,500 to 3,000

are emerging in the western, northwestern, and midwestern regions of the

country. This trend, along with the pressure to convert land used for

agriculture into land used for nonagricultural purposes, will likely result in

a continued increase in the size of farms with a commensurate decline in

the total number of farms in the Northeast.
Appendix III: NEDC’s Intraregional Impacts

Page 79 GAO-01-866 Impacts of Dairy Compacts

Milk production increased in the six NEDC states and the rest of the

country both before and after the NEDC was established. This trend

toward greater milk production has occurred at the same time as the total

number of milk cows has declined, reflecting a greater amount of milk

produced per cow. These trends make it difficult to determine what

impact, if any, the Compact has had on milk production. Two studies have

analyzed the NEDC’s impact on milk production and concluded that while

the NEDC may have caused an increase in production, any increase was

small in relation to the total amount of milk produced in the NEDC states.

Milk production has increased in the NEDC states and the rest of the

country, as measured by both total milk produced and milk produced per

cow. From 1993 to 2000, total milk produced in the NEDC states increased

2.9 percent, from 4.545 billion pounds to 4.678 billion pounds, while

production in the rest of the country increased 10.3 percent from 146.091

to 163.274 billion pounds. With respect to the change from 1997 to 2000,

production increased by 2.5 percent in the NEDC states, or from about 4.6

billion pounds to 4.7 billion pounds; while production increased 7.8

percent in the rest of the country, or from about 151.5 billion pounds to

163.3 billion pounds. Much of this growth reflected an increase in milk

production per cow. Figure 8 shows that from 1993 to 2000 the average

amount of milk produced per cow in the NEDC states increased by 11.6

percent, from 15,633 pounds to 17,440 pounds, while production per cow

in the rest of the United States increased 15.9 percent, or from 15,726

pounds to 18,226 pounds.

Production Has Continued

to Increase
Appendix III: NEDC’s Intraregional Impacts

Page 80 GAO-01-866 Impacts of Dairy Compacts

Figure 8: Pounds of Milk Produced per Cow in the NEDC States and in the Rest of

the United States, 1993-2000

Source: GAO analysis of data from USDA’s National Agricultural Statistics Service.

Whether the increase in milk production per cow was dramatically

influenced by the NEDC, however, is not clear. The data on milk

production per cow do not show a large difference in upward trend

between the NEDC states and states in the rest of the country between

1997 and 2000. Specifically, during this period production per cow

increased by 6.6 percent in the NEDC states, or from 16,360 pounds to

17,440 pounds; while production per cow increased by 7.9 percent in the

rest of the country, or from 16,887 pounds to 18,226 pounds. Increases in

production per cow, and increased efficiency in all of the states, has more

likely resulted from fundamental changes in the structure of dairy farming

throughout the country, such as the increased cost of labor; new improved

machinery; artificial breeding services; better feed and forage; adoption of

different strains of livestock; and careful use of fertilizer, irrigation, and

chemicals. The overall impact drastically increased production per cow,

which has led to the need for fewer cows to supply the market.
Appendix III: NEDC’s Intraregional Impacts

Page 81 GAO-01-866 Impacts of Dairy Compacts

Both of the studies that analyzed the NEDC’s impact on milk production

were based on a limited amount of data. OMB’s 1998 study found that from

July through December 1997, New England milk production was up 3

percent from the same period in the previous year, while national milk

production was up 2 percent during the same period.19 Given this increase

in New England milk production and using USDA’s dairy economic model,

OMB estimated that the Compact commission’s price of $16.94 per

hundredweight for raw milk used for and sold as fluid milk would have

caused milk marketings to increase from 5.38 billion pounds to 5.40 billion

pounds, or by about 0.4 percent , between July and December 1998. OMB

cautioned, however, that the analysis addressed only the first 6 months of

the NEDC.

At the request of the NEDC, economists (Nicholson et al.) at the University

of Vermont also used a model to estimate the impact of higher Compact

prices on milk production.20 Their study, issued in 2000, used state

quarterly all-milk prices for each of the six Compact states as a basis to

estimate what milk prices would have been without a Compact. In

Vermont, these prices ranged from $12.85 to $15.09 per hundredweight. On

the basis of their analysis of milk production data for the period July 1997

to June 1998, Nicholson et al. concluded that the NEDC caused milk

production to increase by 45 million pounds, or about 1 percent. Nicholson

et al. estimated that the Compact resulted in increased production in each

of the six NEDC states, with the largest increase occurring in Vermont.

Nicholson et al. postulated that without the NEDC milk production in that

state would have declined.

The impact of the NEDC on milk consumption in the six NEDC states is

difficult to determine because even though the data indicate that per

capita consumption of fluid milk was higher in the NEDC states than in

much of the rest of the United States between 1993 and 1999, consumption

slowly declined during that period, both within the NEDC states and

throughout much of the rest of the country, suggesting little or no change

 19OMB, Feb. 1998.

20Charles F. Nicholson, Budy P. Resosudarmo, and Rick W. Wackernagel, “Impacts of the

Compact on New England Milk Supply,” The Northeast Interstate Dairy Compact: Milk

Market Impacts, Research Report 73, Agricultural Experiment Station, University of

Vermont, Mar. 2000.

Milk Consumption Has

Continued to Decrease
Appendix III: NEDC’s Intraregional Impacts

Page 82 GAO-01-866 Impacts of Dairy Compacts

as a result of the NEDC. On the other hand, one study that analyzed the

impact of the NEDC on milk consumption concluded that the Compact

could have caused a slight reduction in milk consumption in the NEDC

states in the latter part of 1997.

As figure 9 shows, from 1993 to 1999 annual per capita milk consumption

in the New England Milk Marketing Order declined by about 4 percent,

from about 233 pounds to about 223 pounds.21 This decline is equivalent to

a reduction from about 27 gallons to 26 gallons. Similarly, annual per

capita milk consumption in the rest of the milk marketing orders in the

United States for the same time period declined by about 6 percent, from

about 214 pounds to about 202 pounds. This is equivalent to a reduction

from about 25 gallons to 23 gallons.

 21Because data are not available on milk consumption in the six NEDC states, we used data

for USDA’s New England Milk Marketing Order. The New England Milk Marketing Order

includes Connecticut, Massachusetts, New Hampshire, Rhode Island, and Vermont, or

portions thereof. In January 2000, this marketing order was dissolved and a larger

Northeast Marketing Order, which incorporates additional states, replaced it.
Appendix III: NEDC’s Intraregional Impacts

Page 83 GAO-01-866 Impacts of Dairy Compacts

Figure 9: Per Capita Fluid Milk Consumption in the New England Milk Marketing

Order and in All Other Milk Marketing Orders, 1993-99

Source: GAO analysis of data from USDA’s National Agricultural Statistics Service.

This slow decline in milk consumption began in the late 1970s, probably as

the result of such factors as increasing consumption of other beverages,

such as fruit beverages, bottled water, and carbonated soft drinks; growing

dietary concerns about fat and cholesterol; and an aging U.S. population.

USDA estimated that without marketing efforts undertaken by the milk

industry, such as advertising and product innovation, milk consumption

would have been lower than it was by as much as 1.4 percent from 1996 to

1999.22

OMB’s 1998 study found that from July to December 1997, fluid milk sales

in New England totaled 1.3 billion pounds, which was down 0.7 percent

 22USDA Report to Congress on the Dairy Promotion Programs, 2000.
Appendix III: NEDC’s Intraregional Impacts

Page 84 GAO-01-866 Impacts of Dairy Compacts

from the same period 1 year earlier.23 Nationally, fluid milk sales increased

by 0.2 percent in the last half of calendar year 1997. OMB noted that

studies on the relationship between retail prices and consumption suggest

that a 10-percent increase in retail fluid milk prices reduces consumption

by 1 to 2 percent. Using USDA’s model, OMB estimated that the average

retail price in the Compact states would have been $2.46 per gallon

without the NEDC price regulations, and that with the NEDC price

regulations retail prices increased by 3.7 percent to $2.55 per gallon. Given

the retail price and consumption relationship found in other studies, and

the NEDC’s impact on retail milk prices, OMB concluded that the NEDC’s

price regulations reduced fluid milk consumption in the NEDC states by

about 10 million pounds, or about 0.5 percent, between July and December

1997.

Bailey’s July 2000 study also analyzed the NEDC’s impact on retail fluid

milk consumption.24 Bailey examined Class I sales in the New England

Marketing Milk Marketing Order from 1996 through 1999 and observed a

retail milk price increase of 24 cents per gallon in the Hartford and Boston

markets over that period. He attributed this increase to an average 10-centper-gallon Compact obligation and a general rise in the farm-to-retail

markup. Even though retail prices increased, Bailey concluded that total

fluid milk consumption did not change appreciably after introduction of

the Compact: He estimated that the amount of milk consumed decreased

by less than 0.3 percent in 1998 and 1999.

 23OMB, Feb. 1998.

24Kenneth Bailey, July 2000.
Appendix IV: NEDC’s Impacts on Federal

Program Costs

Page 85 GAO-01-866 Impacts of Dairy Compacts

According to USDA, the NEDC has not increased the net federal costs of

the milk price support program, and the agency is not certain whether the

Compact has increased costs of the nutrition assistance programs

administered by USDA. Net costs for USDA's milk price support program

have not increased because the 1996 farm bill requires that the NEDC

commission compensate USDA for any additional dairy commodity

purchases to the extent that the percentage change in milk production in

the NEDC states exceeds the national average.1 Regarding nutrition

assistance programs, according to USDA, federal costs for its Food Stamp

Program may have increased as a result of the NEDC, but federal costs for

its other nutrition assistance programs have not increased because of how

these programs are funded or because of how federal program benefits are

calculated for them. According to USDA officials, regardless of whether

federal costs for its other nutrition assistance programs have increased,

increased retail milk prices caused by the Compact have been borne by

agencies or organizations that provide program benefits or by program

participants in the NEDC states. The NEDC commission directly

reimburses the NEDC states for increased costs incurred by selected

nutrition assistance programs. While two studies assessed the NEDC’s

impacts on selected nutrition assistance programs, study results are

inconclusive as to whether the NEDC has impacted these programs.

Even though USDA estimates that the NEDC states’ rates of increase in

milk production have exceeded the national rates of increase in 2 of the

4 years since the Compact began setting the price of milk used for and sold

as fluid milk in the NEDC states in July 1997, net federal milk price

support program costs have not increased. The price support program,

created in 1949, supports farm-level prices by providing a standing offer

from the government to purchase butter, cheese, and nonfat dry milk at

specified prices. The 1996 farm bill requires that the Compact commission

compensate USDA when the estimated rate of increase in milk production

in the six NEDC states is greater than the estimated rate of increase in

national milk production. The NEDC commission is required to

compensate USDA before the end of any fiscal year in which the NEDC

states’ estimated rate of increase in production is greater than the national

rate of increase for the preceding fiscal year. Neither the NEDC nor USDA

 1

Federal Agriculture Improvement and Reform Act of 1996 (P.L. 104-127, Apr. 4, 1996).

Appendix IV: NEDC’s Impacts on Federal

Program Costs

Federal Net Costs for

the Milk Price

Support Program

Have Not Increased
Appendix IV: NEDC’s Impacts on Federal

Program Costs

Page 86 GAO-01-866 Impacts of Dairy Compacts

must determine whether the greater rate of increase, or what portion of

the greater rate of increase, is attributable to the NEDC.

According to USDA officials, milk production in the NEDC states did not

increase at a greater rate than the national rate of increase between July

and September 1997. However, in 1998, USDA estimated that milk

production in the NEDC states increased 1.8 percent, based on its analysis

of the average amount of milk produced in the six states during 1997 and

1998, as compared to a national average increase in production of 1.3

percent. On the basis of these two rates, USDA estimated that it purchased

about $1.8 million of nonfat dry milk that was attributable to the NEDC’s

greater rate of increase in production. In 1999, USDA estimated that milk

production in the NEDC states increased 3.6 percent, based on its analysis

of the states’ average milk production in 1998 and 1999, compared with a

national average rate of increase of 3.2 percent. On the basis of these two

rates, USDA estimated that it purchased about $1.4 million of nonfat dry

milk that was attributable to the NEDC’s greater rate of increase in

production. The NEDC commission compensated the federal government

these amounts for these 2 fiscal years. The Compact commission was not

required to compensate USDA for fiscal year 2000 because USDA

concluded that the average rate of increase in milk production in the

NEDC states (0.1 percent) was less than the average national rate (5.1

percent).

USDA analyzed the Compact’s impact on federal nutrition assistance

program costs and concluded that it is uncertain whether the federal costs

of one of its major programs—the Food Stamp Program—have increased,

while federal costs of its other programs most likely have not. Food Stamp

Program costs may have increased to the extent that the NEDC caused

retail milk prices to increase nationally and to the extent that the agencies

or organizations that provide or receive program benefits are not

reimbursed. USDA’s Food and Nutrition Service is responsible for

nutrition assistance programs, which include the Food Stamp Program;

the Special Supplemental Nutrition Program for Women, Infants and

Children (WIC); school programs such as the National School Breakfast

and Lunch Programs and the Special Milk Program; the Child and Adult

Care Food Program; and several small food distribution programs for

Indian reservations, the elderly, pregnant women, and children. These

programs are carried out at the state and local level by state and local

agencies and organizations, such as day care centers or schools.

It Is Unclear Whether

Federal Net Costs for

Nutrition Assistance

Programs Have

Increased
Appendix IV: NEDC’s Impacts on Federal

Program Costs

Page 87 GAO-01-866 Impacts of Dairy Compacts

Regarding the Food Stamp Program, USDA officials said that federal costs

may have increased as a result of the NEDC, but they do not know

because it is difficult to determine (1) how much of the increased retail

milk price in the NEDC states was caused by the Compact, and (2) to what

extent that portion of the increased retail milk price caused an increase in

the national average cost of food items used to determine program

benefits. The Food Stamp Program is operated by state and local welfare

offices. Under the program, food stamp recipients spend their benefits (in

the form of paper coupons or electronic benefits on debit cards), to buy

eligible food in authorized retail food stores. Program benefits under this

program are indexed to the cost of a selected group of foods, which is

sensitive to the changes in the national average retail price of milk.2

Benefit levels have increased since July 1997, because of, among other

things, increased national average retail milk prices. USDA officials said

that the retail milk price increases in the six NEDC states caused by the

Compact had the potential to increase the index used to set benefit levels

and, thus, federal costs, but it is not certain whether they did so. Further, it

is difficult to determine what portion of the retail milk price increases was

attributable to the Compact. USDA estimates that if the NEDC caused a

16-cent per gallon increase in the national average retail milk price, there

is a 50 percent chance that Food Stamp Program benefits increased by $1

per program participant per month and annual federal Food Stamp

Program costs increased by about $60 million. USDA officials also noted

that even if the increased price of milk attributable to the NEDC was

enough to increase national food stamp benefit levels, some portion of the

increased retail milk costs have been borne by participants located in the

six NEDC states.

Regarding WIC, USDA officials said that the Compact has not increased

federal costs to the program because of the discretionary nature of its

funding. Even so, because approximately 30 percent of the funds spent on

WIC foods are used to buy fluid milk, any increase in retail milk prices can

significantly affect the food package cost per participant and these higher

costs, unless offset, would reduce the potential number of participants.

WIC is administered by state agencies, most of whom provide WIC

participants checks or food instruments to purchase specific foods each

month at authorized retailers. While the 1996 farm bill does not require the

Compact commission to reimburse the WIC program, NEDC regulations

 2

This selected group of foods is the core of the Thrifty Food Plan—a nutritious, low-cost

model diet plan. Milk makes up about 10 percent of the value of this plan.
Appendix IV: NEDC’s Impacts on Federal

Program Costs

Page 88 GAO-01-866 Impacts of Dairy Compacts

specify that the Compact commission is to compensate New England state

agencies that administer WIC for any increased costs due to the Compact.

The amount of compensation equals the over-order producer price

payment multiplied by the volume of milk used by program participants in

a given month.3

 For example, in January of 1998 when the Vermont WIC

program purchased 52,403 gallons of milk, the difference between the

NEDC Class I milk price and the minimum USDA Class I price was 74

cents per hundredweight. Given that a hundredweight is equivalent to

about 11.6 gallons of milk, the Compact commission compensated

Vermont about $3,343 for that month. In total, the Compact commission

compensated the six states’ WIC programs $3.8 million from 1997 through

2000 for increased milk costs due to the NEDC.

According to state WIC officials, the programs used to administer WIC are

being held harmless by the NEDC. These officials said that the NEDC has

not resulted in increased WIC program costs or reduced program

participation. One state WIC official said that the NEDC has done

everything it can to ensure that the WIC programs in the six states remain

unharmed by reimbursing the states the full difference between the

NEDC’s minimum Class I producer price and the milk marketing order

minimum Class I price on all WIC milk purchases.

Regarding school programs, according to USDA officials, it is likely that

federal costs to these programs have not increased as a result of the NEDC

because program benefits are based on a broad index of food prices that is

relatively insensitive to changes in the price of milk in the six NEDC

states.4

 Thus, any increases in milk prices caused by the Compact would

either have to be absorbed by the schools or passed on to paying students.

Programs such as the School Lunch Program are usually administered by

state education agencies, which operate the program through agreements

with local school districts. NEDC regulations specify that the Compact will

reimburse schools for any Compact-related increased costs of fluid milk

 3

The memorandum of agreement between the NEDC commission and the state WIC

agencies specifies that reimbursement shall be an amount equal to the over-order

obligation for each month per hundredweight multiplied by the actual number of

hundredweight equivalents of milk provided to WIC participants in each month.

4

Under the school lunch and breakfast programs, meal reimbursements are indexed to the

consumer price index for food-away-from-home for urban consumers. Under the Special

Milk Program, reimbursements are indexed to the producer price index for milk.
Appendix IV: NEDC’s Impacts on Federal

Program Costs

Page 89 GAO-01-866 Impacts of Dairy Compacts

sold in 8-ounce containers by schools in the six NEDC states.5 This

commitment applies to all milk served in 8-ounce containers by schools,

including milk provided under such child nutrition programs as the school

lunch and breakfast programs and the Special Milk Program. The NEDC

commission requires that school food authorities submit claim forms at

the end of each school year that identify the number of 8-oz. cartons of

milk purchased during the school year on these forms. School authorities

document whether part of the price for the 8-ounce milk containers is

attributable to the NEDC over-order premium and, if so, how much on the

basis of milk vendor submissions. Our review of school food authority

claim data indicates that the portion of the contract price that milk

vendors have attributed to the NEDC varies. For example, Connecticut

school food authorities attributed from .2 cents to 1.37 cents per 8-ounce

container to the NEDC over-order premium during the 1999-2000 school

year.

The NEDC commission then verifies that amounts claimed do not exceed

the NEDC’s average over-order premium for the school year and

compensates school food authorities either the average over-order

premium or the amount vendors attributed to the NEDC over-order

premium, whichever is less. Thus, the amounts paid to school food

authorities vary depending on the amount that they attributed to the

NEDC and the amount of milk purchased. For example, one school food

authority in Massachusetts was compensated $308.35 for 146,835 cartons

of milk purchased during the 1999-2000 school year, while another school

food authority in that state was compensated $316.33 for 31,633 cartons of

milk purchased for the same year. In total, the NEDC commission

reimbursed the states $662,606 for the 1998-1999 and 1999-2000 school

years.

Although the amounts paid varied from school to school, officials in the

six states’ departments of education generally said that schools claiming

and receiving compensation were not, in the end, spending additional

funds for milk or having to charge higher prices for milk sold to students.

However, these officials also said that many school food authorities have

chosen not to seek compensation because some school food authorities

view the claim process as burdensome and not worth the effort given the

relatively small amounts of money that they would receive.

 5

The regulations cover fluid milk sold in 8-ounce containers distributed by handlers under

open competitive bid contracts and sold by schools.
Appendix IV: NEDC’s Impacts on Federal

Program Costs

Page 90 GAO-01-866 Impacts of Dairy Compacts

As is the case with the school programs, according to USDA officials it is

likely that federal costs of the Child and Adult Care Food Program also

have not increased as a result of the NEDC because program benefits are

based on a broad index of retail food prices that is relatively insensitive to

changes in the price of milk.6

 State education or health departments

administer the program, with independent centers and sponsoring

organizations entering into agreements with these departments to operate

the program. Under the program, USDA provides eligible centers and

sponsoring organizations, such as family day care homes and child-care

centers, reimbursements for meals served. According to USDA, it has no

data on the amount of milk purchased under the program, and it would be

prohibitively labor-intensive for the NEDC to establish a method for

compensating thousands of individual homes and centers for any

increased retail milk prices.

Regarding USDA’s food distribution programs, according to USDA

officials, USDA has not estimated the potential NEDC-related increased

costs to these programs. USDA officials said, however, that any increased

costs would be relatively small, given the small size of these programs

compared with programs such as WIC. Furthermore, because most of

these programs are not entitlement programs and thus federal funding is

not mandatory, any increased costs due to the NEDC would have to be

borne by program providers and could result in fewer participants being

served.

According to USDA, if the NEDC is expanded to include additional states

or if a southern compact is also created, it is more likely that federal costs

for the Food Stamp Program would increase than with the existing NEDC:

The likely increase in retail milk prices in more states would have a more

direct impact on the index used to set program benefits.

USDA estimated that if retail milk prices in the states of an expanded

NEDC and a southern compact increased by about 20 cents per gallon—an

amount that USDA noted is possible given the NEDC experience—food

stamp participants in compact states would spend about $93 million a year

more to purchase milk. If this price increase did not cause the national

 6

Under the Child and Adult Care Food Program, meal reimbursements are indexed to the

cost of the consumer price index for food-away-from-home for urban consumers.

If Compacts Are

Expanded, Federal Food

Stamp Program Costs

Could Increase, as Could

Nonfederal Costs for Other

Nutrition Assistance

Programs
Appendix IV: NEDC’s Impacts on Federal

Program Costs

Page 91 GAO-01-866 Impacts of Dairy Compacts

price increase to rise sufficiently to increase program benefits, Food

Stamp Program participants would have to absorb this cost. However, if

the 20-cent-per-gallon price increase resulted in a sufficiently large

national average retail milk price increase to cause a $1- to $2-perparticipant increase in Food Stamp Program benefits, USDA estimated

that federal Food Stamp Program costs could increase by as much as

$60 to $120 million per year—an amount that would have to be federally

funded.7 Moreover, if the NEDC is expanded and a southern compact is

established, and if the NEDC does not provide reimbursements, increased

retail milk costs could result in fewer participants being served by state

WIC programs. Given these assumptions, it is also likely that costs to

school programs would have to be absorbed by school food authorities

and program participants because of the index used to establish benefits

under these programs. Table 23 summarizes the additional costs that

USDA estimated could be incurred under the above assumptions in fiscal

year 2000 by food stamp, WIC, and school program providers or

participants in compact states if the NEDC is expanded and a southern

compact is established, and if retail milk prices increase in the compact

states.8

 7

USDA used 2000 as a base year for developing its estimate of increased program costs.

8

For purposes of its analysis, USDA included Connecticut, Delaware, Maine, Maryland,

Massachusetts, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island,

and Vermont in an expanded NEDC, and Alabama, Arkansas, Florida, Georgia, Kansas,

Kentucky, Louisiana, Missouri, Mississippi, North Carolina, South Carolina, Tennessee,

Oklahoma, Texas, Virginia, and West Virginia in a southern compact.
Appendix IV: NEDC’s Impacts on Federal

Program Costs

Page 92 GAO-01-866 Impacts of Dairy Compacts

Table 23: Estimated Impact on Food Stamp, WIC, and School Feeding Program Participants if Retail Milk Prices Increase 10,

15, or 20 Cents per Gallon Under an Expanded NEDC and a Southern Compact

Increase in the retail price of a gallon of milk in an expanded NEDC and

southern compact

Annual impact on the program 10 cents 15 cents 20 cents

Increased Food Stamp Program costsa $46,676,933 $70,015,399 $93,353,866

Increased cost to maintain level of WIC

participation that existed before the NEDC

expanded (number of participants that would

leave WIC if funding remained constant)

15,586,611

(42,498)

23,379,916

(63,429)

31,173,222

(84,153)

Increased cost to National School Breakfast

and Lunch Programs 20,315,004 30,472,505 41,630,007

Total increased cost $82,578,547 $123,867,821 $165,157,094

a

Increased costs are borne by Food Stamp Program participants if federal benefits do not increase. If

federal benefits increase, increased costs would be borne by participants in the first year of the

compact until federal program benefits are reindexed in the year following the compact’s

establishment. According to USDA officials, even if federal benefits increase, the increase in program

benefits may not be sufficient to fully offset increased retail milk prices in compact states. Further,

households in noncompact states would receive higher benefits, even though retail milk price

increases would be limited to compact states.

Source: USDA’s Food and Nutrition Service.

Two studies—one prepared by the Office of Management and Budget

(OMB) and the other by University of Vermont researchers—offer

inconclusive results on the NEDC’s potential impacts on USDA’s nutrition

assistance programs. Both studies were conducted early in the Compact’s

existence and relied on limited retail milk price data. For example, OMB’s

1998 study began before the NEDC commission and the states entered into

agreements for compensating states’ WIC and school programs and relied

on only 6 months of retail price data—from July through December 1997.9

Because of this, the study projected either a low (5- to 10-cent), medium

(10- to 15-cent), or high (15- to 20-cent) impact on retail milk prices, as

reflected in an increased price for a gallon of milk. Assuming no NEDC

reimbursements and a medium impact on retail milk prices, OMB

estimated that a 15-cent increase in the retail price of milk in the first

6 months of the NEDC would increase state WIC program costs by about

$721,300, which would require a reduction in program participation of

about 3,000 people if the states did not spend the additional money. OMB

also estimated that school lunch and breakfast program costs would

increase by $1.2 million during the first 6 months of the NEDC—an

increase that would have to be absorbed by schools or passed on to

 9

OMB’s The Economic Effects of the Northeast Interstate Dairy Compact, Feb. 1998.

Two Studies of the

NEDC’s Impact on

Nutrition Assistance

Programs Provide

Inconclusive Results
Appendix IV: NEDC’s Impacts on Federal

Program Costs

Page 93 GAO-01-866 Impacts of Dairy Compacts

families who pay for meals and snacks. For the same period, OMB also

estimated that participants in USDA’s Food Stamp Program who reside in

the NEDC states would pay an additional estimated $2.4 million because of

increased retail milk prices—an amount that the federal government

would not be required to pay because it is likely that national average milk

prices would not have increased sufficiently to warrant an increase in

benefits. Even if the price increase were large enough to trigger an

increase in the index used to establish program benefits, only a small

portion of the additional program benefits would go to food stamp

recipients in the NEDC states, because all recipients nationwide would

receive the increase.

Researchers at the University of Vermont, who were asked by the NEDC

commission to conduct the study, also relied on limited data.10 Wang et al.

focused on the NEDC’s potential impact on the WIC program and analyzed

retail milk price and program participation data for the period between

June 1997 and February 1998. They accounted for NEDC reimbursements

to the states’ WIC programs and examined retail milk prices in Boston and

Hartford. Their analysis concluded that WIC program participation had not

been significantly affected by the NEDC during the time frame analyzed.

The study also concluded that retail milk prices in Hartford increased

significantly more than in Boston, an increase that might be explained by

differences in market concentration and competition. However, the

authors concluded that their study results had two principal limitations:

(1) their analysis was limited to Boston and Hartford and (2) the NEDC

had been in effect only since July 1997, thus providing a small amount of

data for the analysis.

 10Qingbin Wang, Zooyob Anne, Catherine Halbrendt, Charles Nicholson, and Jaimie Sung,

“Impacts of the Compact on the WIC Program: Evidence From Boston and Hartford,” The

Northeast Interstate Dairy Compact: Milk Market Impacts, Research Report 73,

Agricultural Experiment Station, University of Vermont, Mar. 2000.
Appendix V: Interregional Impacts of Three

Compact Alternatives in 1999

Page 94 GAO-01-866 Impacts of Dairy Compacts

This appendix provides our 1999 estimates of the interregional farm- and

wholesale-level impacts of the NEDC, an expanded NEDC, and an

expanded NEDC combined with a southern compact on various dairy

sector indicators. To develop our estimates, we first estimated the impact

of each compact scenario on the basis of certain assumptions, such as

transportation costs and supply and demand elasticities. We then varied

these assumptions to test the sensitivity of our initial estimates. (See app.

II for a detailed discussion of our methodology; a description of the IRCM;

a list of the states included in the different compact scenarios; values for

parameters used, such as the responsiveness of consumers to changing

commodity prices; and a summary of the data used and sources for these

data.)

We present the data in a series of tables that summarize (1) the range of

estimates that we obtained using our initial and subsequent sets of

assumptions across the various compact scenarios for each of the dairy

sector indicators that we analyzed; (2) our initial estimates of farm-level

and wholesale-level impacts of the NEDC scenario, and the results of our

sensitivity analyses for that scenario; (3) our initial estimates of farm-level

and wholesale-level impacts of the expanded NEDC scenario, and the

results of our sensitivity analyses for that scenario; (4) our initial estimates

of farm-level and wholesale-level impacts of the expanded NEDC scenario

combined with a southern compact, and the results of our sensitivity

analyses for that scenario; and (5) the results of our sensitivity analysis for

the expanded NEDC scenario combined with a southern compact using a

more restrictive trade assumption. In all instances, we present the

estimated impacts of the various compact scenarios as changes to our nocompact baseline values for 1999.

Appendix V: Interregional Impacts of Three

Compact Alternatives in 1999
Appendix V: Interregional Impacts of Three

Compact Alternatives in 1999

Page 95 GAO-01-866 Impacts of Dairy Compacts

Table 24: Range of Estimated Impacts on 1999 Farm-Level Prices Across Different Compact Scenarios

Dollars per hundredweight

Farm-level prices

IRCM99 region

No-compact

baseline in 1999

Change to

baseline with

the NEDC

Change to

baseline with

an expanded

NEDC

Change to

baseline with an

expanded NEDC

and a southern

compact

Change to baseline

with an expanded

NEDC, a southern

compact, and a 100-

mile import constraint

Northeast $15.07 $0.07 to 0.12 $0.30 to 0.48 $0.22 to 0.41 $0.26 to 0.45

Appalachia 15.97 (0.01) to 0 (0.05) to (0.02) 1.10 to 1.85 1.16 to 1.96

Florida 17.14 (0.02) to 0 (0.05) to (0.02) (0.02) to 0.04 (0.07) to 0

Southeast 16.01 (0.02) to 0.02 (0.05) to 0.02 0.79 to 1.66 2.99 to 4.51

Mideast 14.64 (0.02) to 0 (0.05) to (0.03) (0.24) to (0.13) (0.28) to (0.21)

Upper Midwest 13.82 (0.02) to (0.01) (0.05) to (0.03) (0.11) to (0.06) (0.30) to (0.24)

Central 14.22 (0.01) to 0 (0.05) to (0.02) 0.10 to 0.27 0.15 to 0.33

Southwest 14.49 ( 0.01) to 0 (0.04) to (0.02) (0.17) to (0.05) (0.16) to (0.05)

Western 13.18 (0.01) to 0 (0.04) to (0.02) (0.14) to (0.09) (0.19) to (0.12)

Northwest 14.85 (0.01) to 0 (0.04) to (0.03) (0.13) to 0.03 (0.17) to (0.10)

California 12.98 (0.02) to (0.01) (0.06) to 0.02 (0.18) to 0.18 (0.27) to (0.16)

Arizona 13.76 (0.01) to 0 (0.04) to 0.03 (0.36) to 0.06 (0.09) to 0.06

Note: Numbers in parentheses are negative.

Source: GAO’s analysis using the IRCM99.

Table 25: Range of Estimated Impacts on 1999 Farm-Level Production Across Different Compact Scenarios

Pounds in millions

Farm-level production

IRCM99 region

No-compact

baseline in 1999

Change to

baseline with

the NEDC

Change to

baseline with

an expanded

NEDC

Change to

baseline with an

expanded NEDC

and a southern

compact

Change to baseline

with an expanded

NEDC, a southern

compact, and a 100-

mile import constraint

Northeast 29,138 36 to 90 150 to 383 106 to 313 127 to 255

Appalachia 6,437 (6) to (1) (19) to (7) 283 to 504 300 to 533

Florida 2,390 (1) to 0 (4) to (2) (1) to 9 (4) to 0

Southeast 3,548 (3) to 0 (7) to 2 70 to 164 261 to 534

Range of Estimates

Obtained Across

Different Compact

Scenarios
Appendix V: Interregional Impacts of Three

Compact Alternatives in 1999

Page 96 GAO-01-866 Impacts of Dairy Compacts

Pounds in millions

Farm-level production

IRCM99 region

No-compact

baseline in 1999

Change to

baseline with

the NEDC

Change to

baseline with

an expanded

NEDC

Change to

baseline with an

expanded NEDC

and a southern

compact

Change to baseline

with an expanded

NEDC, a southern

compact, and a 100-

mile import constraint

Mideast 12,238 (7) to 0 (16) to (7) (100) to (35) (101) to (56)

Upper Midwest 32,803 (20) to (4) (54) to (20) (152) to (43) (326) to (180)

Central 14,855 (5) to 0 (22) to (12) 45 to 121 103 to 186

Southwest 10,278 (3) to 0 (15) to (5) (45) to (13) (46) to (15)

Western 8,854 (3) to (1) (20 ) to (7) (64) to (28) (83) to (35)

Northwest 7,134 (2)to 0 (12) to (5) (42) to 5 (51) to (23)

California 30,459 (35) to (7) (112) to 21 (400) to 185 (491) to (168)

Arizona 2,914 (1) to 0 (3) to 3 (29) to 6 (7) to 7

Note: Numbers in parentheses are negative.

Source: GAO’s analysis using the IRCM99.

Table 26: Range of Estimated Impacts on 1999 Farm-Level Revenue Across Different Compact Scenarios

Dollars in millions

Farm-level revenue

IRCM99 region

No-compact

baseline in 1999

Change to

baseline with

the NEDC

Change to

baseline with

an expanded

NEDC

Change to

baseline with an

expanded NEDC

and a southern

compact

Change to baseline

with an expanded

NEDC, a southern

compact, and a 100-

mile import constraint

Northeast $4,391 $26 to 46 $110 to 193 $80 to 159 $95 to 165

Appalachia 1,028 (2) to 0 (6) to (2) 119 to 204 126 to 217

Florida 410 (1) to 0 (2) to (1) (1) to 5 (2) to 0

Southeast 568 (1) to 1 (3) to 1 40 to 85 165 to 242

Mideast 1,792 (2) to 0 (8) to (5) (43) to (21) (45) to (34)

Upper Midwest 4,533 (9) to (4) (24) to (13) (63) to (26) (133) to (103)

Central 2,112 (2) to 0 (10) to (5) 21 to 58 37 to 67

Southwest 1,489 (1) to 0 (6) to (3) (24) to (7) (23) to (7)

Western 1,167 (1) to 0 (6) to (3) (20) to (13) (26) to (15)

Northwest 1,059 (1) to 0 (4) to (3) (15) to 3 (17) to (11)

California 3,954 (11) to (4) (33) to 9 (118) to 80 (145) to (70)

Arizona 401 0 (2) to 1 (14) to 2 (4) to 3

Note: Numbers in parentheses are negative.

Source: GAO’s analysis using the IRCM99.
Appendix V: Interregional Impacts of Three

Compact Alternatives in 1999

Page 97 GAO-01-866 Impacts of Dairy Compacts

Table 27: Range of Estimated Impacts on 1999 National Average Wholesale-Level Prices Across Different Compact Scenarios

Dollars per hundredweight

Wholesale-level prices

Dairy commodity

No-compact

baseline in 1999

Change to

baseline with

the NEDC

Change to

baseline with

an expanded

NEDC

Change to

baseline with an

expanded NEDC

and a southern

compact

Change to baseline

with an expanded

NEDC, a southern

compact, and a 100-

mile import constraint

Fluid milk $15.04 $0.04 to 0.07 $0.16 to 0.27 $0.39 to 0.63 $0.66 to 0.93

Soft dairy products 27.31 (0.10) to (0.02) (0.19) to (0.08) (0.55) to (0.17) (0.52) to (0.18)

American cheese 139.24 (0.09) to (0.03) (0.41) to (0.18) (1.41) to (0.62) (1.86) to (1.27)

Italian cheese 93.24 (0.08) to (0.03) (0.31) to (0.13) (1.11) to 0.36 (1.36) to (0.95)

Other cheese 115.58 (0.21) to 0.06 (0.44) to (0.05) (1.11) to 0.69 (1.65) to (0.75)

Butter 119.52 (0.23) to (0.03) (0.88) to (0.46) (6.53) to 0.21 (2.80) to 0.07

Frozen dairy products 21.40 (0.02) to 0 (0.11) to (0.05) (0.53) to (0.10) (0.65) to (0.38)

Other manufactured

products 27.68 (0.03) to 0.04 (0.01) to 0.07 (0.11) to 1.04 (0.18) to 0.08

Nonfat dry milk 102.63 (0.01) to 0 (0.06) to (0.02) (1.22) to (0.07) (0.05) to 0.01

Note: Numbers in parentheses are negative.

Source: GAO’s analysis using the IRCM99.

Table 28: Range of Estimated Impacts on 1999 Wholesale-Level Production Across Different Compact Scenarios

Pounds in millions

Wholesale-level production

Dairy commodity

No-compact

baseline in 1999

Change to

baseline with

the NEDC

Change to

baseline with

an expanded

NEDC

Change to

baseline with an

expanded NEDC

and a southern

compact

Change to baseline

with an expanded

NEDC, a southern

compact, and a 100-

mile import constraint

Fluid Milk 55,043 (69) to (22) (293) to (86) (647) to (233) (778) to (313)

Soft dairy products 5,984 1 to 4 8 to 20 27 to 51 29 to 50

American cheese 3,539 0 to 1 1 to 6 1 to 20 5 to 25

Italian cheese 3,175 0 to 2 1 to 8 (3) to 21 8 to 33

Other cheese 598 0 to 1 0 to 1 (1) to 4 3 to 5

Butter 1,274 0 to 1 1 to 3 (1) to 17 0 to 8

Frozen dairy products 12,131 2 to 4 13 to 20 26 to 98 41 to 79

Other manufactured

products 4,270 (2) to 3 (2) to 1 (56) to 15 (3) to 9

Nonfat dry milk 1,396 1 to 4 9 to 23 22 to 98 27 to 54

Note: Numbers in parentheses are negative.

Source: GAO’s analysis using the IRCM99.
Appendix V: Interregional Impacts of Three

Compact Alternatives in 1999

Page 98 GAO-01-866 Impacts of Dairy Compacts

Table 29: Range of Estimated Impacts on 1999 Wholesale-Level Expenditures Across Different Compact Scenarios

Dollars in millions

Wholesale-level expenditures

Dairy commodity

No-compact

baseline in 1999

Change to

baseline with

the NEDC

Change to

baseline with

an expanded

NEDC

Change to

baseline with an

expanded NEC

and a southern

compact

Change to baseline

with an expanded

NEDC, a southern

compact, and a 100-

mile import constraint

Fluid Milk $8,220 $18 to 33 $69 to 126 $144 to 293 $259 to 438

Soft dairy products 1,626 (5) to 0 (9) to (1) (19) to (2) (19) to 3

American cheese 4,823 (3) to (1) (11) to (2) (41) to (15) (55) to (16)

Italian cheese 3,028 (2) to (1) (8) to (3) (25) to 9 (33) to (12)

Other cheese 792 (1) to 0 (3) to 1 (4) to 4 (7) to (2)

Butter 1,495 (2) to 1 (7) to (2) (64) to 1 (27) to 1

Frozen dairy products 2,570 (2) to 0 (9) to (3) (43) to (6) (62) to (37)

Other manufactured

products 1,199 (1) to 1 0 to 3 (1) to 28 (5) to 3

Nonfat dry milk 1,012 0 (1) to 0 (1) to 1 0

Note: Numbers in parentheses are negative.

Source: GAO’s analysis using the IRCM99.

To obtain our initial estimates of the effects of the NEDC in 1999, we used

the following assumptions (our no-compact baseline includes the first

three assumptions):

• No more than 40 percent of any one region’s milk may be shipped to

another region without being subject to the receiving region’s pricing

requirements. This assumption is used to simulate USDA milk marketing

order regulations regarding minimum pricing requirements for milk

shipped between marketing orders. This threshold was chosen as a proxy

for the requirement that an adjustment be made if a plurality of an order's

packaged milk was sold in another region.

• Supply elasticities are medium-term (that is, 5 years).

• Demand elasticities are medium-term.

• The Class I minimum price in the Compact region is the higher of the

Compact price of $16.94 per hundredweight of milk, or the USDA milk

marketing order price.

• Market-driven over-order premiums are zero in the Compact region. This

initial assumption represents a lower bound, and assumes that all marketdriven over-order premiums in NEDC states are replaced by Compact

over-order producer price payments.

The Economic

Impacts of the NEDC

in 1999
Appendix V: Interregional Impacts of Three

Compact Alternatives in 1999

Page 99 GAO-01-866 Impacts of Dairy Compacts

• A handler must pay the compact over-order producer price into the

Compact pool for milk shipped into the Compact region in order to receive

the compact price.

We then performed a series of sensitivity analyses by varying key

assumptions to test the “robustness” of these initial estimates—that is,

whether, and if so by how much, our initial estimates would change when

we used different assumptions. Tables 30 through 39 present our initial

and subsequent estimates of the impacts of the NEDC in 1999 compared to

a no-compact scenario on farm- and wholesale-level indicators.

Table 30: Initial Estimates of the NEDC’s Impacts on 1999 Farm-Level Indicators

Farm-level prices (dollars per

hundredweight)

Farm-level production (pounds

in millions)

Farm-level revenue (dollars in

millions)

IRCM99 region

No-compact

baseline in 1999

Change to

baseline

No-compact

baseline in 1999

Change to

baseline

No-compact

baseline in 1999

Change to

baseline

Northeast $15.07 $0.08 29,138 40 $4,391 $29

Appalachia 15.97 (0.01) 6,437 (2) 1,028 (1)

Florida 17.14 (0.01) 2,390 (1) 410 0

Southeast 16.01 (0.01) 3,548 (1) 568 (1)

Mideast 14.64 0 12,238 (1) 1,792 0

Upper Midwest 13.82 (0.01) 32,803 (5) 4,533 (4)

Central 14.22 (0.01) 14,855 (3) 2,112 (2)

Southwest 14.49 (0.01) 10,278 (2) 1,489 (1)

Western 13.18 (0.01) 8,854 (1) 1,167 (1)

Northwest 14.85 (0.01) 7,134 (1) 1,059 (1)

California 12.98 (0.01) 30,459 (8) 3,954 (4)

Arizona 13.76 (0.01) 2,914 0 401 0

All noncompact regions

combined

a a 131,910 (25) 18,513 (15)

Note: Numbers in parentheses are negative.

a

Because farm-level prices are regional, an “all noncompact regions combined” price is not

meaningful.

Source: GAO analysis using the IRCM99.

Initial Estimates of the

NEDC’s Impacts
Appendix V: Interregional Impacts of Three

Compact Alternatives in 1999

Page 100 GAO-01-866 Impacts of Dairy Compacts

Table 31: Initial Estimates of the NEDC’s Impacts on 1999 Wholesale-Level Indicators

Wholesale-level prices (dollars

per hundredweight)

Wholesale-level production

(pounds in millions)

Wholesale-level expenditures

(dollars in millions)

Dairy commodity

No-compact

baseline in 1999

Change to

baseline

No-compact

baseline in 1999

Change to

baseline

No-compact

baseline in 1999

Change to

baseline

Fluid milk $15.04 $0.05 55,043 (23) $8,220 $24

Soft dairy products 27.31 (0.02) 5,984 2 1,626 (1)

American cheese 139.24 (0.04) 3,539 0 4,823 (1)

Italian cheese 93.24 (0.04) 3,175 1 3,028 (1)

Other cheese 115.58 (0.09) 598 0 792 (1)

Butter 119.52 (0.14) 1,274 0 1,495 (2)

Frozen dairy products 21.40 (0.02) 12,131 3 2,570 (2)

Other manufactured products 27.68 0 4,270 0 1,199 0

Nonfat dry milk 102.63 0 1,396 3 1,012 0

Note: Numbers in parentheses are negative.

Source: GAO’s analysis using the IRCM99.

Tables 32 through 37 display the results of our sensitivity analyses for 1999

farm- and wholesale-level indicators. In comparison with our initial

estimates, we used (1) 10-year regional supply elasticities as opposed to 5-

year; (2) long-term (i.e., higher), as opposed to medium-term, commodity

demand elasticities, (3) higher market-driven over-order premiums as

opposed to zero; (4) a combination of the previous three assumptions; and

(5) an overall 25-percent increase in transportation costs.1

 1

In tables 32 through 37, as well as in comparable tables showing our estimates of the

impacts of other compact scenarios, we include a column showing our baseline estimates

for our no-compact scenario to provide a context for assessing the estimated changes due

to the compacts under the assumptions used in each sensitivity analysis. In conducting

each of the separate sensitivity analyses, we developed a separate baseline for our farmand wholesale-level variables. For presentation purposes, however, we include only our

baseline estimates developed for our initial estimates for each compact scenario because

they were very similar to the baselines for each sensitivity analysis.

Sensitivity Analyses for the

NEDC Scenario
Appendix V: Interregional Impacts of Three

Compact Alternatives in 1999

Page 101 GAO-01-866 Impacts of Dairy Compacts

Table 32: Estimated Change in 1999 Farm-Level Prices Using Different Assumptions Under the NEDC Scenario

Dollars per hundredweight

Estimated change to baseline farm-level prices using different assumptions

IRCM99 region

No-compact

Baseline farmlevel price in 1999

10-year regional

supply

elasticities

Higher

commodity

demand

elasticities

Higher overorder

premiums

Combined

assumptionsa

Transportation

costs increase

25 percent

Northeast $15.07 $0.08 $0.08 $0.12 $0.11 $0.07

Appalachia 15.97 0 (0.01) (0.01) (0.01) 0

Florida 17.14 (0.01) (0.01) (0.01) (0.02) 0

Southeast 16.01 0 (0.01) (0.01) (0.02) 0.02

Mideast 14.64 (0.01) (0.01) (0.01) (0.02) 0

Upper Midwest 13.82 (0.01) (0.01) (0.01) (0.02) (0.01)

Central 14.22 0 0 (0.01) 0 0

Southwest 14.49 0 0 (0.01) (0.01) (0.01)

Western 13.18 0 (0.01) (0.01) 0 0

Northwest 14.85 0 (0.01) (0.01) (0.01) (0.01)

California 12.98 (0.02) (0.01) (0.01) (0.02) (0.01)

Arizona 13.76 0 0 (0.01) 0 (0.01)

Note: Numbers in parentheses are negative.

a

The combined assumptions include the previous three assumptions: (1) 10-year long-term regional

supply elasticities, (2) higher commodity demand elasticities, and (3) higher over-order premiums.

Source: GAO analysis using the IRCM99.

Table 33: Estimated Change in 1999 Farm-Level Production Using Different Assumptions Under the NEDC Scenario

Pounds in millions

Estimated change to baseline farm-level production using different assumptions

IRCM99 region

No-compact

baseline farm-level

production in 1999

10-year regional

supply

elasticities

Higher

commodity

demand

elasticities

Higher overorder

premiums

Combined

assumptionsa

Transportation

costs increase

25 percent

Northeast 29,138 61 37 60 90 36

Appalachia 6,437 (3) (2) (2) (6) (1)

Florida 2,390 0 (1) (1) (1) (1)

Southeast 3,548 0 (1) (2) (3) 2

Mideast 12,238 (3) (3) (3) (7) 0

Upper Midwest 32,803 (9) (4) (7) (20) (6)

Central 14,855 (1) (3) (5) 0 (2)

Southwest 10,278 (2) 0 (3) (2) (2)

Western 8,854 (3) (3) (3) (2) (1)

Northwest 7,134 0 (2) (2) (2) (1)

California 30,459 (33) (7) (11) (35) (11)

Arizona 2,914 (1) (1) (1) 0 0
Appendix V: Interregional Impacts of Three

Compact Alternatives in 1999

Page 102 GAO-01-866 Impacts of Dairy Compacts

Note: Numbers in parentheses are negative.

a

The combined assumptions include the previous three assumptions: (1) 10-year long-term regional

supply elasticities, (2) higher commodity demand elasticities, and (3) higher over-order premiums.

Source: GAO analysis using the IRCM99.

Table 34: Estimated Change in 1999 Farm-Level Revenue Using Different Assumptions Under the NEDC Scenario

Dollars in millions

Estimated change to baseline farm-level revenue using different assumptions

IRCM99 region

No-compact

baseline farm-level

revenue in 1999

10-year regional

supply

elasticities

Higher

commodity

demand

elasticities

Higher overorder

premiums

Combined

assumptionsa

Transportation

costs increase

25 percent

Northeast $4,391 $33 $29 $44 $46 $26

Appalachia 1,028 0 (1) (1) (2) 0

Florida 410 0 0 0 (1) 0

Southeast 568 0 (1) (1) (1) 1

Mideast 1,792 (2) (2) (2) (3) 0

Upper Midwest 4,533 (5) (4) (4) (9) (4)

Central 2,112 0 0 (2) 0 0

Southwest 1,489 0 0 (1) (1) (1)

Western 1,167 0 (1) (1) (0) (0)

Northwest 1,059 0 (1) (1) (1) (1)

California 3,954 (10) (4) (4) (11) (5)

Arizona 401 0 0 0 0 0

Note: Numbers in parentheses are negative.

a

The combined assumptions include the previous three assumptions: (1) 10-year long-term regional

supply elasticities, (2) higher commodity demand elasticities, and (3) higher over-order premiums.

Source: GAO analysis using the IRCM99.

Table 35: Estimated Change in 1999 National Average Wholesale-Level Prices Using Different Assumptions Under the NEDC

Scenario

Dollars per hundredweight

Estimated change to baseline wholesale-level prices using different assumptions

Dairy

commodity

 No-compact

baseline wholesalelevel price in 1999

10-year regional

supply

elasticities

Higher

commodity

demand

elasticities

Higher overorder

premiums

Combined

assumptionsa

Transportation

costs increase

25 percent

Fluid milk $15.04 $0.04 $0.05 $0.07 $0.07 $0.05

Soft dairy

products 27.31 (0.08) (0.02) (0.03) (0.10) (0.02)

American cheese 139.24 (0.03) (0.07) (0.08) (0.09) (0.05)

Italian cheese 93.24 (0.03) (0.06) (0.05) (0.08) (0.04)

Other cheese 115.58 (0.21) 0.06 (0.10) (0.12) (0.15)
Appendix V: Interregional Impacts of Three

Compact Alternatives in 1999

Page 103 GAO-01-866 Impacts of Dairy Compacts

Dollars per hundredweight

Estimated change to baseline wholesale-level prices using different assumptions

Dairy

commodity

 No-compact

baseline wholesalelevel price in 1999

10-year regional

supply

elasticities

Higher

commodity

demand

elasticities

Higher overorder

premiums

Combined

assumptionsa

Transportation

costs increase

25 percent

Butter 119.52 (0.12) (0.03) (0.23) (0.06) (0.12)

Frozen dairy

products 21.40 (0.01) 0 (0.02) (0.01) (0.01)

Other

manufactured

products 27.68 (0.02) 0.04 0.01 (0.03) 0.01

Nonfat dry milk 102.63 0 (0.01) 0 (0.01) (0.01)

Note: Numbers in parentheses are negative.

a

The combined assumptions include the previous three assumptions: (1) 10-year long-term regional

supply elasticities, (2) higher commodity demand elasticities, and (3) higher over-order premiums.

Source: GAO analysis using the IRCM99.

Table 36: Estimated Change in 1999 Wholesale-Level Production Using Different Assumptions Under the NEDC Scenario

Pounds in millions

Estimated change to baseline wholesale-level production using different assumptions

Dairy

commodity

No-compact

baseline wholesalelevel production in

1999

10-year regional

supply

elasticities

Higher

commodity

demand

elasticities

Higher overorder

premiums

Combined

assumptionsa

Transportation

costs increase

25 percent

Fluid milk 55,043 (23) (46) (36) (69) (22)

Soft dairy

products 5,984 1 2 3 4 2

American cheese 3,539 0 1 0 1 0

Italian cheese 3,175 0 1 1 2 0

Other cheese 598 0 1 0 0 0

Butter 1,274 0 1 1 0 0

Frozen dairy

products 12,131 3 2 4 3 2

Other

manufactured

products 4,270 1 (2) 0 3 (1)

Nonfat dry milk 1,396 1 4 4 3 2

Note: Numbers in parentheses are negative.

a

The combined assumptions include the previous three assumptions: (1) 10-year long-term regional

supply elasticities, (2) higher commodity demand elasticities, and (3) higher over-order premiums.

Source: GAO analysis using the IRCM99.
Appendix V: Interregional Impacts of Three

Compact Alternatives in 1999

Page 104 GAO-01-866 Impacts of Dairy Compacts

Table 37: Estimated Change in 1999 Wholesale-Level Expenditures Using Different Assumptions Under the NEDC Scenario

Dollars in millions

Estimated change to baseline wholesale-level expenditures using different assumptions

Dairy

commodity

No-compact

Baseline wholesalelevel expenditures

in 1999

10-year regional

supply

elasticities

Higher

commodity

demand

elasticities

Higher overorder

premiums

Combined

assumptionsa

Transportation

costs increase

25 percent

Fluid milk $8,220 $18 $20 $33 $28 $24

Soft dairy

products 1,626 (4) 0 (1) (5) (1)

American cheese 4,823 (1) (1) (3) (2) (2)

Italian cheese 3,028 (1) (1) (2) (1) (1)

Other cheese 792 (1) 0 (1) (1) 0

Butter 1,495 (2) 1 (2) (1) (2)

Frozen dairy

products 2,570 (1) 0 (2) (1) (1)

Other

manufactured

products 1,199 (1) 1 0 0 0

Nonfat dry milk 1,012 0 0 0 0 0

Note: Numbers in parentheses are negative.

a

The combined assumptions include the previous three assumptions: (1) 10-year long-term regional

supply elasticities, (2) higher commodity demand elasticities, and (3) higher over-order premiums.

Source: GAO analysis using the IRCM99.

Tables 38 and 39 summarize the results of our initial estimates and

sensitivity analyses by presenting the range of estimates of the changes

from our no-compact scenario that we obtained from our various analyses.

Table 38: Summary of Estimated Changes in 1999 Farm-Level Indicators Using Our

Initial and Subsequent Sets of Assumptions Under the NEDC Scenario

IRCM99 region

Change in farmlevel prices (dollars

per hundredweight)

Change in farm-level

production (pounds

in millions)

Change in farmlevel revenue

(dollars in millions)

Northeast $0.07 to 0.12 36 to 90 $26 to 46

Appalachia (0.01) to 0 (6) to (1) (2) to 0

Florida (0.02) to 0 (1) to 0 (1) to 0

Southeast (0.02) to 0.02 (3) to 0 (1) to 1

Mideast (0.02) to 0 (7) to (0) (2) to 0

Upper Midwest (0.02) to (0.01) (20) to (4) (9) to (4)

Central (0.01) to 0 (5) to 0 (2) to 0

Southwest (0.01) to 0 (3) to 0 (1) to 0

Western (0.01) to 0 (3) to (1) (1) to 0

Summary of the Estimated

Impacts of the NEDC
Appendix V: Interregional Impacts of Three

Compact Alternatives in 1999

Page 105 GAO-01-866 Impacts of Dairy Compacts

IRCM99 region

Change in farmlevel prices (dollars

per hundredweight)

Change in farm-level

production (pounds

in millions)

Change in farmlevel revenue

(dollars in millions)

Northwest (0.01) to 0 (2) to 0 (1) to 0

California (0.02) to (0.01) (35) to (7) (11) to (4)

Arizona (0.01) to 0 (1) to 0 0

Note: Numbers in parentheses are negative.

Source: GAO analysis using the IRCM99.

Table 39: Summary of Estimated Changes in 1999 Wholesale-Level Indicators Using

Our Initial and Subsequent Sets of Assumptions Under the NEDC Scenario

Dairy

commodity

Change in

wholesale-level

prices (dollars per

hundredweight)

Change in

wholesale-level

production (pounds

in millions)

Change in

wholesale-level

expenditures

(dollars in millions)

Fluid milk $0.04 to 0.07 (69) to (22) $18 to 33

Soft dairy

products (0.10) to (0.02) 1 to 4 (5) to 0

American

cheese (0.09) to (0.03) 0 to 1 (3) to (1)

Italian cheese (0.08) to (0.03) 0 to 2 (2) to (1)

Other cheese (0.21) to 0.06 0 to 1 (1) to 0

Butter (0.23) to (0.03) 0 to 1 (2) to 1

Frozen dairy

products (0.02) to 0.00 2 to 4 (2) to 0

Other

manufactured

products (0.03) to 0.04 (2) to 3 (1) to 1

Nonfat dry milk (0.01) to 0 1 to 4 0

Note: Numbers in parentheses are negative.

Source: GAO analysis using the IRCM99.

To obtain our initial estimates of the impacts of an expanded NEDC in

1999, we used the same set of assumptions that we used under our nocompact scenario. We also used the same assumptions that we used in

developing our initial estimates of the impacts of the NEDC. We then

performed the same series of sensitivity analyses as under the NEDC

scenario. Tables 40 through 49 present our initial and subsequent

estimates of the impacts of an expanded NEDC in 1999 compared with a

no-compact scenario.

The Economic

Impacts of an

Expanded NEDC in

1999
Appendix V: Interregional Impacts of Three

Compact Alternatives in 1999

Page 106 GAO-01-866 Impacts of Dairy Compacts

Table 40: Initial Estimates of an Expanded NEDC’s Impacts on 1999 Farm-Level Indicators

Farm-level prices

(dollars per hundredweight)

Farm-level production

 (pounds in millions)

Farm-level revenue

(dollars in millions)

IRCM99 region

No-compact

baseline in 1999

Change to

baseline

No-compact

baseline in 1999

Change to

baseline

No-compact

baseline in1999

Change to

baseline

Northeast $15.07 $0.32 29,138 154 $4,391 $117

Appalachia 15.97 (0.04) 6,437 (10) 1,028 (4)

Florida 17.14 (0.03) 2,390 (2) 410 (1)

Southeast 16.01 (0.03) 3,548 (3) 568 (2)

Mideast 14.64 (0.03) 12,238 (9) 1,792 (5)

Upper Midwest 13.82 (0.04) 32,803 (27) 4,533 (17)

Central 14.22 (0.04) 14,855 (14) 2,112 (8)

Southwest 14.49 (0.03) 10,278 (9) 1,489 (4)

Western 13.18 (0.03) 8,854 (9) 1,167 (4)

Northwest 14.85 (0.03) 7,134 (6) 1,059 (3)

California 12.98 0 30,459 7 3,954 1

Arizona 13.76 (0.03) 2,914 (2) 401 (1)

All noncompact

regions combined a a 131,910 (91) 18,513 (49)

Note: Numbers in parentheses are negative.

a

Because farm-level prices are regional, an “all noncompact regions combined” price is not

meaningful.

Source: GAO analysis using the IRCM99.

Table 41: Initial Estimates of an Expanded NEDC’s Impacts on 1999 Wholesale-Level Indicators

Wholesale-level prices

(dollars per hundredweight)

Wholesale-level production

(pounds in millions)

Wholesale-level expenditures

(dollars in millions)

Dairy commodity

No-compact

baseline in 1999

Change to

baseline

No-compact

baseline in 1999

Change to

baseline

No-compact

baseline in 1999

Change to

baseline

Fluid milk $15.04 $0.17 55,043 (88) $8,220 $80

Soft dairy products 27.31 (0.18) 5,984 8 1,626 (9)

American cheese 139.24 (0.32) 3,539 1 4,823 (10)

Italian cheese 93.24 (0.23) 3,175 2 3,028 (6)

Other cheese 115.58 (0.18) 598 1 792 (1)

Butter 119.52 (0.56) 1,274 1 1,495 (6)

Frozen dairy

products 21.40 (0.07) 12,131 13 2,570 (6)

Other manufactured

products 27.68 0.01 4,270 0 1,199 0

Initial Estimates of the

Expanded NEDC’s Impacts
Appendix V: Interregional Impacts of Three

Compact Alternatives in 1999

Page 107 GAO-01-866 Impacts of Dairy Compacts

Wholesale-level prices

(dollars per hundredweight)

Wholesale-level production

(pounds in millions)

Wholesale-level expenditures

(dollars in millions)

Dairy commodity

No-compact

baseline in 1999

Change to

baseline

No-compact

baseline in 1999

Change to

baseline

No-compact

baseline in 1999

Change to

baseline

Nonfat dry milk 102.63 (0.02) 1,396 0 1,012 0

Note: Numbers in parentheses are negative.

Source: GAO’s analysis using the IRCM99.

Table 42: Estimated Change in 1999 Farm-Level Prices Using Different Assumptions Under an Expanded NEDC Scenario

Dollars per hundredweight

Estimated change to baseline farm-level prices using different assumptions

IRCM99 region

No-compact

baseline farm-level

price in 1999

10-year regional

supply

elasticities

Higher

commodity

demand

elasticities

Higher

over-order

premiums

Combined

assumptionsa

Transportation

costs increase

25 percent

Northeast $15.07 $0.30 $0.30 $0.48 $0.46 $0.32

Appalachia 15.97 (0.04) (0.03) (0.05) (0.05) (0.02)

Florida 17.14 (0.04) (0.03) (0.05) (0.05) (0.02)

Southeast 16.01 (0.04) (0.02) (0.05) (0.04) 0.02

Mideast 14.64 (0.04) (0.03) (0.05) (0.04) (0.03)

Upper Midwest 13.82 (0.04) (0.03) (0.05) (0.05) (0.03)

Central 14.22 (0.03) (0.02) (0.05) (0.03) (0.03)

Southwest 14.49 (0.03) (0.02) (0.04) (0.03) (0.03)

Western 13.18 (0.03) (0.03) (0.04) (0.04) (0.02)

Northwest 14.85 (0.03) (0.03) (0.04) (0.03) (0.03)

California 12.98 (0.01) 0.02 (0.01) (0.06) (0.02)

Arizona 13.76 (0.02) (0.02) (0.04) 0.03 (0.03)

Note: Numbers in parentheses are negative.

a

The combined assumptions include the previous three assumptions: (1) 10-year long-term regional

supply elasticities, (2) higher commodity demand elasticities, and (3) higher over-order premiums.

Source: GAO’s analysis using the IRCM99.

Sensitivity Analyses for the

Expanded NEDC Scenario
Appendix V: Interregional Impacts of Three

Compact Alternatives in 1999

Page 108 GAO-01-866 Impacts of Dairy Compacts

Table 43: Estimated Change in 1999 Farm-Level Production Using Different Assumptions Under an Expanded NEDC Scenario

Pounds in millions

Estimated change to baseline farm-level production using different assumptions

IRCM99 region

No-compact

baseline farmlevel production

in 1999

10-year regional

supply elasticities

Higher

commodity

demand

elasticities

Higher

over-order

premiums

Combined

assumptionsa

Transportation

costs increase

25 percent

Northeast 29,138 248 150 237 383 160

Appalachia 6,437 (17) (8) (13) (19) (7)

Florida 2,390 (3) (2) (3) (4) (2)

Southeast 3,548 (5) (2) (5) (7) 2

Mideast 12,238 (16) (7) (12) (15) (7)

Upper Midwest 32,803 (49) (20) (37) (54) (21)

Central 14,855 (22) (12) (21) (21) (12)

Southwest 10,278 (15) (5) (12) (11) (7)

Western 8,854 (16) (8) (13) (20) (7)

Northwest 7,134 (12) (6) (9) (10) (5)

California 30,459 (20) 21 (7) (112) (26)

Arizona 2,914 (3) (2) (3) 3 (2)

Note: Numbers in parentheses are negative.

a

The combined assumptions include the previous three assumptions: (1) 10-year long-term regional

supply elasticities, (2) higher commodity demand elasticities, and (3) higher over-order premiums.

Source: GAO’s analysis using the IRCM.

Table 44: Estimated Change in 1999 Farm-Level Revenue Using Different Assumptions Under an Expanded NEDC Scenario

Dollars in millions

Estimated change to baseline farm-level revenue using different assumptions

IRCM99 region

No-compact

baseline farm-level

revenue in 1999

10-year regional

supply

elasticities

Higher

commodity

demand

elasticities

Higher overorder

premiums

Combined

assumptionsa

Transportation

costs increase

25 percent

Northeast $4,391 $125 $110 $177 $193 $118

Appalachia 1,028 (5) (3) (5) (6) (2)

Florida 410 (1) (1) (2) (2) (1)

Southeast 568 (2) (1) (3) (3) 1

Mideast 1,792 (7) (5) (8) (7) (5)

Upper Midwest 4,533 (20) (13) (21) (24) (13)

Central 2,112 (8) (5) (10) (7) (6)

Southwest 1,489 (5) (3) (6) (5) (4)

Western 1,167 (5) (4) (5) (6) (3)

Northwest 1,059 (4) (3) (4) (4) (3)

California 3,954 (6) 9 (4) (33) (10)

Arizona 401 (1) (1) (2) 1 (1)
Appendix V: Interregional Impacts of Three

Compact Alternatives in 1999

Page 109 GAO-01-866 Impacts of Dairy Compacts

Note: Numbers in parentheses are negative.

a

The combined assumptions include the previous three assumptions: (1) 10-year long-term regional

supply elasticities, (2) higher commodity demand elasticities, and (3) higher over-order premiums.

Source: GAO’s analysis using the IRCM99.

Table 45: Estimated Change in 1999 National Average Wholesale-Level Prices Using Different Assumptions Under an

Expanded NEDC Scenario

Dollars per hundredweight

Estimated change to baseline wholesale-level prices using different assumptions

Dairy commodity

No-compact

baseline

wholesale-level

price in 1999

10-year

regional supply

elasticities

Higher

commodity

demand

elasticities

Higher overorder

premiums

Combined

assumptionsa

Transportation

costs increase

25 percent

Fluid milk $15.04 $0.16 $0.18 $0.27 $0.27 $0.19

Soft dairy products 27.31 (0.18) (0.08) (0.15) (0.19) (0.09)

American cheese 139.24 (0.30) (0.23) (0.41) (0.35) (0.18)

Italian cheese 93.24 (0.25) (0.19) (0.30) (0.31) (0.13)

Other cheese 115.58 (0.44) (0.05) (0.31) (0.21) (0.44)

Butter 119.52 (0.54) (0.46) (0.88) (0.52) (0.66)

Frozen dairy

products 21.40 (0.07) (0.05) (0.11) (0.07) (0.07)

Other manufactured

products 27.68 (0.01) 0.07 0.04 0.06 0.07

Nonfat dry milk 102.63 (0.02) (0.04) (0.02) (0.06) (0.03)

Note: Numbers in parentheses are negative.

a

The combined assumptions include the previous three assumptions: (1) 10-year long-term regional

supply elasticities, (2) higher commodity demand elasticities, and (3) higher over-order premiums.

Source: GAO’s analysis using the IRCM99.

Table 46: Estimated Change in 1999 Wholesale-Level Production Using Different Assumptions Under an Expanded NEDC

Scenario

Pounds in millions

Estimated change in baseline wholesale-level production using different assumptions

Dairy commodity

No-compact

baseline

wholesale-level

production in

1999

10-year regional

supply

elasticities

Higher

commodity

demand

elasticities

Higher overorder premiumsCombined

assumptionsa

Transportation

costs increase

25 percent

Fluid milk 55,043 (86) (189) (141) (293) (94)

Soft dairy products 5,984 8 14 13 20 8

American cheese 3,539 1 4 2 6 1

Italian cheese 3,175 2 5 3 8 1

Other cheese 598 1 1 1 1 0

Butter 1,274 1 3 3 2 1
Appendix V: Interregional Impacts of Three

Compact Alternatives in 1999

Page 110 GAO-01-866 Impacts of Dairy Compacts

Pounds in millions

Estimated change in baseline wholesale-level production using different assumptions

Dairy commodity

No-compact

baseline

wholesale-level

production in

1999

10-year regional

supply

elasticities

Higher

commodity

demand

elasticities

Higher overorder premiumsCombined

assumptionsa

Transportation

costs increase

25 percent

Frozen dairy

products 2,131 14 13 20 17 13

Other manufactured

products 4,270 1 (2) 0 0 (2)

Nonfat dry milk 1,396 9 18 16 23 12

Note: Numbers in parentheses are negative.

a

The combined assumptions include the previous three assumptions: (1) 10-year long-term regional

supply elasticities, (2) higher commodity demand elasticities, and (3) higher over-order premiums.

Source: GAO’s analysis using the IRCM99.

Table 47: Estimated Change in 1999 Wholesale-Level Expenditures Using Different Assumptions Under an Expanded NEDC

Scenario

Dollars in millions

Estimated change in baseline wholesale-level expenditures using different assumptions

Dairy commodity

No-compact

baseline

wholesale-level

expenditures in

1999

10-year regional

supply

elasticities

Higher

commodity

demand

elasticities

Higher overorder premiumsCombined

assumptionsa

Transportation

costs increase

25 percent

Fluid milk $8,220 $74 $69 $126 $103 $89

Soft dairy products 1,626 (9) (1) (6) (6) (3)

American cheese 4,823 (9) (2) (11) (4) (5)

Italian cheese 3,028 (6) (3) (8) (3) (3)

Other cheese 792 (3) 1 (1) 0 (2)

Butter 1,495 (6) (2) (7) (4) (7)

Frozen dairy

products 2,570 (6) (3) (9) (5) (5)

Other manufactured

products 1,199 0 2 1 3 2

Nonfat dry milk 1,012 0 0 0 (1) 0

Note: Numbers in parentheses are negative.

a

The combined assumptions include the previous three assumptions: (1) 10-year long-term regional

supply elasticities, (2) higher commodity demand elasticities, and (3) higher over-order premiums.

Source: GAO’s analysis using the IRCM99.
Appendix V: Interregional Impacts of Three

Compact Alternatives in 1999

Page 111 GAO-01-866 Impacts of Dairy Compacts

Tables 48 and 49 summarize the results of our initial estimates and

sensitivity analyses by presenting a range of estimates of the changes from

our no-compact scenario that we obtained in our various analyses.

Table 48: Summary of Estimated Changes in Farm-Level Indicators Using Our Initial

and Subsequent Sets of Assumptions Under an Expanded NEDC Scenario

IRCM99 region

Change in farmlevel prices (dollars

per hundredweight)

Change in farm-level

production (pounds

in millions)

Change in farmlevel revenue

(dollars in millions)

Northeast $0.30 to 0.48 150 to 383 $110 to 193

Appalachia (0.05) to (0.02) (19) to (7) (6) to (2)

Florida (0.05) to (0.02) (4) to (2) (2) to (1)

Southeast (0.05) to 0.02 (7) to 2 (3) to 1

Mideast (0.05) to (0.03) (16) to (7) (8) to (5)

Upper Midwest (0.05) to (0.03) (54) to (20) (24) to (13)

Central (0.05) to (0.02) (22) to (12) (10) to (5)

Southwest (0.04) to (0.02) (15) to (5) (6) to (3)

Western (0.04) to (0.02) (20 ) to (7) (6) to (3)

Northwest (0.04) to (0.03) (12) to (5) (4) to (3)

California (0.06) to 0.02 (112) to 21 (33) to 9

Arizona (0.04) to 0.03 (3) to 3 (2) to 1

Note: Numbers in parentheses are negative.

Source: GAO’s analysis using the IRCM99.

Table 49: Summary of Estimated Changes in 1999 Wholesale-Level Indicators Using

Our Initial and Subsequent Sets of Assumptions Under an Expanded NEDC

Scenario

Dairy commodity

Change in

wholesale-level

prices (dollars

per

hundredweight)

Change in

wholesale-level

production

(pounds in

millions)

Change in

wholesale-level

expenditures

(dollars in millions)

Fluid milk $0.16 to 0.27 (293) to (86) $69 to 126

Soft dairy products (0.19) to (0.08) 8 to 20 (9) to (1)

American cheese (0.41) to (0.18) 1 to 6 (11) to (2)

Italian cheese (0.31) to (0.13) 1 to 8 (8) to (3)

Other cheese (0.44) to (0.05) 0 to 1 (3) to 1

Butter (0.88) to (0.46) 1 to 3 (7) to (2)

Frozen dairy

products (0.11) to (0.05) 13 to 20 (9) to (3)

Other manufactured

products (0.01) to 0.07 (2) to 1 0 to 3

Nonfat dry milk (0.06) to (0.02) 9 to 23 (1) to 0

Summary of the Estimated

Impacts of the Expanded

NEDC
Appendix V: Interregional Impacts of Three

Compact Alternatives in 1999

Page 112 GAO-01-866 Impacts of Dairy Compacts

Note: Numbers in parentheses are negative.

Source: GAO’s analysis using the IRCM99.

As with the other compact scenarios, we developed initial estimates of the

effects of an expanded NEDC in conjunction with a southern compact in

1999 by using a set of key assumptions and conducting subsequent

sensitivity analyses. In addition to conducting the same sensitivity

analyses that we conducted under the previous two compact scenarios, we

also varied the assumption regarding the Class I minimum price, or

compact price, in the compact region. For that analysis, we increased the

minimum price from $16.94 to $18.00 per hundredweight in the southern

compact but retained the $16.94 minimum price in the expanded NEDC.

We used this higher minimum southern compact price because

cooperative pay prices in selected cities in USDA’s Appalachian, Southern,

and Central milk marketing orders averaged about a dollar higher than in

the Northeast Marketing Order in 1999.2

 Under this scenario we conducted

an additional analysis in which we assume that fluid trade movements into

compact regions are limited to the amount of milk that is produced within

a 100-mile radius surrounding a compact region.34 Because this analysis

represents a variation of the model, we also conducted a separate set of

sensitivity analyses.

 2

Cooperative pay prices in each marketing order are related to the blend prices for those

marketing orders. However, they also reflect the costs of certain services performed by the

cooperative associations as well as other costs such as membership dues.

3

We modified the model for each of the three compact scenarios to account for this

additional fluid milk trade restriction. The model results under the NEDC and the

expanded NEDC scenarios did not change when this restriction was added, but results

were different for the expanded NEDC in conjunction with a southern compact scenario.

Therefore, we are including the results of this additional modeling effort only for the

expanded NEDC in conjunction with a southern compact scenario.

4

We performed this analysis because our data are at the regional level as opposed to the

milk plant or dairy farm level. Therefore, our transportation cost data are average cost data

and do not apply to individual shipments. As a result, our initial results may reflect more

movement of milk between regions than would actually occur.

The Economic

Impacts of an

Expanded NEDC in

Conjunction With a

Southern Compact in

1999
Appendix V: Interregional Impacts of Three

Compact Alternatives in 1999

Page 113 GAO-01-866 Impacts of Dairy Compacts

Table 50: Initial Estimates of the Impacts of the Expanded NEDC in Conjunction With a Southern Compact on 1999 Farm-Level

Indicators

Farm-level prices

(dollars per hundredweight)

Farm-level production

(pounds in millions)

Farm-level revenue

(dollars in millions)

IRCM99 region

No-compact

baseline in 1999

Change to

baseline

No-compact

baseline in 1999

Change to

baseline

No-compact

baseline in 1999

Change to

baseline

Northeast $15.07 $0.27 29,138 130 $4,391 $99

Appalachia 15.97 1.35 6,437 348 1,028 147

Florida 17.14 0.04 2,390 2 410 1

Southeast 16.01 0.80 3,548 70 568 40

Mideast 14.64 (0.18) 12,238 (49) 1,792 (29)

Upper Midwest 13.82 (0.07) 32,803 (52) 4,533 (30)

Central 14.22 0.10 14,855 45 2,112 21

Southwest 14.49 (0.10) 10,278 (27) 1,489 (14)

Western 13.18 (0.10) 8,854 (28) 1,167 (13)

Northwest 14.85 (0.09) 7,134 (19) 1,059 (9)

California 12.98 (0.06) 30,459 (63) 3,954 (26)

Arizona 13.76 (0.11) 2,914 (8) 401 (4)

All noncompact regions

combined a a 107,070 (246) 14,805 (125)

Note: Numbers in parentheses are negative.

a

Because farm-level prices are regional, an “all noncompact regions combined” price is not

meaningful.

Source: GAO analysis using the IRCM99.

Table 51: Initial Estimates of the Impacts of the Expanded NEDC in Conjunction With a Southern Compact on 1999 WholesaleLevel Indicators

Wholesale-level prices

(dollars per hundredweight)

Wholesale-level production

(pounds in millions)

Wholesale-level expenditures

(dollars in millions)

Dairy commodity

No-compact

baseline in 1999

Change to

baseline

No-compact

baseline in 1999

Change to

baseline

No-compact

baseline in 1999

Change to

baseline

Fluid milk $15.04 $0.47 55,043 (248) $8,220 $218

Soft dairy products 27.31 (0.33) 5,984 32 1,626 (11)

American cheese 139.24 (0.93) 3,539 4 4,823 (27)

Italian cheese 93.24 (0.62) 3,175 6 3,028 (16)

Other cheese 115.58 (0.66) 598 2 792 (2)

Butter 119.52 (2.55) 1,274 6 1,495 (25)

Initial Estimates of the

Impacts of the Expanded

NEDC in Conjunction With

a Southern Compact
Appendix V: Interregional Impacts of Three

Compact Alternatives in 1999

Page 114 GAO-01-866 Impacts of Dairy Compacts

Wholesale-level prices

(dollars per hundredweight)

Wholesale-level production

(pounds in millions)

Wholesale-level expenditures

(dollars in millions)

Dairy commodity

No-compact

baseline in 1999

Change to

baseline

No-compact

baseline in 1999

Change to

baseline

No-compact

baseline in 1999

Change to

baseline

Frozen dairy

products 21.40 (0.30) 12,131 55 2,570 (24)

Other manufactured

products 27.68 0.20 4,270 (8) 1,199 6

Nonfat dry milk 102.63 (0.09) 1,396 40 1,012 (1)

Note: Numbers in parentheses are negative.

Source: GAO’s analysis using the IRCM99.

Tables 52 through 57 present the results of our sensitivity analyses for

1999 farm and wholesale-level economic variables.

Table 52: Estimated Change in 1999 Farm-Level Prices Using Different Assumptions Under an Expanded NEDC in

Conjunction With a Southern Compact Scenario

Dollars per hundredweight

Estimated change to baseline farm-level prices using different assumptions

IRCM9 region

No-compact

baseline farmlevel prices in

1999

10-year

regional

supply

elasticities

Higher

commodity

demand

elasticities

Higher

over -

order

premiums

Combined

assumptionsa

$18.00

minimum

southern

compact price

Transportation

costs increase

25 percent

Northeast $15.07 $0.26 $0.26 $0.41 $0.38 $0.22 $0.25

Appalachia 15.97 1.13 1.10 1.50 1.32 1.85 1.24

Florida 17.14 0.04 0.03 (0.01) (0.01) (0.02) 0.16

Southeast 16.01 0.79 0.80 1.19 1.18 1.66 0.89

Mideast 14.64 (0.19) (0.18) (0.24) (0.23) (0.24) (0.13)

Upper Midwest 13.82 (0.08) (0.08) (0.11) (0.13) (0.10) (0.06)

Central 14.22 0.11 0.12 0.14 0.14 0.17 0.27

Southwest 14.49 (0.09) (0.05) (0.12) (0.07) (0.13) (0.17)

Western 13.18 (0.09) (0.10) (0.12) (0.13) (0.14) (0.10)

Northwest 14.85 (0.08) (0.09) (0.11) (0.12) (0.13) 0.03

California 12.98 (0.13) (0.18) (0.17) (0.22) (0.18) 0.18

Arizona 13.76 (0.03) 0.06 (0.05) 0.05 (0.05) (0.36)

Note: Numbers in parentheses are negative.

a

The combined assumptions include the previous three assumptions: (1) 10-year long-term regional

supply elasticities, (2) higher commodity demand elasticities, and (3) higher over-order premiums.

Source: GAO’s analysis using the IRCM99.

Sensitivity Analyses for the

Expanded NEDC in

Conjunction With a

Southern Compact

Scenario
Appendix V: Interregional Impacts of Three

Compact Alternatives in 1999

Page 115 GAO-01-866 Impacts of Dairy Compacts

Table 53: Estimated Change in 1999 Farm-Level Production Using Different Assumptions Under an Expanded NEDC in

Conjunction With a Southern Compact Scenario

Pounds in millions

Estimated change to baseline farm-level production using different

assumptions

IRCM99 region

No-compact

baseline

farm-level

production in

1999

10-year

regional

supply

elasticities

Higher

commodity

demand

elasticities

Higher

over -

order

premiums

Combined

assumptionsa

$18.00

minimum

southern

compact price

Transportation

costs increase

25 percent

Northeast 29,138 212 126 203 313 106 126

Appalachia 6,437 429 283 388 504 478 319

Florida 2,390 4 2 (1) (1) (1) 9

Southeast 3,548 111 70 104 164 145 78

Mideast 12,238 (79) (48) (63) (100) (65) (35)

Upper Midwest 32,803 (90) (60) (81) (152) (74) (43)

Central 14,855 74 51 64 96 80 121

Southwest 10,278 (41) (13) (33) (29) (34) (45)

Western 8,854 (47) (30) (34) (64) (39) (28)

Northwest 7,134 (31) (20) (23) (42) (26) 5

California 30,459 (245) (183) (173) (400) (186) 185

Arizona 2,914 (4) 4 (4) 6 (3) (29)

Note: Numbers in parentheses are negative.

a

The combined assumptions include the previous three assumptions: (1) 10-year long-term regional

supply elasticities, (2) higher commodity demand elasticities, and (3) higher over-order premiums.

Source: GAO’s analysis using the IRCM99.

Table 54: Estimated Change in 1999 Farm-Level Revenue Using Different Assumptions Under an Expanded NEDC in

Conjunction With a Southern Compact Scenario

Dollars in millions

Estimated change in baseline farm-level revenue using different assumptions

IRCM99 region

No-compact

baseline

farm-level

revenue in

1999

10-year

regional

supply

elasticities

Higher

commodity

demand

elasticities

Higher

over-order

premiums

Combined

assumptionsa

$18.00

minimum

southern

compact price

Transportation

costs increase

25 percent

Northeast 4,391 108 95 151 159 80 92

Appalachia 1,028 146 119 164 172 204 135

Florida 410 2 1 0 0 (1) 5

Southeast 568 47 40 60 70 85 45

Mideast 1,792 (35) (29) (38) (43) (39) (21)

Upper Midwest 4,533 (39) (34) (47) (63) (43) (26)

Central 2,112 27 25 30 35 37 58

Southwest 1,489 (15) (7) (17) (11) (18) (24)
Appendix V: Interregional Impacts of Three

Compact Alternatives in 1999

Page 116 GAO-01-866 Impacts of Dairy Compacts

Dollars in millions

Estimated change in baseline farm-level revenue using different assumptions

IRCM99 region

No-compact

baseline

farm-level

revenue in

1999

10-year

regional

supply

elasticities

Higher

commodity

demand

elasticities

Higher

over-order

premiums

Combined

assumptionsa

$18.00

minimum

southern

compact price

Transportation

costs increase

25 percent

Western 1,167 (14) (13) (15) (20) (17) (13)

Northwest 1,059 (10) (9) (11) (15) (13) 3

California 3,954 (71) (78) (74) (118) (79) 80

Arizona 401 (1) 2 (2) 2 (2) (14)

Note: Numbers in parentheses are negative.

a

The combined assumptions include the previous three assumptions: (1) 10-year long-term regional

supply elasticities, (2) higher commodity demand elasticities, and (3) higher over-order premiums.

Source: GAO’s analysis using the IRCM99.

Table 55: Estimated Change in 1999 National Average Wholesale-Level Prices Using Different Assumptions Under an

Expanded NEDC in Conjunction With a Southern Compact Scenario

Dollars per hundredweight

Estimated change to baseline wholesale-level prices using different assumptions

Dairy

commodity

No-compact

baseline

wholesalelevel price in

1999

10-year

regional

supply

elasticities

Higher

commodity

demand

elasticities

Higher

over-order

premiums

Combined

assumptionsa

$18.00

minimum

southern

compact price

Transportation

costs increase

25 percent

Fluid milk $15.04 $0.44 $0.39 $0.61 $0.57 $0.59 $0.63

Soft dairy

products 27.31 (0.36) (0.17) (0.38) (0.24) (0.43) (0.55)

American

cheese 139.24 (0.91) (1.00) (1.25) (1.24) (1.41) (0.62)

Italian cheese 93.24 (0.62) (0.86) (0.93) (1.11) (1.02) 0.36

Other cheese 115.58 (0.67) (0.56) (1.01) (1.11) (1.08) 0.69

Butter 119.52 (2.01) 0.21 (2.32) (0.22) (2.38) (6.53)

Frozen dairy

products 21.40 (0.26) (0.10) (0.33) (0.16) (0.34) (0.53)

Other

manufactured

products 27.68 0.06 0.04 0.02 (0.11) 0.07 1.04

Nonfat dry milk 102.63 (0.07) (0.07) (0.08) (0.09) (0.09) (1.22)

Note: Numbers in parentheses are negative.

a

The combined assumptions include the previous three assumptions: (1) 10-year long-term regional

supply elasticities, (2) higher commodity demand elasticities, and (3) higher over-order premiums.

Source: GAO’s analysis using the IRCM99.
Appendix V: Interregional Impacts of Three

Compact Alternatives in 1999

Page 117 GAO-01-866 Impacts of Dairy Compacts

Table 56: Estimated Change in 1999 Wholesale-Level Production Using Different Assumptions Under an Expanded NEDC in

Conjunction With a Southern Compact Scenario

Pounds in millions

Estimated change in baseline wholesale-level production using different assumptions

Dairy

commodity

No-compact

baseline

wholesalelevel

production in

1999

10-year

regional

supply

elasticities

Higher

commodity

demand

elasticities

Higher

over-order

premiums

Combined

assumptionsa

$18.00

minimum

southern

compact price

Transportation

costs increase

25 percent

Fluid milk 55,043 (233) (445) (330) (647) (328) (324)

Soft dairy

products 5,984 27 27 35 43 37 51

American

cheese 3,539 3 16 5 20 6 1

Italian cheese 3,175 5 21 8 28 9 (3)

Other cheese 598 2 3 3 4 3 (1)

Butter 1,274 4 (1) 6 0 5 17

Frozen dairy

products 12,131 51 26 62 41 65 98

Other

manufactured

products 4,270 (1) 3 2 15 (2) (56)

Nonfat dry milk 1,396 32 22 40 34 42 98

Note: Numbers in parentheses are negative.

a

The combined assumptions include the previous three assumptions: (1) 10-year long-term regional

supply elasticities, (2) higher commodity demand elasticities, and (3) higher over-order premiums.

Source: GAO’s analysis using the IRCM99.

Table 57: Estimated Change in 1999 Wholesale-Level Expenditures Using Different Assumptions Under an Expanded NEDC in

Conjunction With a Southern Compact Scenario

Dollars in millions

Estimated change in baseline wholesale-level expenditures using different assumptions

Dairy

commodity

No-compact

baseline

wholesalelevel

expenditures

in 1999

10-year

regional

supply

elasticities

Higher

commodity

demand

elasticities

Higher

over-order

premiums

Combined

assumptionsa

$18.00

minimum

southern

compact price

Transportation

costs increase

25 percent

Fluid milk $8,220 $205 $144 $282 $211 $271 $293

Soft dairy

products 1,626 (14) (3) (13) (2) (16) (19)

American

cheese 4,823 (27) (12) (36) (15) (41) (20)

Italian cheese 3,028 (15) (9) (23) (11) (25) 9

Other cheese 792 (2) 0 (3) (4) (4) 4
Appendix V: Interregional Impacts of Three

Compact Alternatives in 1999

Page 118 GAO-01-866 Impacts of Dairy Compacts

Dollars in millions

Estimated change in baseline wholesale-level expenditures using different assumptions

Dairy

commodity

No-compact

baseline

wholesalelevel

expenditures

in 1999

10-year

regional

supply

elasticities

Higher

commodity

demand

elasticities

Higher

over-order

premiums

Combined

assumptionsa

$18.00

minimum

southern

compact price

Transportation

costs increase

25 percent

Butter 1,495 (20) 1 (22) (3) (24) (64)

Frozen dairy

products 2,570 (20) (6) (27) (10) (27) (43)

Other

manufactured

products 1,199 2 3 1 (1) 2 28

Nonfat dry milk 1,012 (1) (1) (1) (1) (1) 1

Note: Numbers in parentheses are negative.

a

The combined assumptions include the previous three assumptions: (1) 10-year long-term regional

supply elasticities, (2) higher commodity demand elasticities, and (3) higher over-order premiums.

Source: GAO’s analysis using the IRCM99.

Tables 58 and 59 summarize the results of our initial estimates and

sensitivity analyses by presenting the range of estimates of the changes

from our no-compact scenario that we obtained from our various analyses.

Table 58: Summary of Range of Estimated Changes in Farm-Level Indicators Using

Our Initial and Subsequent Sets of Assumptions Under an Expanded NEDC in

Conjunction With a Southern Compact Scenario

IRCM99 region

Change in farm-level

prices (dollars per

hundredweight)

Change in farm-level

production (pounds

in billions)

Change in farmlevel revenue

(dollars in millions)

Northeast $0.22 to 0.41 106 to 313 $80 to 159

Appalachia 1.10 to 1.85 283 to 504 119 to 204

Florida (0.02) to 0.04 (1) to 9 (1) to 5

Southeast 0.79 to 1.66 70 to 164 40 to 85

Mideast (0.24) to (0.13) (100) to (35) (43) to (21)

Upper Midwest (0.11) to (0.06) (152) to (43) (63) to (26)

Central 0.10 to 0.27 45 to 121 21 to 58

Southwest (0.17) to (0.05) (45) to (13) (24) to (7)

Western (0.14) to (0.09) (64) to (28) (20) to (13)

Northwest (0.13) to 0.03 (42) to 5 (15) to 3

California (0.18) to 0.18 (400) to 185 (118) to 80

Arizona (0.36) to 0.06 (29) to 6 (14) to 2

Note: Numbers in parentheses are negative.

Summary of the Estimated

Impacts of the Expanded

NEDC in Conjunction With

a Southern Compact
Appendix V: Interregional Impacts of Three

Compact Alternatives in 1999

Page 119 GAO-01-866 Impacts of Dairy Compacts

Source: GAO’s analysis using the IRCM99.

Table 59: Summary of Range of Estimated Changes in 1999 Wholesale-Level

Indicators Using Our Initial and Subsequent Sets of Assumptions Under an

Expanded NEDC in Conjunction With a Southern Compact Scenario

Dairy commodity

Change in

wholesale-level

prices (dollars per

hundredweight)

Change in

wholesale-level

production

(pounds in

millions)

Change in

wholesale-level

expenditures

(dollars in millions)

Fluid milk $0.39 to 0.63 (647) to (233) $144 to 293

Soft dairy products (0.55) to (0.17) 27 to 51 (19) to (2)

American cheese (1.41) to (0.62) 1 to 20 (41) to (15)

Italian cheese (1.11) to 0.36 (3) to 21 (25) to 9

Other cheese (1.11) to 0.69 (1) to 4 (4) to 4

Butter (6.53) to 0.21 (1) to 17 (64) to 1

Frozen dairy products (0.53) to (0.10) 26 to 98 (43) to (6)

Other manufactured

products (0.11) to 1.04 (56) to 15 (1) to 28

Nonfat dry milk (1.22) to (0.07) 22 to 98 (1) to 1

Note: Numbers in parentheses are negative.

Source: GAO’s analysis using the IRCM99.

Tables 60 and 61 provide our initial estimates obtained by modifying the

IRCM to include a more restrictive trade assumption about fluid milk.

Table 60: Initial Estimates of 1999 Regional Farm-Level Indicators Using a More Restrictive Fluid Milk Trade Assumption

Under an Expanded NEDC in Conjunction With a Southern Compact Scenario

Farm-level prices

(dollars per hundredweight)

Farm-level production

(pounds in millions)

Farm-level revenue

 (dollars in millions)

IRCM99 region No-compact

baseline in 1999

Change to

baseline

No-compact

baseline in 1999

Change to

baseline

No-compact

baseline in 1999

Change to

baseline

The Economic

Impacts of an

Expanded NEDC in

Conjunction With a

Southern Compact

Using a More

Restrictive Fluid Milk

Trade Assumption
Appendix V: Interregional Impacts of Three

Compact Alternatives in 1999

Page 120 GAO-01-866 Impacts of Dairy Compacts

Farm-level prices

(dollars per hundredweight)

Farm-level production

(pounds in millions)

Farm-level revenue

 (dollars in millions)

IRCM99 region No-compact

baseline in 1999

Change to

baseline

No-compact

baseline in 1999

Change to

baseline

No-compact

baseline in 1999

Change to

baseline

Northeast $15.07 $0.28 29,138 138 $4,391 $103

Appalachia 15.97 1.35 6,437 349 1,028 147

Florida 17.14 (0.02) 2,390 (2) 410 (1)

Southeast 16.01 2.99 3,548 261 568 156

Mideast 14.64 (0.24) 12,238 (64) 1,792 (39)

Upper Midwest 13.82 (0.26) 32,803 (195) 4,533 (112)

Central 14.22 0.33 14,855 151 2,112 71

Southwest 14.49 (0.12) 10,278 (32) 1,489 (17)

Western 13.18 (0.12) 8,854 (34) 1,167 (15)

Northwest 14.85 (0.11) 7,134 (22) 1,059 (11)

California 12.98 (0.16) 30,459 (168) 3,954 (70)

Arizona 13.76 (0.04) 2,914 (2) 401 (1)

All noncompact regions

combined a a 107,070 (519) 14,805 (266)

Note: Numbers in parentheses are negative.

a

Because farm-level prices are regional, an “all noncompact regions combined” price is not

meaningful.

Source: GAO’s analysis using the IRCM99.

Table 61: Initial Estimates of 1999 Wholesale-Level Indicators Using a More Restrictive Fluid Milk Trade Assumption Under an

Expanded NEDC in Conjunction With a Southern Compact Scenario

Wholesale-level prices

(dollars per hundredweight)

Wholesale-level production

(pounds in millions)

Wholesale-level expenditures

(dollars in millions)

Dairy commodity

No-compact

baseline in 1999

Change to

baseline

No-compact

baseline in 1999

Change to

baseline

No-compact

baseline in 1999

Change to

baseline

Fluid milk $15.04 $0.71 55,043 (336) $8,220 $335

Soft dairy products 27.31 (0.48) 5,984 37 1,626 (19)

American cheese 139.24 (1.30) 3,539 5 4,823 (38)

Italian cheese 93.24 (0.95) 3,175 8 3,028 (23)

Other cheese 115.58 (1.19) 598 3 792 (5)

Butter 119.52 (2.48) 1,274 6 1,495 (24)

Frozen dairy products 21.40 (0.51) 12,131 65 2,570 (48)

Other manufactured

products 27.68 (0.08) 4,270 2 1,199 (3)

Nonfat dry milk 102.63 0.01 1,396 42 1,012 0

Note: Numbers in parentheses are negative.

Source: GAO’s analysis using the IRCM99.

Tables 62 through 67 present the results of our sensitivity analyses using a

more restrictive fluid trade assumption.
Appendix V: Interregional Impacts of Three

Compact Alternatives in 1999

Page 121 GAO-01-866 Impacts of Dairy Compacts

Table 62: Change in 1999 Farm-Level Prices Using Different Assumptions and a More Restrictive Fluid Milk Trade Assumption

Under an Expanded NEDC in Conjunction With a Southern Compact Scenario

Dollars per hundredweight

Estimated change in baseline farm-level prices using different assumptions

IRCM99 region

No-compact

baseline

farm-level

price in 1999

10-year

regional

supply

elasticities

Higher

commodity

demand

elasticities

Higher overorder

premiums

Combined

assumptionsa

$18.00

minimum

southern

compact

price

Transportation

costs increase

25 percent

Northeast $15.07 $0.28 $0.28 $0.45 $0.31 $0.26 $0.27

Appalachia 15.97 1.18 1.16 1.59 1.39 1.96 1.24

Florida 17.14 (0.01) 0.00 (0.06) (0.02) (0.07) 0.00

Southeast 16.01 3.01 3.16 3.81 3.84 4.51 3.20

Mideast 14.64 (0.24) (0.21) (0.27) (0.23) (0.28) (0.24)

Upper Midwest 13.82 (0.26) (0.24) (0.29) (0.27) (0.30) (0.27)

Central 14.22 0.27 0.23 0.26 0.15 0.29 0.25

Southwest 14.49 (0.10) (0.05) (0.15) (0.07) (0.16) (0.11)

Western 13.18 (0.12) (0.13) (0.17) (0.17) (0.19) (0.12)

Northwest 14.85 (0.10) (0.11) (0.15) (0.14) (0.17) (0.13)

California 12.98 (0.19) (0.20) (0.21) (0.27) (0.24) (0.21)

Arizona 13.76 (0.01) 0.06 (0.05) 0.06 (0.05) (0.09)

Note: Numbers in parentheses are negative.

a

The combined assumptions include the previous three assumptions: (1) 10-year long-term regional

supply elasticities, (2) higher commodity demand elasticities, and (3) higher over-order premiums.

Source: GAO’s analysis using the IRCM99.

Table 63: Change in 1999 Farm-Level Production Using Different Assumptions and a More Restrictive Fluid Milk Trade

Assumption Under an Expanded NEDC in Conjunction With a Southern Compact Scenario

Pounds in millions

Estimated change in baseline farm-level production using different assumptions

IRCM99 region

No-compact

baseline

farm-level

production in

1999

10-year

regional

supply

elasticities

Higher

commodity

demand

elasticities

Higher overorder

premiums

Combined

assumptionsa

$18.00

minimum

southern

compact

price

Transportation

costs increase

25 percent

Northeast 29,138 225 139 220 255 127 135

Appalachia 6,437 448 300 412 533 507 320

Florida 2,390 (1) 0 (3) (2) (4) 0

Southeast 3,548 418 277 333 534 395 281

Mideast 12,238 (101) (56) (71) (101) (75) (63)

Upper Midwest 32,803 (314) (180) (214) (326) (223) (195)

Central 14,855 186 104 117 103 130 110

Southwest 10,278 (46) (15) (40) (31) (43) (30)

Western 8,854 (61) (37) (48) (83) (53) (35)
Appendix V: Interregional Impacts of Three

Compact Alternatives in 1999

Page 122 GAO-01-866 Impacts of Dairy Compacts

Pounds in millions

Estimated change in baseline farm-level production using different assumptions

IRCM99 region

No-compact

baseline

farm-level

production in

1999

10-year

regional

supply

elasticities

Higher

commodity

demand

elasticities

Higher overorder

premiums

Combined

assumptionsa

$18.00

minimum

southern

compact

price

Transportation

costs increase

25 percent

Northwest 7,134 (39) (23) (31) (51) (34) (26)

California 30,459 (348) (211) (218) (491) (249) (224)

Arizona 2,914 (2) 5 (4) 7 (4) (7)

Note: Numbers in parentheses are negative.

a

The combined assumptions include the previous three assumptions: (1) 10-year long-term regional

supply elasticities, (2) higher commodity demand elasticities, and (3) higher over-order premiums.

Source: GAO’s analysis using the IRCM99.

Table 64: Change in 1999 Farm-Level Revenue Using Different Assumptions and a More Restrictive Fluid Milk Trade

Assumption Under an Expanded NEDC in Conjunction With a Southern Compact Scenario

Dollars in millions

Estimated change in baseline farm-level revenue using different assumptions

IRCM99 region

No-compact

baseline

farm-level

revenue in

1999

10-year

regional

supply

elasticities

Higher

commodity

demand

elasticities

Higher

over–order

premiums

Combined

assumptionsa

$18.00

minimum

southern

compact

price

Transportation

costs increase

25 percent

Northeast 4,391 116 103 165 130 95 99

Appalachia 1,028 153 126 175 182 217 135

Florida 410 0 0 (2) (1) (2) 0

Southeast 568 186 165 201 242 241 168

Mideast 1,792 (44) (34) (43) (43) (45) (38)

Upper Midwest 4,533 (128) (103) (124) (133) (129) (115)

Central 2,112 67 49 56 37 62 53

Southwest 1,489 (17) (7) (21) (12) (23) (16)

Western 1,167 (19) (16) (21) (26) (24) (15)

Northwest 1,059 (13) (11) (15) (17) (17) (13)

California 3,954 (103) (88) (92) (145) (105) (93)

Arizona 401 (1) 2 (2) 3 (2) (4)

Note: Numbers in parentheses are negative.

a

The combined assumptions include the previous three assumptions: (1) 10-year long-term regional

supply elasticities, (2) higher commodity demand elasticities, and (3) higher over-order premiums.

Source: GAO’s analysis using the IRCM99.
Appendix V: Interregional Impacts of Three

Compact Alternatives in 1999

Page 123 GAO-01-866 Impacts of Dairy Compacts

Table 65: Change in 1999 National Average Wholesale-Level Prices Using Different Assumptions and a More Restrictive Fluid

Milk Trade Assumption Under an Expanded NEDC in Conjunction With a Southern Compact Scenario

Dollars per hundredweight

Estimated change in baseline wholesale-level prices using different assumptions

Dairy commodity

No-compact

baseline

wholesalelevel price in

1999

10-year

regional

supply

elasticities

Higher

commodity

demand

elasticities

Higher overorder

premiums

Combined

assumptionsa

$18.00

minimum

southern

compact

price

Transportation

costs increase

25 percent

Fluid milk $15.04 $0.69 $0.66 $0.91 $0.80 $0.93 $0.69

Soft dairy products 27.31 (0.44) (0.24) (0.48) (0.18) (0.52) (0.31)

American cheese 139.24 (1.32) (1.27) (1.68) (1.51) (1.86) (1.38)

Italian cheese 93.24 (0.99) (1.08) (1.24) (1.33) (1.36) (1.11)

Other cheese 115.58 (1.25) (0.75) (1.41) (1.33) (1.50) (1.65)

Butter 119.52 (2.08) (0.11) (2.80) 0.07 (2.78) (1.08)

Frozen dairy products 21.40 (0.51) (0.38) (0.64) (0.41) (0.65) (0.53)

Other manufactured

products 27.68 0.01 (0.05) 0.08 0 0.06 (0.18)

Nonfat dry milk 102.63 (0.01) (0.02) (0.03) (0.05) (0.03) 0

Note: Numbers in parentheses are negative.

a

The combined assumptions include the previous three assumptions: (1) 10-year long-term regional

supply elasticities, (2) higher commodity demand elasticities, and (3) higher over-order premiums.

Source: GAO’s analysis using the IRCM.

Table 66: Change in 1999 Wholesale-Level Production Using Different Assumptions and a More Restrictive Fluid Milk Trade

Assumption Under an Expanded NEDC in Conjunction With a Southern Compact Scenario

Pounds in millions

Estimated change in baseline wholesale-level production using different

assumptions

Dairy commodity

No-compact

baseline

wholesalelevel

production in

1999

10-year

regional

supply

elasticities

Higher

commodity

demand

elasticities

Higher overorder

premiums

Combined

assumptionsa

$18.00

minimum

southern

compact

price

Transportation

costs increase

25 percent

Fluid milk 55,043 (323) (646) (433) (778) (440) (313)

Soft dairy products 5,984 35 43 45 50 47 29

American cheese 3,539 5 20 7 25 7 6

Italian cheese 3,175 8 26 11 33 12 10

Other cheese 598 3 4 4 5 4 3

Butter 1,274 5 2 8 0 7 3

Frozen dairy products 12,131 62 41 77 44 79 49

Other manufactured

products 4,270 (1) 7 (3) 5 (3) 9

Nonfat dry milk 1,396 40 39 54 45 54 27
Appendix V: Interregional Impacts of Three

Compact Alternatives in 1999

Page 124 GAO-01-866 Impacts of Dairy Compacts

Note: Numbers in parentheses are negative.

a

The combined assumptions include the previous three assumptions: (1) 10-year long-term regional

supply elasticities, (2) higher commodity demand elasticities, and (3) higher over-order premiums.

Source: GAO’s analysis using the IRCM99.

Table 67: Change in 1999 Wholesale-Level Expenditures Using Different Assumptions and a More Restrictive Fluid Milk Trade

Assumption Under an Expanded NEDC in Conjunction With a Southern Compact Scenario

Dollars in millions

Estimated change in wholesale-level expenditures using different assumptions

Dairy commodity

No-compact

baseline

wholesalelevel

expenditures

in 1999

10-year

regional

supply

elasticities

Higher

commodity

demand

elasticities

Higher overorder

premiums

Combined

assumptiona

$18.00

minimum

southern

compact

price

Transportation

costs increase

25 percent

Fluid milk $8,220 $326 $259 $428 $313 $438 $327

Soft dairy products 1,626 (17) (2) (17) 3 (18) (11)

American cheese 4,823 (39) (16) (49) (18) (55) (39)

Italian cheese 3,028 (25) (12) (31) (14) (33) (27)

Other cheese 792 (5) (2) (5) (5) (6) (7)

Butter 1,495 (20) 1 (26) 1 (27) (10)

Frozen dairy products 2,570 (48) (37) (61) (40) (62) (54)

Other manufactured

products 1,199 0 0 3 1 2 (5)

Nonfat dry milk 1,012 0 0 0 0 0 0

Note: Numbers in parentheses are negative.

a

The combined assumptions include the previous three assumptions: (1) 10-year long-term regional

supply elasticities, (2) higher commodity demand elasticities, and (3) higher over-order premiums.

Source: GAO’s analysis using the IRCM99.

Tables 68 and 69 summarize the results of our initial estimates and

sensitivity analyses by presenting the range of estimates of the changes

from our no-compact scenario that we obtained from our various analyses

using a more restrictive trade assumption.
Appendix V: Interregional Impacts of Three

Compact Alternatives in 1999

Page 125 GAO-01-866 Impacts of Dairy Compacts

Table 68: Summary of Estimated Changes in 1999 Farm-Level Indicators Using Our

Initial and Subsequent Sets of Assumptions and a More Restrictive Fluid Milk Trade

Assumption Under an Expanded NEDC in Conjunction With a Southern Compact

Scenario

IRCM99 region

Change in farmlevel prices

(dollars per

hundredweight)

Change in farm-level

production

(pounds in millions)

Change in farmlevel revenue

(dollars in millions)

Northeast $0.26 to .45 127 to 255 $95 to 165

Appalachia 1.16 to 1.96 300 to 533 126 to 217

Florida (0.07) to 0 (4) to 0 (2) to 0

Southeast 2.99 to 4.51 261 to 534 156 to 242

Mideast (0.28) to (0.21) (101) to (56) (45) to (34)

Upper Midwest (.30) to (.24) (326) to (180) (133) to (103)

Central 0.15 to 0.33 103 to 186 37 to 71

Southwest (0.16) to (0.05) (46) to (15) (23) to (7)

Western (0.19) to (0.12) (83) to (34) (26) to (15)

Northwest (0.17) to (0.10) (51) to (22) (17) to (11)

California (0.27) to (0.16) (491) to (168) (145) to (70)

Arizona (.09) to .06 (7) to 7 (4) to 3

Note: Numbers in parentheses are negative.

Source: GAO’s analysis using the IRCM99.

Table 69: Summary of Estimated Changes in 1999 Wholesale-Level Indicators Using

Our Initial and Subsequent Sets of Assumptions and a More Restrictive Fluid Milk

Trade Assumption Under an Expanded NEDC in Conjunction With a Southern

Compact Scenario

Dairy commodity

Change in wholesalelevel prices

(dollars per

hundredweight)

Change in

wholesale-level

production

(pounds in

millions)

Change in

wholesale-level

expenditures

(dollars in millions)

Fluid milk $0.66 to 0.93 (778) to (313) $259 to 438

Soft dairy products (0.52) to (0.18) 29 to 50 (19) to 3

American cheese (1.86) to (1.27) 5 to 25 (55) to (16)

Italian cheese (1.36) to (0.95) 8 to 33 (33) to (12)

Other cheese (1.65) to (0.75) 3 to 5 (7) to (2)

Butter (2.80) to 0.07 0 to 8 (27) to 1

Frozen dairy

products (0.65) to (0.38) 41 to 79 (62) to (37)

Other

manufactured

products (0.18) to 0.08 (3) to 9 (5) to 3
Appendix V: Interregional Impacts of Three

Compact Alternatives in 1999

Page 126 GAO-01-866 Impacts of Dairy Compacts

Dairy commodity

Change in wholesalelevel prices

(dollars per

hundredweight)

Change in

wholesale-level

production

(pounds in

millions)

Change in

wholesale-level

expenditures

(dollars in millions)

Nonfat dry milk (0.05) to 0.01 27 to 54 0

Note: Numbers in parentheses are negative.

Source: GAO’s analysis using the IRCM99.
Appendix VI: Interregional Impacts of Three

Compact Alternatives in 2000

Page 127 GAO-01-866 Impacts of Dairy Compacts

We present our estimates of the three compact scenarios’ impacts on 2000

farm-level and wholesale-level indicators when compared with a nocompact scenario in the following tables. As with our 1999 analysis, we

calibrated the Interregional Dairy Sector Competition Model (IRCM) using

2000 data to develop a baseline—an IRCM00. However, we did not

conduct a series of sensitivity analyses for the 2000 estimates for several

reasons:

• The data for 2000 were preliminary when we conducted these analyses in

July 2001.

• The dairy industry was undergoing a period of adjustment following

USDA’s regulatory changes to its milk marketing order program in January

2000. Because the IRCM is a spatial equilibrium model, and the dairy

markets appeared to be in disequilibrium in 2000, we questioned whether

2000 could be used to accurately estimate the impacts of dairy compacts.

• The sensitivity analyses performed for the 1999 estimates indicated that

the IRCM99 model was robust—that is, the estimates that we obtained

when we used different assumptions were similar to the initial estimates

that we obtained using our initial set of assumptions. As a result, we did

not think that another series of sensitivity analyses would provide much

additional information.

The following tables provide baseline estimates of the dairy sector

indicators under our no-compact scenario and the estimates of the impacts

of the three different compact alternatives. As with our 1999 estimates, we

present estimates under both less restrictive and more restrictive fluid

trade assumptions for the expanded NEDC in conjunction with a southern

compact scenario. Our baseline estimates for 2000 also include the effects

that USDA’s milk marketing order regulatory reforms had on farm-level

and wholesale-level dairy sector indicators. As a result, the baseline

estimates for 2000 are not comparable to those for 1999.

We used the same set of assumptions to develop our 2000 estimates as we

did to develop our 1999 baseline and initial estimates:

• No more than 40 percent of any one region’s milk may be shipped to

another region without being subject to the receiving region’s pricing

requirements. This assumption is used to simulate USDA milk marketing

order regulations regarding minimum pricing requirements for milk

shipped between marketing orders. This threshold was chosen as a proxy

for the requirement that an adjustment be made if a plurality of an order's

packaged milk was sold in another region.

• Supply elasticities are medium-term (that is, 5 years).

Appendix VI: Interregional Impacts of Three

Compact Alternatives in 2000
Appendix VI: Interregional Impacts of Three

Compact Alternatives in 2000

Page 128 GAO-01-866 Impacts of Dairy Compacts

• Demand elasticities are medium-term.

• The Class I minimum price in the compact region, or the compact price, is

$16.94 per hundredweight of milk.

• Market-driven over-order premiums are zero in the compact region. This

initial assumption represents a lower bound, and assumes that all marketdriven over-order premiums in NEDC states are replaced by Compact

over-order producer price payments.

• A handler must pay the compact over-order producer price into the

compact pool for milk shipped into the compact region in order to receive

the compact price.

Using these assumptions, tables 70 through 75 compare our no-compact

baseline scenario with our estimated changes in farm-level and wholesalelevel indicators across different compact scenarios for 2000.

Table 70: Range of Estimated Impacts on 2000 Farm-Level Prices Across Different Compact Scenarios

Dollars per hundredweight

Farm-level prices

IRCM00 region

No-compact

baseline in 2000

Change to baseline

with the NEDC

Change to

baseline with an

expanded NEDC

Change to

baseline with an

expanded NEDC

and a southern

compact

Change to baseline

with an expanded

NEDC, a southern

compact, and 100-

mile import constraint

Northeast $13.39 $0.12 $0.47 $0.41 $0.36

Appalachia 14.35 (0.01) (0.04) 0.46 0.42

Florida 15.64 (0.02) (0.04) 0.03 0.03

Southeast 13.52 (0.02) (0.04) 1.35 2.25

Mideast 12.84 (0.01) (0.04) (0.12) (0.14)

Upper Midwest 11.82 (0.01) (0.04) (0.04) (0.43)

Central 12.14 (0.01) (0.03) 0.08 0.77

Southwest 12.95 0 (0.03) (0.08) (0.10)

Western 10.82 0 0.01 (0.03) (0.17)

Northwest 12.83 0 (0.03) (0.09) (0.12)

California 11.05 (0.01) (0.05) (0.10) (0.10)

Arizona 11.93 0 (0.03) (0.09) (0.10)

Note: Numbers in parentheses are negative.

Source: GAO’s analysis using the IRCM00.
Appendix VI: Interregional Impacts of Three

Compact Alternatives in 2000

Page 129 GAO-01-866 Impacts of Dairy Compacts

Table 71: Range of Estimated Impacts on 2000 Farm-Level Production Across Different Compact Scenarios

Pounds in millions

Farm-level production

IRCM00 region

No-compact

baseline in 2000

Change to baseline

with the NEDC

Change to

baseline with an

expanded NEDC

Change to

baseline with an

expanded NEDC

and a southern

compact

Change to baseline

with an expanded

NEDC, a southern

compact, and a 100-

mile import constraint

Northeast 29,165 66 262 231 203

Appalachia 6,493 (5) (12) 132 122

Florida 2,461 0 (2) 2 2

Southeast 3,505 (1) (4) 139 232

Mideast 12,704 (5) (13) (39) (45)

Upper Midwest 33,104 (15) (34) (41) (375)

Central 15,753 (5) (19) 43 420

Southwest 10,920 (3) (11) (29) (33)

Western 9,709 (3) 1 (14) (67)

Northwest 7,233 (1) (8) (23) (30)

California 32,093 (7) (56) (129) (127)

Arizona 3,006 0 (3) (9) (9)

Note: Numbers in parentheses are negative.

Source: GAO’s analysis using the IRCM00.

Table 72: Range of Estimated Impacts on 2000 Farm-Level Revenue Across Different Compact Scenarios

Dollars in millions

Farm-level revenue

IRCM00 region

No-compact

baseline in 2000

Change to baseline

with the NEDC

Change to

baseline with an

expanded NEDC

Change to

baseline with an

expanded NEDC

and a southern

compact

Change to baseline

with an expanded

NEDC, a southern

compact, and a 100-

mile import constraint

Northeast $3,905 $44 $173 $152 $133

Appalachia 931 (1) (4) 50 46

Florida 384 0 (1) 2 2

Southeast 474 (1) (2) 68 115

Mideast 1,631 (2) (7) (20) (24)

Upper Midwest 3,913 (5) (17) (18) (185)

Central 1,912 (2) (7) 18 176

Southwest 1,414 0 (4) (12) (15)

Western 1,050 0 1 (4) (23)

Northwest 928 0 (3) (9) (12)

California 3,546 (4) (22) (46) (46)

Arizona 359 0 (1) (4) (4)

Note: Numbers in parentheses are negative.
Appendix VI: Interregional Impacts of Three

Compact Alternatives in 2000

Page 130 GAO-01-866 Impacts of Dairy Compacts

Source: GAO’s analysis using the IRCM00.

Table 73: Range of Estimated Impacts on 2000 National Average Wholesale-Level Prices Across Different Compact Scenarios

Dollars per hundredweight

Wholesale-level prices

Dairy commodity

No-compact

baseline in 2000

Change to

baseline with

the NEDC

Change to

baseline with

an expanded

NEDC

Change to

baseline with

an expanded

NEDC and a

southern

compact

Change to baseline

with an expanded

NEDC, a southern

compact, and a 100-

mile import constraint

Fluid milk $13.55 $0.07 $0.26 $0.47 $0.58

Soft dairy products 27.44 (0.03) (0.14) (0.29) (0.28)

American cheese 140.13 (0.08) (0.27) (0.88) (2.20)

Italian cheese 99.58 (0.08) (0.23) (0.70) (1.71)

Other cheese 126.23 (0.09) (0.28) (0.84) (1.77)

Butter 123.04 (0.17) (0.99) (2.22) (1.51)

Frozen dairy products 21.61 (0.03) (0.12) (0.24) (0.17)

Other manufactured products 32.49 (0.04) 0.01 0.03 0.66

Nonfat dry milk 102.1 (0.02) (0.02) (0.17) (0.34)

Note: Numbers in parentheses are negative.

Source: GAO’s analysis using the IRCM00.

Table 74: Range of Estimated Impacts on 2000 Wholesale-Level Production Across Different Compact Scenarios

Pounds in millions

Wholesale-level production

Dairy commodity

No-compact

baseline in 2000

Change to

baseline with

the NEDC

Change to

baseline with

an expanded

NEDC

Change to

baseline with

an expanded

NEDC and a

southern

compact

Change to baseline

with an expanded

NEDC, a southern

compact, and a 100-

mile import constraint

Fluid milk 55,549 (37) (155) (313) (371)

Soft dairy products 6,134 2 13 31 29

American cheese 3,610 0 1 3 8

Italian cheese 3,300 0 2 6 15

Other cheese 613 0 1 3 7

Butter 1,251 0 2 5 3

Frozen dairy products 12,015 4 21 43 32

Other manufactured products 4,115 2 1 1 (23)

Nonfat dry milk 1,507 3 17 36 41

Note: Numbers in parentheses are negative.
Appendix VI: Interregional Impacts of Three

Compact Alternatives in 2000

Page 131 GAO-01-866 Impacts of Dairy Compacts

Source: GAO’s analysis using the IRCM00.

Table 75: Range of Estimated Impacts on 2000 Wholesale-Level Expenditures Across Different Compact Scenarios

Dollars in millions

Wholesale-level expenditures

Dairy commodity

No-compact

baseline in 2000

Change to

baseline with

the NEDC

Change to

baseline with an

expanded NEDC

Change to

baseline

with an

expanded

NEDC and

a southern

compact

Change to baseline

with an expanded

NEDC, a southern

compact, and a 100-

mile import constraint

Fluid milk $ 7,467 $34 $122 $216 $268

Soft dairy products 1,672 (1) (5) (9) (9)

American cheese 4,962 (3) (8) (26) (67)

Italian cheese 3,315 (3) (7) (19) (44)

Other cheese 995 (1) (1) (4) (7)

Butter 1,502 (2) (10 (21 (15)

Frozen dairy products 2,574 (2) (9) (19) (13)

Other manufactured products 1,347 (1) 1 2 20

Nonfat dry milk 721 0 0 0 1

Note: Numbers in parentheses are negative.

Source: GAO’s analysis using the IRCM00.
Appendix VII: Studies of the Interregional

Economic Impacts of Various Dairy Compact

Alternatives

Page 132 GAO-01-866 Impacts of Dairy Compacts

We reviewed and analyzed five studies that provide estimates of the

interregional economic impacts of various compact alternatives. These

studies used a variety of economic models, assumptions about model

parameters such as demand elasticities, and data sets. The compact

alternatives that they examined also varied. Despite these differences, the

results of these studies on the impacts of relatively small compacts, such

as the NEDC, on dairy farmers in noncompact regions were generally

comparable to ours. In addition, these studies agree with ours that, as

compacts expand in size, the economic impacts on dairy farmers in

noncompact regions increase.

A study issued in 1999 by USDA estimated the interregional impacts that

the NEDC would have on noncompact regions.1 USDA used a model

derived, in part, from a national dairy sector model developed by USDA’s

Economic Research Service and dairy sector data from 1999 to forecast

the impact of the NEDC from 2000 through 2005.2

 The parameters used in

the analysis were not directly estimated, but instead, were drawn from the

Economic Research Service model. The Service’s national dairy sector

model is an annual, time-series dairy model that is estimated as a system

of equations using a three-stage, least squares regression analysis. USDA

modified the Service’s model to allow for a multiregional analysis. The

modified model used to estimate the interregional impacts of the NEDC

consisted of five sections: (1) milk supply, (2) dairy product supply,

(3) dairy product demand, (4) market equilibrium conditions, and

(5) regional market utilization and pricing.3

 The major features of USDA’s

analysis and model included the following:

• The model used an iterative process to solve a system of simultaneous

dairy demand and supply equations.

• The model used 36 regions, including the former 32 federal milk marketing

orders; California; and three other nonfederally regulated regions.

• The model did not provide for milk movements between regions.

 1

USDA Agricultural Marketing Service analysis provided to the Subcommittee on Livestock

and Horticulture, Committee on Agriculture, U.S. House of Representatives, June 14, 1999.

2

The NEDC comprises Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island,

and Vermont.

3

For further discussion of the USDA regional dairy model, see Federal Milk Marketing

Order Reform: New England, Final Decision, Regulatory Impact Analysis, USDA’s

Agricultural Marketing Service, Mar. 1999.

Appendix VII: Studies of the Interregional

Economic Impacts of Various Dairy Compact

Alternatives

USDA (1999)—A

Study Using an

Annual, Time-Series

Dairy Sector Model
Appendix VII: Studies of the Interregional

Economic Impacts of Various Dairy Compact

Alternatives

Page 133 GAO-01-866 Impacts of Dairy Compacts

• USDA adjusted parameters developed for the Economic Research Service

model to reflect regional differences in the dairy industry.

• USDA used 1999 data to project the NEDC’s impacts in each of 6 years—

2000 through 2005—and the average annual impact over the same period.

USDA used two different scenarios to estimate the NEDC’s impacts:

(1) the NEDC price of $16.94 per hundredweight of milk would remain

constant during the years 2000 through 2005 and (2) the NEDC price of

$16.94 per hundredweight would remain in effect only in 2000, after which

time the NEDC price would change to the USDA federal milk marketing

order Class I price for Boston plus $1.30 per hundredweight.

Table 76 summarizes USDA’s estimates of the 6-year average annual

impact of the NEDC in (1) noncompact regions of the country affected the

most by the NEDC, (2) all 32 marketing orders combined, (3) California,

and (4) the country as a whole. These estimated impacts are expressed as

changes to average production levels, farm-level prices, and farm-level

revenue from levels that would be expected in the absence of the NEDC.

Table 76: USDA Estimates of the NEDC’s Interregional Impacts on Average Annual Production Levels and Farm-Level Prices

and Revenue, 2000-05

Amount

without the

NEDC

Change due to the NEDC using a

$16.94 over-order compact price

in 2000-05

Change due to the NEDC using a

$16.94 over-order compact price

in 2000 and a Boston Class I

price plus $1.30 in 2001-05

Region Baseline Amount Percentage Amount Percentage

New York-New Jersey

Production (pounds in millions) 12,028 (1.6) (0.01) (2.4) (0.02)

Farm-level price (dollars per

hundredweight) $15.15 0 0 (0.01) (0.07)

Farm-level revenue (dollars in millions) $1,822 (0.5) (0.03) (1.6) (0.09)

Southeast

Production (pounds in millions) 5,690 (0.5) (0.01) (0.8) (0.01)

Farm-level price (dollars per

hundredweight) $16.56 0 0 (0.01) (0.06)

Farm-level revenue (dollars in millions) $943 0 0 (0.4) (0.04)

Southern Michigan

Production (pounds in millions) 4,606 (0.4) (0.01) (0.7) (0.02)

Farm-level price (dollars per

hundredweight) $15.24 0 0 (0.01) (0.07)

Farm-level revenue (dollars in millions) $703 0 0 (0.4) (0.06)

Chicago

Production (pounds in millions) 14,777 (1.6) (0.07) (2.1) (0.01)
Appendix VII: Studies of the Interregional

Economic Impacts of Various Dairy Compact

Alternatives

Page 134 GAO-01-866 Impacts of Dairy Compacts

Amount

without the

NEDC

Change due to the NEDC using a

$16.94 over-order compact price

in 2000-05

Change due to the NEDC using a

$16.94 over-order compact price

in 2000 and a Boston Class I

price plus $1.30 in 2001-05

Region Baseline Amount Percentage Amount Percentage

Farm-level price (dollars per

hundredweight) $14.60 (0.01) (0.01) (0.07) (0.07)

Farm-level revenue (dollars in millions) $2,154 (1.3) (0.06) (1.7) (0.08)

Southwest Plains

Production (pounds in millions) 3,059 (0.3) (0.01) (0.4) (0.01)

Farm-level price (dollars per

hundredweight) $15.08 0 0 (0.01) (0.07)

Farm-level revenue (dollars in millions) $461 (0.1) (0.02) (0.3) (0.07)

Texas

Production (pounds in millions) 6,353 (0.6) (0.01) (0.9) (0.01)

Farm-level price (dollars per

hundredweight) $15.16 0 0 (0.01) (0.07)

Farm-level revenue (dollars in millions) $963 (0.1) (0.01) (0.6) (0.06)

Great Basin

Production (pounds in millions) 2,635 (0.2) (0.01) (0.3) (0.01)

Farm-level price (dollars per

hundredweight) $14.25 (0.01) (0.07) (0.01) (0.07)

Farm-level revenue (dollars in millions) $377 (0.2) (0.05) (0.3) (0.08)

Pacific Northwest

Production (pounds in millions) 7,619 (0.5) (0.01) (0.8) (0.01)

Farm-level price (dollars per

hundredweight) $14.37 0 0 (0.1) (0.07)

Farm-level revenue (dollars in millions) $1,098 1 (0.01) (0.6) (0.05)

All federal order markets

Production (pounds in millions) 112,739 20.5 0.02 30.7 0.03

Farm-level price (dollars per

hundredweight) $15.04 0.01 0.07 0.01 0.07

Farm-level revenue (dollars in millions) $16,944 12 0.07 19.5 0.12

State of California

Production (pounds in millions) 32,666 (2.2) (0.01) (3.4) (0.01)

Farm-level price (dollars per

hundredweight) $14.25 0 0 (0.01) (0.07)

Farm-level revenue (dollars in millions) $4,667 (0.9) (0.02) (3.3) (0.07)

United States

Production (pounds in millions) 165,157 16.3 0.01 24.8 0.02

Farm-level price (dollars per

hundredweight) $14.73 0 0 0.01 0.07

Farm-level revenue (dollars in millions) $24,369 8.6 0.04 13.2 0.05

Note: Numbers in parentheses are negative.

Source: USDA study.
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USDA also reported on the interregional impacts in each of its thenexisting 32 milk marketing orders and in all noncompact regions

combined. For example, under the first scenario, for which it used a $16.94

NEDC price for each of the 6 years, USDA estimated that the average allmilk price in all noncompact regions would decline by less than 1 cent per

hundredweight during the years 2000 through 2005.4

 With regard to its

individual marketing orders, such as the Upper Midwest Marketing Order,

USDA estimated that the all-milk price would decline by 1 cent per

hundredweight in 2000, 2001, 2004, and 2005.

A study issued by Cox, Cropp, and Hughes in 1999 estimated the impacts

of an expanded NEDC and an expanded NEDC in conjunction with a

southern compact on noncompact regions.5

 Cox et al. used a spatial

market equilibrium model and dairy sector data for 1997 to estimate the

potential impacts of compacts in that year. For purposes of the analysis,

the expanded NEDC included the six New England states, New Jersey,

New York, Maryland, and Pennsylvania. The southern compact consisted

of 10 states.6

The spatial market equilibrium model also incorporated two additional

modeling features: It simulated the processing of dairy commodities in a

vertical marketing sector and used price wedges, or mark-ups, for each

dairy commodity to simulate USDA’s classified pricing system and

compacts.7

 To generate a competitive spatial market equilibrium, the

model maximized producer and consumer surpluses in each region, minus

transportation costs, for the different commodities, subject to certain

trade-flow and other constraints. In addition, the model allowed for

 4

The all-milk price is the weighted average farm price of milk that meets the more stringent

federal standards for milk to be used as fluid milk (although some is used for

manufacturing purposes), and milk that meets less stringent federal standards and can only

be used for manufactured dairy products.

5

Tom Cox, Bob Cropp, and Will Hughes, “Interregional Analysis of Interstate Dairy

Compacts,” Department of Agricultural and Applied Economics, College of Agricultural

and Life Sciences, University of Wisconsin-Madison, Marketing and Policy Briefing Paper

No. 69, July 1999.

6

The southern compact included Alabama, Arkansas, Florida, Georgia, Kansas, Kentucky,

Louisiana, Mississippi, Missouri, and North Carolina.

7

The vertical market portion of the model transformed raw milk into dairy products

consistent with how milk components (protein, fat, and carbohydrates) are allocated and

priced.

Cox et al. (1999)–A

Study Using a Spatial

Market Equilibrium

Model
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classified pricing so that raw milk used for fluid milk attracted a higher

price than raw milk used for manufactured dairy commodities. Using an

iterative technique, the model solved for regional farm-level milk prices

and production, wholesale-level dairy prices and production, and

interregional trade flows. This model—the IRCM97—is an earlier version

of the model that we used for our analysis of interregional impacts.

The model assumed intermediate-run (3- to 5-year) supply and demand

functions for 12 geographic regions of the country (the current 11 USDA

milk marketing orders and California), representing different milk and

dairy product supply and demand regions. In addition, Cox et al. used

component yield data from other researchers.8

 Features of their analysis

follow:

• The model was an interregional, spatial equilibrium model.

• The model prohibited fluid milk trade between compact and noncompact

regions.

• Twelve demand relationships for dairy products were developed for the 12

regions in the model; these demand relationships were based on consumer

demand for nine distinct dairy products using national estimates of per

capita wholesale demand.

• To link prices among the 12 regions, the model used 1995 transportation

cost estimates provided by researchers at Cornell University.

• The model used 1997 price and production data obtained from USDA for

developing a 1997 base year.

• The model added a price wedge of $2 per hundredweight to the 1997 Class

I differentials in each compact region.

• All scenarios assumed no Commodity Credit Corporation milk price

supports because these were set to expire in 2000.

Under the model assumptions used, the researchers estimated the impacts

of dairy compacts on farm-level prices and revenue, and commodity prices

and expenditures. Tables 77 and 78 provide the study’s results.

 8

R. Selinsky, T.L. Cox, and E.V. Jesse, “Estimation of U.S. Dairy Product Component

Yields,” College of Agricultural and Life Sciences, University of Wisconsin-Madison, Staff

Paper No. 355, Sept. 1992.
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Table 77: Cox et al. Estimates of the Interregional Impacts of Compacts on Farm-Level Prices and Revenue in 1997

Expanded NEDC

Expanded NEDC in conjunction with a southern

compact

IRCM97 region

Change in farm-level

price (dollars per

hundredweight)

Change in farm-level

revenue (dollars in

millions)

Change in farm-level

price (dollars per

hundredweight)

Change in farm-level

revenue (dollars in

millions)

Northeast $0.66 $237 $0.53 $190

Appalachia (0.09) (10) 0.86 99

Florida (0.08) (3) 1.48 53

Southeast (0.08) (4) 1.32 74

Mideast (0.10) (16) (0.26) (42)

Upper Midwest (0.10) (42) (0.22) (92)

Central (0.07) (15) (0.24) (52)

Southwest (0.05) (7) 0.58 79

Western (0.08) (8) (0.21) (22)

Northwest (0.08) (8) (0.14) (14)

California (0.08) (31) (0.28) (110)

Arizona (0.05) (2) (0.22) (8)

United States 0.06 91 0.09 156

Note: Numbers in parentheses are negative.

Source: Cox et al., 1999.

Table 78: Cox et al. Estimates of the Interregional Impacts of Compacts on Commodity Prices and Expenditures in 1997

Expanded NEDC

Expanded NEDC in conjunction with a southern

compact

Dairy commodity

Change in commodity

price (dollars per

hundredweight)

Change in commodity

expenditures (dollars in

millions)

Change in commodity

price (dollars per

hundredweight)

Change in commodity

expenditures (dollars

in millions)

Fluid milk $0.32 $148 $0.70 $326

Soft dairy products (0.10) (3) (0.30) (8)

American cheese (0.70) (19) (1.74) (48)

Italian cheese (0.70) (15) (1.14) (32)

Other cheese (0.52) (4) (0.72) (5)

Butter 0.67 6 0.51 7

Frozen dairy products (0.06) (5) (0.12) (17)

Other manufactured

products (0.30) (9) (0.52) (28)

Nonfat dry milk (1.15) (6) (1.76) (21)

Note: Numbers in parentheses are negative.

Source: Cox et al., 1999.
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In 2000, Kenneth Bailey, an agricultural economist at Pennsylvania State

University, issued a study that estimated the interregional economic

impacts of a large compact on noncompact states.9 Bailey used a static

equilibrium model, similar in structure to the constant elasticity functional

form policy models developed by Gardner.10,11 In his 2000 study, Bailey

relied on 1997 data to forecast the impact of compacts in 2000. The

compact simulation included those states in USDA’s Appalachian, Florida,

Northeast, and Southeast milk marketing orders.12 The model was

multiregional to reflect milk supply, allocation, and class prices in federal

milk marketing orders. However, overall supply and demand for dairy

products were modeled at the national level, as opposed to on a marketing

order basis. The model also relied on medium-run supply and demand

elasticities as reported in agricultural economics literature. The data

sources for the model included USDA’s Agricultural Marketing Service,

federal milk marketing order administrators, and the California

Department of Agriculture.

The model incorporated several significant aspects of USDA’s milk

marketing order reform that were adopted in January 2000, including

component pricing.13 As specified in milk marketing order reform, the

model based the Class I price on the higher of the Class III or IV price. The

model posited 13 regions: 11 federal marketing orders, California, and an

 9

Kenneth W. Bailey, “Evaluating the Economic Impacts of Regional Milk Pricing

Authorities: The Case of Dairy Compacts,” Agricultural and Resource Economics Review,

Vol. 29, No. 2 (Oct. 2000), pp. 208-19.

10A constant elasticity functional form policy model is one in which the elasticity of supply

or demand is assumed to be constant over the relevant range of the function.

11Bruce L. Gardner, The Economics of Agricultural Policies (New York, N.Y.: MacMillan

Publishing Company, 1987).

12In Bailey’s model, the northern dairy compact consisted of the following states or

portions thereof: Connecticut, Delaware, Maine, Maryland, Massachusetts, New

Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, and Vermont; and the

District of Columbia. The Mid-Atlantic compact consisted of the following states or

portions thereof: Georgia, Indiana, Kentucky, North Carolina, South Carolina, Tennessee,

Virginia, and West Virginia. The southern dairy compact consisted of the following states or

portions thereof: Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, Missouri,

and Tennessee.

13Even though the model incorporated changes included in USDA’s January 2000 milk

marketing order reform, the model used “Option 1B” Class I fluid milk pricing differentials

that were initially proposed by USDA, as opposed to “Option 1A” milk pricing differentials,

which were adopted in the Final Rule. The use of Option 1B as opposed to Option 1A

resulted in different prices for the various classes of milk.

Bailey (2000)–A Study

Using a Regional

Economic Simulation

Model
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“unregulated” region representing all areas of the country that did not fall

under federal marketing orders or California’s milk pricing plan.

Bailey analyzed the impacts of a large multiregional dairy compact

accounting for about 27 percent of all milk marketed in the model. This

compact scenario was evaluated relative to a no-compact baseline. Bailey

also conducted additional analyses by varying retail fluid milk demand

elasticities (from –0.32 to –0.23) and by using a fixed-percentage farm-toretail milk markup instead of a fixed-dollar markup. The major features of

Bailey’s analysis and model follow:

• The model did not allow for trade between regions.

• The model estimated supply, price, and demand for fluid milk and three

dairy commodities: butter, cheese, and nonfat dry milk.

• Both a $1 and a $2 fixed amount per hundredweight were used to model

an effective compact over-order producer price payment.

• The assumption about the amount of the market-driven over-order

premium was varied to reflect either the full amount of the market-driven

over-order premium as that in the no-compact baseline or half the amount

in the no-compact baseline.

• The model estimated demand for fluid milk at the retail level and demand

for manufactured dairy products at the wholesale level. In addition, the

model used various farm-to-retail markup assumptions.

Table 79 summarizes Bailey’s estimates of the multiregion compact on

farm-level milk prices, revenue, and production in 2000.

Table 79: Bailey’s Estimates of the Interregional Impacts of a Multiregional Compact on Farm-Level Prices, Revenue, and

Production in 2000

Impact in all noncompact regions

Farm-level milk price

(dollars per hundredweight)

Farm-level revenue

 (dollars in millions)

Milk production

 (pounds in millions)

Modeling assumptions

Baseline and

change to

baseline

Percentage

change

Baseline and

change to

baseline

Percentage

change

Baseline and

change to

baseline

Percentage

change

No-compact baseline $12.94 $15,402.40 $119,042.20

Compact using a $1 compact

producer price payment; full

over-order premium (0.07) (0.06) (114.3) (0.7) (212.3) (0.2)

Compact using a $1 compact

producer price payment;

one-half over- order premium (0.04) (0.03) (56.4) (0.4) (106.2) (0.1)
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Impact in all noncompact regions

Farm-level milk price

(dollars per hundredweight)

Farm-level revenue

 (dollars in millions)

Milk production

 (pounds in millions)

Modeling assumptions

Baseline and

change to

baseline

Percentage

change

Baseline and

change to

baseline

Percentage

change

Baseline and

change to

baseline

Percentage

change

Compact using a $2 compact

producer price payment; full

over-order premium (0.14) (1.1) (217.8) (1.4) (406.6) (0.3)

Compact using a $2 compact

producer price payment;

one-half over-order premium (0.10) (0.8) (163.0) (1.1) (305.6) (0.3)

Note: Numbers in parentheses are negative.

Source: Bailey, Oct. 2000.

In addition to estimating the multiregional compact’s impact on farm-level

milk prices, revenue, and production, Bailey also estimated changes within

the compact region, and the impact that these changes would have on all

noncompact regions. Bailey estimated that milk production within the

compact region would increase by 0.4 to 1.4 percent, causing lower

wholesale prices for butter (by 0.3 to 1.0 percent), cheese (by 0.5 to

1.7 percent), and nonfat dry milk (by 0.3 to 0.8 percent) in all federal milk

marketing orders.

A study conducted in 2001 by Balagtas and Sumner estimated the

interregional effects of the NEDC and an expanded NEDC on noncompact

regions.14 Balagtas and Sumner used an annual, national-level supply and

demand simulation model to estimate the effects of the Compact on the

U.S. dairy sector, based on 1999 data.15 For purposes of this analysis, the

expanded NEDC included the NEDC states and New Jersey and New York.

The model simulated class and blend prices that would be announced by

USDA’s milk marketing orders in the absence of any compact. The model's

parameters were established by using milk marketing order and Compact

 14Joseph V. Balagtas and Daniel A. Sumner, “The Effect of the Northeast Dairy Compact on

Producers and Consumers, with Implications of Compact Contagion,” Department of

Agricultural and Resource Economics, University of California, Davis, 2001.

15The model built on a price discrimination framework developed by Ippolito and Masson,

which assumed linear supply and demand schedules for milk across regions. See R.A.

Ippolito and R.T. Masson, “The Social Cost of Government Regulation of Milk,” Journal of

Law and Economics, Vol. 21 (Apr. 1978), pp. 33-65.

Balagtas and Sumner

(2001)–A Study Using

a Price Discrimination

Framework
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commission data and intermediate-run (3- to 6-year) supply and demand

elasticities. The model also used national-level, as opposed to regionallevel, supply elasticities.

The major features of the model follow:

• The model included two aggregate milk categories—fluid milk and

manufactured dairy products—as opposed to four milk classes.

• The model estimated the interregional impacts of the two different

compacts in four noncompact regions: California, Wisconsin, Minnesota,

and a combined rest of the United States that excluded the NEDC states.

• The model calculated the elasticity of demand for manufactured dairy

products in the New England region.

Table 80 summarizes the results of Balagtas and Sumner’s estimates of the

interregional impacts of the NEDC and an expanded NEDC on farm-level

milk prices and production in noncompact regions.

Table 80: Balagtas and Sumner’s Estimates of the Interregional Impacts of the NEDC and an Expanded NEDC on Farm-Level

Prices and Production in 1999

Noncompact region

Baseline

amount with

no NEDC

Change to

baseline due

to the NEDC

Percentage

change due to

the NEDC

Change to

baseline due to an

expanded NEDC

Percentage

change due to an

expanded NEDC

California

Farm-level price (dollars per

hundredweight) $13.47 $(0.02) (0.16) $(0.05) (0.40)

Production (pounds in million

hundredweight) 304.57 (0.49) (0.16) (1.16) (0.40)

Wisconsin

Farm-level price (dollars per

hundredweight) 13.88 (0.02) (0.16) (0.05) (0.37)

Production (pounds in million

hundredweight) 228.34 (0.35) (0.16) (0.84) (0.37)

Minnesota

Farm-level price (dollars per

hundredweight) 14.01 (0.02) (0.15) (0.05) (0.36)

Production (pounds in million

hundredweight) 93.87 (0.14) (0.15) (0.34) (0.36)

All noncompact regions

Farm-level price (dollars per

hundredweight) 14.36 (0.02) (0.15) (0.05) (0.35)

Production (pounds in million

hundredweight) 1,562.63 (2.34) (0.15) (5.37) (0.34)

Note: Numbers in parentheses are negative.

Source: Balagtas and Sumner, 2001.
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Balagtas and Sumner also estimated the interregional impacts on the price

of milk used for manufactured dairy commodities and farm-level revenue.

They estimated that in 1999, the price of milk used for manufactured dairy

commodities would fall in noncompact regions by about 2 cents per

hundredweight, which would have translated into producer surplus losses

for noncompact producers of about $34 million in 1999.

A study issued by Allen Rosenfeld in 2001 estimated the interregional

impacts of the NEDC and a larger compact on noncompact states.16

Rosenfeld used a classified pricing model and dairy sector data from 2000

to predict potential impacts in that year. For purposes of the analysis, the

larger compact included a total of 29 states located in the Northeast and

the South.17 These 29 states accounted for about 62 percent of Class I milk

consumption in 2000.

The model used supply and demand analysis within the context of

traditional modeling of classified pricing. Rosenfeld used supply and

demand elasticities from the dairy economics literature to estimate the

increase in milk production and the decrease in milk consumption in the

compact regions caused by a higher compact minimum price for milk used

for and sold as fluid milk. Rosenfeld then used these elasticities to

estimate the decrease in the price of milk used for manufacturing

purposes, which he then used to estimate the decline in dairy farm

revenue in noncompact states.

The major features of Rosenfeld’s analysis and model follow:

• The model used a compact Class I over-order premium for both compact

scenarios of 18.5 cents per gallon of milk.

• The model used a supply elasticity of 0.227 to estimate the impact of a

higher blend price within the compact region on milk production. The

model subsequently used a higher elasticity (0.35) in a sensitivity analysis.

 16Allen Rosenfeld, “The Impacts of the Proposed Expansion of Dairy Compacts on Dairy

Farm Revenue in Noncompact States,” M&R Strategic Services, Washington, D.C., May

2001.

17The expanded scenario included the six NEDC states in conjunction with Alabama,

Arkansas, Delaware, Florida, Georgia, Kansas, Kentucky, Louisiana, Maryland, Mississippi,

Missouri, Nebraska, New Jersey, New York, North Carolina, Ohio, Oklahoma,

Pennsylvania, South Carolina, Tennessee, Texas, Virginia, and West Virginia.

Rosenfeld (2001)–A

Study Using an

Economic Model of

Classified Pricing
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Page 143 GAO-01-866 Impacts of Dairy Compacts

• The model used a wholesale demand elasticity of –0.144 for Class I milk

and a wholesale demand elasticity of –0.261 for all other classes of milk to

estimate the impact of price changes on consumption.

• The model did not allow for decreased production by farmers in

noncompact states in response to lower prices.

• The study did not discuss interregional trade.

Table 81 summarizes Rosenfeld’s estimates of the interregional impacts of

the NEDC and a larger compact on dairy farm revenue in noncompact

states for 2000.

Table 81: Rosenfeld’s Estimates of the Interregional Impacts of Compacts on FarmLevel Revenue in 2000

Dollars in thousands

Reduction in farm-level revenue under different compact

scenarios

Noncompact state NEDC scenario

Expanded 29-state

compact scenario

Arizona $735 $9,510

California 9,170 118,610

Colorado 475 6,145

Idaho 1,920 24,805

Illinois 520 6,690

Indiana 445 5,730

Iowa 970 12,565

Michigan 1,070 13,825

Minnesota 2,785 36,020

Montana 55 705

Nevada 120 1,565

New Mexico 1,010 13,075

North Dakota 125 1,615

Oregon 415 5,375

South Dakota 440 5,710

Utah 450 5,795

Washington 1,370 17,735

Wisconsin 6,825 88,250

Wyoming 20 230

Total $28,920 $373,645

Source: Rosenfeld, 2001.

Rosenfeld noted that his use of 2000 data may have overstated the

estimates of the impact of the NEDC and an expanded compact because,

in 2000, the difference between the Class 1 milk marketing order price and

the NEDC price of $16.94 was larger than in other years since the NEDC
Appendix VII: Studies of the Interregional

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Page 144 GAO-01-866 Impacts of Dairy Compacts

has been in effect. To account for this, he performed a sensitivity analysis

by adjusting the compact Class I price to simulate the average amount of

the NEDC over-order payment during the first 44 months of NEDC

operations. The result was that the 29-state compact had a smaller impact

on dairy farm revenue in noncompact states ($228 million as opposed to

$374 million).

The five studies we reviewed and analyzed used a variety of models,

assumptions, and data sets. They also varied in terms of the dairy compact

alternatives they examined. To allow a comparison, table 82 summarizes

the key features of these studies.

Table 82: Summary of Characteristics of Studies That Estimate the Interregional Economic Impacts of Dairy Compact

Alternatives

Study

Study

characteristic USDA Cox et al. Bailey

Balagtas and

Sumner Rosenfeld

Type of model A 36-region timeseries dairy sector

model that uses a

multistage

regression analysis

technique

An interregional

spatial equilibrium

hedonic model

incorporating a

vertical milk

marketing sector

A static equilibrium,

13-region, economic

simulation model

using a constant

elasticity functional

form

An annual nationallevel supply and

demand simulation

model based on

Ippolito and

Masson’s price

discrimination model

A supply and

demand simulation

model based on

price discrimination

inherent in classified

pricing

Compact scenario NEDC An expanded NEDC

and an expanded

NEDC plus a

southern compact

A region

encompassing the

Northeast,

Appalachian,

Southeast, and

Florida milk

marketing orders

The NEDC and an

expanded NEDC

The NEDC and a

29-state compact

Baseline year Forecasted for 2000

through 2005 based

on 1999 data

1997 Forecasted to 2000

based on 1997 data

1999 2000

Level of model

aggregation

Market equilibrium is

determined at the

national level for

seven dairy

commodities

Supply and demand

are modeled at the

regional level for

nine dairy

commodities

Supply and demand

are modeled at the

national level for

four dairy

commodities

Supply and demand

are modeled at the

national level for

milk used for fluid

milk and

manufactured

products

Supply and demand

are modeled at the

state level for raw

milk used for fluid

milk and

manufactured

products

Trade assumption No trade between

regions or compact

and noncompact

regions

No trade between

regions or compact

and noncompact

regions

No trade between

regions or compact

and noncompact

regions

Not a regional

model

Not a regional

model

Comparison of

Studies Reviewed
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Page 145 GAO-01-866 Impacts of Dairy Compacts

Study

Study

characteristic USDA Cox et al. Bailey

Balagtas and

Sumner Rosenfeld

Compact price

assumption

Two price scenarios:

either $16.94 per

hundredweight for

the 6 forecasted

years or $16.94 per

hundredweight in

2000 followed by

$1.30 per

hundredweight

above the USDA

Class I price in the

subsequent years

Price wedge of $2

over-order producer

price payment per

hundredweight of

milk

Price wedge of

either $1 or $2 overorder producer price

payment per

hundredweight of

milk

Price wedge of

$1.20 over-order

producer price

payment per

hundredweight of

milk

A compact Class I

over-order premium

of 18.5 cents per

gallon for both

compact scenarios.

Other key

assumptions

Parameterized

supply response

Intermediate supply

and demand

elasticities

Intermediate supply

and demand

elasticities;

sensitivity analyses

include (1) both 100-

percent baseline

and 50-percent

over-order

premiums, (2) lower

retail fluid demand

elasticity, and (3) an

alternative farm-toretail mark-up

assumption

Intermediate supply

and demand

elasticities; supply

elasticity of 1.0; fluid

demand elasticity of

-0.2; national

manufacturing

demand elasticity of

-0.2; an estimated

demand elasticity for

the Northeast of -39;

and assumes no

over-order

premiums

Supply elasticity of

0.227 and demand

elasticities of -0.144

for Class I milk and

-0.261 for milk used

for manufacturing

purposes

Source: GAO analysis of cited studies.
Appendix VIII: Comments From the Executive

Director, NEDC

Page 146 GAO-01-866 Impacts of Dairy Compacts

Appendix VIII: Comments From the

Executive Director, NEDC

Note: GAO comments

supplementing those in

the report text appear at

the end of this appendix.
Appendix VIII: Comments From the Executive

Director, NEDC

Page 147 GAO-01-866 Impacts of Dairy Compacts

See comment 3.

See comment 2.

Now on p. 2.

See comment 1.
Appendix VIII: Comments From the Executive

Director, NEDC

Page 148 GAO-01-866 Impacts of Dairy Compacts

See comment 5.

See comment 3.

See comment 3.

See comment 3.

See comment 4.
Appendix VIII: Comments From the Executive

Director, NEDC

Page 149 GAO-01-866 Impacts of Dairy Compacts

See comment 6.

See comments 2 and 4.

See comment 2.
Appendix VIII: Comments From the Executive

Director, NEDC

Page 150 GAO-01-866 Impacts of Dairy Compacts

See comment 11.

See comment 10.

See comment 9.

Now on pp. 77 to 78.

See comment 8.

See comment 7.

Now on p. 76.
Appendix VIII: Comments From the Executive

Director, NEDC

Page 151 GAO-01-866 Impacts of Dairy Compacts
Page 152 GAO-01-866 Impacts of Dairy Compacts

The following are GAO's comments on the NEDC's written response dated

September 7, 2001, to our draft report.

1. We recognize that the National Agricultural Statistics Service revised

its estimates of New England's milk production for 2000. However, our

estimates of the impacts of the NEDC are based primarily on 1999

data. While we also used preliminary data for 2000 to estimate the

impacts for that year, we note that these data are preliminary and as a

result, we did not conduct sensitivity analyses for that year. Further, a

2-percent adjustment in New England's milk production would be

unlikely to affect our estimates of the NEDC's impact on noncompact

regions in the country.

2. We recognize that before USDA's milk marketing order regulatory

reforms took effect in January 2000, New York was in a different milk

marketing order than were the New England states. However, we do

not model New York as being in a different milk marketing order.

Rather, the dairy model that we used to estimate the impact of

compacts aggregates states on a regional basis. As discussed in

appendix II, the states included in the model's Northeast region

include the six NEDC states, Delaware, the District of Columbia,

Maryland, New Jersey, New York, and Pennsylvania. Because the

model is a regional model, the NEDC is represented as being part of

the Northeast region. As a result, the model is unable to estimate the

impact of compact states on noncompact states within the same

region.

3. We disagree that the report misrepresents the regulation's design and

function. We state that all raw milk used for and sold as fluid milk in

the six NEDC states is subject to the NEDC's regulations, not just milk

produced by dairy farmers in the six NEDC states. We have revised the

report to explicitly state that farmers in New York may receive NEDC

payments. However, the impact of the NEDC on dairy farmers in New

York was beyond the scope of work that we agreed to perform for

Senator Kohl.

4. We concur that New York dairy farmers have received NEDC

payments, based on data developed by the NEDC commission. The

report, however, does not state that $50 million has been provided to

New York dairy farmers. We have revised the report to include data

published by the NEDC that indicates that about 1,300 New York dairy

GAO Comments
Page 153 GAO-01-866 Impacts of Dairy Compacts

farmers have received NEDC payments that have averaged, on an

annual basis, $9,812 since the NEDC began in July 1997.1

5. We disagree that the model omits from consideration the regulatory

treatment of plants located outside New England that sell packaged

milk in New England—partially regulated plants. The model provides

for shipments of packaged milk between compact and noncompact

regions. A discussion of how this is modeled is included in appendix II.

6. USDA officials and other dairy economists who have analyzed the

NEDC's impact on the premium structure in New England told us that

the NEDC has had the effect of eroding much of the market-driven

over-order premium that processors had been paying prior to the

NEDC's establishment, as opposed to premiums that cover services

provided by cooperatives or handlers. This effect would vary, however,

depending upon market forces. Such market forces could fluctuate

from month to month and year to year. Much of the data needed to

determine the specific impact that the NEDC has had on the premium

structure in New England are proprietary in nature, and thus we do not

have access to this data.

7. The report states that the trends regarding farm attrition rates and

production in the NEDC states and the rest of the country were

similar, both before and after the compact. This is not to say that the

percentage change in the NEDC states was identical to the percentage

change in the rest of the country. Regarding attrition, the number of

farms has been steadily declining both within the NEDC states and in

the rest of the country, but at a slightly different rate.

8. We disagree that the report concludes that the NEDC had no impact on

farm attrition. We note that the percentage reduction declined slightly

following the NEDC's establishment but conclude that it is difficult to

determine the extent to which the NEDC, relative to other factors, may

have changed farm attrition.

9. We disagree that the herd size discussion is less helpful. We believe

that providing a longer-term perspective that includes national trends

provides a useful context for discussing dairy policy options.

 1

Testimony by Daniel Smith, Executive Director, Northeast Dairy Compact Commission,

before the U.S. Senate Judiciary Committee, July 25, 2001.
Page 154 GAO-01-866 Impacts of Dairy Compacts

10. We agree that the NEDC's impact on retail milk prices is a complex

question. Our report states that many factors affect retail prices, in

addition to the farm-level price of milk. We revised the report to

recognize that retail milk prices, after increasing by about 20 cents per

gallon in July 1997, subsequently fell by as much as 5 to 7 cents per

gallon for several months.

11. We relied on USDA's Food and Nutrition Service's analysis of the

NEDC's impact on the Food Stamp Program. On the basis of its

analysis, USDA was unable to determine if the NEDC increased

program benefit levels. According to USDA, if the NEDC's impact on

retail milk prices in the NEDC states had caused a $1 increase in

national benefit levels, this would have resulted in an additional $60

million in federal funding per year. Aside from the issue of whether the

NEDC has increased federal costs, USDA indicated that the NEDC has

increased Food Stamp Program participant costs.
Page 155 GAO-01-866 Impacts of Dairy Compacts

James R. Jones, Jr (202) 512-9839

In addition to those named above, M. Shawn Arbogast, Venkareddy

Chennareddy, Jay R. Cherlow, Nancy L. Crothers, Oliver H. Easterwood,

Barbara J. El Osta, and Marcia B. McWreath made key contributions to

this report.

Appendix IX: GAO Contact and Staff

Acknowledgments

GAO Contact

Staff

Acknowledgments
Page 156 GAO-01-866 Impacts of Dairy Compacts

Dairy Industry: Information on Milk Prices and Changing Market

Structure (GAO-01-561, June 15, 2001).

Fluid Milk: Farm and Retail Prices and the Factors That Influence Them

(GAO-01-730T, May 14, 2001).

Dairy Products: Imports, Domestic Production, and Regulation of Ultrafiltered Milk (GAO-01-326, Mar. 5, 2001).

Dairy Industry: Information on Prices for Fluid Milk and the Factors

That Influence Them (GAO/RCED-99-4, Oct. 8, 1998).

Dairy Industry: Information on Marketing Channels and Prices for

Fluid Milk (GAO/RCED-98-70, Mar. 16, 1998).

Related GAO Products

(150192)
Page 157 GAO-01-866 Impacts of Dairy Compacts

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