Government's Role in Milk Pricing; Then and Now: Discussion

The primary thesis of the Novakovic-Boynton paper is that government regulation of the dairy industry is as justified today as it was in the 1930s. The paper provides an excellent historical review and documentation of the economic conditions in the dairy industry when our present regulatory system was developed. In doing so, a contrast is provided between the relatively decentralized producer structure and the centralized, if not collusive, monopsony structure that exists on the buyer (processor) side of the market. Out of this relative imbalance in market position grew the state and federal milk marketing order system. It is important to note that much of the disorderly market conditions that existed during the pre-order period were the result of producer efforts to impose classified pricing. State and federal milk marketing orders were the means by which classified pricing was imposed as an institution of dairy policy. Over time an assumption has developed that classified pricing is an inherently natural economic phenomenon in milk. That assumption was not challenged or significantly evaluated until the mid-1970s. As Gardner correctly points out, classified pricing has now become a focal point of discussion in the dairy policy debate. With this background my discussion will be focused on two central issues. (a) Is government regulation of the milk industry as justified today as it was in the 1930s? (b) What changes in dairy policy might be considered to regulate milk marketing more effectively? In regard to the justification for regulation of the milk industry, more discussion of basic economic changes that have occurred in the milk industry over the past half century would appear to have been warranted. Three such changes are particularly important, although many more could be identified. (a) Expansion in the scope of the market for milk has occurred. Federal and state marketing orders were built around the concept of localized markets for milk. Regional markets began to develop in the 1960s or earlier. The development of regional markets was a major reason for the decline in state milk marketing orders. While federal orders have been regionalized to a degree, in most instances today's milk markets are broader in scope than most federal order markets. (b) The balance of market power in the dairy industry has changed. The driving force in the dairy industry is no longer the proprietary processors-Kraft, Beatrice, Borden, or Foremost. Rather it is a series of regional producer cooperatives-having virtually unlimited legal rights to merge and set prices among themselves-and integrated processor-retailer chains. The structure of the dairy industry today more nearly approximates that of bilateral oligopoly than the atomistic producer structure of the 1930s. It is quite possible that a legal structure that worked well in the monopsonistic setting of the 1930s may require substantial adjustment in the bilateral oligopoly setting of the 1980s. (c) The economic justification for classified pricing of milk has deteriorated. All individual dairy products have many more substitutes than they had in previous decades. Differences in demand elasticities between fluid and manufactured products are not as obvious today as they were in the 1930s. Higher prices for Class I milk can no longer be justified on the basis of the need to assume as adequate supply of Grade A milk. Such comments are often taken by milk producer advocates as a condemnation and rejection of current dairy policy instruments. That is not my position. It would be interesting to experiment with a move toward a deregulation strategy in milk to see what would happen; and I suspect the results would not be nearly as destructive and disparaging as is The author is a professor and extension economist, Texas A&M University.