Dairy Compacts: Lessons Learned from the Northeast Compact
Dr. E. Bruce Godfrey
USU Extension Economics Specialist

In late 1999 and early 2000 dairymen in Utah were seriously considering the formation of a dairy compact as a method bolstering milk prices, which at that point in time were at their lowest level in more than a decade. Most of those involved in the discussions pointed to the apparent success of the Northeastern Dairy Compact (NEDC) in improving returns. However, the formation of this compact, as well as other proposed compacts, was controversial. Most of this controversy is associated with the provisions of the compact that allow a region to regulate the prices paid for fluid milk beyond the provisions of the national milk marketing orders, the impact of this regulation on the prices paid by consumers, and the impact it has on milk producers within as well as outside of the compact. It should also be noted that the Northeast compact expired on 30 September when Congress failed to enact legislation to allow its continuance. However, milk prices are regulated in several western states (e.g., Nevada, Montana and California) under provisions of some unit of state government and efforts to form compacts and to regulate milk prices at the state and/or regional level will continue to be discussed. The NE compact therefore provides insights into the success of this and other possible regulatory options.

There have been a number of studies that have evaluated the impact of the NE compact. But, perhaps the most succinct evaluation was provided by Charles Nicholson at a dairy policy meeting that was held in Reno, Nevada, on October 9, 2001. This article summarizes the major points discussed by Dr. Nicholson. Readers who want additional detail can view the paper by clicking on the appropriate weblet button at the Cornell University web page (http://www.cpdmp.cornell.edu) or refer to one of the many papers that have been written (see the links at the above web page or the references listed in the paper by Nicholson and others).

One of the principal reasons for forming any compact, including the NEDC, is to enhance the prices received by farmers. This is not the only reason for forming a compact, but it is the one most commonly suggested by many dairy operators. From this point of view, was the NEDC successful? The price of fluid milk was set at $16.94 per cwt at Boston, Massachusetts, and did not change during the life of the NEDC. The "over order obligation" was zero when the price in the Federal Milk Marketing Order (FMMO) was greater than this amount. Thus, the NEDC set a minimum and not a maximum price. During the period July 1997 through August 2001 average "over order" price was $1.27 per cwt, but there were 14 of the 50 months when the FMMO price was greater than the NEDC price and over order price was zero. Other provisions were also in effect during this period, but the bottom line is the "over order" premium received by producers averaged $0.53/cwt from July 1997 through August 2001. This would suggest that the NEDC was a success. However, this only tells part of the story, because several unexpected things also occurred. First, there was anecdotal evidence that establishment of the mandatory over-order premiums resulted in "a decrease in other (voluntary) premiums paid by handlers." To the extent that this was true, the increase in the price received by farmers was less than the over order premiums would indicate. Secondly, the increased price for fluid milk resulted in increased production. As a result, the price paid for manufacturing milk fell. The result was a decline of about $0.05 in the blend price received by producers from that which might have occurred in the absence of the NEDC. This would suggest that the compact was not successful in raising milk prices when viewed in the aggregate. A third impact that may be important, however, is that prices were less variable in the NEDC than they were under the FMMO. This is probably especially true at the retail level where milk prices did not decline as much as they would under the FMMO, the NEDC set a minimum level that was greater than the price under the federal order. One reason suggested by some dairy operators for forming a compact is that higher prices would help to keep small family-type operations in business. However, most of the benefits of increased prices are captured by those who produce the most milk. Thus, while every producer receives the same per unit increase in price, the largest increases in total revenue are obtained by the largest producers. This suggests that the compact had a minimal impact on small operators who were struggling to stay in business. The final impact that cannot be ignored is that the price paid by consumers for fluid milk did increase (in Boston and Hartford) with the implementation of the NEDC. It is not known how much these higher prices depressed the sale of fluid milk products, but the percentage decrease in sales was likely less than the percentage increase in price. As a result, the total dollar value of retail fluid milk sales probably increased. The decrease in the quantity of fluid milk sold may have been partially offset by increased sales of manufacturing products when the price of these products declined. Finally, the existence of higher fluid prices within the NEDC region provided a strong incentive to ship milk from other areas. In summary, the NEDC did provide some increase in price for fluid milk, but the total impact of the compact on all prices and quantities sold must be evaluated, and not just the price received for fluid milk. Price stability may be a positive benefit of forming a compact, but it is not clear that an increase in price for all classes of milk (blend price) was obtained in the NEDC. ase in price, the largest increases in total revenue are obtained by the largest producers. This suggests that the compact had a minimal impact on small operators who were struggling to stay in business. The final impact that cannot be ignored is that the price paid by consumers for fluid milk did increase (in Boston and Hartford) with the implementation of the NEDC. It is not known how much these higher prices depressed the sale of fluid milk products, but the percentage decrease in sales was likely less than the percentage increase in price. As a result, the total dollar value of retail fluid milk sales probably increased. The decrease in the quantity of fluid milk sold may have been partially offset by increased sales of manufacturing products when the price of these products declined. Finally, the existence of higher fluid prices within the NEDC region provided a strong incentive to ship milk from other areas. In summary, the NEDC did provide some increase in price for fluid milk, but the total impact of the compact on all prices and quantities sold must be evaluated, and not just the price received for fluid milk. Price stability may be a positive benefit of forming a compact, but it is not clear that an increase in price for all classes of milk (blend price) was obtained in the NEDC.

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