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Federal Trade Commission
Staff Repor~ on
FARM SIZE and REGIONAL
DISTRIBUTION of the BENEFIT under
FEDERAL MILK MARKET REGULATION
Bureau of Economics
May 1978
.,.
Economic Report
May 1978
Farm Size and Regional Distribution of the Benefit Under Federal Milk Market Regulation
by
David R. Fronk
Staff Report to the Federal Trade Commission
FEDERAL TRADE COMMISS I ON
Michael Pertschuk, Chairman Paul Rand Di xon , Commissioner Elizabeth Han ford Dole , Commi ssioner Dav id A. Clanton , Commissioner
BUREAU OF ECONOMICS
James M~ Fol som, Acti ng Di rector Edward Eitches , Ass istant to t h e Di rector Keith B. Ande rson, Assistant to the Director Michael W. Klass, Assistant Direc t or f or
Economic Ev idence P. David Qualls, As s istant Di rector for
Industry Analy sis William H. Spr unk, Assistant Di r ector f or
Financial Stat istics
This is a staff report p repared by the Commiss ion's Bureau of Economics. The Comm ission has not adopted t his report in whole or in p ar t. Hence , all statements, conc lus ions, and recommendations con tained he re in are solely those of t he s t aff responsible for its preparation.
II
ACKNOWLEDGEMENTS
This is an economic report to tqe Federal Trade Commission by the Bureau of Economics~ James M. Folsom, Acting Director. David R. Fronk is the author of this study.
A special written contribution was made by John E. Kwoka, Jr., who authored appendix A.
The author especially wishes to thank John E. Kwoka, Jr., for his help in preparing this Report. P. David Qualls, Assistant Director for Industry Analysis, Ronald S. Bond, Deputy Assistant Director for Industry Analysis, and Michael P. Lynch, former Assistant Director for Industry Analysis, provided valuable comments and criticisms. Their assistance is greatly appreciated. In addition, Betsy Zichterman, under the supervision of Ronald Lewis, and Patricia Allen typed successive drafts of this Report. Bess Townsend provided editorial assistance. The author is responsible for any remaining errors.
III
TABLE OF CONTENTS
Section
I. Introduction •
II. Development of Federal Regulation of Milk Markets • • • • • • • • • •
III. Features of the Modern-Day Program ••
IV. Data Sources .. V. Methodology and Presentation of the Data •
VI. Distribution of the Benefit
VII. Summary
Appendix
Page
1
2
3
5
12
17
21
A. Regional Distribution of the "Subsidyn Under Federal Milk Market Regulation • • • • • • • • • • • •• 34
B. Milk Deliveries to Federal Order Plants 40
C. State-by-State Composition of Regions. 41
D. Determination of the Upper and Lower Bound Gini Ratios • • 42
References 44
IV
Table
1
2
3
4A
4B
LIST OF TABLES
Page
Dairy Farms With Sales of $2,500 or More: Characteristics by Economic Class, 1969.. 11
Interclass and Interregional Gini Ratios Given Alternative Supply Elasticities. 18
Dairy Farms With Total Farm Product Sales of $2,500 or More: Number of Farms, Dairy Products Sold, and Federal Order Sales by Economic Class and by Region •••••••••••••• '. 22
Dairy Farms With Total Farm Product Sales of $2,500 or More: Number of Farms, Percentage of Farms, Federal Order Benefit Amounts, and Percentage of Benef its by E'conomic Class and by Region and Intraregional and Interregional Gini Ratios, 1969, € = .7, Lower Bound. • • • • • •• • • • • 24
Dairy Farms With Total Farm Product Sales of $2,500 or More: I Number of Farms, Percentage of Farms, Federal Order Benefit Amounts, and Percentage of Benefits by Economic Class and by Region and Intraregional and Interregional GiniRatios, 1969, € = .7, Upper Bound •••••••••••
v
29
I. Introduction
Much politica~ and economic discussion is currently
devoted to examining and evaluating Federal. regulation in
terms of its scope, its impact, and its effectiveness. Regu-
lation of milk markets, as embodied in the Federal Milk
Mqrketing Order Program, is no exception. To date, most
empirical research into the milk program has focused on the
magnitude of milk price enhancement, the extent of the redis-
tribution of income from milk consumers to milk producers and
milk handlers (or dealers), and the "deadweight" welfare or
efficiency losses resulting from the milk program.
While there is still disagreement over the degree of
the program's enhancement of milk prices, the existence of
re~ulation-induced price enhancement is now generally
accepted. II Implicit in milk price enhancement is a transfer
of income from consumers to producers; and while the size of
this total benefit to producers has been estimated, ]j little
attention has been paid to how it is distributed among dairy
farmers and among geographic areas. This report focuses on this
II See [13], [14], and [17, p. 21] for discussions of price enhancement. -- --
21 Ippolito and Masson [13] estimate that the effect of regulation is to increase blend price approximately 3.7 percent. Kwoka [14] estimates that fluid milk prices are 7 percent to 15 percent above competitive levels, depending upon the year. The U.S. Department of Agriculture [17, p. 21] states that the program results in "modest" enhancement of Class I milk prices.
-1-
distributional issue by addressing t he fo llow ing t wo quest i ons:
(1) How unequal is the distri bution of the prog r am benefit among
dairy farmers? (2) How unequa l is the distribution of the program
benefit among regions?
To answer these questions, a statistical measure of
distributional inequality, the Gini ratio, is employed. The
computed Gini ratios demonstrate that the distribution of the
milk program benefit, both among dai ry farmers and among regions,
is quite unequal. The program is shown to provide substantial
benefits for large dairy farmers and limited benefits for small
dairy farmers. This result is then examined in light of the
goals of milk market regulation. First, however, background
on the milk program and the data sources is provided.
II. Development of Federal Regulation of Milk Markets
Milk, with its perishable, bulky, and seasonal qualities,
posed two special problems for American farmers early in the
20th century. Forced to sell their product quickly and close
to horne, farmers had little bargaining power over the pr ices
they received [12, p. 4]. In addition, the seasonal fluctu-
ation in the supply of milk, coupled wi t h almost constant
demand, resulted in pricing and marketing difficulties for
the farmers [!2, p. 4). Consequently, in the early 1900 ' s milk
producers formed cooperatives to offset the oligopsonistic power
of milk dealers and to promote market stability. While such
-2-
voluntary associations were somewhat effective in stabilizing
markets throughout the 1920's, they broke down in the face of
the Great Depression. During the early 1930's, plummeting demand
and increasingly chaotic market conditions alarmed the coopera
tives and prompted them to solicit Government help [!2, p. 5].
As part of its effort to restore the economy, Congress
enacted the Agricultural Adjustment Act of 1933 which authorized
Federal regulation of certain agricultural commodities, includ
ing milk and dairy products. The modern-day regulatory framework
is rooted in the Agricultural Marketing Agreement Act of 1937.
Today, 40 years after its introduction, the same basic
program operates in the face of new technologies which have
lowered transportation costs and improved refrigeration and
sanitation. Packaged milk is now shipped as far as 250 miles
and bulk milk as far as 2,000 miles [!2, p. 6]. The con
sequent merging of markets once distinct and isolated has sub
stantially reduced local oligopsonistic power, but it has also
created the regulatory problem of coordinating previously
separate markets.
III. Features of the Modern-Day Program
Federal regulation of milk markets operates through
Federal Milk Marketing Orders, which were created during the
1930's to regulate the dealings between milk producers and milk
handlers within certain areas. By the end of 1976, there were
50 Federal Orders regulating about 80 percent of Grade A milk
-3-
[.§., p. 10]. (Grade A milk meets the s anitary r equirement s
for fluid consumption; Grade B milk does not .)
Orders classify Grade A milk as e ither Cla ss I or Clas s II,
depending upon it s use. Class I milk is used f o r f luid consump
tion; Class II mi l k is used in the manufacture o f other dairy
products; for example, cheese and dry milk solids. So me Grade A
milk ends up in manufacturing uses because the Cl as s I - Class II
pricing scheme (described below) stimulates t otal Grade A mi lk
production while simultaneously reducing the q uant ity of Class I
milk demanded.
The less sanitary Grade B milk , wh ich i s use d for manu
factured dairy products, is not expli c itly r egulated. I t s
price is determined either by market forces o r by Government
price supports. Be cause Grade B milk and Class II mi lk are
substitutes, Class II prices are tied to Grade B prices. Thus,
regulatory discretion exists only f o r Class I mi lk , though order
provisions do apply to both Grade A classes [!!, p. 368J . The
Class I price in an order is usually the Grade B pr ice in t he
major surplus area of Minnesota a nd Wisconsin plus a dif fer
ential. The differential is based on the transportat ion costs
from Minnesota-Wisconsin to the order and the increas e d costs
of meeting the strict Grade A sanitary requi rement s. Class II
prices are lower than Class I prices because Cl ass II milk com
petes with Grade B milk, which is less sanitary and, therefore,
cheaper to produce.
- 4-
Although the milk handler faces this two-class pricing
scheme, the dairy farmer does not. To eliminate the problem
of paying dairy farmers two prices for the same quality milk,
Grade A milk producers receive neither the Class I nor the
Class II price, but a uniform price from an order-wide pobl
that is a combination of the two [14, p. 369]. This uniform
price, or blend price, is determined within each order accord
ing to a weighted average formula that relates class consump
tion in the order to total Grade A milk production in the
order. The formula is as follows:
PIQI + PII QII BP -X -QI + QII
Where:
BP X = blend price in Order x.
PI = price of Class I milk in Order X.
PII = price of Class II milk in Order X.
QI = quantity of Class I milk demanded in Order X.
QII = quantity of Class II milk demanded in Order X.
IV. Data Sources
Consideration of the distributional questions framed in
the introduction to this Report required data on different sized
dairy farms and a knowledge of the regional characteristics of
milk production and demand. As a result, the statistical tables
-5-
contained in this report were developed from the f ollowing three
sou rce s: (1) the General Reports and Area Report s por t ions of
the 1969 Census of Agriculture, 1/ (2) t he U.S. Depa rtment of
Agr iculture (USDA) publication Federal Milk Order Market
Stat i stics : Annual Summary for 1970 (1969 data), [~, p. 3], and
( 3) a heretofore unpublished paper by John E. Kwok a, Jr., which
divided the contiguous United States i nto s ix milk r egions on
the basis of demand strength, production costs, and the size of
the blend pr i ce . (Kwoka's paper is i nc l uded her e as appendix A.)
The three sources were used in the above order ; tha t is, the
basic Census data were modified by the USDA sta tistics and the
resu l t s were then aggregated according to Kwoka' s regional
scheme. A description of the specifics follows.
The milk market benefit is embodied in the blend price
far me r s receive for their milk. In essence , t he benefit per
un i t of milk sold is the difference between the established
blend price and the estimated long-run competit i ve pr ice; that
is, the price that would prevai l in the absence of regulation.
Thu s , the amount of total benefit any farme r r eceives is
direc t ly related to the size of the blend price - competitive
price di ff erential and the size of his dairy produc t s ales.
It is possible that over t ime this benefit has been incor-
porated into the value of dairy land. Because t he milk pro-
gram has been in effect for many years, some of t he current
1/ See generally [21], [22], [23, p. 24], and [24, pp . 9, To, 13 , and 176-191"'):" - - -
-6-
generation of dairy farmers may have paid a price for their
land that reflected future program benefits. To the extent
that expected benefits have been incorporated or "capitalized"
into land values by previous owners, present dairy farmers
incur higher land or "fixed" costs .of ~ilk production. To
measure the program's impact on the distribution of current
net farm income, capitalization and its effect on production
costs would have to be taken into account. Accordingly, this
Report must be interpreted as an analysis of the distribution
of gross program benefits, independent of precise, current net
income effects.
The ~969 agricultural census provided farm counts and
dairy product (milk and cream) sales data f or da iry farmers !/
with total farm product sales of at least $2,500. 2/ The data
were available for all but four States (Arizona, MOutana, New
Mexico, and Wyoming) and were classed by total farm product
1/ In general, to be classified as a dairy farm, a farm had to have milk and cream sales amounting in value to at least 50 percent of the total value of all of its farm products sold during the year. However, a farm not meeting this criterion was classified as a dairy farm if: (a) Dairy products sold accounted for more than 30 percent of the total value of products sold; and (b) milk cows represented 50 percent or more of total cows; and (c) the value of dairy products sold plus the value of cattle and calves sold amounted to 50 percent or more of the total value of all farm products sold.
2/ At this point, it should be noted that the universe selected ~as limited to "dairy farms." It could be argued that the presence of dairy product sales should have been the selection criterion, independent of the relative importance of dairy product sales for a given farm enterprise and independent of type of farm classifications. However, because milk market regulations are aimed primarily at " d airy farmers ," the program should be examined and evaluated in t erms of what it does for this target group.
-7-
sales in the following manner by the Census Bureau
[Q, p. XXIV]:
Class 1: $40,000 or more of farm product sales
Class la: $100,000 or more of f arm product sales
Class Ib: $40,000-99, 99 9 of farm prod uc t sales
Class 2: $20,000-39,999 of farm product sales
Class 3: $10,000-19,999 of farm product sa les
Class 4: $5,000-9,999 of farm product sales
Class 5: $2,500-4,999 of farm product sales, or having a value of products sold of less than ~2,500 provided such farms had the acreage or livestock operations which normally would have had sales in excess of $2,500. These would include new farm operations, farms having crop failure, and farms with large inventories and small 1969 sales.
Not all milk and cream sales reported by the Census, how-
ever, are covered under the Federal Order program. Consequently,
the Census dairy sales figures for each State were adjusted
using the USDA [~] statistics.!1 The resulting data are labeled
Federal Order sales in the tables that follow.
II The U.S. Department of Agricultu r e publication contained a table which presented, for each State, milk deliveries to Federal Order plants as a percent of all milk {milk and cream) sold to all plants and dealers. To obtain a figure for dairy product sales covered under the Federal Order program, the single U.S. Department of Agriculture percentage for each State was applied across the seven size classes in the given State. (The percentages used are reproduced in appendix B.) This procedure assumed that all dairy farmers in a given State, regardless of their economic class, sold the same percentage of their "milk sold to plants and dealers" to Federal Order plants.
-8-
Because the costs of production, the strength of demand,
and the level of the blend price vary from milk market to
milk market, milk producers in different markets benefit
from the program to varying degrees. Consequently, the
state data generated from the Census Bureau and the
USDA data were aggregated into regions. The Nation (ex-
eluding Alaska and Hawaii) was divided along State boundaries
into six regions with similar market conditions and, there-
fore, similar expected benefit magnitudes. (See appendix C
for the States included in each region.) The six ~egions
along with their respective market conditions and expected
benefit magnitudes are as follows: !/
(1) North Central: Strong demand, 2/ very low production costs, and a relatively low blend price imply a relatively low benefit.
(2) Northeast: Very strong demand, relatively low production costs, and a moderate blend price imply a relatively high benefit.
(3) East Central: Moderate demand, relatively low production costs, and a moderate blend price imply a moderate benefit.
(4) west Central: Moderate demand, moderate production costs, and a moderate blend price imply a moderate benefit.
(5) South: Low income and de~and, very high production costs, and a high blend price imply a relatively low benefit.
l/ See appendix A for a more detailed discussion.
2/ In this context, strong demand simply means a high regional Tncome level; low demand simply means a low regional income level.
-9-
(6) West: Moderate demand, moderate production costs, and a moderate blend p rice imply a moderate benefit .
Number of farms a nd Feder?l Orde r s ale s data by economi c
class and by region are p r e sented in t able 3. l/
An analysis of the distribut i onal questions raised by the
milk program relies upon the p rope r ident ificat ion of " l arge,"
"small," "wealthy," and "poor" dairy f armers. In t hi s section,
sales have been esta bl ished as a p roxy for bigness and wealth.
Table 1, developed to e va lua t e t he validity o f this large
farmer - large sales ass umption., p resents prope rty and asset
characteristics for dairy farms by econom i c class and demon-
strates tha t the lar gest dairy farms in terms of s ales are
also the wealthiest. Cl as s 1 da i r y fa~ms (13.3 percent of all
dairy farms) account f o r 25 percent of the land in farms, 34
percent of the value o f land a nd buil d ings, a nd 41 perce nt of
the total value of all ag ri cultural prod uc ts sold. They are
also largest in terms of average acrea ge a nd avera ge number of
milk cows. On the other hand, Class 5 da i ry fa rms ( 7 .6 percent
of all dairy farms ) account f or only 3.7 pe rcen t of the land
in farms, 2.6 percent of the va l ue o f land and bu i ldings, and
1.2 percent of the t o t al value of a l l agr icultural product s
1/ Farm counts p r esente d in t hi s Repor t a lso include those dairy farms whi ch sold a ll of the i r mi lk outs ide of Fede ral Orders. The re wa s no r el iable way to identify and e xtract s uch farms.
-1 0-
......
......
TABLE l.--Dairy Farms With Sales of $2,500 or More: Char acteristics by Economic Class , 1/ 1969
All dairy farms Class 1 Class 2 Class 3 Class 4
Percent dis t ribution:
Number of farms Land in farms Value of land and buildings Total pasture land Total value of all agricultural
product s sold Value of cattle and calves sold
Average per farm:
Land in farm (acres) Value of land and buildings
(dollars) Total pastureland (acres) Value of all agricultural
products sold (dollars) Value of cattle and calves
sold (dollars) Value of machinery and
equipment (dollars) Cattle and calves (number) Milk cows (number)
100.0 100.0 100.0 100.0
100.0 100.0
249
68,276 100
25,216
3,238
13,540 67 37
1/ See page 8 for the class definitions.
13.3 25.1 33.7 26.2
41.1 38.6
47l
172,992 202
78,096
9,402
27,991 173
99
31.4 34.9 35.1 31.5
34 .8 33.1
276
76,419 101
27 ,935
3,414
16,418 74 40
30.3 25.4 20.7 25.0
17.8 19.5
209
46,810 82
14,792
2,083
10,296 47 26
17.4 11.0 7.9
12.5
5.2 7.0
157
30,970 72
7,486
1,304
6,606 30 16
Class 5
7.6 3.7 2.6 4 .7 -
1.2 1.8
120
22 ,833 63
3.,817
779
4,909 20 11
Source: 1969 Census of Agriculture, Volume II, General Report: Chapter 8 (Type of Farm), Bureau of the Census, Department of Commerce, 1973, p. 13.
sold . I n I i gh t of these facts, sale~ seem"::>to be a reasonable
proxy for weal t h .
v. Methodology and Presentation of the Data
Because Federal Order sales figures reflect blend price,
a certain fraction of any given Federal Order sales figure is
benefit. The size of that fraction, termed Federal Order bene
fit in the tables following, has been estimated by several
researchers (see f ootnote 2 on page 1). Because their benefit
estimates are not in close agreement, three possible degrees of
price enhancemen t were selected to accommodate their conflict
ing views: Benefit per unit of milk sold equals 2 percent of
blend price (bp) i benefit per unit of milk sold equals 5 percent
of bPi and be nef it per unit of milk sold equals 10 percent of
bp. This approach emphasizes that this report is concerned
with the distributional pattern rather than the absolute size
of the benefit.
The total national milk program benefit was initially
computed at each price enhancement level by multiplying the
benefit per unit of milk by the number of units of milk sold.
Each resultan t total benefit was then allocated among the six
regions according to a formula which captured the regionally
uneven impact of the program (see appendix A). Within regions,
the distribut ion of the predetermined benefit among economic
classes was patterned after the distribution of Federal Order
sales.
Computing the nationwide benefit in this manner, however,
overestimates the total benefit slightly as figure 1 illustrates.
-12-
FIGURE 1
P
QC Qs Q
Where:
8M is the supply curve for milk
DM is the demand curve for milk
PB is blend price
QB is blend quantity
Pc is the estimated competitive price
QC is the estimated competitive quantity
The benefit is not properly described as rectangle Ps ASPC
as the computation would imply; i~ is represented in~tead by
the smaller area PBACPC• The crosshatched area, triangle ABC,
represents certain real costs of production of milk offered
for sale at prices above PC.
-13-
To correct the or iginal benefit estimates, the over-
est imate ( triang le ABC) was computed 1/ and then extracted
f rom the origina l est imates on an economic class basis (as
de scribed be low). Thi s correctional process required an
e stimate of the respons ive ness of milk supply to milk price
c ha nges since this responsiveness (or supply elasticity)
partly de termi ned t he size of the benefit overestimate. (In
terms o f f igure 1, t he "steeper" or more inelastic the supply
curve , the smalle r t he overestimate.) The literature was
e xami ned for measurements of milk supply elasticity and a wide
range of e stima tes was uncovered. l/ In order to focus on
d i stributional patterns r a ther than specific numbers, three
differe nt s upply e las ticities were selected for computational
p urposes: 0.3, 0 .7, and 1.5.
Because t he benefit was overestimated only for the last
un it s of milk supp l i ed (segment AC of the supply curve in
f igure 1 ) , a s econd assumption concerning the distribution
of dairy f armers a long the supply curve was also necessary.
In reality , the benefit was probably overestimated for each
1/ Pa and Q were known . Estimates of Pc and th~ supply elast icity o~tained from the literature_were used to determine Qc . The arc elast ic ity technique was used to overcome the r e versibility problem of ~omputing Qc •
2/ Wilson and Thompson [20 ] estimated the long-run supply elas ticity for the Un ited-States to be 0.5. Halvorson's [11] estimate was 0.4 to 0.9, and Hammond [12] determined t hat the elasticity was a more ine lastic 0.145.--Cromarty's [ 3] estima te wa s 2 .5. See generally [2], [3], [10], [11], ~[12], T18], [19 1, and [ 20 ] . - - -- -- - -- -
-14-
economic class. However, because It was impossible, to deter-
mine accurately the degree to which each class was over-
estimated, two polar cases were examined as the upper and lower
bounds for this correction. A summary of the methodology
appears below (see appendix D for details).
The entire overestimate was first extractpd from the
large-sales farms (even though they were presumably the more
efficient farms that would exist even in the absen~e of a milk
program). By extracting the overestimate from these farms,
the most nearly equal distribution of the program benefit was
obtained. Table 4A presents these lower bound benefit estimates
for a supply elasticity equal to 0.7. !/
The entire overestimate was then extracted from the small-
sales farms (presumably the more marginal, less efficient farms,
some of which may exist only because milk prices are maintained
above competitive levels). By extracting the overestimate from
these farms, the most unequal distribution of the program bene-
fit was obtained. Table 4B presents these upper bound estimates
for a supply elasticity equal to 0.7. !/
In actuality, the true benefit amounts are probably closer
to these upper bound estimates. While the last units of milk
were most likely supplied by all size classes, . they were 'prob-
ably disproportionately supplied by small-sales farms. In
other words, the high costs associated with producing those
1/ Similar tables for supply elasticities of 0.3 and 1.5 are available upon request.
-15-
last units of milk were probably more prevalent among small-sales
dairy farms. As a result, it is likely that the benefit of
the small-sales farms was overestimated relatively more than
the benefit of the large-sales farms.
Once percentage of farms statistics are combined with
percentage of benefit statistics, the pattern of benefit
distribution among dairy farmers is established. One can
see in table 4A, for example, that at the 5 percent price
enhancement level Class la dairy farmers in the Northeast,
1.5 percent of the region's dairy farmers, receive 5.9 percent
of the benefit for that area; Class 5 farmers, 3.0 percent of
the region's dairy fa~mers, receive only 0.4 percent of the
benefit.
The Gini ratio is a shorthand method of describing such
distributional patterns.!/ Calculated from the Lorenz curve
relating cumulative percentages of farms to cumulative percen-
tages of benefits, this ratio (ranging from zero to one) measures
the relative concentration (inequality) of program benefits.
The closer the figure is to one, the more concentrated the
1/ The methodology for computing the Gini is based on Bonnen [I]. The Gini ratios contained in this paper were developed from approximations of the area under the Lorenz curve formed by the cumulated economic class data. This methodology tends to underestimate slightly the resulting Gini ratios. See [7] and [8]. -
-16-
benefits. A Gini of zero represents an equal distribution;
that is, X percent of the farms receive X percent of the bene
fits. The Gini ratio for the Northeast example, above, 'is
approximately 0.338.
A second Gini ratio representing .th~ nature of the bene
fit distribution among regions was also developed. Like the
intraregional Gini ratios, these interregional Gini ratios can
range between zero and one, zero being an equal distribution.
VI. Distribution of the Benefit
Table 2 summarizes the Gini ratios developed for this
Report. The interclass ratios contained in table 2 describe,
for the Nation as a whole, the pattern of benefit distribution
among farm size classes. The interregional ratios describe the
pattern of benefit distribution among the six regions. Despite
the differing assumptions about the elasticity of supply and
the distribution of the overestimate, interclass ratios are all
in the 0.4 to 0.5 range; interregional ratios vary even less,
ranging from 0.32 to 0.35.
The lower bound interclass estimates become smaller as the
size of the benefit increases, reflecting the extraction of
larger benefit overestimates from the large-sales farms. For
example, given a supply elasticity of 0.7, the lower bound Gini
declines from 0.436 at the 2 percent price enhancement level
to 0.419 at the 10 percent level. On the other hand, upper
bound interclass estimates become larger as the size of the
-17-
I
I-' co
Interclass:
2 percent level
5 percent level
10 percent level
Interre~ional:
2 percent l evel
5 percent level
10 percent l evel
TABLE 2.--Interc1ass and Inter regional Gini Ratios Given Alternative Supply Elasticities
Lower bound
. 438
.436
. 431
. 331
.330
. 331
E ::: 0.3 Upper bound
.445
.451
. 458
. 332
. 333
.336
Lower bound
. 436
.430
. 419
.331
.329
.328
E = 0.7 Upper bound
.449
.463
. 482
. 334
. 335
. 340
Lower bound
.433
.418
.397
.330
. 325
.322
E = 1.5 Upper bound
.457
.484
.514-
.336
.340
.347
Source: Calculated from data derived from the 1969 Census of Agriculture, Volt.nne I , Area Reports , Bureau of the Census, Department of COIJBT\erce , 19~and Federal Mil k order Market Statlsffcs,Ai'U'iua1 Summary for 1970, Statistical Bullet in No. 470, Const.nn~ting Service, USDA, June 1971.
benefit increases, reflecting the extraction of larger benefit
overestimates from the small-sales farms. Given a supply
elasticity of 0.7, the upper bound Gini increases from 0.449
at the 2 percent price enchancement level to 0.482 at the
10 percent level. Interregional ratios demonstrate similar but
less pronounced trends.
Because larger supply elasticities result in greater bene
fit overestimates, the range between the lower and upper bound
interclass Gini ratios increases as the supply elasticity
increases. For example, at the 5 percent price enhancement
level, the ratio range is 0.436 to 0.451 for a supply elasticity
of 0.3 and 0.418 to 0.484 for a supply elasticity of 1.5.
While the Gini ratios have no precise normative meaning,
they do indicate that the distribution of the program benefit
is quite unequal. Similar distributional inequalities were
identified by James Bonnen in his classic study {ll of several
agricultural programs a decade ago. While Bonnen did not
examine the milk program, he did evaluate eight commodity price
and income support programs in terms of their effectiveness
in insuring a minimum standard of living for low-income farmers.
His analytical procedure, which served as a model for this
paper, included the development of numerous Gini ratios correla
ting program benefits with the acreage allotrnentg of program
participants.
-19-
Although the milk program provides benefits for all dairy
farmers, it provides much greater benefits for the large
farmers. Given the direct relationship between dairy product
sales and program benefits, this result is not surprising.
However, while this distributional inequality may be the
inevitable end product of current milk market regulation, it
may not be the desired result. Over the past 40 years, farm
policy has almost always been partially motivated by a desire
to help the poor farmer [.!., p. 461].0 The data in this Report
reveal that the milk program does not do this effectively.
Even under the most generous set of assumptions (10 percent
price enhancement level, supply elasticity of 1.5, lower bound),
the average Class 5 farmer receives only about $135 in program
benefits while the average Class la farmer receives slightly
over $2,000. In other words, the Class la farmer receives
$15 for every $1 received by the Class 5 farmer. Even though
the $135 is probably of considerable importance to the small
farmer, thousands of dollars in program benefits must be generated
and distributed to much larger, and probably less needy, farmers
in order to achieve that end.
-20-
VI. Summary
Federal regulation of milk markets creates a considerable
benefit at consumer expense by setting prices above competi
tive levels. The Gini ratios contained in this paper demon
strate that this benefit is then distributed unequally. The
result is a program which provides . a deluge of benefits for
large dairy farmers and only a trickle of additional gross
income for small dairy farmers. Thus, as a vehicle for aiding
the small and probably non~affluent farmer, the milk program
appear)) to be ineffective and inefficient. The objectives of
the milk programehould be clarified and the methods of
achieving these goals should be re-examined.
-21"'-
N N
TABLE 3.--Dairy Farms With Total Farm Product Sales of $2,500 or More:
U. S. Total~, ~
Number of farms 4/ Dairy product sales Federal Order sales 5/
Northeast 6/
Number of farms 4/ Dairy product sales Federal Order sales 5/
South 6/ ---Number of farms 4/ Dairy product sales Federal Order sales 5/
East Central 6/
Number of farms 4:/ Dairy product sales Federal Order sales 5/
Number of Farms, Dairy Product Sales, and Federal Order Sales by Economic Class 1/ and by Region, 1969
(Sales in millions of dollars)
Total Class 1 Class 2 Total Class la Class lb
259,850 34,153 4,808 29,345 81,668 4,966 2,079 777 1,302 1,731 2,960 1,199 338 862 1,108
53,756 9,396 811 8,585 21,554 1,269 509 87 422 523 1,120 452 79 374 461
23,422 7,121 1,457 5,644 7,068 781 538 253 285 174 502 356 184 171 108
41,319 4,388 231 4,157 12,329 592 180 23 157 248 440 134 17 117 185
Footnotes at end of table.
Class 3
78,805 866 496
15,149 194 170
3,932 47 27
11,017 114
85
Class 4 Class 5
45,339 19,885 239 51 131 28
6,040 1,617 38 5 33 4
3,188 2,113 16 5 9 3
8,375 5,210 38 12 28 8
TABLE 3.--Dairy Farms With Total Farm Product Sales of $2,500 or More: Number of Farms, Dairy Product Sales ... Continued
N V-l
Total Class 1 Class 2 Class 3 Class 4 Class 5 Total Class la Class lb
North Central §/
Number of farms 4/ 98,829 5,650 228 Dairy product sales
5,422 27,898 36,724 20,847 7,710 1,300 221 22 199 ' 546 398 114 21
Federal Order sales ~ 609 122 13 108 256 173 49 9
West Central §/
Number of farms 4/ 28,641 2,822 168 2,654 9,174 9,063 5,221 2,361 Dairy product sales 371 105 Federal Order sales 5/ 153 47
West ~, §/
Number of farms 4/ 13,883 4,776 Dairy product sales 653 526 Federal Order sales 5/ 136 89
1/ See page 8 for the class definitions. 2/ Excludes Alaska and Hawaii.
16 7
1,913 377
37
89 156 80 24 40 63 30 10
2,863 3,645 2,920 1,668 149 84 33 9
51 35 10 2
3/ Excludes Arizona, Montana, New Mexico, and Wyoming because no data were available. 4/ Also includes those dairy farms which sold all of their milk outside of Federal Orders. An attempt to
extract such farms would have generated unreliable results. 5/ Determined by multiplying dairy product sales by the U. S. Department of Agriculture percentages. See
appendix B. 6/ See appendix C for States included. 11 Less than $500,000.
Note: Dairy product sales detail and Federal Order sales detail may not add to total because of rounding.
Source: Derived from the 1969 Census of Agriculture, Volume I, Area Reports, Bureau of the Census, Department of Commerce, 1972; ana-Federal Milk Order Market Statistics, Annual Summary for 1970, Statistical Bulletin No. 470, Consumer and Marketing Service, USDA, June 1971.
6 3
874 2 7/
N .j::>.
I
TABLE 4A.--Dairy Farms With Total Farm Product Sales of $2,500 or More: Number of Farms, Percentage of Farms, Federal Order Benefit
Amounts, and Percentage.of Benefits by Economic Class y and by Region and Intraregional and Interregional Gini Ratios, 1969
-(Benefit amounts in millions of dollars)
€ = .7, Lower Bound 2/
Total Class 1 Class 2 Class 3 Total Class la ,Class IE
U. S. Total ~, ~
No. of fanns 5/ 259,850 34,153 4,808 29,345 81,668 78,805 Percentage of-fanns 6/ 100 13.1 1.9 11.3 31.4 30.3 Fed. Ord. ben. 7/: -
2 percent level 58.8 23.2 5.7 17.5 22.6 9.9 Percentage of ben. ~ 100 39.4 9.7 29.7 38.5 16.9
·· 5 'percent level 145.3 56.2 12.6 43.6 56.6 24.9 Percentage of ben. 8/ 100 38.7 8.7 30.0 38.9 17.1
10 percent level 285.7 107.6 20.3 87.3 113.1 49.7 Percentage of ben. 8/ 100 37.7 7.1 30.5 39.6 17.4
Footnotes at end of table.
Class 4 Class 5 Goo ratio 10/
45,339 19,885 17.4 7.7
2.6 :5 4.4 .9 .436
6.4 1.3 4."4 .9 . • 430
12.9 2.7 4.5 .9 .419
TABLE 4A;- -Dairy Farms With Total Fam Product Sales of $2,500 or More: .. ... € "'.7, Lower Bound y -- Continued -
Total Class 1 Class 2 Class 3 Class 4 Class 5 Gini Total Class 1a Class 1b ratio 10/
Northeas t cy
No. of farms 5/ 53,756 9,396 811 8,585 21,554 15,149 6,040 1,617 Percentage or-farms 6/ 100 17.5 1.5 16 .. 0 40.1 28.2 11.2 3.0 Fed. Ord. ben. 7/: -
2 percent level 25.5 10.2 1.7 8.5 10.5 3.9 .8 .1 Percentage of ben. §! 100 40.1 6.6 33.5 41.4 15.3 3.0 .4 .344
5 percent level 63.2 25.0 3.7 21.4 26.4 9.7 1.9 .2 Percentage of ben. y 100 39.7 5.9 33.8 41. 7 15.4 3.0 .4 .338
10 percent level 124.9 48.6 6.0 42.7 52.7 19.4 3.8 .5 Percentage of ben. 8/ 100 38.9 4.8 34.2 42.2 15.6 3.0 .4 .330
I -
N tIl South 9/ 1---
No. of farms 5/ 23,422 7,121 1,457 5,644 7,068 3,932 3,188 2,113 Percentage or-farms 6/ 100 30.4 6.2 24.1 30.2 ' 16.8 13.6 9.0 Fed. Ord. ben. 7/: -
2 percent level 7.4 5.2 2.6 2 .6 1. 6 .4 .1 11/ Percentage of ben.]V 100 70.2 35.2 34.9 22.0 5.6 1.9 --.6 .530
5 percent level 17.6 12.1 5.7 6.4 4.1 1.0 .3 .1 Percentage of ben. 8/ 100 68.9 32.3 36.5 23.0 5.8 2.0 .6 .512 - -
10 percent level 33.0 22.1 9.2 12.9 8.12.0 .7 .2 Percentage of ben. §j 100 66.8 27.8 38.9 24.5 6.2 2.1 . . . 6 .483
Footnotes at end ~f table.
TABLE 4A--Dairy Farms With Total Farm Product Sales of $2,500 or More: ..• E =.7, Lower Bound ~ -- Continued
Total Class 1 Class 2 Class 3 Class 4 Class 5 Gini Total Class la Class Hi . ratio lOL
East Central ry
No. of farms 5/ 41,319 4,388 231 4,157 12,329 11,017 8,375 5,210 Percentage or-farms 6/ 100 10.6 .6 10.1 29.8 26.7 20.3 12.6 Fed. O:rd. ben. 7/: -
2 percent level 9.5 2.9 .3 2.5 4.0 1.8 .6 .2 Percentage of ben. ~ 100 30.2 3.6 26.7 42.2 19.4 6.3 1.9 .414
5 percent level 23.6 7.1 .7 - 6.3 10.0 4.6 1.5 _ .4 Percentage of ben. ~ 100 29.9 3.1 26.8 42.4 19.5 6.4 1.9 .411
10 percent level 47.0 13.9 1.2 12.7 20.0 9.2 3.0 .9 Percentage of ben. 8/ 100 29.5 2.5 26.9 42.6 19.7 6.4 1.9 .406
N North Central 9/ Q\
I
No. of farms 5/ 98,829 5,650 228 5,422 27,898 36,72/. 20,847 7,710 Percentage of-farms ~ 100 5.7 .2 5.5 28.2 37.2 21.1 7.8 Fed. Ord. ben. 7/:
2 percent level 10.2 2.0 .2 1.8 4.3 2.9 .8 .2 Percentage of ben . ~ 100 19.9 2.0 17.8 42.0 28.4 8.0 1.6 .364
5 percent level 25.5 5.0 .5 4.6 10 . 8 7.3 2.1 .4 Percentage of ben. ~ 100 19.7 1.8 17.9 42.2 28.5 8.0 1.6 .362
10 percent level 50.9 9.9 .7 9.1 21. 5 14.6 4.1 .8 Percentage of ben. ~ 100 19.4 1.5 17.9 42.3 28.6 8.1 1.6 .360
Footnotes at end of table.
I .
TABLE 4A.--Dairy Farms With Total Farm Product Sales of $2,500 or More: . . . s = .7, Lower Bound ~ -- Continued
Total Class 1 Class 2 Class 3 Class 4 Class 5 Gini Total Class la Class 1'5 ratio lOt
West Central 2./
No. of farms 5/ 28,641 2,822 168 2,654 9,174 9,063 5,221 2,361 Percentage or-farms ~ 100 9.9 .6 9.3 32.0 31.6 18.2 8. 2 Fed. Ord. ben. 7/:
2 percent level 3.3 1.0 .1 .9 1.4 .7 .2 . 1 Percentage of ben. 8/ 100 30.6 4.4 26.2 41.6 19.9 6.4 1.6 .388
5 percent level 8.3 2.5 .3 2.2 3.5 1.7 .5 .1 Percentage of ben. ~ 100 30.2 3.9 26.3 41.8 20.0 6.4 1.7 .385
10 percent level 16.5 4.9 .5 4.4 7.0 3.3 1.1 .3 Percentage of ben. ~ 100 29.7 3.2 26.5 42.2 20.1 6.5 1.7 .380
1
~ West y, '}j I
No. of farms 5/ 13,883. 4,776 1,913 2,863 3,645 2, 920 1,668 874 Percentage or-farms 6/ 100 34.4 13.8 20.6 26.3 21.0 12.0 6.3 Fed. Ord. ben. 7/: -
2 percent level 2.9 1.9 .8 1.1 .8 .2 11/ 11/ Percentage of ben. ~ 100 64.5 26.1 38.3 .25.9 7.8 1.""5 -.3 .388
5 percent level 7.0 4.4 1.7 2.8 1.9 .6 .1 11/ Percentage of ben. ~ 100 63,3 23.7 39.5 26.8 8.1 1.5 ~3 .373
10 percent level 13.4 8.2 2.7 5.5 3.8 1.1 .2 11/ Percentage of ben. 8/ 100 61.6 20.0 41.4 28.1 8.5 1.6 -.4 .350
Gini 10/:
2 percent level .331 5 percent level .329
10 percent level .328
TABLE 4A. --Dairy Fanns With Total Farm Product Sales of $2 , 500 or More: ... 2 = • 7 ~ LOl'JeY Bound 2/ -- Continued
1/ See page 8 for the class definitions. 2/ See page 1 5 . 3/ Excludes Alaska and Hawaii. 4/ Excludes Arizona, Montana, New r.1exico, and Wyoming because no data were available. 5/ Also includes those dairy fanns which sold all of their milk outside of Federal Orders. An attempt
to extract such fanns would have generated unreliable results. 6/ For a given region, number of fanns i n a given economic class divided by the total number of farms for
the region. 7/ Three possible degrees of price enhancement (price enhancement measured as a fraction of blend price) were
selected to accommodate the differing views of various researchers. See page 12 . 8/ For a given region, amount of benefit for a given ecoIlomic class divided by the total benefit for the
region at the appropriate benefit l evel. 9/ See appendix C for States included.
10/ Class statistics were rounded prior t o inclusion in t his table to improve data presentation. Because Gini ratios were computed with the unrounded data~ dupl ication of t he computations will give slightly different results.
11/ Less than $50,000.
N Note: Percentage of farm detail, percentage of benefit detail, and benefit amoUnt detail ITBy not add t o t ot al because co of rounding .
Source : Derived from the 1969 Census of Africulture, Volume I, Area Reports , Bureau of the Census, Department of Commerce, 1972; ana-Federal MIIk rder Market Statistic~ual Summary for 1970, Statistical Bulletin
470, C:onsumer and Marketing ServICe, USDA, June 1971. - ._-
I
N \.0
I
TABLE 4B.--Dairy Farms With Total Farm Product Sales of $2,500 or More: Number of Farms, Percentage of Farms, Federal Order Benefit
Amounts, and Percentage of_Benefits by Economic Class 1/ and by Region and Intraregional and Interregional Gini Ratios, 1969
---(Benefit amounts in millions of dollars)
E: ;: • 7, Upper Bound Y
Total Class 1 Class 2 Class 3 Total Class la Class Hi
U. S. Total ~, ~
No. of farms 5/ 259,850 34,153 4,808 29,345 81,668 78,805 Percentage of-farms 6/ 100 13.1 1.9 11.3 31.4 30.3 Fed. Ord. ben. 7/: -
2 percent level 58.8 23.6 6.1 17.5 22.6 9.9 Percentage of ben. ~ 100 40.1 10.4 29.7 38.5 16.9
5 percent level 145.2 59.0 15.3 43.6 56.6 24.9 Percentage of ben. ~ 100 40.6 10.5 30.1 38.9 17.1
10 percent level 285.5 117.9 30.6 87.3 113.1 49.1 Percentage of ben. ~ 100 41.3 10.7 30.6 39.6 17.2
Footnotes at end of table.
Class 4 Class 5 Gini ratio 10/
45,339 19,885 17.4 7.7
2.5 .2 4.3 .3 .449
4.9 .1 3.4 .1 .463
5.6 .1 2.0 12/ .482
TABLE 4B.--Dairy Fanns With Total Fann Product Sales of $2,500 or More: ••. E: = . 7,. Upper Bound y -- Continued
Total Class 1 Class 2 Class 3 Class 4 Class 5 Gini Tot al Cl ass la Class IE ratio l0i
Northeas t 'ij
No. of fanns 5/ 53 ,756 9 ,396 811 8,585 21 , 554 15,149 6, 040 1,617 Percentage or-farms 6/ Fed. Ord . ben. 7/: -
100 17 . 5 1.5 16 .0 40. 1 28.2 11 .2 3, 0
2 percent level 25.5 10. 3 1.8 8. 5 10 .5 3.9 . 7 11/ Percentage of ben. 8/ 100 40 . 5 7.1 33. 5 41.3 15.2 2. 9 - . 1 . 352
5 percent level 63.3 25.8 4.5 21.4 26. 4 9.7 1.4 11/ Percentage of ben . ~ 100 40 . 8 7. 1 33. 8 41. 6 15 .4 2. 3 IZ/ .359
10 percent level 125.1 51. 7 9.0 42.7 52.7 19 . 2 1.6 11/ Percentage of ben. §! 100 41.3 7. 2 34.1 42 .1 15.3 1.3 IT; .375
~ South ry 0
I
No. of fanns 5/ 23,422 7, 121 1,457 5,644 7,068 3,932 3,188 2,113 Percentage otfarms 6/ 100 30. 4 6.2 24 .1 30 . 2 16. 8 13 .6 9.0 Fed. Ord. ben. 7/: -
2 percent level 7.5 5.3 2.8 2.6 1.6 .4- .1 ill Percentage of ben. 'lj 100 71.2 36. 8 34. 2 21.6 5.S 1.8 .2 .544
5 percent level :t8.7 13 .4 6.9 6. 4 4. 1 1.0 .3 11/ Percentage of ben. ~ 100 71. 6 37.1 34 . 4 21.7 5. 5 1.4 -.1 .552
10 percent level 37 .1 26. 7 13. 8 12. 9 8 .1 2.0 .3 11/ Percentage of ben. ~/ 100 72.1 37 .3 34 .7 21. 9 5. 5 .8 IT/ . 560
Footnotes at end of table.
TABLE 4B~-Dairy Farms With Total Farm Product Sales of $2,50.0. or More: ••. € = .7, Upper Bound ~ -- Continued
Total Class 1 Class 2 Class 3 Class 4 Class 5 Gini Total Class 1a Class 1'5 ratio 10/
East Central JJ No. of farms 5/ 41,319 4,388 231 4,157 12,329 11,0.17 8,375 5,210 Percentage of-farms Q/ 100 10.6 .6 10.1 29.8 26.7 20.3 12.6 Fed. Ord.ben. 7/:
2 percent level 9.4 2.9 .4 2.5 4.0 1.8 .6 .1 Percentage of ben. ~ 100 30.8 3.8 27.0 42.7 19.7 6.3 .6 .432
5 percent level 23.0 7.2 .9 6.3 10.0 4.6 1.1 11/ Percentage of ben. ~ 100 31.4 3.9 27.5 43.5 20.0 5.0 -.2 .451
10 percent level 44.9 14.5 1.8 12.7 20.0 9.1 1.3 11/ Percentage of ben. 8/ 10.0 32.2 4.0 28.2 44.6 20.3 2.9 -.1 .476
VJ North Central 9/ I-'
No. of farms 5/ 98,829 5,650 228 5,422 27,898 36,724 20,847 7,710 Percentage of-farms 6/ 100 5.7 .2 5.5 28.2 37.2 21.1 7.8 Fed. Ord. ben. 7/:
2 percent level 10.1 2.0 .2 1.8 4.3 2.9 .8 .1 Percentage of ben. ~ 100 20.2 2.2 18.0 42.5 28.7 8.,0 .5 .379
5 percent level 24.8 5.1 .6 4.6 10..8 7.3 1.6 11/ Percentage of ben. ~ 100 20.7 2.3 18.4 43.4 29.4 6.3 -.2 .401
10 percent level 48.0 10.2 1.1 9.1 21.5 14.4 1.8 11/ Percentage of ben. 8/ 100 21.4 2.3 19.0 44.9 30.0 3.7 -.1 .434
Footnotes at end of table.
TABLE 4B~-Dairy Farms With Total Farm Product Sales of $2,500 or More: •.. E = .7, Upper Bound 31 ~- Continued
Total Class 1 Class 2 Class 3 Class 4 Class 5 Goo Total Class 1a Class 10 ratio 10/
West Central 9/
No. of farms 5/ 28,641 2,822 168 2,654 9,174 9,063 5,221 2,361 Percentage of-farms §I 100 9.9 .6 9.3 32.0 31.6 18.2 8.2 Fed. Ord. ben. 7/:
2 percent level 3.3 1.0 .2 .9 1.4 .7 .2 11/ Percentage of ben. ~ 100 31. 2 4.8 26.4 42.0 20.0 6.3 -.6 .405
5 percent level 8.1 2.6 .4 2.2 3.5 1.7 .4 11/ Percentage of ben. ~ 100 31.8 4.8 26.9 42.8 20.4 5.0 -.2 .426
10 percent level 15.9 5.2 .8 4.4 7.0 3.3 .5 11/ Percentage of ben. ~ 100 32.6 5.0 27.6 43.9 20.7 2.9 -.1 .453
~ West y, ry N ,
No. of farms 5/ l3,883 4,776 1,913 2,863 3,645 2,920 1,668 874 Percentage of-farms 6/ 100 34.4 13.8 20.6 26.3 21.0 12.0 6.3 Fed. Ord. ben. 7/: -
2 percent level 2.9 1.9 .8 1.1 .8 .2 1Y 11/ Percentage of ben. 8/ 100 65.3 27.5 37.7 25.6 7.7 1.4 -.1 .400
5 percent level 7.3 4.8 2.0 2.8 1.9 .6 .1 11/ Percentage of ben. ~j 100 65.5 27.6 37.8 25.7 7.7 1.1 V/ .406
10 percent level 14.6 9.6 4.0 5.5 3.8 1.1 .1 11/ Percentage of ben. ~ 100 65.9 27.7 38.1 25.8 7.7 .6 TI/ .411
Gini 10/:
2 percent level .338 5 percent level .338
10 percent level .343
TABLE 4B.--Dairy Farms With Total Farm Product Sales of $2,500 or More: ... E = .7, Upper Bound l! -- Continued
1/ See page 8 for the class definitions. 2/ See page 1 5 . 3/ Excludes Alaska and Hawaii. 4/ Excludes Arizona, Montana, New Mexico, and Wyoming because no data were available. 5/ Also includes those dairy farms which sold all of their milk outside of Federal Orders. An attempt to
extra~t such farms would have generated unreliable results. §! For a given region, number of farms in a given economic class divided by the total number of farms for the
region. 7/ Three possible degrees of price enhancement (price enhancement measured as a fraction of blend price) were
selected to accommodate'the differing views of various researchers. See page 12 . 8/ For a given region, amount of benefit for a given economic class divided by the total benefit for the
region at the appropriate benefit level. 9/ See appendix C for States included.
10/ Class statistics were rounded prior to inclusion in this table to improve data presentation. Because Gini ratios were computed with the unrounded data, duplication of the computations will give slightly different results.
11/ Less than $50,000. 12/ Less than 0.05 percent.
i ~ Note: Percentage of farms detail, percentage of benefit detail, and benefit amount detail may not add to total
because of rounding.
Source: Derived from the 1969 Census of Agriculture, Volume I, Area Re~rts, Bureau of the Census, Department of Commerce, 1972; arur-rederal Ml~ order Market Statistic~ua Summary for 1970, Statistical Bulletin No. 470, Consumer and.Marketing ServICe, USDA, June 1971. ----
APPENDIX A
Regional Distribution of the "Subsidy" Under Federal Malk Market Regulation
John E. Kwoka, Jr.
For a given total "subsidy" generated under the Federal milk order
system, producers in different areas of the country benefit to varying
degrees. The subsidy is embodied in the price producers receive, and
hence the per-unit amount is given by:
S = PB - PC (1)
where PB is blend price and PC the underlying competitive price. The
former is known for any order area (largely determined by the regula-
tory administration), and the latter has been estimated for 46 markets
in 1970. 1/ What follows is based on those results.
Blend price is linearly related to distanr p ~rom Mannesota-Wisconsin
as the result of regulatory price-setting practices which explicitly
incorporate transportation costs. The underlying competitive price varies
more widely as a consequence of local supply and demand conditions.
Empirically, demand conditions are strongly influenced by income levels,
which are generally higher in northern markets than in the South. Supply
conditions reflect production costs, which are much lower in the North
Central States than elsewhere (although some places like New York enjoy
local production advantages).
1/ J . Kwoka, "Pricing Under Federal Milk Market Regulation," Appendix Table-B, Economic Inquiry, July 1977.
-34 -
Identifying subsidy levels by distinct geographical region must
resolve these often conflicting forces on blend and comPetitive prices.
In addition, this process runs some risk of describing a continuum of
effects as discrete phenomena. Nonetheless, some clear differences can
be isolated, and the following six-region breakdown is accompanied by
a priori justification:
(1) The North Central area (NC) is characterized by strong
demand conditions, extremely low production costs, and a low blend
price. There can be little subsidy here since blend price is tied to
local marketing conditions.
(2) The Northeast (NE) is characterized by very strong demand,
relatively low production costs, and a moderate blend price. The subsidy
depends on how advantageous production conditions are relative to strong
demand, but the subsidy is probably considerable.
(3) The East Central region (EC) is characterized by moderate
demand levels, relatively low production costs, and a moderate blend
price. A moderate-to-considerable subsidy is likely to result.
(4) The West Central negion (WC) is characterized by moderate
demand conditions, production costs, and blend price. Here the subsidy
is probably moderate.
(5) The South (S) is characterized by low income and demand, very
high production costs, and a high blend price. Since costs probably
dominate PC, the subsidy is small.
(6) The West (W) is characterized by moderate income, production
costs, and blend price. The subsidy is likely to be moderate.
-35-
These descriptions suggest that the per-unit subsidy is minimal
in the North Central area, due to low blend, and minimal in the South,
due to high production costs, but rather considerable in between,
depending on the balance of und~rlying supply and demand factors.
The accompanying map serves to identify these s ix regi ons , and t able l
gives, for order areas within each region , weighted averages of actual
PB, estimated PC, the dollar value of the subsidy and its ratio to PB,
as well as the number of observations (orders) on which each calculation
was based. y The figures broadly confirm the pattern alr eady described.
There are essentially two types of subsidy regions , one comprised of
the North Central area and the South where the subsidy is relatively
small (though for different reasons), and the other consisting of the
other four areas where, for various reasons , most of the subsidy is
concentrated. No clear distinctions can be drawn among these latter fou~c.
The specific figures for competitive price in table I are, of
course, appropriate only for the total national subsidy estimated for
the 46-market sample in 1970. 2/ But while the absolute level of
subsidy depends on the total, the key result, the geographical pattern,
will persist. That is, the relative subsidies among regions reported
here will be preserved. The regional distribution of any total subsidy
(TS) can be found by solving for the proportionality constant K in the
following expression:
1/ J. Kwoka, "Pricing under Federal Milk Market Regul ati on,'i Appenaix Table B, Economic Inquiry, July 1977. . .
2/ Ibid., p. 377.
-36-
TS =
or equivalently:
6 r KS.Q.
i=l 1 1
TS = ~ . K( PBS). SAL~S. i=l 1 1
(2)
(3)
Here Si' Q., and SALESi refer to each region 1 s subsidy, Federal order 1 ,
quantity, and dollar sales, respectively. The expression (S/PB)i is
the percent price increase over blend price in each region, as given
in the last coltmm of table I. Total regional subsidies are a
straightforward implication of this computational procedure, and \ .
preserve the interregional relationships previously described.
-37-
<.N 00
U. S. DEPARTMENT 8F AGR 1C;~LTURE
FIGURE 1.~~Regions
NEG . 26678 BUREAU OF' AGRICUL1UR.~l ECONOM ICS
TABLE I
Region N PB PC S S/PB
NE 4 $6.30 $5.10 $1.20 .190
NC 5 5.37 4.62 .75 .140
EC 10 5.79 4.75 1.04 .180
WC 9 5.67 4.63 1.04 .183
S 13 6.30 5.51 .79 .125
W 5 6.00 4.92 1.08 .180
Source: Bureau of Economics, Federal Trade Commission.
-39-
APPENDIX B
Milk Deliveries to Federal Order Plant s as a Percentage of Milk Delivered to All Plants and Dealers, by State
(1969)
State Percent State Percent
Alabama Arizona Arkansas California Col orado Connecti cut Delaware Flor ida Georgi a Idaho Illinois Indi ana Iowa Kansas Kentucky Louis i ana Maine -Maryland Massachusetts Michi gan Minnesota Mississippi Missouri ~ntana Nebraska Nevada New Hampshire New Jer sey New Mexico New York North Carolina North Dakot a Ohio Oklahoma Oregon Pennsylvani a Rhode Island South Carolina
2 96 62
1 93
100 83 98 74 6
67 80 31 70 57 61 39 96 92 86 19 74 49
1 38 4
90 96 96 89
2 16 87 84 o
86 100
3
South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming
18 64 98 65 93 43 79 85 48 25
Source: Federal Milk Order Market Statistics. Annual Surrnnary for 1970, Stat i s t ical Bul l etin No. 470, Consumer and Marketing Service, USDA, June 1971.
-40-
APPENDIX C
North Central
Michigan Minnesota Wisconsin
Northeast
Connecticut Delaware Maine Maryland Massachusetts New Hampshire New Jersey New York Pennsylvania Rhode Island Vennont
East Central
Illinois Indiana Kentucky Ohio Tennessee West Virginia
West Central
Iowa Kansas Missouri Nebraska North Dakota South Dakota
State-By-State Composition of Regions
South
Alabama Arkansas Florida Georgia Louisiana Mississippi North Carolina Oklahoma South Carolina Texas Virginia
West
Arizona California Colorado Idaho Montana Nevada New Mexico Oregon Utah Washington Wyoming
Source: "Regional Distribution of the 'Subsidy' Under Federal Milk Market Regulation," a paper by John E. Kwoka, Jr., included here as appendix A.
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APPENDIX D
The entire overestimate was first extracted from the large-sale~
' farms (presumably the more efficient farms that would exist even
in the absence of the milk program). By extracting the over-
estimate from these farms, the most nearly equal distribution of
the program benefit was obtained. The technique used to determine
these lower bound estimates is illustrated below.
P
Class lb quantity I
I
: Class la /quantity ----'""'--- I '
Q
Essentially, the milk supply was allocated among dairy farms as if
all of the last units of milk supplied came from Class la farms, the
next to last units supplied came from Class lb farms, etc. That
portion of the triangle (area ABCE) originally included in the
-A2 -
Class la benefit (area ABCF) was extracted, leaving triangle AEF as
the final Class la benefit. The distribution , of this final Class la
benefit among the Class la farmers in the six different regions was
patterned after the distribution of the overestimated Class la
benefit. The Class lb benefit was computed similarly.
In detennining upper bound estimates, it was assumed that all'
of the last units of milk supplied came from Class 5 farms, the
next to last units supplied came from Class 4 farms, etc.
Computation then proceeded in the same fashion, By extracting
the entire overestimate from the small-sales farms (presumably
the more marginal, less efficient farms)t the most unequal
distribution of the program benefit was obtained.
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REFERENCES
[1] Bonnen, James T., "The Distribution of Benefits From Selected U. S. Farm Programs, ", in Rural Poverty in the United States, The President's National Advisory Commission on Rural Poverty, Wasnington, D. C., May 1968.
[2] Chen, D., R. Courtney, and A. Schmitz, "A Polynomial Lag Formulation of Milk Production Response," American Journal of Agricultural Economics, February 1972.
[3] Crornarty, William, "An Econometric Model of United States Agriculture," Journal of the American Statistical Association, September 1959. - --
[4] Federal Milk Marketing Order Program, Marketing Bulletin 27, Consurner-andMarketing Service, USDA, April 1968.
[5] Federal Milk Order Market Statistics, Annual Surmnary for 1970, Statistical Bulletin No. 470, Consumer and Marketing Service, USDA, June 1971.
[6] Federal Milk Order Market Statistics, Annual Summary for 1976, Statistical Bulletin No. 575, Agricultural Marketing Serv~ USDA, June 1977.
[7] Gastwirth, Joseph 1., "The Estimation of the Lorenz Curve and Gini Index," The Review of Economics and Statistics, August 1972.
[8] Gastwirth, Joseph 1., and Marcia G1auberrnan, "The Interpolation of the Lorenz Curve and Gini Index from Grouped Data," Econometrica, May 1976 .
[9] Government's Role in Pricing Fluid Milk in the United States, Agricultural Economic Report No, l5~conomic Research Service, USDA, December 1968.
[10] Hallberg, M. C., and R. F. Fallert, Policy Simulation Model for the United States Dairy Industry, Bulletin 805, The PennsylvanIa State University, January 1976.
[11] Halvorson, H. W., "The Response of Milk Production to Price," Journal of Farm Economics, December 1958.
[12] Hammond, Jerome W., Regional Milk Supply Analysis, Staff Report 74-12, Department of Agricultural and Applied Economics, University of Minnesota, July 1974.
[13] Ippolito, Richard A., and Robert T. Masson, "The Social Cost of Government Regulation of Milk," Journal of Law and Economics, April 1978. - ----
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[14]
[15]
[16]
[17]
[18]
[19]
[20]
[21]
[22]
[23]
[24]
Kwoka, John E., Jr., "Pricing Under Federal Milk Market Regulation, " Economic Inquiry, July 1977.
Kwoka, John E., Jr., "Regional Distribution of the 'Subsidy ' Under Fed~ral Milk Market Regulation," here.tofore unpublish~d paper, February 1975.
Manchester, Alden C., Pricing Milk and Dairy Products -~ Principles, Practices, Problem~conomic Research Sernce Report No. 207, USDA, June 1971.
Price Impacts of Federal Market Order Pr ograms, Special Report 12, Farmer Cooperative Service, USDA, January 1975 .
Riley, John B., and Leo V. Blakley, "Impact of Alternative Class I Pricing Systems on Fluid Milk Prices," American Journal of Agricultural Economics, February 1975 . --
West, D. A., and G. E. Brandow, Equil ibritml Prices , Production, and Shipments of Milk in the Dai~ Regions of t he United States, 1960, Report NO: 49, Department Q Agricultural Economics and Rural Sociology, Agricultural Experiment Station , The Pennsylvania State University, Nov~mber 1964.
Wilson, R. R., and R. G. Thompson, "Demand, Supply, and Pr ice Relationships for the Dairy Sector, Post -Wor ld War II Period, '! Journal of Farm Economics, May 1967.
1969 Census of Agriculture, Voltmle 1, Area Reports, Bureau of ~Census, Department of Commerce, 19~
1969 Census of Agriculture, Voltmle II, General Report: Chapt er 1, TGeneral In~rmation; Procedures for Collect ion, Processing, Classification), Bureau of the Census, Department of Commerce, 1972 .
1969 Census of Agriculture, Voltmle II, Gener al Report : Chatter 7 lVifue of Proaucts, Economic Class , Contracts), Bureau of t e Census,JDepartment of Commerce, 1973.
1969 Census of Agriculture, Voltmle II , General Report: Chapter 8 (:!lEe of FariTl), Bureau of the Census , Department of Commerce, 1973.
"u.s. GOVE~M[NT PRINn"G OFFICE, 1978-725-268/1347
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