Summary: Federal dairy policies and programs are designed to ensure an adequate milk supply, but the U.S. dairy industry has continually produced more milk than can be marketed commercially at established market prices. The surplus is purchased by the government in the form of dairy products such as cheese and butter. The dairy price support program uses parity price as the standard for determining the support level and is considered to be the principal cause of surpluses. Its object is to set a support price that will: (1) ensure an adequate supply of milk to meet current needs; (2) reflect changes in production costs; and (3) ensure a level of farm income adequate to maintain productive capacity sufficient to meet anticipated future needs. A study was made to evaluate the strengths and weaknesses of existing federal programs and the consequences of possible new programs for controlling or minimizing surpluses.
Most of the rapid increase in the milk support price has resulted from the formula for computing the parity price for milk. The formula does not adequately consider many economic factors affecting milk market conditions and includes some factors which have little to do with milk production. Alternative milk-pricing standards that could help solve or reduce the surplus problem and more effectively and equitably accomplish program objectives include: (1) a dairy parity price standard; (2) a cost-of-production standard; and (3) a standard based on a comprehensive formula that systematically and simultaneously considers changes in cost of production, milk product stocks, and demand. A dairy parity price standard would more closely reflect changes in factors affecting prices of dairy inputs, but would not reflect productivity increases or supply and demand factors. A cost-of-production standard would reflect the costs of producing milk and productivity increases, but would not consider supply and demand factors. A standard could be developed that would use a comprehensive formula to relate the price of milk to factors affecting supply and demand. GAO believes that such a formula could eventually be used to adjust the dairy price-support level. Since research needs to be done before this approach could be used, the basis for setting the support price could be changed to either a dairy parity price standard or a cost-of-production standard. GAO believes that the dairy parity price standard would be the least disruptive to the industry.
