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Licensed Unlicensed Requires Authentication Published by De Gruyter November 2, 2013

Conflict over Cooperation: Why So Much Disagreement over the Proposed Dairy Market Stabilization Program?

Jeremy Jay Jackson, Cameron S. Thraen and Marin Bozic

Abstract

The creation of a Dairy Market Stabilization Program (DMSP) is a current topic of contention in the discussion of United States federal dairy policy. DMSP is designed to speed up income over feed cost (IOFC) margin recovery through triggered disincentives for milk production. This federally mandated supply control with its price-enhancing benefits to producers has proven to be controversial. The controversy surrounding DMSP implementation is illuminated by the construction of a stylized prisoner’s dilemma game in which DMSP acts as an enforceable commitment mechanism to restrict supply and prop up prices when feed costs experience an adverse shock. Volatile and high feed costs are likely to be the norm for the foreseeable future resulting in large expected benefits to milk producers if DMSP is implemented. The game shows that differing dairy management styles lead to different incentives regarding DMSP implementation as producer groups from feed-growing regions oppose DMSP in an effort to raise the costs of their rivals in feed-buying regions. Opposition to DMSP by feed growers can lead to increased market share and profitability in the future.

JEL: Q18

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  1. 1

    This is true as long as milk prices cover at least variable costs of production, even if revenue is not sufficient to compensate for capital costs and management efforts.

  2. 2

    A listing of producer groups in support of DMSP is available at http://www.nmpf.org/files/Coalition-of-Dairy-Organizations-Supporting-DSA-050813.pdf

  3. 3

    $/cwt is price per hundredweight.

  4. 4

    All equilibrium mentioned in the text refers to the familiar subgame perfect Nash equilibrium.

  5. 5

    Rather than letting each dairy style have a different cost parameter in the feed shock state, we could have allowed the solvency parameter S, , to differ with reflecting the larger cash flow requirements of FB dairies. All results follow through with minor notational differences.

  6. 6

    The assumption of risk neutrality is purely made for convenience and ease of exposition. The results presented are robust to the inclusion or risk preferences at the cost of additional notation with no added intuition.

  7. 7

    Evidence of this is seen in Figures 1 and 2 as the decline in the California dairy herd corresponds to the uptick in feed costs and volatility in 2008.

  8. 8

    Major dairy feeds include corn silage and soybean meal.

  9. 9

    The evidence documented in Merlo (2012) suggests this is the case.

  10. 10

    For more detailed discussion of slippery slope arguments in general see Van der Burg (1991) and Volokh (2003).

Published Online: 2013-11-02

©2013 by Walter de Gruyter Berlin / Boston