DMSP POTENTIAL IMPACT ON U.S. DAIRY EXPORTS

Transcription

1 DMSP POTENTIAL IMPACT ON U.S. DAIRY EXPORTS Prepared by: Prepared for: International Dairy Foods Association June 2012

2 Table of Contents Executive Summary... 2 I. Evolution of U.S. Dairy Exports... 3 Stage 3 in Detail... 4 U.S. Competitiveness... 6 II. DMSP Impact on Exports... 7 Explanation of the Dairy Market Stabilization Program (DMSP)... 7 Studies Done on DMSP... 7 FAPRI/Brown... 8 Stephenson/Nicholson... 8 Results of Studies... 9 Export Price Elasticity... 9 Modeling U.S. Dairy Exports III. Other DMSP and Trade Related Issues Choosing which prices and products to suspend DMSP Impact of government purchases with withheld revenue Conclusion References List of Exhibits Exhibit 1: Manufacturing Milk Prices, Monthly (USD/cwt.)... 3 Exhibit 2: U.S. NFDM Exports and Price Spread to Oceania, Monthly... 5 Exhibit 3: Recent Econometric Analysis of Proposed Dairy Policies... 9 Exhibit 4: U.S. Milk Solids Exports (Log Scale) Exhibit 5: Estimated Export Elasticity ('98-'09) Exhibit 6: U.S. Milk Solids Exports vs. Price Spread to Oceania Exhibit 7: Monthly U.S. Cheese Prices, CME and NASS Exhibit 8: U.S. Exports by Product, Percent of Total Dairy Exports (2011) Exhibit 9: FAPRI Estimate of DMSP on Cheese Price in

3 Executive Summary Recent studies of proposed supply control programs for the U.S. dairy industry have found varied impacts on exports in the long-run, but the short-run impact is undoubtedly a reduction in exports as U.S. prices rise and become uncompetitive with other exporters. The designers of various supply control programs recognize that U.S. prices have to remain competitive and the programs would be suspended if U.S. prices rise above comparable prices on the world market by anywhere between zero and 20% for two consecutive months. But semi-regular spikes in U.S. prices relative to other exporters could change perceptions of U.S. sourced supplies and damage the long-run prospects for U.S. exports. U.S. exports have increased 178% in the past ten years, taking the U.S. industry from a mostly inward looking closed system to a market largely driven by exports, global market conditions, and international prices. This dramatic increase in exports and increasing integration between the U.S. and the world market has changed the market dynamics in the U.S. With the majority of new milk created in the country headed into the export market, U.S. dairy prices have to be competitive with the other major exporters. That means U.S. prices are now driven by the global supply and demand balance instead of just the supply and demand balance in the domestic market. Structural economic models of the U.S. dairy industry struggle to capture the evolving structure of the market. The models try to detect and measure the relationships between various variables, like exports and the spread between U.S. and Oceania prices. However, if the relationship between the variables is changing over time, then the model may produce biased predictions about how the variables will interact in the future. There are also other influences on exports, like long-term business relationships between companies and traders that do not lend themselves well to modeling. Various studies have found that the Dairy Market Stabilization Program (DMSP) would be active 7.5% 7 to 46.2% 8 of the time, depending on the model, forecast horizon, and program assumptions. The program is designed to deactivate with a trigger that relies on a comparison of U.S. prices reported by NASS to prices on the world market. But the NASS prices lag the spot markets, which much of the industry is priced off of and the DMSP trigger considers only cheese and nonfat dry milk prices to determine if U.S. dairy prices are higher than the world market. Howerver, these two products accounted for less than 38% of U.S. dairy exports in The program would also use money withheld from farmers when the program is activate to purchase dairy products, which could keep U.S. dairy prices higher than the world market even after the program has been deactivated. Growing global demand has allowed U.S. dairy farmers to sell more milk at a higher average price than ever before. U.S. processors and cooperatives have worked hard and invested considerable resources into processing plants, packaging, product development, and business relationships to take advantage of the growing demand. The result has been narrowing price spreads between the U.S. and other global exporters, and 2

4 more consistent export volume. There is little doubt that proposed supply control programs would have a negative impact on exports in the short-run. The impact on the long-run is less certain. Increased milk production would likely necessitate increased exports, but the frequency or severity of price spikes resulting from supply control programs could reduce long-term competitiveness and require wider price spreads between the U.S. and world market to move the increased volume into the export market. I. Evolution of U.S. Dairy Exports The relationship between the domestic and the world dairy markets has evolved significantly in the last ten years and it continues to evolve. The U.S. dairy industry used to view exports simply as a way to occasionally clear excess product out of the domestic market, and it often took government subsidies to make the exports happen. Growing global demand has pushed prices on the world market high enough to make U.S. exports profitable without subsidies. Exports have gone from absorbing less than 5% of U.S. milk production in 1999 (with subsidies) to more than 13% in 2011 with no subsidies, and exports have absorbed more than 67% of the growth in milk production since Exhibit 1: Manufacturing Milk Prices, Monthly (USD/cwt.) Over the last 18 years there have been three distinct stages of evolution between the domestic and world markets. In the first stage prices on the world market were below the U.S. government support price. During periods of low prices it made more sense for U.S. processors to sell surplus dairy products to the government than it did to export them, and as a result, U.S. exports were small relative to milk production. When 3

5 international prices rose above U.S. government support in 2004, U.S. exports started to grow, but domestic fundamentals continued to support U.S. prices above the world market until mid As global prices shot above domestic prices toward the end of 2006, global supply and demand started to set the price level for U.S. dairy products. The spread between the domestic and international prices acted as a throttle for exports. If the U.S. market was tight, U.S. prices would rise toward prices on the world market to slow exports, and if U.S. supplies were heavy, then the spread would widen out and encourage more exports. During this stage U.S. dairy products were often considered inferior to similar products from the EU or Oceania. U.S. products were being made to standards that are typical for the domestic market, not what is typical on the world market. Processors and exporters started to work with importers to develop products that matched what consumers in importing countries wanted, and the U.S. began to produce products specifically for the export market while building long-term relationships with importers. That has paid off in stage 3. In mid-2010 the spread between U.S. dairy prices and Oceania tightened, but U.S. exports did not slow down like they have in the past. Over the past 24 months U.S. prices have not needed to be at a sharp discount to keep exports moving, although they still have to be competitive with other exporters. When domestic prices rise above other exporters, like dry whey prices did during the second half of 2011, we still see export volume fall. A government policy that pushes domestic prices above the prevailing world prices, even for a short period of time, is detrimental to export volume. The increase in U.S. exports since 2004 has allowed U.S. dairy farmers to sell more milk, and at a higher average price, than they have ever before. Unfortunately it has also increased volatility. With domestic prices being driven by global supply and demand, the range of influences on U.S. prices has grown exponentially. Everything from the weather in New Zealand to economic growth in Vietnam and drought in Russia now factor into U.S. dairy prices. The increased price volatility is undesired by most in the dairy industry, but with exports absorbing more than 13% of U.S. milk production and growing, U.S. prices have to remain competitive with the other major exporters. Stage 3 in Detail In late 2010 U.S. prices started moving up toward the prices prevailing on the world market, which in the past would have resulted in a significant slowdown in U.S. exports. Instead, exports remained relatively steady. 4

6 Exhibit 2: U.S. NFDM Exports and Price Spread to Oceania, Monthly The spread between the U.S. price of NFDM and the SMP price in Oceania (the red line) has remained volatile, but the level of exports (blue bars) has been relatively steady at a high level since the second half of While the price spread has been tighter, the U.S. has continued to trade at discount. There are likely a number of factors that have steadied out exports, but certainly one of them has been investments made in developing relationships and products specifically for the export market. The U.S. Dairy Export Council (USDEC) is a non-profit organization created in 1995 and funded primarily by U.S. dairy farmers through the milk check-off program. Their mission is to enhance demand for U.S. dairy products through building demand overseas and resolving market access barriers. USDEC has been one of the driving forces helping U.S. commercial processors, cooperatives, and independent exporters to develop long-run relationships and develop products to match the preferences of consumers in importing countries. Two of the best examples of these long-term investments are string cheese in South Korea and bulk Gouda cheese production for export (with particular early success in exports to Mexico). After earlier success in importing U.S. cream cheese for South Korean bakeries and eventually single-serve cream cheese packs in convenience stores, an innovative importer started buying U.S. single-serve string cheese to be distributed through South Korean convenience stores during the third quarter of The product was successful and by February 2009 approximately 8,500 c-stores in South Korea were selling U.S. string cheese, becoming the second-best selling dairy product in c-stores (the number one 5

7 item was banana flavored milk). Angelique Hollister, USDEC marketing director for cheese and manufactured products commented that it was a long collaborative process, but it shows that commitment, perseverance, investment in building a relationship, and trust in a successful outcome can pay off even in tougher times. 1 Gouda is the third largest type of cheese consumed globally. 2 The U.S. has produced small quantities of Gouda for years, but typically for retail and specialty use. Mexico is the largest export market for U.S. dairy products, and Gouda accounts for about half of the cheese consumption in Mexico. Since the U.S. did not produce bulk Gouda, Mexico imported it from other suppliers. In 2007, USDEC started working with importers to identify appealing product and packaging specifications to aid U.S. cheese makers in developing bulk Gouda production. USDEC then worked with U.S. processors to develop Gouda that would appeal to importers. By 2011, USDEC estimated that about 20% of U.S. cheese exports to Mexico were in the form of Gouda. Les Hardesty, a dairy farmer and chairman of USDEC commented, Significantly, this is new and ongoing business, it s not cannibalizing existing U.S. cheese sales. We ve branched out into a new variety that has displaced other suppliers from South America, New Zealand, and Europe. 3 U.S. Competitiveness Even without a supply management program that would periodically reduce milk production, the U.S. has historically been viewed as an inconsistent supplier. A study commissioned by the Innovation Center for U.S. Dairy found that importers are still concerned about the availability of U.S. product when domestic supply and demand gets tight. A buyer noted, it is hard to make the United States a supplier of strategic ingredients if I can t count on them to be here when things are good and bad. If the domestic U.S. market takes off, then I worry that my export supply will disappear. 5 While the U.S. is contemplating milk supply control policies, the competition is moving their policies in the other direction. Europe has had a milk production quota in place since 1984, but it is being phased out and will be dissolved on April 1 st, So far, the restriction on European production has helped to open opportunities for growing U.S. exports, but the trend could react in the opposite direction as Europe removes their supply controls while the U.S. puts them in place. With global demand pushing dairy prices to record highs in recent years, becoming a consistent and large exporter has been the best way to maximize revenue for dairy farmers, and that is expected to continue into the future. But supply management programs that restrict U.S. supplies and suddenly push U.S. prices higher than other exporter s prices could damage perceptions of the U.S. as a consistent supplier, hurting both short-term and long-term export opportunities. 6

8 II. DMSP Impact on Exports Explanation of the Dairy Market Stabilization Program (DMSP) The Dairy Market Stabilization Program (DMSP) was first introduced in the National Milk Producers Federation set of policy proposals for the upcoming Farm Bill called Foundation for the Future (FFTF). The set of policy proposals have gone through a number of iterations as they have been drafted into bills for congressional consideration, but the basic structure and operation of the program remains largely the same across the various drafts. The program is designed to encourage dairy farmers to reduce milk production when a calculated margin (difference between milk and feed prices) falls below specified levels. If the margin falls between $5 and $6 for two consecutive months, the program would activate and farmers would only receive payment for milk delivered up to 98% of their base, with a maximum withholding of 6% of their payment. A farm s base would be equal to the average amount of milk delivered in the three months prior to the program activating, or it would be equal to production during the same month during the previous year. The farmer would choose which base calculation method he would like to use at the start of each calendar year. If the margin falls between $4 and $5, farmers will only be paid for milk delivered up to 97% of their base, with the maximum withholdings capped at 7%. If the margin drops below $4 for a single month, the program will be activated, and farmers will only be paid on milk delivered up to 96% of their base, with the maximum withholdings capped at 8%. Under the original FFTF language, participation in the program would have been mandatory for all U.S. dairy farmers. In subsequent proposals participation is voluntary, but if a farmer opts out of participation in DMSP, they also opt out of participating in a proposed margin protection program. The program would deactivate when the margin rises above $6 for two consecutive months. There are also provisions that would deactivate the program at lower margin levels if certain U.S. dairy prices rise above the equivalent price on the world market by a certain percentage. Early proposals deactivated the program if the U.S. cheese or Nonfat Dry Milk (NFDM) price rose above the world market by 20% or more for two consecutive months. More recent proposals use a sliding scale, deactivating the program if the margin is between $5 and $6 and U.S. prices are above the world market by any amount for two consecutive months, or if the margin is between $4 and $5 and U.S. prices are above the world market by more than 5%, or if the margin is below $4 and U.S. prices are more than 7% above the world market. 4 Studies Done on DMSP Between September 2010 and April 2012, five studies have been released using economic models to analyze the impact of DMSP and other proposed changes to dairy policy. As the proposed policy language has changed, some of the assumptions in the models have changed, and the studies have covered different forecast horizons, so the results are not directly comparable across all studies. The studies were not designed to look at DMSP in isolation from other changes in dairy policy, so the results include the 7

9 impact from other policy changes as well as DMSP. There have been two groups with separate models of the dairy industry releasing the studies, FAPRI/Brown and Nicholson/Stephenson. The models have to capture both the dynamics within the U.S. dairy industry, like how farmers will react to changes in milk prices and feed costs, and how domestic consumers and end users will adjust purchases due to changes in income and prices, and consequently how those changes in supply and demand will affect prices in following months and years. With export markets absorbing an increasing portion of U.S. milk production, global supply and demand increasingly driving U.S. prices, and U.S. exports also affecting global prices the models also have to estimate how U.S. exports will be impacted by changes in domestic and global prices, as well as how global prices will change in relation to changes in U.S. exports. A full explanation of how these models work is beyond the scope of this study, but the relevant structure and assumptions around exports and global prices are covered below. FAPRI/Brown The dairy model used in the FAPRI/Brown studies finds market clearing dairy prices at an annual level, given various inputs like feed costs, other dairy input costs, and real U.S. income growth as well as government policy assumptions. To create a baseline forecast, 500 possible paths for the input variables are generated and fed into the dairy model to generate 500 outcomes, which are averaged together. To analyze the impact of DMSP, the assumptions about government policy are changed, and the same 500 possible paths for the input variables are fed into the model again, the outcomes are averaged and then compared to the baseline. Domestic and international prices are determined within the model with U.S. exports primarily being a function of the spread between U.S. and international prices and trend. Since DMSP and other dairy programs operate on a monthly basis, monthly milk and feed prices are generated as a percentage of the annual price. The percentage used in each month is drawn from the historical distribution of prices in that month compared to the annual average. Stephenson/Nicholson The model used by Stephenson/Nicholson does not assume the market reaches a stable equilibrium, instead the market is assumed to always be moving toward a state of equilibrium. Both domestic and international prices are determined within the model. U.S. exports are a function of a number of factors, including the price spread, exchange rates, and the global supply and demand balance. The long-run growth in global demand is not determined within the model, instead Stephenson/Nicholson adopt the same growth rate used by FAPRI. Since the market is always adjusting toward equilibrium, the price forecasts generated by the model cycle up and down similar to observed price cycles. The cycling price allows the model to examine high and low margin environments without introducing random exogenous variables. To examine the impact of a change in government policy, a baseline forecast is generated that assumes the current policies remain in place. Those policies are then removed and replaced by the proposed changes and the model is run a second time, and the results are compared to see what the impact of the change in policy is. 8

10 Results of Studies Exhibit 3: Recent Econometric Analysis of Proposed Dairy Policies Recent Econometric Analysis of Proposed Dairy Policies FAPRI FAPRI Brown Stephenson/Nicholson Study Date Jun-10 Mar-11 Apr-12 Sep-10 Oct-11 Policy Analyzed FFTF FFTF MDSA2011 FFTF FFTF w/shocks DSA REFRESH Time Period Impact on: Milk Production Increased Decreased Decreased Decreased Decreased Increased Increased U.S. Dairy Prices Decreased Increased Increased Increased Increased Decreased Decreased Exports Increased Decreased Decreased Mixed Decreased Increased Increased International Price Suspension Level 20% 20% 0-7% 20% 20% 20% 0-10% All of the studies except FAPRI Mar-11 examined the potential impact of the program over an approximate 10-year time horizon. The studies examined various policy proposals, with the projections covering different time horizons, so the results are not necessarily directly comparable, but every study that found an increase in milk production (relative to the baseline) also found an increase in exports over the long-run. Studies that found a decrease in U.S. milk production mostly found a decrease in exports. The increases or decreases in prices are against a baseline scenario where current policy is extended into the future, so a finding that the program decreases milk production does not necessarily mean production at the end of the period is lower than at the start of the period, it only means production would be lower at the end of the period compared to a scenario where no change in government policy is made. The only study that examines a period when the program is active in detail is FAPRI Mar-11. As U.S. prices jumped higher when DMSP was activated, exports fell. Given that all of the models use the spread between the domestic and world market as a determinant of U.S. exports, and the studies find that U.S. dairy prices rise when the program activates, then the short-term impact of DMSP would be a reduction in exports. The long-term impact generated by the models depends on whether milk production increases or decreases relative to the baseline. The models assume global demand growth will continue and that U.S. exporters can take advantage of that if the milk is available in the U.S. So an increase in milk production translates into higher exports, although slightly lower prices in the U.S. to accomplish those exports. Export Price Elasticity In economics, elasticity refers to how sensitive one variable is to another. One of the relationships that needs to be modeled to examine the impact of DMSP is how 9

11 sensitive U.S. exports are to the price spread between the U.S. and other exporters (usually Oceania). The estimated elasticity can vary considerably depending on which time periods are used and what assumptions are built into the model. Modeling U.S. Dairy Exports Models, by definition, are simplifications of more complicated systems. It simply is not possible to include all of the potential influences on exports in a single equation. Instead modelers try to identify variables that explain most of the change in another variable over time. The number and type of variables that are included in the model depends on economic theory, assumptions about the structure of the market, availability of data, and statistical significance. One variable that is often included in models is trend. A graph of U.S. exports shows a relatively steady up-trend from 1998 through 2011, with exports increasing about 11.5% per year over that timeframe. Exhibit 4: U.S. Milk Solids Exports (Log Scale) Trend can be used as a proxy for other variables that are hard to measure but are changing over time. For instance, various free trade agreements result in tariffs falling over time, lowering the final landed price of products, which increases the quantity demanded over time at any given market price. Also, the investments made in business 10

12 relationships and product development are also partly captured by trend over time. However, we know a lot of other factors (like the price spread) also impact exports. Because the trend in U.S. dairy exports is so strong, the trend may steal some of the explanatory power of the other variables. We modeled U.S. exports of dairy solids on an annual basis from 1998 through 2009 as a function of trend and the price spread between the U.S. manufacturing milk price and the Oceania milk price with all variables in log form. We also estimated a model without trend. Exhibit 5: Estimated Export Elasticity ('98-'09) Estimated Export Elasticity ('98-'09) Price Spread Trend Adj. R2 w/ Trend w/o Trend N/A The model with trend estimates the elasticity at only -0.58, which means a 1% increase in the price spread only decreases exports by 0.58%. The trend coefficient suggest that exports will increase by 5.8% per year due to other influences, assuming the price spread is steady. If trend is left out of the model, then the spread has to do most of the work in explaining the change in exports and the result is a much larger elasticity of -1.25, which implies a 1% increase in the price spread would decrease exports by 1.25% compared to a 0.58% decrease implied by a model with trend included. All variables were statistically significant in both models. So which is the correct way to model exports, and what is the true elasticity? It depends on the assumptions of the modeler. 11

13 Exhibit 6: U.S. Milk Solids Exports vs. Price Spread to Oceania We believe there have been three significant stages in the evolution of U.S. dairy exports since 1998 which is changing the elasticity of U.S. dairy exports over time. If this is correct, then modeling exports with a trend and price spread over a long period of time would result in an elasticity estimate that is biased. However, if exports were only a function of the spread, the spread would have to grow larger over time to keep U.S. exports growing, and recent experience in stage 3 has shown the spread is narrowing over time and exports have been steady or growing. So it is obvious that a model based only on the spread over a long period of time isn t correct either. Estimating separate export equations for different periods of time using just the price spread results in models that fit the data better over the shorter time periods, but predicting when the relationships will shift to the next stage is nearly impossible. While we do not have a conclusion about what the right way to model U.S. exports is, the discussion does show how difficult modeling exports is and how adding or removing a single variable can have a large impact on the estimated elasticity and consequently have a large impact on the final quantities and prices generated by the models under various scenarios. 12

14 III. Other DMSP and Trade Related Issues Choosing which prices and products to suspend DMSP Once activated, DMSP would deactivate if margins rise back above certain levels, or if U.S. cheese or nonfat dry milk (NFDM) prices rise above prices on the world market by certain percentages for two consecutive months. The original Foundation for the Future (FFTF) language was vague in regards to the actual percentage, and which U.S. and international price series should be compared. Recent House (HR 3111) and Senate (S 1658) bills have specified the Cheddar and NFDM prices reported by the National Agricultural Statistics Service (NASS) should be used for the U.S. prices while the world price of cheddar cheese or skim milk powder in Oceania, as determined by the Secretary, 6 should be used for the international prices. The choice of price series is not trivial and can change how long DMSP would stay activated. For instance, most of the cheese sold in the United States is priced off of the Chicago Mercantile Exchange (CME) spot market. The cheese price reported by NASS lags the CME price by a few weeks, which can result in monthly differences of up to 25 cents, with differences of 15 cents common. Overtime, the two price series average very close to each other, but the lead-lag price relationship means the DMSP could remain activated for an extra month even though CME prices (which most sales are tied to) have exceeded the world market for more than two months. Exhibit 7: Monthly U.S. Cheese Prices, CME and NASS 13

15 Another problem with using domestic versus world prices to deactivate DMSP is the choice of which dairy products to use. All of the proposals that we are aware of have used cheese and NFDM, but together they accounted for only 37.3% of dairy exports by volume in Under current proposals, DMSP could drive up the domestic price of dairy products like whey proteins and lactose higher than the world market, likely reducing exports, and the program would not deactivate unless cheese or NFDM prices also jumped higher, or margins improved enough to deactivate the program. Exhibit 8: U.S. Exports by Product, Percent of Total Dairy Exports (2011) Impact of government purchases with withheld revenue When DMSP is active, if a dairy farmer delivers more than his base production multiplied by the reduction rate for that month, the processor still has to pay for the milk, but the money is sent to the Secretary of Agriculture. The Secretary would be obliged to use the funds by purchasing dairy products for donation to food banks and other programs that the Secretary determines appropriate 9 within three months of collecting the money. It has been assumed in other studies that this money would primarily be used to purchase cheese which would be donated. In the FAPRI Mar-11 report, the authors developed a monthly structural dairy model to examine what would have happened if DMSP had been in place during The analysis only included the impact of DMSP and did not include margin insurance or other proposed changes to dairy policy, and participation in DMSP was assumed to be 14

16 mandatory for all dairy farmers. It was assumed that the money withheld from farmers under DMSP would be used to purchase cheese in the following three months and be donated to food banks, with the assumption that 10% of the volume donated would displace commercial sales of cheese. Exhibit 9: FAPRI Estimate of DMSP on Cheese Price in 2009 They found that the DMSP program would have been active for six months during 2009, from March through May, and then September through November. However, the analysis did not use the difference between domestic and international prices as a condition for suspending DMSP, it relied only on an improvement in margin to suspend the program. DMSP might have deactivated a month earlier each time if the international price spread was factored in. But, under the conditions analyzed, the price of cheese remained well above the world market even after the program deactivated the first time, likely due to cheese purchases by the CCC. The comparison being made between the actual Oceania price against what the FAPRI monthly model suggests would have happened to the U.S. cheese price if DMSP had been in place. It is possible that a reduction in U.S. exports of cheese could have tightened supply on the world market and pulled the Oceania price higher, potentially reducing the number of months that the U.S. price would have been higher than the world market. But U.S. cheese exports in 2009 accounted for less than 8.7% of global trade, so it is unlikely that the DMSP would have pulled the Oceania price significantly higher at the time. 15

17 Conclusion The export market is a large and growing part of the overall demand for U.S. dairy products, absorbing nearly 70% of the increase in milk production since The relationship between the domestic and global markets has been evolving, and will likely continue to change in the future. Through long-term investments in business relationships and product development the price spread between U.S. and other major exporters has narrowed and export volume has steadied. The increase in U.S. price volatility since 2006 has primarily been driven by the world market. U.S. prices have to remain competitive with the other major exporting countries, or U.S. export volume will likely suffer. The studies using structural models of the U.S. dairy industry find DMSP reduces short-term exports when it is activated. Through purchases of cheese using money withheld from dairy farmers under the program domestic prices could remain above the world market for longer than the program is active. The studies found mixed results for the long-term impact of the proposed policy changes on exports. Under scenarios where the package of proposals increases milk production relative to the baseline, exports were also higher over an approximate 10 year horizon. Modeling the domestic and global dairy markets is difficult, and small changes in assumptions or model specification can dramatically change the results from the models. U.S. exports have increased 178% in the past ten years, taking the U.S. industry from a mostly inward looking closed system to a market largely driven by exports, global market conditions, and international prices. That type of rapid change may be difficult to pick up in the models, along with changes in business relationships, product specifications, and perceptions of the U.S. by importers. 16

18 References 1. Hollister, Angelique. "Sailing Well Against the Prevailing Winds." Cheese Market News 13 Mar 2009, n. pag. Web. 3 Jun < Toolkit reprint.pdf>. 2. USDEC. "U.S. Dairy Export Council - Foreign Offices.". U.S. Dairy Export Council, n.d. Web. 3 Jun < =81690>. 3. USDEC. USDEC recognized for work to facilitate sales of gouda to Mexico. 3 Jan Web. 3 Jun < USDECRecognizedforWorktoFacilitateSalesofGoudatoMexico pdf>. 4. Brown, Scott. The Effects of a Modified Dairy Security Act of 2011 on Dairy Markets. n.p., April Web. 4 Jun < 5. USDEC,. "Market Conditions." USDEC Export Profile. 01 Nov 2011: 3. Web. 4 Jun < 6. United States. Cong. Senate. Rural Economic Farm and Ranch Sustainability and Hunger Act of th Cong. 1 st sess. S Washington: GPO, Web. 7. Brown, Scott. Statement to the House, Subcommittee on Livestock, Dairy, and Poultry. Formulation of the 2012 Farm Bill: Dairy Programs, Hearing, April 26, Available at: 8. Stephenson, Mark, and Charles Nicholson. Market Impacts of the Dairy Secuirty Act of 2011 (H.R.3062) and the Dairy Provisions of the Rural Economic Farm and Ranch Sustainability and Hunger Act of 2011 (S.1658). Dairy Markets and Policy Consortium, Oct Web. 11 Jun < Market.pdf>. 9. United States. Cong. Senate. Agriculture Reform, Food, and Jobs Act of th Cong. 2 nd sess. S Washington: GPO, Web. 17