Impact of Federal Marketing Orders on the Structure of Milk Markets in the United States

Transcription

1 September 997 RB 97-3 Impact of Federal Marketig Orders o the Structure of Milk Markets i the Uited States Tsuemasa Kawaguchi Nobuhiro Suzuki Harry M. Kaiser Departmet of Agricultural, Resource, ad Maagerial Ecoomics College of Agriculture ad Life Scieces Corell Uiversity Ithaca, New York

2 Impact of Federal Marketig Orders o the Structure of Milk Markets i the Uited States Tsuemasa Kawaguchi, Nobuhiro Suzuki, ad Harry M. Kaiser The 996 Farm Bill madated a reductio i the umber of federal milk marketig orders (FMMOs) i the Uited States (from 33 to betwee 0 ad 4) through the merger ad cosolidatio of existig orders. This chage is supposed to be made by 999. The drastic reductio i FMMOs will udoubtedly have maor cosequeces for milk markets i the Uited States. Because the law calls for arguably the largest chage i marketig orders sice their iceptio i the 930s, the U.S. Departmet of Agriculture ad various uiversity researchers are curretly studyig the potetial ecoomic impacts of FMMO mergers ad cosolidatios. Oe of the key issues researchers are addressig is the appropriate structure for iterregioal milk pricig for the ewly formed orders. I aswerig this questio, it is useful to kow the impact of curret FMMOs o the structure of milk markets i the Uited States. FMMOs regulate the terms ad coditios of Grade A milk (eligible for beverage cosumptio) sales i the Uited States. The mai ecoomic feature of FMMOs is classified pricig of milk, which price discrimiates milk accordig to how the milk is used. Milk used i beverage products, or Class I products (the most price ielastic of all dairy products), receives a price premium (Class I differetial), while milk goig ito more price elastic maufactured products (Classes II, III, ad IIIa) receives lower prices (see discussio below). FMMOs may provide market power to farmers or their cooperatives to couterbalace the market power of Tsuemasa Kawaguchi is a professor i the Semiar of Ecoometric Aalysis i Agriculture, Faculty of Agriculture, Kyushu Uiversity, Japa. Nobuhiro Suzuki is director of Research Coordiatio Divisio at the Natioal Research Istitute of Agricultural Ecoomics, Japaese Miistry of Agriculture, Forestry ad Fisheries. Harry M. Kaiser is a associate professor i the Departmet of Agricultural, Resource, ad Maagerial Ecoomics, Corell Uiversity, ad director of the Corell Commodity Promotio Research Program.

3 - 2 - fluid milk processors. The degree of market power created ca be measured by the size of the Class I differetial created by orders. All previous studies o FMMOs ad the structure of iterregioal milk pricig i the Uited States have used Takayama ad Judge-type spatial equilibrium models (e.g., Cox, Chavas, ad Jesse; McDowell, Flemig, ad Spielli; Novakovic ad Pratt). These models are used to determie optimal levels of milk shipmets amog regios i the Uited States, as well as shadow prices o the value of milk for each regio, which is useful iformatio for evaluatig regioal Class I price surfaces. A potetial drawback of these models, however, is the assumptio that markets are perfectly competitive. I reality, the structure of U.S. milk markets may be better characterized as imperfectly competitive due to the existece of large ad domiat dairy cooperatives, milk processors, ad retail supermarket chais, as well as the ifluece of FMMOs. Therefore, a more geeralized spatial equilibrium model that ca impose ay degree of market structure would be beeficial. I this paper, we develop a spatial equilibrium model that allows for the iclusio of ay degree of market structure from perfect competitio to moopoly. To our kowledge, the oly other spatial equilibrium model allowig for ay degree of market structure is a recet oe developed by Kawaguchi, Suzuki, ad Kaiser to study the Japaese milk market structure. No similar spatial study has bee coducted for U.S. milk markets. Sice FMMOs may give some market-power-equivalet to dairy cooperatives by settig miimum Class I price differetials, the model is used to ivestigate the impact of milk marketig orders o market structure. To determie what degree of market-power-equivalet is created by the curret orders, we simulate possible Class I ad maufacturig milk prices which could be created by dairy cooperatives

4 - 3 - without the FMMO system, uder alterative assumed market structures. The simulatio results are the compared with curret regioal milk prices uder the FMMO system to gai isight o the impact of orders o market structure. FMMO Pricig ad Simplifyig Assumptios FMMOs geerally classify milk ito four uses: Class I (milk used i beverage products), Class II (milk used i soft maufactured products), Class III (milk used i hard dairy products), ad Class IIIa (milk used i ofat dry milk). The Class III price is the base for milk pricig uder the FMMO system. For almost all marketig orders, the Class III price is equal to the Basic Formula Price calculated from the Miesota-Wiscosi (MW) price, which is the actual price paid for maufacturig grade (Grade B) milk i these two states. While FMMOs apply oly to Grade A milk, Grade B milk prices are used as the pricig base sice the maufactured product market is atioal i scope, ad therefore Grade A milk processed ito maufactured products competes with Grade B milk i Wiscosi ad Miesota. Some marketig orders have a Class IIIa price for ofat dry milk, which is usually lower tha the Class III price. The Class II milk price for soft dairy products is about 30 cets higher tha the Class III price. While these class prices are the miimum prices regulated hadlers must pay farmers, the actual maufacturig milk prices are ofte higher i some orders because of over-order paymets. I the model, all maufacturig milk is aggregated ito oe product ad the average maufacturig price is used. Over-order paymets for maufacturig milk are ot icluded i the model sice this data is ot available. Dairy farmers, or their cooperatives, are assumed to be price takers i the maufacturig milk market because they face atiowide competitio from other cooperatives ad proprietary milk hadlers based o the MW price.

5 - 4 - The Class I price is determied by addig the Class I differetial to the Class III price for each marketig order. The Class I differetial icreases with distace from Miesota ad Wiscosi. The Class I differetial partially reflects the cost of shippig milk from the largest surplus or reserve area i the Uited States to other orders. The Class I price is also a miimum price, ad there are over-order paymets i may markets through egotiatios betwee dairy cooperatives ad proprietary milk hadlers. Over-order Class I premiums are ot icorporated i the model sice they are uavailable. There were 40 FMMOs ad about 300 dairy cooperatives i the Uited States i 993, which is the year chose for this aalysis. The model uses the same regioal classificatio used by Cox, Chavas, ad Jesse, who modeled the U.S. dairy market as 3 regios. All prices are calculated as weighted averages based o the amout of milk i each regio. The Califoria state order is icluded as a separate order i this aalysis. It is assumed that cooperatives are the agets makig milk marketig decisios i the model. Although there is more tha oe cooperative i oe regio, it is difficult to icorporate data o milk prices ad quatities disaggregated to the cooperative level. Therefore, oly the umber of cooperatives i each regio is cosidered i the model, meaig the size ad all the equilibrium decisios of each cooperative are assumed to be the same withi the regio. Because the dairy price support program (DPSP) is supposed to exist util 999, the program is icorporated i this aalysis. I 993, the DPSP supported the maufacturig milk price at $0.00 per hudredweight (3.5 percet butterfat). The DPSP is icorporated ito the model by requirig the govermet to purchase maufactured dairy products to support the maufacturig grade milk price at $0.00 per hudredweight.

6 - 5 - Coceptual Model Although Class I differetials (ot icludig over-order paymets) are madated by the FMMO system, they are ot guarateed i this model. I order to estimate the degree of market-powerequivalet due to curret FMMOs, the model simulates Class I ad maufacturig milk prices which could be created by dairy cooperatives themselves without the FMMOs, uder alterative assumed market structures. Cosider (=3) regios with fluid ad maufacturig milk markets. The fluid market i regio i is called market i, ad the maufacturig market i regio i is called market +i. Because maufactured milk is processed withi each regio ad is ot shipped outside the regio as bulk milk, we oly cosider the trasportatio costs for iterregioal raw milk shipmets for fluid processig. Sice the maufactured products market is atiowide, dairy cooperatives are assumed to be price takers with respect to maufacturig milk marketig. It is assumed that the maufacturig milk price for each regio is give as a uiform atioal price reflectig atiowide demad ad supply coditios of the maufacturig milk market. I order to determie equilibrium maufacturig milk price, a dowward-slopig atioal demad fuctio for maufacturig milk is icorporated ito the model. The focus of this paper is o dairy cooperative market-power-equivalet due to the existece of FMMOs. To simplify the model, it is assumed that fluid milk processors have o market power i buyig milk from cooperatives. This assumptio is reasoable sice there are may fluid processors i the U.S. It is also assumed that each regio has a liear margial raw milk cost fuctio ad a liear fluid demad fuctio, with all fuctios kow by all

7 - 6 - cooperatives (or cosigmet sellers), ad that the size ad all the equilibrium decisios of each cooperative are the same withi each regio. It is assumed that milk producers i regio i cosig their aual milk supply to cooperatives i regio i. Each cooperative s role is to allocate farmers raw milk amog the fluid markets ( to ) ad the maufacturig market (+i) i regio i to maximize sales reveues et of trasportatio costs. Farmers are paid a bled price (weighted average price for milk sold i the fluid ad maufacturig milk markets) ad are assumed to be price takers who produce milk based o the level of the bled price. The followig otatio is used for the variables described above: N i : the umber of cooperatives i regio i (i=, 2,..., ), D : quatity of milk demaded i fluid market (=, 2,..., ), D m : quatity of milk demaded i the atioal maufacturig milk market, FS i : quatity of raw milk supplied ad cosiged i regio i (i=, 2,..., ), PS i : margial reveue et of trasportatio costs for each market for regio i (i=, 2,..., ), X i : quatity of raw milk shipped from regio i to fluid market (i=, 2,..., ; =, 2,..., ), X i(+i) : quatity of raw milk shipped from regio i to the maufacturig milk market +i (i=, 2,..., ), X i (k): the portio of X i shipped by cooperative k i regio i, where Xi = Xi ( k), X i(+i) (k): the portio of X i(+i) shipped by cooperative k i regio i, where N i k =

8 - 7 - N i X X ( i( i) i( i) k ) + = +, k = PD : demad price i fluid market (=, 2,..., ), PD m : demad price i the atioal maufacturig market, BP i : producer s pooled (bled) price i regio i (i=, 2,..., ), P ccc : support price for maufacturig milk, D =α-βpd : demad fuctio i fluid market (=, 2,..., ), D m =α m -β m PD m : demad fuctio i the atioal maufacturig market, FS i = -νi+ηibp i : margial cost fuctio for raw milk i regio i (i=, 2,..., ), T i : uit trasportatio cost of shippig raw milk from regio i to fluid market (i=, 2,..., ; =, 2,..., ), R i : total milk sales reveue et of trasportatio costs i regio i (i=, 2,..., ). Usig the above otatio, the total milk sales reveue maximizatio problem, et of trasportatio costs, aggregated for all regios ca be expressed as: () Max. Ri = i= + m PD X PD X T X i i( + i) = i= i= = i= Whe cooperative k i regio i believes that a chage i their fluid supply will cause a chage i all other cooperatives fluid supply to market, the cooperative s perceived margial fluid reveue i market is: i i (2) ( PD X ( k)) X i i ( k) = PD ( ri ( k) + ) X i ( k), (k=, 2,, N β i ), where r i (k) is the coectural variatio of cooperative k i regio i with respect to chages i all other cooperatives fluid supply to market.

9 - 8 - As the size ad all the equilibrium decisios of each cooperative are assumed to be the same withi each regio, equatio (2), i equilibrium, ca be rewritte as: (3) ( PD X ( k)) X i i ( k) X i = PD ( ri + ), (k=, 2,, N β N i ), i where r i is the commo coectural variatio of the regio i cooperative. Usig the relatioship expressed i (3), the total reveue maximizatio problem for all regios ca be re-specified as the followig et social payoff maximizatio problem (ANSP) adusted for imperfectly competitive markets: (4) Max: ANSP = = α m D dd + PD Xi + i ri + ( ) ( ) X dx β β i = i= β N i X i i= (5) s.t. D <, for all, (6) Xi + Xi( + i)< FS i, for all i, = (7) D > 0, X i > 0, X i(+i) > 0 for all i ad. i i i i = = i= Whe the market is perfectly competitive (r i = -), the term ( r + i ) XidXi is N = i = β zero ad (4) is equal to the origial Takayama ad Judge model. Usig the Lagrage fuctio (L) with the multipliers λ ad θi for the costraits (5) ad (6), respectively, the Kuh-Tucker optimality coditios for the maximizatio problem ca be expressed as: i T X

10 (8) (9) L D L X i α = D λ D L 0, = 0, for all, β β D X i L = ( ri + ) Ti + λ θi 0, Xi = 0, for all i ad, β N X i i (0) L X i( + i) m L = PD θi 0, X i( + i) = 0, for all i, X i( + i) L () = λ L D Xi 0, = 0, for all, λ λ = L (2) = + + θ L Xi Xi( i) FSi 0, i = 0, for all i. θ θ i = i The Lagrage multipliers, λ ad θi, measure the fluid demad price (PD ), ad perceived margial reveue et of trasportatio costs for each market (PS i ), respectively. The Kuh-Tucker coditios represeted by (9) ad (0) idicate that each cooperative must equalize margial reveue, et of trasportatio costs, across all fluid markets where it sells milk to the maufacturig milk price (if it sells milk to the maufacturig milk market). That is: X i m (3) PD ri + Ti = PD β ( ), if X N i > 0, ad X i(+i) >0, for all i ad. i The equilibrium values ca be calculated by the quadratic programmig model solutio. To complete the model, farmers milk supply fuctios eed to be icorporated. Producers i regio i, as price takers, determie their supply based o the producer bled price. Specifically, milk productio levels are determied by equatig margial cost ad the bled price, i.e., (4) BP i = Ri FS i for all i,

11 - 0 - (5) FS i = -νi + ηibp i for all i. I the comparative-static equilibrium, FS i i (5) must be equal to FS i give i the above milk sales maximizatio problem. Equilibrium values for FS i ca be foud by cotiuig a iterative solutio process util values for FS i become statioary, as was doe by Kawaguchi, Suzuki, ad Kaiser i their Japaese milk market model. To reach equilibrium, the atioal maufacturig milk demad fuctio eeds to be icorporated. I equilibrium, the maufacturig milk price (PD m ) for each cooperative i the above sales maximizatio problem must satisfy the coditio that the sum of milk shipped to maufacturig milk market +i, or X i ( + i ) i=, must be equal to maufacturig milk demad, D m. If the equilibrium value of PD m is larger tha the support price level (P ccc ), the the followig equatios must be satisfied: X i ( + i ) i= (6) =D m, (7) D m =α m -β m PD m, if market-clearig PD m >P ccc. Equilibrium values for X i ( + i ) i= ad PD m are foud by cotiuig a similar iteratio procedure util X i ( + i ) i= becomes approximately equal to D m. O the other had, if the equilibrium value for PD m is below P ccc, the PD m is replaced by P ccc, ad the CCC purchases i raw milk equivalets will be give as i= X i( + i) - D m. A Applicatio of the Model to the U. S. Milk Market

12 - - The data set used i this aalysis comes from several sources, icludig Cox, Chavas, ad Jesse; Suzuki ad Kaiser; ad USDA s Dairy Market Statistics ad Federal Milk Order Market Statistics. Based o Cox, Chavas, ad Jesse, the 3 regios iclude: North East (NE), Middle Atlatic (MA), South Atlatic (SA), South East (SE), Cetral (C), East South Cetral (ESC), West South Cetral (WSC), East North Cetral (ENC), Upper Midwest (UM), West Cetral (WC), North West (NW), Moutai (MOU), ad Califoria (CA). Table shows how FMMOs i 993 were icluded i the 3 regios. The umber of cooperatives i regio i (N i ) is estimated usig data from Hoard s Dairyma, May 0, 994. For 993, N =8 i NE, N 2 =9 i MA, N 3 =8 i SA, N 4 =2 i SE, N 5 =5 i C, N 6 =3 i ESC, N 7 =0 i WSC, N 8 =57 i ENC, N 9 =63 i UM, N 0 =6 i WC, N =7 i NW, N 2 =3 i MOU, ad N 3 =6 i CA. Table 2 shows the data set used i this aalysis. Prices (3.5 percet butterfat) are weighted averages calculated usig the FMMO data (except for Califoria), ad milk quatity data icludes ot oly order milk, but also other source milk. Based o supply elasticities for the 3 regios from Cox, Chavas, ad Jesse, the regioal price ad quatity observatios i Table 2, ad the applicatio of a atioal fluid demad price elasticity estimated by Suzuki ad Kaiser (- 0.58) to all regios, the liear margial cost ad fluid milk demad fuctios for each regio are: (8) FS = BP, D = PD, (9) FS 2 = BP 2, D 2 = PD 2, (20) FS 3 = BP 3, D 3 = PD 3, (2) FS 4 = BP 4, D 4 = PD 4, (22) FS 5 = BP 5, D 5 = PD 5,

13 - 2 - (23) FS 6 = BP 6, D 6 = PD 6, (24) FS 7 = BP 7, D 7 = PD 7, (25) FS 8 = BP 8, D 8 = PD 8, (26) FS 9 = BP 9, D 9 = PD 9, (27) FS 0 = BP 0, D 0 = PD 0, (28) FS = BP, D = PD, (29) FS 2 = BP 2, D 2 = PD 2, (30) FS 3 = BP 3, D 3 = PD 3, where FS i ad D are measured i millio pouds, ad BP i ad PD are measured i dollars per hudredweight. Usig the U.S. total ad average data i Table 2, Class I percetage (43.percet) reported i Federal Milk Order Market Statistics, ad a atioal maufacturig milk demad elasticity estimated by Suzuki ad Kaiser (-0.27), the atioal maufacturig milk demad fuctio is specified as: (3) D m = PD m. The estimated atioal average maufacturig milk price was $.9/cwt (3.5 percet butterfat) i 993. Uit trasportatio costs for raw milk, T i, are take from Cox, Chavas, ad Jesse ad are show i Table 3. Note that the trasportatio cost matrix is asymmetric, or T i is ot ecessarily the same as T i.

14 - 3 - Results The model was solved for three forms of market structure: perfect competitio, moopoly, ad Courot-Nash equilibrium, where a cooperative believes other cooperatives will ot chage their supply i respose to its actios. These results were compared to actual observatios for 993. Sice the simulated results do ot iclude FMMOs, the simulated market structure closest to the actual observatios provides a measure of the impact of FMMOs o market structure. Perfect Competitio Equilibrium Perfect competitio meas all cooperatives do ot cosider price chages caused by supply chages, or each cooperative i regio i recogizes its margial reveue i fluid market as: (32) ( PD X ( k)) X i i ( k) = PD. Tables 4 to 6 summarize the results. Compared with actual observatios, the perfect competitio solutio resulted i lower Class I milk prices, higher maufacturig milk prices, ad more milk goig ito fluid markets. The maufacturig milk price, uder perfect competitio, was $2.6 per hudredweight, while the actual maufacturig milk price was $.9 i 993. Except i two Class I-deficit regios, the Class I differetial disappeared. Compared with actual observatios, bled prices were slightly lower i most regios due to the absece of Class I differetials (the simulated U.S. average was $2.70, while the actual average was $2.89). However, the differece i regioal bled prices betwee the perfect competitio solutio ad actual observatios was relatively small because the higher simulated maufacturig prices

15 - 4 - offset the lower simulated Class I prices. Because bled prices are, o average, lower uder perfect competitio, simulated U.S. milk productio was slightly lower tha the actual observatio level. To satisfy Class I deficit markets, there were some iterregioal Class I milk shipmets uder perfect competitio. I this case, iterregioal milk movemets occurred oly from C to SE ad ESC. The SE ad ESC regios did ot have eough milk productio to meet their fluid demad, ad the earest reserve area to these regios was C. Moopoly Equilibrium Uder moopoly, it is assumed that cooperatives oitly recogize their margial reveue i fluid market as: (33) PD X s= i X ( k) s = PD β s= X s. Compared to the perfect competitio coditio (32), coditio (33) implies that icreasig milk shipmets to market reduces milk prices ad margial reveue to each cooperative i ay regio. The moopoly solutio, i geeral, resulted i urealistic price ad quatity levels compared with actual 993 observatios (see Tables 4 to 6). For istace, the simulated Class I milk supply uder moopoly was oly oe-half of the actual level. The huge reductio i Class I milk supply resulted i urealistically high Class I prices ($50 to $60 per hudredweight). While the Class I milk supply was reduced, there was a huge icrease i milk goig ito maufactured products. I fact, the moopoly solutio resulted i a surplus of 52 billio pouds of milk beig

16 - 5 - bought by the govermet uder the DPSP--substatially higher tha the 6.5 billio pouds the govermet actually purchased i 993. The huge surplus of maufacturig milk caused the maufacturig milk price to be at the $0 support level. The atioal average bled price was $7.42, which was substatially higher tha the actual $2.89 level i 993. Iterestigly, although moopolies usually result i the least productio, total milk supply i the moopoly equilibrium was sigificatly higher tha i the perfect competitio solutio (30 billio pouds, or 29 percet higher). This was due to the result that bled prices were substatially higher i the moopoly case ad cooperatives had o power to cotrol supply. The huge divergece betwee simulated ad actual prices ad quatities suggests curret miimum Class I differetials uder the FMMO system are far from the moopoly levels. Courot-Nash Equilibrium I the Courot-Nash case, cooperatives cosider price chages caused oly by their ow supply chages. That is, perceived margial reveue of each cooperative i regio i i fluid market is expressed as: (34) ( PD X ( k)) X i i ( k) X i = PD. β N i Compared to the other market structures, the Class I price, Class I differetial, ad maufacturig milk price, as well as total milk supply ad demad i the Courot-Nash solutio were the closest to actual 993 observatios (Tables 4 to 6). For example, the simulated average Class I differetial for the Uited States was $2.22 compared to $2.28, which was the differetial i 993. Compared with actual observatios, the Courot-Nash solutio resulted i slightly

17 - 6 - lower Class I milk prices, higher maufacturig milk prices, ad more milk goig ito fluid markets. The maufacturig milk price, uder the Courot-Nash solutio, was $2.07 per hudredweight, while the actual maufacturig milk price was $.9 i 993. Similar to the perfect competitio solutio, the simulated bled prices were slightly lower tha actual observatios i most regios (the simulated U.S. average was $2.6, while the actual average was $2.89). Because bled prices were, o average, lower uder Courot-Nash, simulated U.S. milk productio was slightly lower tha the actual observatio level. Compariso of Coectural Variatios amog Scearios I the moopoly case, values for r ii were calculated as: (35) r ii Ni Xsi s= = = Ni.( Xii = X X si i practice). ii s= For example, the coectural variatio of a cooperative i regio regardig market was 7. O the other had, all r ii s were - i perfect competitio, or price takig behavior, ad 0 i the Courot-Nash case. These values implied the degree of market-power-equivalet give to dairy cooperatives by curret federal orders was far from moopoly ad closer to perfect competitio. Coclusios A spatial equilibrium model that allows for the iclusio of ay degree of market structure from perfect competitio to moopoly was developed ad applied to the U.S. dairy sector. The model was used to ivestigate the impact of milk marketig orders o market structure by simulatig

18 - 7 - possible Class I ad maufacturig milk prices which could be created by dairy cooperatives without the FMMO system, uder alterative assumed market structures. The simulatio results were the compared with curret regioal milk prices uder the FMMO system to gai isight o the impact of orders o market structure. It was clear from the results that the curret FMMO system does ot create much moopoly power for dairy cooperatives. The simulated prices ad quatities for the moopoly solutio were substatially differet from actual observatios. O the other had, the simulatio prices ad quatities assumig Courot-Nash behavior were the most similar to actual observatios. While ot as close as the Courot-Nash solutio, the results of the perfect competitio solutio simulatio were also fairly similar to actual observatios. These results suggest FMMOs have had a moderate impact o market structure approximately equivalet to some degree of imperfect competitio relatively close to perfect competitio.

19 - 8 - Refereces T. Cox, J-P Chavas, ad E. Jesse. Regioal Impacts of Reducig Dairy Price Supports ad Removig Milk Marketig Orders i the U.S. Dairy Sector. Uiversity of Wiscosi - Madiso, Agricultural Ecoomics Staff Paper Series No. 377, May 994. Kawaguchi, T., N. Suzuki, ad H.M. Kaiser. A Spatial Equilibrium Model for Imperfectly Competitive Milk Markets, America Joural of Agricultural Ecoomics (forthcomig). McDowell, H., A. Flemig, ad F. Spielli. U.S. Milk Markets uder Alterative Federal Pricig Policies, Staff Report AGES 9068, U.S. Departmet of Agriculture, Ecoomic Research Service, 990. Novakovic, A. M. ad J. Pratt. Geographic Price Relatioship uder Federal Milk Marketig Orders, A.E. Research 9-8, Departmet of Agricultural Ecoomics, Corell Uiversity, 99. Suzuki, N. ad H.M. Kaiser. Imperfect Competitio Models ad Commodity Promotio Evaluatio: The Case of U.S. Geeric Milk Advertisig, Joural of Agricultural ad Applied Ecoomics (forthcomig). Takayama, T. ad G.G. Judge. Spatial Equilibrium ad Quadratic Programmig, Joural of Farm Ecoomics 46(964):67-93.

20 Table. The Federal Milk Marketig Orders Icluded i the 3 Regios i 993. Regio Marketig Orders Icluded NE New Eglad 2 MA New York-New Jersey, Middle Atlatic 3 SA Carolia 4 SE Georgia, Upper Florida, Tampa Bay, Southeaster Florida 5 C Teessee Valley, Nashville, Paducah, Memphis 6 ESC Cetral Arkasas, Greater Louisiaa, New Orleas-Mississippi, Alabama-West Florida 7 WSC Southwest Plais, Texas 8 ENC Michiga Upper Peisula, Souther Michiga, Easter Ohio-Wester Pesylvaia, Ohio Valley, Idiaa, Cetral Illiois, Souther Illiois-Easter Missouri, Louisville-Lexigto-Evasville 9 UM Chicago Regioal, Upper Midwest 0 WC Iowa, Nebraska-Wester Iowa, Kasas City, Easter South Dakota, Black Hills NW Pacific Northwest, Southwester Idaho-Easter Orego 2 MOU Easter Colorado, Wester Colorado, Great Basi, Cetral Arizoa, New Mexico-West Texas 3 CA (Califoria)

21 Table 2. Data Set for the Aalysis (993). Regio FMMO FMMO Class I Milk Milk Fluid Bled Class I Differetial Productio Supply Demad Price Price Elasticity $/cwt $/cwt $/cwt Millio Millio Pouds Pouds NE , ,902 2 MA , ,264 3 SA , ,084 4 SE , ,490 5 C ,052.44,882 6 ESC , ,897 7 WSC , ,757 8 ENC , ,57 9 UM , ,330 0 WC , ,626 NW , ,95 2 MOU , ,447 3 CA , ,540 Average/Total ,382 NA 54,292 Note: Prices, except for Califoria, are weighted averages calculated usig USDA/AMS s Dairy Market Statistics ad Federal Milk Order Market Statistics. Quatities, supply elasticities, ad prices for Califoria are from Cox, Chavas, ad Jesse.

22 Table 3. Iterregioal Uit Trasportatio Costs ($/cwt). To: NE MA SA SE C ESC WSC ENC UM WC NW MOU CA From NE MA SA SE C ESC WSC ENC UM WC NW MOU CA Source: Cox, Chavas, ad Jesse.

23 Table 4. Compariso of Bled Prices ad Maufacturig Prices i each Case with Observatios. Bled Price ($/cwt) Regio Actual Perfect Competitio Differece Moopoly Differece Courot- Nash Differece NE MA SA SE C ESC WSC ENC UM WC NW MOU CA Average Maufacturig Milk Price ($/cwt) Actual Perfect Competitio Differece Moopoly Differece Courot- Nash Differece Average

24 Table 5. Compariso of Class I Prices ad Class I Differetials i each Case with Observatios. Class I Price ($/cwt) Regio Actual Perfect Competitio Differece Moopoly Differece Courot- Nash Differece NE MA SA SE C ESC WSC ENC UM WC NW MOU CA Average Class I Differetial ($/cwt) Regio Actual Perfect Competitio Differece Moopoly Differece Courot- Nash Differece NE MA SA SE C ESC WSC ENC UM WC NW MOU CA Average

25 Table 6. Compariso of Milk Supply ad Class I Demad i each Case with Observatios. Milk Supply (Millio Pouds) Regio Actual Perfect Competitio Differece Moopoly Differece Courot- Nash Differece NE 4,454 4, , , MA 2,648 2, ,29-4,48 2, SA 3,786 3, , , SE 5,903 5, ,034 -,3 5, C 4,052 3, ,60 -,558 3, ESC 2,98 2, , , WSC 9,78 9,399 39,874-2,56 9, ENC 4,750 4, ,4-5,364 5, UM 35,276 35, ,636-2,360 35, WC 8,887 9, ,5-5,228 9, NW 9,793 0, ,878-2,085 9, MOU 5,304 5, , , CA 22,893 23, ,348-3,455 23, Total 49,382 48, ,46-29,764 48, Class I Demad (Millio Pouds) Regio Actual Perfect Competitio Differece Moopoly Differece Courot- Nash Differece NE 2,902 2,97-69,526,376 2, MA 8,264 8, ,34 3,923 8, SA 3,084 3,54-70,620,464 3, SE 6,490 6, ,423 3,067 6, C,882, , ESC 2,897 2,925-28,524,373 2, WSC 4,757 4, ,498 2,259 4, ENC 8,57 8, ,248 3,909 8, UM 2,330 2,339-9,207,23 2, WC 2,626 2,648-22,365,26 2, NW,95, , MOU 2,447 2,485-38,279,68 2, CA 6,540 6, ,379 3,6 6, Total 54,292 55, ,390 25,902 54,55 37