Space-Product Equilibrium in the Dairy Industry of the Northeastern and North Central Regions

Abstract

The broad impact of the removal of all institutional barriers to the production and movement of fluid milk on the dairy industry of the Northeastern and North Central regions is examined. Competitive equilibrium patterns of milk production, utilization, prices, and shipments are obtained by estimating supply and demand functions for various areas of the nation and relating prices in the areas by transfer costs for fluid and manufactured milk. The effects of alternative estimates of some key variables are studied. All equilibrium solutions show a decline in Class I prices in the Northeast, a general increase in manufacturing milk prices, and some shift of production from the Northeast to the Lake States. These results are modified only a little by introducing a hypothetical fresh milk concentrate. Some implications for price policy are discussed.M ILK MARKETING is characterized by a large degree of geographic variation in production, consumption, disposition, and prices. Observation suggests that relationships among prices and production in different areas and of different products often are far from competitive equilibrium. For example, a large and increasing percentage of the fluid-eligible milk sold in several markets is actually used in manufactured milk products. In addition, some price differentials within and between regions appear to exceed transfer costs by appreciable amounts.Several institutional factors associated with fluid milk marketing are often cited as causing these distortions by acting as barriers to the movement of milk among geographic areas. These institutional factors include sanitary and trucking regulations and various pricing penalties. Strong producer cooperatives then succeed in using the classified pricing system and market orders to exploit the relatively inelastic demand for fluid milk, raising the returns to local producers, With blend pricing and no production control, producers then provide more milk of fluid quality than required for fluid needs.Such institutional arrangements are under considerable pressure because of surplus milk production and technological changes in dairy ,0 Journal Series No. 2905 of The Pennsylvania Agr. Expt. Sta. The article necessarily omits a great deal of detail about supply and demand functions, transfer costs and area solutions. Such details are given in D. A.