Food: Inside the Byzantine World of Milk Prices

• Shrey Chaurasia- 2012175• Rohan Harsh – 2012173• Mallika Grover – 2012151• Vinay Harinarayanan – 2012184• Vineet Shreshtha – 2012185• Raunak Arora - 2012169

Background for Eau Claire Rule• In the 1930s upper Midwest were seen as primary producers of the milk.• U.S.A had poor transportation infrastructure and lacked portable refrigeration facility.• The idea behind EAU CLAIRE rule was to encourage the development of local supply of

milk in those areas of the country which were insufficient in meeting the local needs.

Milk Belt

Low milk Producing States

What Midwest dairy farmers made the government do (the Eau Claire Rule) so they could take advantage of refrigerated trucks and how they hoped to benefit?

Quantity (Mil Gallon)

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Demand

SupplyIncreased Supply

•There is a Demand-Supply Mismatch in Markets like Idaho, Tallahassee. Eau Claire rule will reduce this by increasing the local supply.•Interstate commerce would increase and this will open up new markets for the Wisconsin farmers with the use of Refrigerated trucks.•Bonus prices will jack up market prices elsewhere making Wisconsin’s milk the cheaper option available.

•Rise in supply of milk due to bonus given to farmers far away from the mid west region.

Local farmers raise supply

Original Shortage

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Quantity (Mil Gallon)Q0

Q1

P1

P0

•The dairy farmers far away from mid west region entered the market and made farming economical in their region.Indirect Cost- a)Cost to administer the staff of 500 people of Agriculture Department.Direct Cost- a) Bonus being offered to dairy farmers whose cows are far away from

the Wisconsin City. b) The rules cost consumers some $1.7 billions/ year. •This has led to inefficient farmers entering and staying in the market in non-milk belt areas.

SupplyDemand

Impact of government policies. Direct & indirect costs due to inefficiencies

Why was Eau claire rule abolished?•Eau Claire Rule was introduced as an added incentive to the farmers of non-milk belt areas on USA. The whole premise behind this rule was the gap in milk production from places like Wisconsin & Idaho.

•The system worked too well- Wisconsin is no longer the largest milk producing state in the nation anymore.

•New technology, rise of Mega farms in places like Idaho and New Mexico today produce milk far cheaper than any farm. The class-I differential incentive that was required to keep Non-milk belt farmers in business is no longer required, infact it is today shortchanging the Midwest dairy farmers.

•According to Congressional record 1997, as a consequence of Eau Claire Rule, 200 dairy farmers in Wisconsin are going out of business every month!!!

•Providing artificial boost to milk prices in places like Idaho made sense in 1960s, not anymore.

S1960S1990

Technology reduced production cost shifting supply

Although demand for most mineral resources has increased dramatically over the past century, prices have fallen or risen only slightly in real (inflation-adjusted) terms because cost reductions have shifted the supply curve to the right just as dramatically.

As an example of technology making supply cheaper, let’s look at mineral resources over last 100 years.

Long run Path of Price & consumption

Quantity (mil Galllon)

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D

How compacts help inefficient farmers stay in business

•Abolition of Eau Claire rule will push inefficient Farmers out of business.•As a protectionist measure New England Compact was implemented.•Price floor of $1.46/Gallon was decided, which was 5 to 22% higher than Federal prices•This pushed lower priced milk from outside the area from entering the market & protected the inefficient local markets.•Buyer’s surplus is being mopped up by these local farmers by up to $1000 a month for each farmer.

Inefficient Farmers getting protected

Surplus

Pmin

Peq

Buyer’s Surplus

SD

Price floor of $1.46

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Quantity (mil Galllon)

Mopped up by inefficient farmers

The future prospects of the industry according to Kilman.

• No matter what the protectionist measures, market forces will prevail and inefficient operators will be pushed out of business.

• Inefficient markets are difficult to survive and too much of Government intervention has brought this market inefficiency.

• There is no significant change in demand ,the price has increased and increase in supply has not increased demand.

• There has been decrease in number of farmers by 44% already, this number will increase in the future.

• It will be difficult for any new protectionist measures like North East compacts to come up. The market has to be efficient for farmers and consumers .

Key Managerial Takeaways• Government interference in a market in form of price

limits leads to inefficient practices & sellers & buyers both lose.

• Markets don’t always act in their perfect competitive form. Lobbies are a reality.

• Impact of technology and how it changes supply and demand dynamics in a market

• Government pricing, if deemed necessary should have a timely revaluation, without the need for a court verdict.