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Group Title: Policy Brief Series - International Agricultural Trade and Policy Center. University of Florida ; no. 03-10
Title: Reducing seasonality in dairy production
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 Material Information
Title: Reducing seasonality in dairy production
Series Title: Policy Brief Series - International Agricultural Trade and Policy Center. University of Florida ; no. 03-10
Physical Description: Book
Language: English
Creator: Weldon, Richard N.
Muhammed, Andrew A.
Kilmer, Richard L.
Publisher: International Agricultural Trade and Policy Center, Institute of Food and Agricultural Sciences, University of Florida
Institute of Food and Agricultural Sciences, University of Florida
Place of Publication: Gainesville, Fla.
Publication Date: 2003
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Bibliographic ID: UF00089765
Volume ID: VID00001
Source Institution: University of Florida
Holding Location: University of Florida
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Table of Contents
    Front Cover
        Page 1
    Center information
        Page 2
    Title Page
        Page 3
    Main
        Page 4
        Page 5
        Page 6
        Page 7
        Page 8
    For more information
        Page 9
    Table and figures
        Page 10
        Page 11
        Page 12
Full Text

PBTC 03-10


I onal Agricultural Trade and Policy Center


REDUCING SEASONALITY IN DAIRY PRODUCTION
By

Richard N. Weldon, Andrew A. Muhammed, & Richard L. Kilmer


PBTC 03-10


September 2003


POLICY BRIEF SERIES


UNIVERSITY OF
FLORIDA


Institute of Food and Agricultural Sciences


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INTERNATIONAL AGRICULTURAL TRADE AND POLICY CENTER


MISSION AND SCOPE: The International Agricultural Trade and Policy Center
(IATPC) was established in 1990 in the Food and Resource Economics Department
(FRED) of the Institute of Food and Agricultural Sciences (IFAS) at the University of
Florida. Its mission is to provide information, education, and research directed to
immediate and long-term enhancement and sustainability of international trade and
natural resource use. Its scope includes not only trade and related policy issues, but also
agricultural, rural, resource, environmental, food, state, national and international
policies, regulations, and issues that influence trade and development.

OBJECTIVES:

The Center's objectives are to:

Serve as a university-wide focal point and resource base for research on
international agricultural trade and trade policy issues
Facilitate dissemination of agricultural trade related research results and
publications
Encourage interaction between researchers, business and industry groups,
state and federal agencies, and policymakers in the examination and
discussion of agricultural trade policy questions
Provide support to initiatives that enable a better understanding of trade and
policy issues that impact the competitiveness of Florida and southeastern
agriculture specialty crops and livestock in the U.S. and international markets


















Reducing Seasonality in Dairy Production


By




Richard N. Weldon, Associate Professor, Department of Food and Resource Economics,
University of Florida

Andrew A. Muhammad, Assistant Professor, Department of Economics,
Southern University

Richard L. Kilmer, Professor, Department of Food and Resource Economics,
University of Florida










Since the passage of the Capper-Volstead Act and the Cooperative Marketing Act in the
early 19th century, farmers in the U.S. have used cooperatives to purchase inputs and
market their products. Individual producers benefit from cooperatives that operate at cost
to provide cheaper inputs and services. Marketing cooperatives also provide producers
with potentially higher prices and access to markets. The consumer also benefits when
the cooperative provides a more efficient market, economies of size, and/or market
coordination.

The vast majority of the milk produced in the U.S. moves through dairy cooperatives.
These cooperatives, in conjunction with federal marketing orders, have attempted from
time to time, by implementing seasonal pricing plans, to minimize the variability of
seasonal and yearly milk production and provide consumers with a stable and fresh
supply of fluid milk and dairy products. However, in spite of these attempts, U.S. dairy
marketing cooperatives in general, and the Florida cooperatives in particular, continue to
struggle with seasonal supply and demand disequilibriums. This inefficiency is
expensive to both the producer and the consumer.

Florida

Florida milk production varies throughout the year. Moderate temperatures in the spring
help to promote monthly production at levels 15 percent above the monthly average
while summer heat contributes to production levels 17 percent below the monthly
average (Figure 1). At the same time, demand for milk varies seasonally due to school
lunch programs and tourism. Consequently, even though annual production and annual
consumption may be similar, these seasonal patterns result in monthly supply and
demand imbalances. Florida dairy cooperatives must export bulk fluid milk early in the
year and then turn around a few months or even weeks later and import milk. Due to the
nature of "full supply" contracts with milk processors, Florida dairy cooperatives incur
transportation costs for both the importing and exporting of fluid milk.

Given the size and type of market, little, if anything, can be done to bring consumption or
demand into synch with production. A more likely course of action would be to bring
production in line with consumption by reducing seasonal production. The problem of
output coordination with the changes in seasonal demand could be dealt with by using
production controls (quotas) or with price incentives. Numerous issues, such as
implementation and administration as well as the likelihood of capitalization of benefits
into the quotas, preclude the use of production controls. The more likely course of action
would be the use of price incentives.










In January 1993 in an attempt to reduce the variability in seasonal production, the two
milk-marketing cooperatives in Florida, the Florida Dairy Farmers Association (FDFA),
which marketed approximately 75 percent of Florida's milk, and the Tampa Independent
Dairy Farmers Association (TIDFA), which marketed about 25 percent, implemented a
seasonal pricing plan. The overall objective of the pricing plan was to provide an
incentive for dairy farmers to change their patterns of production so as to produce less
milk during the surplus months and more during the deficit months. By achieving this
objective, the cost associated with importing and exporting milk would be reduced.

The seasonal pricing plan was in place from January 1993 through December 1995. Due
to the apparent ineffectiveness of the plan, Florida cooperatives voted to do away with
the seasonal pricing plan after three years. However, upon closer examination, it is
apparent it was not the plan that was unsuccessful, but rather the lack of full participation
in the plan on the part of the cooperatives' membership that was at fault.

Cost of Importing and Exporting

In 1992, the last year before the implementation of the pricing plan, significant amounts
of fluid milk were imported into and exported out of Florida. Because of transportation
costs, imported milk costs cooperatives more, on average, than milk produced in Florida
while exported milk, on average, results in a price returned to producers below the price
received in Florida. For the five-month period in 1992, July through November, Florida
cooperatives imported 110.5 million pounds of milk at a total cost of $20.2 million (Table
1) for an average price paid of $18.25 per hundredweight. For the remaining seven
months, January through June and December, Florida cooperatives exported a total of
122.1 million pounds of milk at a total return of only $11.7 million for an average price
received by producers of $9.58 per hundredweight which had transportation cost
subtracted (Lawson, Kilmer, and Nubern).

The Pricing Plan and Participation

The seasonal pricing plan was implemented in an attempt to entice individual farmers to
change their production patterns to reduce the seasonality of production and aid in cutting
the costs associated with imports and exports. Each farm's production in the three highest
producing months (March, April, and May) was summed and divided by 92 (the total
number of days in these three months) to give a per day base production amount for each
farm. The premium per hundredweight was paid in the lowest production and highest
importing months (August, September, and October) when the average daily production
in any of these months was greater than 75 percent of the daily base production in March,









April and May. Farmers meeting this criterion were paid a premium of at least $3.00 per
hundredweight, which was added to the market price for all milk produced in excess of
75 percent of their daily production base.

Production data from January 1992 through October 1995 was collected for 68 of a
possible 307 dairy farmers that belonged to FDFA and TIDFA dairy cooperatives. All
farmers included in the data set were farmers that produced each year from 1992 through
1995 and were Dairy Herd Improvement Associate members. In 1993, 1994, and 1995,
of the 68 farms 37, 40, and 47 percent participated in the pricing plan (Washington,
Lawson and Kilmer). Accordingly, there were 25 participants (43 non-participants) in
1993, 28 (40) in 1994, and 32 (36) in 1995.

The Plan That Failed?

Figure 2 depicts the average daily production in 1992, the year before the plan, for each
month for all farms in the two milk-marketing cooperatives. Also, shown is the monthly
average for all the months that the plan was in place (January 1993 through December
1995) for the 68 farms in the data set. The plan was not effective in reducing the
seasonality of production for the 68 farms. However, upon closer inspection, it is
apparent that the voluntary nature of the pricing plan caused the plan to fail.

Although the seasonal pricing plan may have appeared unsuccessful overall in reducing
seasonality, assessing the effects of the pricing plan on farms that participated in the plan
separately from those that did not shows a different outcome. Results (for details see
Washington, Lawson and Kilmer) indicate that of the 68 farms used in this study, those
farmers that participated in the seasonal pricing plan were able to reduce output
seasonality in each year (1993-1995) by as much as 20 percent (Figure 3)! For those
farms that did not participate, seasonality actually increased in each year by as much as
32 percent! These results were supported in an examination of the actual production
practices used by the farms where it was found that the participating farms altered their
practices to change seasonal production (Washington, Kilmer, and Weldon).

One of the ways for a dairy farmer to change the amount of milk being produced in
response to a change in the price of milk is to change the milk production per cow by
altering feeds and feeding practices. A second way to change the amount of milk being
produced is to change the number of cows being milked. The number of cows being
milked can be changed by altering various practices including the proportion of cows
milking, the total number of first lactation animals entering the herd, the culling and
breeding rates and others.










Participating and non-participating farmers showed no difference in the seasonal use of
production practices in 1992, before the seasonal pricing plan was put into effect.
However, a different story emerges after implementation of the seasonal pricing plan in
January of 1993. Numerous practices differed for non-participating farms compared to
participating farms. Proportion of cows milking, milk production per cow, calving rates
and other production practices differed in some or all three years. In each case, the
seasonal use of the production practices was less seasonal (i.e., smaller) for participating
farms compared to non-participating farms. This reduced the degree of seasonality in
milk production for participating farms compared to non-participating farms.

Consequently, the seasonality of those that participated in the pricing plan decreased
compared to 1992, while the seasonality of those non-participating producers clearly
worsened (Figure 4). Given that seasonality increased for those firms that did not
participate, this dampened or overshadowed the pricing plan's effectiveness. Table 1
gives insights into the potential benefits that could have been realized if the cooperatives
had full participation in the plan and also the cost associated with not having the plan.

As noted previously, in 1992 the cooperatives imported 110.5 million pounds of milk
from July through November at a cost of $20.2 million and during the other months of
the year exported 122.1 million pounds and received about $11.7 million. These actual
levels of imports and exports, given in Table 1, are the result of monthly production
levels as depicted by the actual 1992 production seasonality index in Figure 4. However,
using the actual production and consumption data for 1992, but imposing the pricing plan
and non-pricing plan participating indexes from Figure 4, generates the comparison in
Table 1. For example, if in 1992 all the cooperative producers had experienced the
average seasonality index in Figure 4 of the farms that had participated in the pricing plan
for the three-year period, and assuming prices and consumption unchanged, imported
milk needs would have been only 85.6 million pounds, some 24.9 million pounds less,
and cost $15.6 million or $4.5 million less. In a similar manner, the quantity of milk
exported during the January through June and December months would have been
reduced. Pounds of milk exported would have decreased from 122.1 to 95.4 million as
production became less seasonal.

Table 1 also presents the export and import values if the average seasonal production
realized for the non-participating farms for the three-year period of the plan as given in
Figure 4 were replicated for the entire cooperative membership in 1992. Imported milk
would have been 130.8 million pounds, some 20.3 million pounds higher, and cost $23.9
million or $3.7 million more! In a similar manner the quantity of milk exported during









the January through June and December months would have increased from 122.1 to
141.3 million as production became much more seasonal.

Thus, an effective seasonal pricing plan for the Florida cooperatives would require either
mandatory participation of all members or a penalty for excess seasonal variability. This
policy would do away with the incentive for non-participants to over produce to make up
for the decrease in production by those who participate.









For More Information:


Lawson, Robert W. Jr., Richard L. Kilmer, and Chris Nubern. "Potential for a
Supply and Demand Balance in the Florida Milk Market, 1992". Food and Resource
Economics Department Staff Paper #93-14, University of Florida, October 1994: 1-26.

Washington, Andrew, Robert W. Lawson, and Richard L. Kilmer. "An Evaluation
of the Effectiveness of the Florida Cooperative Seasonal Pricing Plan on Seasonal
Production Variability." Journal of Agricultural and Applied Economics. (April 2000)
113-121.

Washington, Andrew A., Richard L. Kilmer, and Richard N. Weldon. "Practices
Used by Dairy Farmers to Reduce Seasonal Production Variability." Agricultural and
Resource Economics Review 31(1)(April 2002): 127-137.
































Figure 1. Florida Milk Production and Consumption Seasonality
Index, January 1992 December 1992.


I .
1.15
1.1
1.05
1
0.95
0.9
0.85
0.8


- -


JAN FEB MAR APR MAY JUN


JUL AUG SEP OCT NOV DEC


--- Production X Consumption
Source: Florida Dairy Cooperatives


Table 1: Actual and Estimated Florida Dairy Cooperative Milk Imports and Exports for 1992.
Assuming Seasonality of Assuming Seasonality of
Pricing Plan Participating Non-Pricing Plan
Actual Farms Participating Farms
1,000 Pounds
Milk Imports 110,518 85,593 130,803
Milk Exports 122,095 95,392 141,319
Dollars
Cost of import 20,166,809 15,658,664 23,866,044
Value of exports 11,711,289 9,173,476 13,585,448














Figure 2. 1992 Milk Production and 3-Year Average (1993, 1994, and
1995) Florida Seasonal Daily Production (Thousands).


7,000



-
6,500


6,000


5,500


5,000


4,500 .
JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC


-e-1992 *K- 3 Yr.Avg.









Figure 3: Percentage Changes in Seasonality when Compared to 1992
for Production in 1993, 1994 and 1995.


92/93


92/94


92/95


0 Pricing Plan 0 Non-Pricing Plan


Figure 4. Seasonality of Actual Production in 1992 and
Average Seasonality of Pricing and Non-Pricing Plan
Participants for 1993-95.
1.2
1.15
1.1
1.05
1
0.95 ---,--Actual 1992
0.9 -4-Pricing Plan
0.85 -ONon-Pricing Plan o
0.8
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec


40
30
20
100,
00%
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-20/
-30/


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