The Economics of a Regulated Dairy Market: An Empirical Analysis of Factors Determining the Values of Fluid Milk Quota


Based on the hypothesis that tradeable marketing quotas may be analysed as an economic input in the production process of regulated firms, the standard capital asset pricing model is adapted to assess the impact of expectations of quota rents on Ontario fluid milk quota values. The analysis provides estimates of the marginal impacts on quota values of two variables postulated to proxy the rent that arises from the highly regulated market for this product. The results are consistent with expectations from economic theory for a divisible capital asset. It appears that the regulated marketing system for fluid milk has enabled appreciable returns from improvements in milk production technology and administered prices to be appropriated by producers. Milk production technology advances, proxied by average herd size, and increases in administered prices for milk evidently contribute to increased quota values. An experiment to assess the impact of reductions in milk prices on quota values is reported. The results of the study indicate that, following a 1 percent change in producers' price levels for milk, Ontario fluid milk quota values change by some 0.36 percent immediately and by some 6 percent over a longer-term period of about four years.Livestock Production/Industries,

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