Efficiency losses in milk marketing boards – the importance of exports

Abstract

A milk marketing board (MMB) is a legislatively specified compulsory marketing institution, and a common way to regulate markets for dairy products. MMBs are based on price discrimination. As price discrimination leads to unequal profitability between products, receipts from sales are pooled and farmers receive a single price adjusted for composition and quality. It is well documented that price discrimination through MMBs incurs an efficiency loss to the society. Earlier contributions, Ippolito and Masson (1978) and Serck-Hansen (1979), point to the fact that a particular high loss is incurred if export of dairy products is included in the MMB. It proves difficult to find examples where this is the case. MMB countries are either large with a low export share in dairy products (USA and Japan), have economies of scale (Australia) or exports are excluded from the MMB arrangement (Canada). We find Norway to be the only example. Using a numerical model of the Norwegian agricultural sector we show that substantial efficiency gain may be achieved by deregulating the dairy sector, mainly due to the elimination of exports. It is estimated that a transition to cost based pricing may increase the economic surplus by 1.4 billion NOK, which is 25 % of the production value. This computed gain from deregulation is far larger than for the other MMB-countries.Dairy policy; milk marketing boards; price discrimination; deregulation; numerical model.