Livestock Production/Industries, Marketing, Q13, Q18,

Chouinard, Hayley H.

Davis, David E.

LaFrance, Jeffrey T.

Perloff, Jeffrey M.

English

Research Papers in Economics

 
2nd Quarter 2010, 25(2) 
Milk Marketing Orders: Who Wins and Who Loses? 
 
Hayley Chouinard, David E. Davis, Jeffrey LaFrance, and Jeffrey M. Perloff 
JEL Classifications: Q13, Q18
 
Federal milk marketing orders (FMMO) raise prices of fluid milk products and lower the prices 
of manufactured dairy products such as cheese and ice cream. What effect do these prices 
changes have on the well-being of various groups of consumers? Do the federal milk marketing 
orders favor the rich over the poor? We use data from retail sales to answer these questions. 
The milk market is not a textbook competitive industry. Over the years, it has been 
affected by dairy price support programs, import quotas on dairy products, and the FMMO. For 
several decades, the supports, quotas, and marketing orders jointly determined farm, wholesale, 
and retail prices for processed fluid milk and manufactured products. We look at a period, 1997-
1999, when milk marketing orders were the main policy affecting dairy markets. 
Milk Marketing Orders 
Many states are covered by the federal milk marketing order system. Four states have their own 
milk marketing orders; however, only Virginia’s and California’s orders completely replace 
federal orders. The most striking feature of milk marketing regulations is they allow the industry 
to engage in classified pricing, where milk used in various products sells for different prices. 
During the period we studied, separate prices were set for Class I milk used in fluid beverage 
products; Class II milk used in soft dairy products such as ice cream, cottage cheese, and yogurt; 
Class III milk used in hard dairy products such as butter and cheese; and Class III–A milk used  
 
to manufacture nonfat dry milk. By allowing the industry to set different prices for various uses, 
the milk marketing orders essentially allows the industry to price discriminate. Were it not for 
the FMMO, all milk would sell for a single price at the farm-level. 
The Federal Agriculture Improvement and Reform Act of 1996 mandated reforms to the 
FMMO program, changing how the minimum prices paid to farmers were determined. We study 
the transition period, 1997-1999, immediately following the passage of this law.  
Empirical Study  
To determine the effects of the marketing orders on consumers, we need to determine how 
consumers change their consumption of milk products in response to price changes. To do that, 
we estimated how the quantities of these goods demanded by consumers vary with prices, taking 
account of city-level demographic variables: ethnicity, home ownership, employment status, 
occupation, age and number of children in the household, education and age of household heads, 
and income (Chouinard et al., 2010). The estimating model uses Information Resources, 
Incorporated retail grocery scanner data of weekly city–level purchases of dairy products 
matched with demographic characteristics of the purchasing households in 22 cities, where we 
adjusted the prices for taxes.  
We simultaneously estimated demand functions for 14 dairy products: milk (non–fat, 1% 
milk, 2% milk, whole), cream/creamers (dairy cream, including half and half, and coffee 
creamers); spreads (butter and margarine); ice cream (including frozen yogurt and ice milk); 
yogurt (cooking, divided into plain and vanilla yogurt, and flavored); and cheese (cream cheese, 
shredded and grated, American and other processed cheese, and natural). The demand functions 
show how the quantity demanded varies as the retail prices of the various dairy products change 
for various demographic groups.  
 
We find—not surprisingly—that whole milk, 2%, 1%, and nonfat milk are close 
substitutes. That is, if the relative prices change slightly, consumers will switch from the now 
relatively expensive milk to the now relatively cheap one. Although this result is intuitively 
appealing, earlier studies that failed to subdivide milk products as finely as we do failed to find 
it. 
Removing the FMMO would affect farm prices. LaFrance (1993), Cox and Chavas 
(2001), and Kawaguchi, Suzuki, and Kaiser (2003) estimated that the lower farm prices for fluid 
milk would lower retail fluid milk prices proportionally. These same studies find that the degree 
to which the increase in milk prices for manufactured milk products would be passed on to retail 
products varies by product, and their estimates differ slightly. 
Here, we used the average of their estimated retail price responses and our demand 
system estimates to simulate how removing the FMMO would change the quantities of dairy 
products demanded in response to price changes. Chouinard et al., 2010, simulated other possible 
retail price change scenarios as well. 
Next, we calculated how much consumers are harmed by a price increase or helped by a 
price cut using the measure of well-being that economists call equivalent variation. The 
equivalent variation for a price increase is the amount of income that, if taken from the 
consumer, harms the consumer by as much as the price increase. Thus, if the equivalent variation 
is negative, then consumers are worse off after the price changes. We calculated the equivalent 
variation of milk marketing orders for various demographic groups. 
Table 1 shows how the price and quantity demanded change on average across 
demographic groups for each dairy product when the federal milk marketing orders are 
eliminated. Because milk prices would fall by 15.5%, the purchased quantities of 1%, 2%, non– 
 
fat, and whole milk increase substantially. Because the prices rise for some manufactured 
products, the corresponding purchased quantities of these products fall, but by comparatively 
modest amounts.  
Table 1. Estimated Percent Change in Price and the Resulting 
Average Percentage Change in Quantity from Eliminating the 
Federal Milk Marketing Orders 
Food  Price   Quantity 
1% Milk  –15.5  25.0 
2 % Milk  –15.5  9.5 
Nonfat Milk  –15.5  7.4 
Whole Milk  –15.5  6.8 
Fresh Cream  1.3  0.8 
Coffee Additives  1.3  1.1 
Natural Cheese  0.5  0.2 
Processed Cheese  0.5  0.5 
Shredded Cheese  0.5  0.5 
Cream Cheese  0.5  –1.1 
Butter  –3.0  –0.3 
Ice Cream  –1.0  1.9 
Cooking Yogurt  1.3  –4.2 
Flavored Yogurt  1.3  –1.0 
Source: Chouinard et al. (2010) based on Information 
Resources, Incorporated retail grocery scanner data. 
 
Given the estimated changes in the purchased quantities of fresh fluid milk and 
manufactured dairy products in the scenarios when all dairy prices change, we expect some dairy 
consumers to benefit and others to lose. Table 2 shows the simulated equivalent variation effects, 
in dollars per week, across several demographic groups when we hold all but the specified 
demographic variable fixed at their sample means. All but the wealthiest consumers would 
benefit from eliminating the FMMO—that is, their equivalent variation is positive. 
The first row of Table 2 shows that the price changes from removing the FMMO would 
help the average household by the same amount as giving them an extra $2.94 per week. The  
 
next two rows show that the equivalent variation is $2.96 for a white household and $2.10 for a 
nonwhite household. 
Table 2. Equivalent Variation ($/week) for Various 
Demographic Groups from Eliminating the Federal 
Milk Marketing Orders 
Group  Equivalent Variation 
Mean  2.94 
White  2.96 
Nonwhite  2.10 
Income=$10,000  3.84 
Income=$30,000  2.63 
Income=$50,000  1.41 
Income=$70,000  0.20 
Income=$90,000  –0.92 
Education=10 Years  1.95 
Education=16 Years  3.62 
Young Child (0–5.9)  3.88 
Middle Child (6–11.9)  1.65 
Older Child (12–18)  2.57 
No Children  2.83 
Family with 3 Children
a  5.77 
Childless Couple
b  3.34 
a The heads of household are 35 years old, they have 
a real income of $20,000, the wife is not employed, the 
husband works in a nonprofessional occupation, they 
have three children under six years of age, and they 
rent their dwelling. 
 
b The heads of household are 30 years old, they have 
a real income of $60,000, both are working 
professionals, and they own their dwelling. 
 
That the welfare effects of changes in dairy product prices vary with the race of the household 
may be due to varying incidences of lactose intolerance. In the United States, the occurrence of 
lactose intolerance (nutrigenomics.ucdavis.edu) is, at 5%, relatively low for Caucasians of 
northern European and Scandinavian descent—although it spikes to 70% for North American 
Jews. Lactose intolerance is much higher for other ethnicities: 45% for African American  
 
children and 79% for African American adults, 55% for Mexican American males, and 90% for 
Asian Americans—98% for those from Southeast Asia. 
Not surprisingly, families with children younger than six years of age that consume large 
quantities of milk have a much larger benefit, $3.88 per week, than families with no children, 
$2.83. The equivalent variation falls with income from $3.84 for the poorest households with 
incomes less than $10,000, to -$0.92 for households with incomes of over $90,000. 
Consequently, as the next to last row shows, a family with a relatively low income of $20,000 
and three children under the age of six that rents its dwelling, benefits substantially, $5.77, from 
eliminating federal milk marketing orders. 
Finally, our simulations show that FMMO regulations are highly regressive. We define 
the regulatory burden of the FMMO program as a household’s annual equivalent variation from 
removing the marketing orders divided by its annual income. That is, the regulatory burden is the 
share by which a family’s effective income would rise from eliminating the federal marketing 
orders. 
Figure 1 compares the regulatory burden as a function of income for white and nonwhite 
families. The equivalent variation of removing the marketing order is positive at low incomes—
consumers benefit from removing it—so there is a regulatory burden (loss) from imposing the 
federal marketing orders for milk. For white families, the burden falls from 0.61% at an income 
of $7,500, to 0.44% at $10,000, 0.19% at $20,000, 0.11% at $30,000, 0.04% at $50,000, and 
0.01% at $75,000. At higher incomes, the burden is slightly negative, ranging from –0.002% at 
$85,000 to –0.04% at $200,000.  
 
The curve for nonwhite families lies strictly below that for white families, although both 
curves fall with income. At $7,500, the regulatory burden of a nonwhite family is about half that  
 
of a white family. At the average real income, $25,000, the regulatory burden is about one-third 
for the nonwhite family as for a white one. Perhaps this difference has to do with higher rates of 
lactose intolerance among nonwhites. 
 
Figure 1. Regulatory Burden of the FMMO 
Competition and Antitrust 
As this set of articles concerns competition and antitrust, we briefly examine how marketing 
orders affect competition. During the Great Depression when dairy marketing orders were first 
instituted, some people justified them as a response to bottling plant monopsony—a single 
buyer—or oligopsony—a small number of buyers. Even if that was once true, this justification is 
no longer plausible. Moreover, ameliorating the problems of monopsony by imposing costs on  
 
consumers cannot be the optimal response. As the FMMOs raise the average price to consumers, 
they effectively create the same harm as a monopoly or oligopoly. 
Conclusions 
The federal milk marketing orders raise the retail prices of fluid milk products and lower the 
prices of some manufactured dairy products, raising the average price of milk across all dairy 
products. The loss from the federal milk marketing orders is equivalent to a loss of income of 
$2.94 per week for the average household, or $152.88 per year. Given that there are roughly 100 
million U.S. households that buy dairy products, the total harm to society is approximately $15.3 
billion. Thus, the federal milk marketing orders disproportionately harm the poorest members of 
society—the proverbial widows and orphans—by raising fluid milk prices, and benefit the 
richest by lowering the prices of such goods as triple cream cheeses. 
For More Information
Berck, P., and Perloff, J. M. (1985). A dynamic analysis of marketing orders, voting, and 
welfare. American Journal of Agricultural Economics, 67(3), 487–96. 
Chouinard, H. H., Davis, D. E., LaFrance, J. T., and Perloff, J. M. (2010). Milk marketing order 
winners and losers. Applied Economic Perspectives and Policy, 32(1), 59-76. 
Cox, T.L. and Chavas, J.P. (2001). An interregional analysis of price discrimination and 
domestic policy reform in the U.S. dairy industry. American Journal of Agricultural 
Economics, 83(1), 89-106. 
Kawaguchi, T., Suzuki, N., and Kaiser, H.M. (2001). Evaluating class I differentials in the new 
federal milk marketing order system. Agribusiness, 17(4), 527–538. 
LaFrance, J.T. (1993). Weak separability in applied welfare analysis. American Journal of 
Agricultural Economics, 75(3), 770–775.  
LaFrance, J.T., and de Gorter, H. (1985). Regulation in a dynamic market: The U.S. dairy 
industry. American Journal of Agricultural Economics, 67(4), 821–832. 
 
Hayley Chouinard (chouinard@wsu.edu) is Associate Professor, School of Economic Sciences, 
Washington State University, Pullman, Washington. David E. Davis (David.Davis@sdstate.edu)  
is Assistant Professor, Economics Department, South Dakota State University, Brookings, South  
© 1999-2010 Choices. All rights reserved. Articles may be reproduced or electronically 
distributed as long as attribution to Choices and the Agricultural & Applied Economics 
Association is maintained. 
Dakota. Jeffrey T. LaFrance (jtlafrance@wsu.edu) is Professor, School of Economic Sciences, 
Washington State University, Pullman, Washington. Jeffrey M. Perloff (jperloff@berkeley.edu) is 
Professor, Department of Agricultural & Resource Economics, University of California, 
Berkeley, California. 

Milk Marketing Orders: Who Wins and Who Loses?

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