Abstract for: Modeling Government Intervention in Agricultural Commodity Markets: U.S. Dairy Policy Under the Agricultural Act of 2014
The U.S. Agricultural Act of 2014 creates a new “margin insurance” program under which dairy farmers can receive indemnity payments from the U.S. government if a margin (defined as the difference between milk prices paid to farmers and an index of feed costs) falls below the insured level. The design of the program suggests that it has the potential to substantially weaken feedback processes that would adjust milk production, prices and margins if margins fall below program threshold levels, especially if the proportion of milk covered by insurance is large. This paper discusses motivations for the implementation of a dairy margin insurance program, then describes an empirical SD commodity model for the U.S. dairy industry based on the commodity model described in Sterman (2000). We use the model to compare the results of a baseline scenario representing status quo dairy policies to outcomes under implementation of the new margin insurance program. Our analysis indicates that if margins fall to levels that activate indemnity payments, weakened feedback processes are likely to result in persistent low prices, low margins and large government expenditures. However, U.S. and international dairy product consumers would benefit from substantially lower dairy product prices under the program.