Accounting for federal dairy program expenditures : a macroeconomic approach

Abstract

Dairy products account for 13 percent of the total cash receipts from all farm commodities. In addition, fluid milk and dairy products represent about 15 percent of consumer expenditures for food. The U.S. dairy industry is subjected to more federal government regulation than any other agricultural industry and therefore, is highly affected by farm policy decisions. Although many studies have evaluated the effects of government intervention in the dairy sector, none have done so in a fully simultaneous, general equilibrium context. The objective of this study is to specify equations which capture the interaction between the government sector and the dairy sector. The equations needed to account for the direct and indirect linkages between the U.S. dairy sector and the federal government sector were specified according to economic theory and then estimated using the ordinary least squares estimation procedure. The estimated equations were then validated by simulating outside of the sample period and examining the root-mean-square percent error. In order to simulate the dairy sector model in a general equilibriun context, the equations were endogenized into an existing macroeconometric model (COMGEM). This provides a framework which allows the analysis of the impacts of changes in various policy variables on the dairy and government sectors, as well as the general economy. The study examines the effects of specifying the price support for milk an additional 25 cents per cwt lower than the levels established in the 1985 farm bill for 1988 and 1989. The analysis implies .that additional reductions in the price support for milk are needed in order to bring the current production/consumption imbalance back into line. The small reduction in this component of the farm program did not significantly affect macroeconomic level variables, but did reduce federal expenditures on the dairy program without significantly reducing net farm income. Alternative policy scenarios can be evaluated using this framework to assess the potential impacts of proposed policy changes on the farm sector and the cost to taxpayers of implementing the changes.