Do MILC Program Payments Affect Milk Supply Response Across Regions of the U.S.?

This paper assesses the impact of the milk income loss contract program on U.S. dairy producers. The Milk Income Loss Contact (MILC) program was created through the 2002 farm bill, which financially compensates dairy producers when domestic milk prices fall below a predetermined Boston Class I trigger price. MILC payments were made to eligible dairy producers/farms on a per cwt basis at a rate equal to 45 percent of the difference between the trigger price of $16.94 and the Boston Class I milk price. In the analysis, the 20 major milk-producing states were analyzed to determine if MILC payments caused a milk supply response to be different across these states. By dividing the U.S. into states, this will give a better understanding of production decisions based on the availability of inputs. To test the hypothesis, milk production was regressed against each state's All Milk price, MILC payments, production trends, the milk-feed price ratio, and average productivity per dairy farm in each state. Data were collected over an 10-year period (1995-2004), and MILC variable was used as a dummy variable in the model. The a priori expectations suggest that, in certain states, MILC payments will dampen the state's milk supply response to low milk prices. However, results may also help explain why a state increased or decreased milk production after the implementation of the MILC program. Of the 20-states, those dairies located in the west and southwest regions of the U.S. experienced the largest increases of production during the selected eight years. OLS regression results obtained from the individual state models report mixed results and generally failed to support the hypothesis that MILC did alter the response of monthly milk production to All Milk prices.