Dairy Models Fuel Debate

Competing economic models produce different results, fueling the dairy policy debate.
There’s an old adage among economists: “All economic models are wrong, but some are more useful than others.”
That’s certainly true when it comes to the two economic models that have been deployed to analyze the proposed Dairy Security Act (DSA).
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Several months ago, we reported on a study by dairy economists Chuck Nicholson of Cal Poly and Mark Stephenson of the University of Wisconsin (“Dairy Reform Laid Bare,” December 2011, page 6). Their economic model shows that the DSA could significantly reduce milk price volatility, but that the reduction would come at the cost of a nearly $1 per cwt. decline in the All-Milk price. The model also suggests that the plan’s market stabilization program would be in effect 40% to 45% of the time and net farm operating income would be reduced by 32% to 48%.
Another economic model has been created by Scott Brown, a dairy economist with the University of Missouri, who released the results of his study earlier this year.
His analysis shows little change in the All-Milk price in a comparison between the current dairy program and DSA. In fact, there is not a nickel’s worth of difference from 2012 through 2021.
Brown’s analysis also suggests that the market stabilization program will be triggered far less than predicted in the Nicholson/Stephenson model.
About the only agreement between the two models is that the DSA would prevent a recurrence of 2009.
A University of Minnesota spreadsheet built off the Nicholson/Stephenson model suggests that under the DSA, a 500-cow herd would have netted $175,000 in 2009 because the act protects against catastrophically low milk prices (and margins).
Brown’s model suggests the All-Milk price would have been about $2 per cwt. better in 2009—not dipping nearly as low as it did, and rebounding more sharply—had the DSA been in place.
The concern, of course, is why these two models spit out such different numbers for most years with more normal feed and milk prices.
Economists I’ve talked with say Nicholson/Stephenson is the more dynamic model because it looks at monthly price changes and then tries to gauge how dairy producers and processors will react.
Brown only looks at price changes annually. But his model uses more normal, historically based milk-feed margins than Nicholson/Stephenson.
Even though feed prices are expected to remain high for the remainder of the decade, USDA is projecting much stronger milk prices due to strong international demand.
Each model has its problems.
Little has been published on the inner workings of the Nicholson/Stephenson approach, and outside economists have difficulty evaluating it. Brown’s model isn’t designed to pick up month-to-month changes.
The debate is sure to continue. It would be easy to assume that the true answer lies somewhere between these two models. But when commodity markets as volatile and inelastic as milk, corn and soybeans intersect, nothing is easy.