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Economics Research Institute Study Paper




Utah State University Department of Economics

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"In theory, theory and practice are the same, in practice they're not"-Yoggi Berra . Federal Milk Marketing Orders (FMMO) were established in the Agricultural Marketing Act of 1937. They were designed to reduce/eliminate the effects of milk pricing wars generated by processors that essentially had monopsony power when buying milk from producers as a result of seasonal production (Stillman; Kessel; Ladd; Blayney and Normile). More generally Masson and Eisenstat indicate that orders were to provide: a) orderly marketing, b) an adequate supply of milk and c) an increase in farmers' incomes. In practice, the establishment of the FMMO order system allowed a classified milk pricing system and dictated the minimum prices processors had to pay for milk associated with an order. The FMMO system still has its proponents while others believe the FMMO has too many problems and has outlived its usefulness(Marsh; Schiek). Some believe the system provides benefits besides classified pricing. "These include reducing price uncertainty for buyers and sellers, reducing, if not eliminating, incentives for destructive competition, and providing a framework to encourage rational and orderly marketing behaviors and outcomes." (Novakovic). However, these potential benefits do not come without a cost. Several authors have outlined these costs (Buxton; Dahlgren; Ippolito and Mason; Kessel; Ladd; McDowell, Fleming and Fallerts). The outcome of these studies indicate that prices paid by consumers and revenue received by producers are generally higher as a result of the FMMO system. However, the majority of these results are more than 20 years old and do not reflect recetnt structural changes in the industry, changes that could potentially alter the outcomes of these evaluations. Some of the important changes that have occurred in the last 20 years include