    Dairy Industry: Estimated Economic Impacts of Dairy Compacts
    (14-SEP-01, GAO-01-866).

    U.S. dairy farmers produced 167.7 billion pounds of unprocessed,
    raw farm milk in 2000. Federal and state dairy programs influence
    the minimum prices to farmers for raw milk.  These prices are
    based on how the raw milk is to be used.  Minimum prices set for
    raw milk to be used for making drinking milk (fluid milk) are
    higher than those for milk used for manufacturing cheese, butter,
    and other dairy products. About 70 percent of the raw milk
    produced in the United States is regulated under the U.S.
    Department of Agriculture (USDA) federal milk marketing order
    program. The 1996 farm bill established another pricing program
    -- the Northeast Interstate Dairy Compact (NEDC) -- which is
    administered by a commission that sets a minimum price for raw
    milk sold as fluid milk in six New England states. The NEDC works
    in conjunction with federal and state dairy programs to establish
    an alternative minimum price for raw milk in the Compact states.
    When the monthly NEDC minimum price exceeds the federal marketing
    order or state minimum price, the NEDC price becomes the minimum
    price. Congress is currently considering legislation that would
    reauthorize and expand the NEDC and also establish additional
    interstate dairy compacts. This report reviews the potential
    economic impacts of different compact alternatives. It is likely
    that the NEDC has affected dairy sector indicators within the six
    New England states, but determining the extent to which it has
    done so is difficult. Although there is general agreement that
    the Compact was a factor in dairy sector indicators, there is
    disagreement over what portions of the increases can be
    attributed to the Compact because other factors, such as consumer
    demand and the costs of processing and marketing fluid milk, also
    affect retail prices. According to USDA, while the NEDC has not
    increased the federal government's net costs for its milk price
    support program, it may have increased the government's costs for
    one of its nutrition assistance programs--the Food Stamp Program.
    The 1996 farm bill requires that the Compact commission
    compensate USDA for any resulting increase in costs to the milk
    price support program. As of the end of fiscal year 2000, the
    Compact had compensated USDA a total of  $3.2 million. GAO
    estimates that for 1999 the impacts of different dairy compact
    alternatives on farm-level prices, production, and revenue in
    other regions of the country would have increased as compacts
    increased in size and accounted for a greater portion of the
    nation's milk supply. The NEDC, which accounts for about three
    percent of the nation's milk supply, had a minimal impact on
    farm-level prices, production, and revenue in 1999. An expanded
    NEDC would have accounted for approximately 18 percent of the
    nation's milk supply in 1999, and the interregional impacts of
    this Compact would have been a little larger but still small in
    that year. An expanded NEDC in conjunction with a southern
    compact would have accounted for about 27 percent of the nation's
    milk supply, and its impacts would have been somewhat larger. The
    estimated impacts vary from region to region, and greater impacts
    are estimated to occur in those regions with higher levels of
    milk production and a larger share of raw milk being used to
    manufacture products such as butter and cheese. In 2000, national
    average farm-level milk prices were lower than they were in 1999,
    resulting in a larger difference between the NEDC's and USDA's
    minimum prices. Consequently, the NEDC would have greater
    economic impacts than in years when USDA's minimum prices were
    high.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-01-866
        ACCNO:   A01786
        TITLE:   Dairy Industry: Estimated Economic Impacts of Dairy
                 Compacts
         DATE:   09/14/2001
      SUBJECT:   Agricultural programs
    	     Dairy products
    	     Farm income stabilization programs
    	     Price regulation
    	     Price supports
    	     Prices and pricing
    	     Food Stamp Program
    	     National School Lunch Program
    	     USDA Northeast Interstate Dairy Compact
    	     Special Supplemental Nutrition Program
    	     for Women, Infants and Children
    	     USDA New England Milk Marketing Order
    	     National School Breakfast Program
    	     USDA Milk Marketing Order Program
    	     USDA Norheast Milk Marketing Order
    	     Program

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    GAO-01-866

    Report to the Honorable Herbert Kohl, U. S. Senate

    United States General Accounting Office

    GAO

    September 2001 DAIRY INDUSTRY Estimated Economic Impacts of Dairy Compacts

    GAO- 01- 866

    Page i GAO- 01- 866 Impacts of Dairy Compacts Letter 1

    Results in Brief 4 Background 6 Isolating the Intraregional Impacts of the
    NEDC Is Difficult 11 The NEDC Has Not Increased Net Federal Costs for the
    Milk Price

    Support Program, but Its Impact on a Major Nutrition Assistance Program Is
    Less Certain 16 Estimated 1999 Interregional Impacts of Various Compact

    Alternatives Increased as Compacts Grew in Size 19 Concluding Observations
    31 Agency Comments and Our Response 32

    Appendix I Objectives, Scope, and Methodology 34 NEDC?s Intraregional
    Impacts 34 NEDC?s Impacts on Federal Programs 37 Compacts? Interregional
    Impacts 37

    Appendix II Methodology for Estimating the Interregional Impacts of Dairy
    Compacts 40

    IRCM Structure 40 Data Used in the Model 48 1999 Baseline Calibration 49
    Compact Scenarios 52 Parameter Values for Our Baseline and Initial Estimates
    54 Sensitivity Analyses 56 IRCM Limitations 60

    Appendix III NEDC?s Intraregional Impacts 61 Retail Milk Prices Increased in
    the NEDC States, but It Is Difficult

    to Determine the Amount Attributable to the Compact 61 Limited Data Are
    Available to Estimate the Potential Impacts of the

    Compact on Producer Income 69 The NEDC?s Impacts on Farm Structure, Milk
    Production, and Milk

    Consumption Are Difficult to Determine 76

    Appendix IV NEDC?s Impacts on Federal Program Costs 85 Federal Net Costs for
    the Milk Price Support Program Have Not

    Increased 85 Contents

    Page ii GAO- 01- 866 Impacts of Dairy Compacts

    It Is Unclear Whether Federal Net Costs for Nutrition Assistance Programs
    Have Increased 86 Two Studies of the NEDC?s Impact on Nutrition Assistance

    Programs Provide Inconclusive Results 92

    Appendix V Interregional Impacts of Three Compact Alternatives in 1999 94

    Range of Estimates Obtained Across Different Compact Scenarios 95 The
    Economic Impacts of the NEDC in 1999 98 The Economic Impacts of an Expanded
    NEDC in 1999 105 The Economic Impacts of an Expanded NEDC in Conjunction
    With

    a Southern Compact in 1999 112 The Economic Impacts of an Expanded NEDC in
    Conjunction With

    a Southern Compact Using a More Restrictive Fluid Milk Trade Assumption 119

    Appendix VI Interregional Impacts of Three Compact Alternatives in 2000 127

    Appendix VII Studies of the Interregional Economic Impacts of Various Dairy
    Compact Alternatives 132

    USDA (1999)- A Study Using an Annual, Time- Series Dairy Sector Model 132
    Cox et al. (1999)- A Study Using a Spatial Market Equilibrium

    Model 135 Bailey (2000)- A Study Using a Regional Economic Simulation

    Model 138 Balagtas and Sumner (2001)- A Study Using a Price Discrimination

    Framework 140 Rosenfeld (2001)- A Study Using an Economic Model of
    Classified

    Pricing 142 Comparison of Studies Reviewed 144

    Appendix VIII Comments From the Executive Director, NEDC 146

    Appendix IX GAO Contact and Staff Acknowledgments 155

    Page iii GAO- 01- 866 Impacts of Dairy Compacts Related GAO Products 156

    Tables

    Table 1: Reduction in 1999 Farm- Level Revenue in the Upper Midwest Under
    Three Compact Alternatives 5 Table 2: USDA?s Milk Classes Used for Setting
    Milk Prices 8 Table 3: Estimated Reduction in 1999 Farm- Level Milk Revenue
    in

    Noncompact Regions as a Result of the NEDC 22 Table 4: Estimated Reduction
    in 1999 Farm- Level Milk Revenue in

    Noncompact Regions as a Result of an Expanded NEDC 23 Table 5: Estimated
    Reduction in 1999 Farm- Level Milk Revenue in

    Noncompact Regions as a Result of an Expanded NEDC Combined With a Southern
    Compact 25 Table 6: Estimated Reduction in 1999 Farm- Level Milk Revenue in

    Noncompact Regions as a Result of an Expanded NEDC Combined With a Southern
    Compact Under a More Restrictive Fluid Milk Trade Assumption 27 Table 7:
    Estimated Reduction in 2000 Farm- Level Milk Revenue in

    the Upper Midwest and in All Noncompact Regions Under the Compact Scenarios
    29 Table 8: USDA's Marketing Orders Before January 2000, States in

    the IRCM99 Regions, and States That Had Authorized Entry Into a Compact by
    February 2001 42 Table 9: IRCM99 Dairy Product Fixed Component Composition
    45 Table 10: IRCM99 Farm- Level Price Calibration 50 Table 11: IRCM99 Farm-
    Level Production Calibration 50 Table 12: IRCM99 Aggregate Wholesale
    Commodity Price

    Calibration 51 Table 13: IRCM99 Aggregate Wholesale Commodity Production

    Calibration 52 Table 14: Medium- Term Wholesale Demand Elasticities Used in

    Initial Estimates 54 Table 15: Medium- Term Regional Supply Elasticities
    Used in Initial

    Estimates 55 Table 16: Long- Term Wholesale Demand Elasticities Used in the

    Sensitivity Analyses 56 Table 17: Long- Term Regional Supply Elasticities
    Used in the

    Sensitivity Analyses 56

    Page iv GAO- 01- 866 Impacts of Dairy Compacts

    Table 18: USDA?s Classified Prices, and the Difference Between These Prices
    and the Price for Cheese (USDA's Class III or California?s Class 4b) in 2000
    59 Table 19: California's Classified Prices, and the Difference Between

    These Prices and the Price for Cheese (USDA's Class III or California?s
    Class 4b) in 2000 59 Table 20: IRCM00 Classified Component Price Premiums in

    Federal Milk Marketing Orders and California 60 Table 21: Retail Prices for
    a Gallon of Milk in NEDC States Before

    and Immediately Following the NEDC?s Establishment 62 Table 22: Average
    Annual NEDC Over- Order Payment Received by

    a Dairy Farmer Located in the Six NEDC States 71 Table 23: Estimated Impact
    on Food Stamp, WIC, and School

    Feeding Program Participants if Retail Milk Prices Increase 10, 15, or 20
    Cents per Gallon Under an Expanded NEDC and a Southern Compact 92 Table 24:
    Range of Estimated Impacts on 1999 Farm- Level Prices

    Across Different Compact Scenarios 95 Table 25: Range of Estimated Impacts
    on 1999 Farm- Level

    Production Across Different Compact Scenarios 95 Table 26: Range of
    Estimated Impacts on 1999 Farm- Level Revenue

    Across Different Compact Scenarios 96 Table 27: Range of Estimated Impacts
    on 1999 National Average

    Wholesale- Level Prices Across Different Compact Scenarios 97 Table 28:
    Range of Estimated Impacts on 1999 Wholesale- Level

    Production Across Different Compact Scenarios 97 Table 29: Range of
    Estimated Impacts on 1999 Wholesale- Level

    Expenditures Across Different Compact Scenarios 98 Table 30: Initial
    Estimates of the NEDC?s Impacts on 1999 FarmLevel Indicators 99 Table 31:
    Initial Estimates of the NEDC?s Impacts on 1999

    Wholesale- Level Indicators 100 Table 32: Estimated Change in 1999 Farm-
    Level Prices Using

    Different Assumptions Under the NEDC Scenario 101 Table 33: Estimated Change
    in 1999 Farm- Level Production Using

    Different Assumptions Under the NEDC Scenario 101 Table 34: Estimated Change
    in 1999 Farm- Level Revenue Using

    Different Assumptions Under the NEDC Scenario 102 Table 35: Estimated Change
    in 1999 National Average WholesaleLevel Prices Using Different Assumptions
    Under the

    NEDC Scenario 102

    Page v GAO- 01- 866 Impacts of Dairy Compacts

    Table 36: Estimated Change in 1999 Wholesale- Level Production Using
    Different Assumptions Under the NEDC Scenario 103 Table 37: Estimated Change
    in 1999 Wholesale- Level Expenditures

    Using Different Assumptions Under the NEDC Scenario 104 Table 38: Summary of
    Estimated Changes in 1999 Farm- Level

    Indicators Using Our Initial and Subsequent Sets of Assumptions Under the
    NEDC Scenario 104 Table 39: Summary of Estimated Changes in 1999 Wholesale-
    Level

    Indicators Using Our Initial and Subsequent Sets of Assumptions Under the
    NEDC Scenario 105 Table 40: Initial Estimates of an Expanded NEDC?s Impacts
    on

    1999 Farm- Level Indicators 106 Table 41: Initial Estimates of an Expanded
    NEDC?s Impacts on

    1999 Wholesale- Level Indicators 106 Table 42: Estimated Change in 1999
    Farm- Level Prices Using

    Different Assumptions Under an Expanded NEDC Scenario 107 Table 43:
    Estimated Change in 1999 Farm- Level Production Using

    Different Assumptions Under an Expanded NEDC Scenario 108 Table 44:
    Estimated Change in 1999 Farm- Level Revenue Using

    Different Assumptions Under an Expanded NEDC Scenario 108 Table 45:
    Estimated Change in 1999 National Average WholesaleLevel Prices Using
    Different Assumptions Under an

    Expanded NEDC Scenario 109 Table 46: Estimated Change in 1999 Wholesale-
    Level Production

    Using Different Assumptions Under an Expanded NEDC Scenario 109 Table 47:
    Estimated Change in 1999 Wholesale- Level Expenditures

    Using Different Assumptions Under an Expanded NEDC Scenario 110 Table 48:
    Summary of Estimated Changes in Farm- Level Indicators

    Using Our Initial and Subsequent Sets of Assumptions Under an Expanded NEDC
    Scenario 111 Table 49: Summary of Estimated Changes in 1999 Wholesale- Level

    Indicators Using Our Initial and Subsequent Sets of Assumptions Under an
    Expanded NEDC Scenario 111 Table 50: Initial Estimates of the Impacts of the
    Expanded NEDC in

    Conjunction With a Southern Compact on 1999 Farm- Level Indicators 113

    Page vi GAO- 01- 866 Impacts of Dairy Compacts

    Table 51: Initial Estimates of the Impacts of the Expanded NEDC in
    Conjunction With a Southern Compact on 1999 WholesaleLevel Indicators 113
    Table 52: Estimated Change in 1999 Farm- Level Prices Using

    Different Assumptions Under an Expanded NEDC in Conjunction With a Southern
    Compact Scenario 114 Table 53: Estimated Change in 1999 Farm- Level
    Production Using

    Different Assumptions Under an Expanded NEDC in Conjunction With a Southern
    Compact Scenario 115 Table 54: Estimated Change in 1999 Farm- Level Revenue
    Using

    Different Assumptions Under an Expanded NEDC in Conjunction With a Southern
    Compact Scenario 115 Table 55: Estimated Change in 1999 National Average
    WholesaleLevel Prices Using Different Assumptions Under an

    Expanded NEDC in Conjunction With a Southern Compact Scenario 116 Table 56:
    Estimated Change in 1999 Wholesale- Level Production

    Using Different Assumptions Under an Expanded NEDC in Conjunction With a
    Southern Compact Scenario 117 Table 57: Estimated Change in 1999 Wholesale-
    Level Expenditures

    Using Different Assumptions Under an Expanded NEDC in Conjunction With a
    Southern Compact Scenario 117 Table 58: Summary of Range of Estimated
    Changes in Farm- Level

    Indicators Using Our Initial and Subsequent Sets of Assumptions Under an
    Expanded NEDC in Conjunction With a Southern Compact Scenario 118 Table 59:
    Summary of Range of Estimated Changes in 1999

    Wholesale- Level Indicators Using Our Initial and Subsequent Sets of
    Assumptions Under an Expanded NEDC in Conjunction With a Southern Compact
    Scenario 119 Table 60: Initial Estimates of 1999 Regional Farm- Level
    Indicators

    Using a More Restrictive Fluid Milk Trade Assumption Under an Expanded NEDC
    in Conjunction With a Southern Compact Scenario 119 Table 61: Initial
    Estimates of 1999 Wholesale- Level Indicators

    Using a More Restrictive Fluid Milk Trade Assumption Under an Expanded NEDC
    in Conjunction With a Southern Compact Scenario 120 Table 62: Change in 1999
    Farm- Level Prices Using Different

    Assumptions and a More Restrictive Fluid Milk Trade Assumption Under an
    Expanded NEDC in Conjunction With a Southern Compact Scenario 121

    Page vii GAO- 01- 866 Impacts of Dairy Compacts

    Table 63: Change in 1999 Farm- Level Production Using Different Assumptions
    and a More Restrictive Fluid Milk Trade Assumption Under an Expanded NEDC in
    Conjunction With a Southern Compact Scenario 121 Table 64: Change in 1999
    Farm- Level Revenue Using Different

    Assumptions and a More Restrictive Fluid Milk Trade Assumption Under an
    Expanded NEDC in Conjunction With a Southern Compact Scenario 122 Table 65:
    Change in 1999 National Average Wholesale- Level Prices

    Using Different Assumptions and a More Restrictive Fluid Milk Trade
    Assumption Under an Expanded NEDC in Conjunction With a Southern Compact
    Scenario 123 Table 66: Change in 1999 Wholesale- Level Production Using

    Different Assumptions and a More Restrictive Fluid Milk Trade Assumption
    Under an Expanded NEDC in Conjunction With a Southern Compact Scenario 123
    Table 67: Change in 1999 Wholesale- Level Expenditures Using

    Different Assumptions and a More Restrictive Fluid Milk Trade Assumption
    Under an Expanded NEDC in Conjunction With a Southern Compact Scenario 124
    Table 68: Summary of Estimated Changes in 1999 Farm- Level

    Indicators Using Our Initial and Subsequent Sets of Assumptions and a More
    Restrictive Fluid Milk Trade Assumption Under an Expanded NEDC in
    Conjunction With a Southern Compact Scenario 125 Table 69: Summary of
    Estimated Changes in 1999 Wholesale- Level

    Indicators Using Our Initial and Subsequent Sets of Assumptions and a More
    Restrictive Fluid Milk Trade Assumption Under an Expanded NEDC in
    Conjunction With a Southern Compact Scenario 125 Table 70: Range of
    Estimated Impacts on 2000 Farm- Level Prices

    Across Different Compact Scenarios 128 Table 71: Range of Estimated Impacts
    on 2000 Farm- Level

    Production Across Different Compact Scenarios 129 Table 72: Range of
    Estimated Impacts on 2000 Farm- Level Revenue

    Across Different Compact Scenarios 129 Table 73: Range of Estimated Impacts
    on 2000 National Average

    Wholesale- Level Prices Across Different Compact Scenarios 130 Table 74:
    Range of Estimated Impacts on 2000 Wholesale- Level

    Production Across Different Compact Scenarios 130

    Page viii GAO- 01- 866 Impacts of Dairy Compacts

    Table 75: Range of Estimated Impacts on 2000 Wholesale- Level Expenditures
    Across Different Compact Scenarios 131 Table 76: USDA Estimates of the
    NEDC?s Interregional Impacts on

    Average Annual Production Levels and Farm- Level Prices and Revenue, 2000-
    05 133 Table 77: Cox et al. Estimates of the Interregional Impacts of

    Compacts on Farm- Level Prices and Revenue in 1997 137 Table 78: Cox et al.
    Estimates of the Interregional Impacts of

    Compacts on Commodity Prices and Expenditures in 1997 137 Table 79: Bailey?s
    Estimates of the Interregional Impacts of a

    Multiregional Compact on Farm- Level Prices, Revenue, and Production in 2000
    139 Table 80: Balagtas and Sumner?s Estimates of the Interregional

    Impacts of the NEDC and an Expanded NEDC on FarmLevel Prices and Production
    in 1999 141 Table 81: Rosenfeld?s Estimates of the Interregional Impacts of

    Compacts on Farm- Level Revenue in 2000 143 Table 82: Summary of
    Characteristics of Studies That Estimate the

    Interregional Economic Impacts of Dairy Compact Alternatives 144

    Figures

    Figure 1: USDA?s Milk Marketing Orders 44 Figure 2: Comparison of the
    Average Retail Price of a Gallon of

    Milk in Boston and in the United States, November 1996- September 2000 64
    Figure 3: Comparison of the Average Retail Price of a Gallon of

    Milk in Boston and the USDA Class I or NEDC Price, November 1996- September
    2000 66 Figure 4: Net Farm Income of a Representative Dairy Farmer in the

    Northeastern Region and in Other U. S. Regions, 1991- 99 73 Figure 5:
    Comparison of the Percentage of Dairy Farms Having

    Favorable Solvency in the Northeastern Region With the Percentage in Other
    Regions, 1991- 99 74 Figure 6: Decline in the Number of Licensed Dairy Farms
    in the

    NEDC States and in the Rest of the United States, 1992- 2000 77 Figure 7:
    Average Number of Cows per Farm in the NEDC States

    and in the Rest of the United States, 1992- 2000 78 Figure 8: Pounds of Milk
    Produced per Cow in the NEDC States

    and in the Rest of the United States, 1993- 2000 80

    Page ix GAO- 01- 866 Impacts of Dairy Compacts

    Figure 9: Per Capita Fluid Milk Consumption in the New England Milk
    Marketing Order and in All Other Milk Marketing Orders, 1993- 99 83

    Abbreviations

    IRCM97 Dairy Sector Interregional Competition Model for 1997 IRCM99 Dairy
    Sector Interregional Competition Model for 1999 IRCM00 Dairy Sector
    Interregional Competition Model for 2000 NEDC Northeast Interstate Dairy
    Compact OMB Office of Management and Budget USDA U. S. Department of
    Agriculture WIC Special Supplemental Nutrition Program for Women,

    Infants, and Children

    Page 1 GAO- 01- 866 Impacts of Dairy Compacts

    September 14, 2001 The Honorable Herbert Kohl United States Senate

    Dear Senator Kohl: U. S. dairy farmers produced about 167.7 billion pounds
    of unprocessed, raw farm milk in 2000. The amount of raw milk produced is
    influenced by federal and state dairy programs that affect minimum prices
    processors of dairy products must pay farmers for raw milk. These programs
    were established because of concern that dairy farmers lack the market power
    to substantially influence the prices that they are paid for raw milk,
    compared with the market power of processors and manufacturers of dairy
    products and retailers that sell these products to consumers. Minimum prices
    are based on, and vary according to, how the raw milk is to be used; minimum
    prices set for raw milk to be used for making drinking milk (fluid milk) are
    higher than those for milk used for manufacturing cheese, butter, and other
    dairy products. About 70 percent of the raw milk produced in the United
    States is regulated under the U. S. Department of Agriculture?s (USDA)
    federal milk marketing order program. Some states, such as California and
    Maine, and portions of other states are not covered by the federal program
    but instead by state programs.

    The 1996 farm bill established another pricing program- the Northeast
    Interstate Dairy Compact (NEDC)- which is administered by a commission that
    sets a minimum price for raw milk to be used for and sold as fluid milk in
    the six New England states- Connecticut, Maine, Massachusetts, New
    Hampshire, Rhode Island, and Vermont. 1 The NEDC works in conjunction with
    federal and state dairy programs to establish an alternative minimum price
    for raw milk to be used for and sold as fluid milk in the Compact states.
    When the monthly NEDC minimum price exceeds the federal marketing order or
    state minimum price, the NEDC price becomes the minimum price. When the
    monthly federal marketing order or state minimum price exceeds the NEDC
    price, the federal or state

    1 The Federal Agriculture Improvement and Reform Act of 1996 (P. L. 104-
    127, Apr. 4, 1996). The act conditioned the six states' implementation of
    the Compact on the Secretary of USDA's finding that there was a compelling
    public interest in the Compact region to establish the Compact. This finding
    was made on August 8, 1996.

    United States General Accounting Office Washington, DC 20548

    Page 2 GAO- 01- 866 Impacts of Dairy Compacts

    price becomes the relevant minimum price. The NEDC's minimum pricing
    requirement became effective in July 1997, when the Compact commission set
    $16.94 as the minimum price for a hundredweight of raw milk used for and
    sold as fluid milk. 2 Since then, the NEDC's price has usually been higher
    than the federal price. Proponents of the NEDC assert that the Compact is
    necessary to ensure the continued viability of dairy farming in New England
    and, thus, an adequate local supply of fluid milk. However, opponents
    counter that the NEDC causes retail prices in the Compact states to
    increase, harming consumers in those states. They also counter that the NEDC
    leads to lower milk prices paid to dairy farmers in other regions, harming
    those farmers.

    Legislation authorizing the NEDC is scheduled to expire at the end of
    September 2001, and the Congress is currently considering proposed
    legislation that would not only reauthorize and expand the NEDC but also
    establish additional interstate dairy compacts. 3 Consequently, you asked us
    to provide information on the potential economic impacts of different
    compact alternatives. Specifically, you asked for information on

     the intraregional impacts (that is, the impacts within the six NEDC
    states) of the NEDC on dairy sector indicators such as (1) retail milk
    prices, (2) milk producer income, (3) dairy farm structure, (4) milk
    production, and (5) milk consumption;

     the impact of the NEDC on the costs to the federal government of its milk
    price support and nutrition assistance programs; 4 and

     the interregional impacts (that is, impacts on other milk- producing
    regions) of the current NEDC, an expanded NEDC, and an expanded

    2 A hundredweight of milk is 100 pounds of milk, which equates to
    approximately 11. 6 gallons. Thus, the Compact?s price of $16.94 per
    hundredweight equates to about $1.46 per gallon of milk.

    3 The Dairy Consumers and Producers Protection Act of 2001 (H. R. 1827, May
    14, 2001, and S. 1157, June 29, 2001) would authorize 6 additional states to
    join the NEDC; establish a southern compact consisting of 17 states; and
    establish a Pacific Northwest compact and an Intermountain compact, each
    consisting of 3 states. Had these compacts existed in 2000, about 61 percent
    of the raw milk produced in the country would have been produced in states
    belonging to one of these compacts.

    4 The milk price support program, administered by the USDA?s Commodity
    Credit Corporation, indirectly ensures a minimum price for milk by
    purchasing cheese, nonfat dry milk, and butter from manufacturers at
    specified prices. The nutrition assistance programs, administered by USDA?s
    Food and Nutrition Service, include the Food Stamp Program; the Special
    Supplemental Nutrition Program for Women, Infants, and Children; and the
    School Breakfast and Lunch Programs.

    Page 3 GAO- 01- 866 Impacts of Dairy Compacts

    NEDC in conjunction with a southern compact on selected farm- level and
    wholesale- level indicators, such as prices, production, and revenue. 5

    To address the first objective, we sought, but did not find, a comprehensive
    economic model to estimate the Compact?s intraregional impacts while holding
    constant other factors that affect the indicators. Further, time and
    resource constraints limited our ability to develop our own model or series
    of models to address the Compact's impact on some or all of the indicators.
    As a result, we analyzed federal, state, and other data on these indicators,
    covering a period of time before and after the NEDC?s minimum pricing
    requirement became effective, to determine any changes in historic trends.
    We also reviewed available studies regarding the NEDC?s potential
    intraregional impacts on these indicators. For the second objective, we
    analyzed information from USDA, the NEDC commission, and the six NEDC
    states. To address the third objective, we used an interregional dairy
    competition model developed by economists at the University of Wisconsin-
    Madison. This economic model is useful for estimating the impacts of
    different dairy policy options, such as compacts, on such indicators as milk
    production, farm revenue, and wholesale commodity prices in various regions
    of the country. In employing this model, we used 1999 data on such
    indicators as milk production, demand, and prices because they were the most
    recent, final data available at the time of our review. Using preliminary
    data for 2000, we also conducted some limited modeling to estimate the
    impacts of compacts in that year. In addition, we consulted with leading
    dairy economists from across the country and USDA officials on our use of
    the model and related assumptions, such as how milk production and purchases
    of different dairy products respond to price changes. Finally, we reviewed
    available studies of the potential interregional impacts of dairy compacts.
    Appendix I provides more detail on our scope and methodology. Appendix II
    provides information on the University of Wisconsin- Madison dairy model and
    the related assumptions that we used.

    5 For purposes of our analysis, the expanded NEDC includes the Compact?s
    current member states plus Delaware, Maryland, New Jersey, New York, and
    Pennsylvania. The southern compact includes Alabama, Arkansas, Georgia,
    Kansas, Kentucky, Louisiana, Missouri, Mississippi, North Carolina, South
    Carolina, Tennessee, and Virginia. As of the end of February 2001, these
    states had enacted laws authorizing their entry into such compacts should
    the Congress establish them. While West Virginia has also enacted such a
    law, we did not include that state in our analysis because of modeling
    difficulties. These difficulties are discussed in app. II.

    Page 4 GAO- 01- 866 Impacts of Dairy Compacts

    It is likely that the Northeast Compact has affected dairy sector indicators
    within the six New England states, but determining the extent to which it
    has done so is difficult. Dairy sector indicators changed to varying degrees
    after July 1997, when the Compact commission?s price became effective.
    Retail milk prices in selected cities and towns within New England increased
    by as much as 20 cents per gallon in July 1997. Although there is general
    agreement that the Compact was a factor in these increases, there is
    disagreement over what portions of the increases can be attributed to the
    Compact because other factors, such as consumer demand and the costs of
    processing and marketing fluid milk, also affect retail prices. Regarding
    milk producer income, according to the Compact commission, farmers supplying
    raw milk to be used for and sold as fluid milk in the NEDC states were paid
    about $146 million from July 1997 through June 2001. This figure represents
    the difference between the Compact price and the minimum federal price. Some
    portion of this amount is likely attributable to the Compact, but it is also
    likely that dairy farmers would have received some portion even without the
    Compact because, depending on market conditions, wholesale milk processors
    often pay more than the minimum federal or state prices to purchase raw
    milk. Finally, for the remaining indicators that we examined, there was
    little difference in historic trends before and after the Compact?s minimum
    price was established: The number of farms continued to decline, milk
    production continued to increase, and fluid milk consumption continued to
    decline. The data showed similar trends for the rest of the United States.

    According to USDA, while the Northeast Compact has not increased the federal
    government?s net costs for its milk price support program, it may have
    increased the government?s costs for one of its nutrition assistance
    programs- the Food Stamp Program. The 1996 farm bill requires that the
    Compact commission compensate USDA for any increased costs to the milk price
    support program resulting from the Compact. As of the end of fiscal year
    2000, the Compact had compensated USDA a total of about $3.2 million.
    Regarding nutrition assistance programs, USDA is not certain whether the
    Compact?s impact on increased retail milk prices in the six Compact states
    was sufficiently large to cause national retail milk prices to increase,
    which could raise Food Stamp Program benefit levels, thus increasing the
    federal government's costs. Concerning USDA?s other major nutrition
    assistance programs, the Compact commission directly reimburses the six NEDC
    states for the estimated cost of increased milk purchased under some of
    these programs. At the end of fiscal year 2000, this compensation totaled
    about $4.5 million, including about $3.8 million Results in Brief

    Page 5 GAO- 01- 866 Impacts of Dairy Compacts

    to cover the estimated increased costs to the Special Supplemental Nutrition
    Program for Women, Infants, and Children.

    We estimate that for 1999 the impacts of different dairy compact
    alternatives on farm- level prices, production, and revenue in other regions
    of the country would have increased as compacts increased in size and
    accounted for a greater portion of the nation?s milk supply. The Northeast
    Compact, which accounts for about 3 percent of the nation?s milk supply, had
    a minimal impact on farm- level prices, production, and revenue in 1999. An
    expanded Northeast Compact would have accounted for approximately 18 percent
    of the nation?s milk supply in 1999, and we estimate that the interregional
    impacts of this Compact would have been a little larger but still small in
    that year. An expanded Northeast Compact in conjunction with a southern
    compact would have accounted for about 27 percent of the nation?s milk
    supply, and its impacts would have been somewhat larger. The estimated
    impacts vary from region to region, and greater impacts are estimated to
    occur in those regions with higher levels of milk production and a larger
    share of raw milk being used to manufacture products such as butter and
    cheese. This is the case in the Upper Midwest (which includes most of
    Minnesota and Wisconsin and portions of five other states), where 80 percent
    of the milk produced is used for manufactured dairy products. For example,
    we estimate that the three dairy compact alternatives mentioned above would
    have reduced 1999 farm- level revenue in the Upper Midwest, which we
    estimate would have been about $4.5 billion in the absence of any dairy
    compact, by between $4 million and $133 million. Table 1 summarizes our
    estimates of how this revenue would have been affected by the three compact
    alternatives.

    Table 1: Reduction in 1999 Farm- Level Revenue in the Upper Midwest Under
    Three Compact Alternatives

    Dollars in millions Reduction in 1999 farm- level revenue Compact
    alternative Dollars Percentage

    Northeast Compact $4 to 9 0. 09 to 0.20 Expanded Northeast Compact 13 to 24
    0.29 to 0.53 Expanded Northeast Compact and a southern compact 26 to 133
    0.57 to 2.93

    Source: GAO's analysis using the University of Wisconsin- Madison dairy
    model.

    Page 6 GAO- 01- 866 Impacts of Dairy Compacts

    In 2000, national average farm- level milk prices were lower than they were
    in 1999, resulting in a larger difference between the NEDC's and USDA's
    minimum prices. Consequently, one would expect that the NEDC would have
    greater economic impacts than in years when USDA's minimum prices were high.
    Nevertheless, using preliminary data available for 2000, our estimates of
    the impacts of the three compact alternatives are similar to those in 1999.
    In addition, our review of the available studies of the interregional impact
    of dairy compacts indicated that our estimates are comparable to those
    estimated by other agricultural economists.

    We provided a draft of this report to USDA officials and the Executive
    Director of the Northeast Compact commission to obtain their comments. In
    general, these officials stated that we conducted a comprehensive assessment
    of the impacts of dairy compacts. However, the Executive Director expressed
    some concern about the model we used to estimate interregional impacts.

    Of the approximately 167.7 billion pounds of raw milk produced in the United
    States in 2000, about 55.5 billion pounds were processed into fluid milk
    products- such as whole, 2- percent, 1- percent, and skim milk; flavored
    milks; and buttermilk- that yielded approximately $22 billion in retail
    sales. The rest of the raw milk was used to produce manufactured products,
    such as butter, cheese, ice cream, powdered milk, and yogurt. In the United
    States, a complex pricing system has evolved that affects prices paid for
    raw milk used to produce processed milk (fluid drinking milk) and
    manufactured dairy products, such as cheese and butter. Various milk
    regulators- USDA, some states, and the Northeast Dairy Compact- establish
    minimum prices that must be paid for raw milk to help stabilize the milk
    supply. In addition to USDA, the states, and the NEDC, other entities affect
    milk prices, including cooperatives, which may provide services to farmers
    such as collecting farmers? milk; milk processors, which convert raw milk to
    fluid milk; manufacturers of dairy products; and retailers, which stock and
    sell dairy products to consumers. Each of these groups contributes to the
    value of fluid milk and dairy products sold at the retail level, and each
    receives a portion of the difference between the prices that farmers receive
    and the retail price.

    USDA's milk marketing and milk price support programs, as well as some
    states' dairy programs, are intended to ensure an adequate supply of milk by
    establishing milk prices and other milk marketing rules, which, in turn, are
    intended to stabilize milk marketing conditions and thus assist Background

    Federal and State Dairy Programs

    Page 7 GAO- 01- 866 Impacts of Dairy Compacts

    individual farmers as well as consumers. In effect, these programs ensure
    that farm prices do not fall below a minimum level and provide a safety net
    for individual farmers who lack the market power of other entities, such as
    wholesale milk processors.

    Currently, about 70 percent of the milk produced in the United States is
    regulated under the federal milk marketing order program created in 1937 and
    administered by USDA. Under this program, on the basis of national dairy
    market information, USDA sets the minimum prices that must be paid by
    processors for raw fluid grade milk in specified marketing areas, or orders.
    6 These prices vary by the type of dairy product for which the milk is used;
    the minimum price for raw milk used for fluid drinking purposes also varies
    by location. Even though USDA sets minimum prices for raw milk, buyers of
    milk can and sometimes do pay farmers prices in excess of the established
    minimums- prices known as ?over- order premiums.? Market forces play a role
    in determining any such premiums.

    Under the federal milk marketing order program, USDA has a classified
    pricing system for setting minimum prices, on a monthly basis, for milk that
    is based upon its intended use, as shown in table 2. 7 Federal milk
    marketing order class prices are determined by using product price formulas
    that compute milk component values based on wholesale dairy product prices.
    For example, Class III formulas use monthly average butter, cheese, and dry
    whey prices to determine values for butterfat, protein, and other solids,
    respectively. Class IV formulas use monthly average butter and nonfat dry
    milk prices to determine values for butterfat and nonfat solids,
    respectively. The Class II price is determined by adding an amount- a Class
    II differential- to the Class IV price, while the Class I price is
    determined by adding a Class I differential to the higher of the Class III
    or IV price. Class I prices can vary from one milk marketing order to
    another.

    6 The federal milk marketing order program currently in place consists of 11
    geographic orders, each covering multiple states or portions of states. For
    example, the Northeast order includes the following states or portions
    thereof: Connecticut, Delaware, Massachusetts, Maryland, New Hampshire, New
    Jersey, New York, Pennsylvania, Rhode Island, Vermont, and Virginia. It also
    includes the District of Columbia. Maine is not part of the order. Instead,
    Maine has its own commission that regulates milk prices.

    7 The 1996 farm bill required USDA to revise its milk marketing order
    program. Among other things, USDA collapsed its 31 orders into 11, increased
    the number of milk classes from three to four, and changed its formulas for
    setting minimum prices. These changes took effect in January 2000.

    Page 8 GAO- 01- 866 Impacts of Dairy Compacts

    Table 2: USDA?s Milk Classes Used for Setting Milk Prices Class Usage

    Class I Fluid milk for drinking purposes Class II Soft manufactured
    products, such as cream products, cottage

    cheese, ice cream, and yogurt Class III Cream cheese, other spreadable
    cheeses, and hard cheese Class IV Butter and dried milk products such as
    nonfat dry milk

    Source: USDA.

    Dairy farmers selling raw milk within a federal milk marketing order receive
    an average, or ?blend,? price that is the weighted average of the prices of
    Class I through IV milk, with the weights determined by the amount of milk
    sold for each class of use in each marketing order. The average price
    farmers receive, therefore, depends in part on the extent to which the total
    raw milk supply in a specific order is used to make fluid milk as opposed to
    the three classes of manufactured products.

    Dairy farmers located in one milk marketing order sometimes ship their milk
    to another order to obtain a higher price. Depending on the amount of milk
    shipped, a producer may qualify for a receiving order?s blend price. If the
    producer meets the receiving milk marketing order's blend price
    requirements, not only can the milk shipped qualify for the blend price- all
    of that producer's milk can qualify for the blend price. However, farmers
    must consider whether the cost of transporting a sufficient amount of milk
    to qualify for the receiving order's blend price outweighs the benefit of
    receiving a higher blend price.

    Some states, such as California, Maine, Nevada, New York, Pennsylvania, and
    Virginia, have established their own minimum farm- level milk pricing
    programs that cover all or portions of their states. These states have
    established commissions or boards to perform functions similar to those of
    USDA. For example, Virginia?s milk commission, created in 1934, establishes
    monthly producer prices to ensure dairy farmers an adequate return on their
    investment and to preserve market stability. Similarly, Nevada?s dairy
    commission, established in 1955, sets minimum prices for raw milk sold to
    processing facilities located within that state.

    The federal milk price support program, established in 1949, also influences
    farm- level prices. This program supports farm- level prices by providing a
    standing offer from USDA to purchase butter, cheese, and nonfat dry milk at
    specified prices. The prices offered for these dairy products are intended
    to provide sufficient revenue so that dairy product manufacturers can pay
    farmers, on average, a legislatively mandated

    Page 9 GAO- 01- 866 Impacts of Dairy Compacts

    support price. This program is intended to make the support price a floor
    price for raw milk used for manufacturing purposes, and it is unlikely that
    manufactured product prices will fall below the floor for very long. Because
    the price for raw milk used for fluid purposes is based, in part, on the
    price of raw milk used for manufacturing purposes, the price support program
    influences the price that farmers receive for raw milk used for fluid
    purposes as well.

    In addition to the federal and state milk marketing order programs that set
    minimum milk prices, in 1996, the Congress authorized the Northeast
    Interstate Dairy Compact for the six New England states. The Compact
    supplements the federal milk marketing order and state programs by setting
    the monthly minimum price to be paid for raw milk used for fluid milk
    marketed in the six- state area. 8 In July 1997, the Compact set a minimum
    price of $16. 94 per hundredweight for raw milk used for Class I, or fluid
    milk, and that minimum price has not changed. In months when the federally
    set minimum price for Class I milk for the Northeast Milk Marketing Order
    falls below the Compact price, the Compact price takes effect. 9 In other
    months, when the federally set Class I price is higher than the Compact
    Class I price, the federally set Class I price takes effect. Since the
    Compact was established, federally set minimum prices for the area of the
    Compact that is subject to federal milk marketing regulation have ranged
    from $13.50 to $20. 50 per hundredweight but have usually been below the
    Compact price of $16.94 per hundredweight.

    In those months when the Compact Class I price is higher than the federally
    set Class I price, processors having sales of fluid milk in the six NEDC
    states are required to pay a monthly over- order obligation per
    hundredweight equal to the difference between $16.94 and the federally set
    Class I price. Processors multiply the monthly over- order obligation by the
    volume of their total fluid milk sales in the six NEDC states in

    8 Raw milk sold in the Compact states for manufacturing purposes is not
    eligible for the minimum price set by the Compact commission. 9 Prior to
    January 2000, USDA?s New England Milk Marketing Order established the
    minimum federal milk prices in those New England areas that fell under
    federal milk marketing regulations. In January 2000, USDA reorganized its
    milk marketing orders, collapsing the then- existing 31 orders into 11. The
    new Northeast Milk Marketing Order assumed responsibility for setting
    minimum milk prices in those New England areas that fall under federal milk
    marketing regulations. Dairy Compacts

    Page 10 GAO- 01- 866 Impacts of Dairy Compacts

    hundredweight by this difference and pay this amount to the commission that
    administers the Compact. After deducting administrative fees and other
    expenses, the commission distributes the balance of the proceeds in
    accordance with the amount of milk produced that was actually used for fluid
    milk, as opposed to cheese or other manufactured products. The commission
    makes disbursements to farmer cooperatives and milk handlers, located both
    within and outside the NEDC states, who then make individual payments to
    farmers based on their production. Thus, dairy farmers from other states,
    such as New York, that supply raw milk used to make fluid milk that is sold
    in the Compact states also benefit from the Compact?s minimum prices.

    The 1996 farm bill provided the Compact with considerable flexibility to
    establish regulations to carry out its intended purpose. The legislation
    authorized the establishment of a commission composed of delegates from the
    six NEDC states to administer the Compact. The state delegates are appointed
    by each of their respective states and include farmer, milk processor, and
    consumer representatives. In addition to being empowered to establish
    Compact prices, the commission may investigate costs associated with
    producing and selling milk; examine the economic forces affecting producers,
    including trends in production, consumption, and the financial conditions of
    dairy farmers; and prepare and provide periodic reports to the states
    regarding its efforts. While the commission is required to report annually
    to USDA, USDA is not required to investigate or report on the commission?s
    efforts.

    States in other regions of the country, including some southern states, are
    considering the adoption of similar compact arrangements. The proposed Dairy
    Consumers and Producers Protection Act, a bill that was introduced in the
    Congress in May 2001, if enacted, would reauthorize the NEDC. The bill would
    also allow additional states to enter the NEDC. 10 In addition, it would
    establish a southern dairy compact consisting of 17 states, as well as a
    Pacific Northwest dairy compact and an Intermountain dairy compact, each
    consisting of 3 states. 11 The proposed bill, like the 1996 farm

    10 The proposed expanded NEDC would also include Delaware, Maryland, New
    Jersey, New York, Ohio, and Pennsylvania. 11 The proposed southern compact
    would include Alabama, Arkansas, Florida, Georgia, Kansas, Kentucky,
    Louisiana, Mississippi, Missouri, Nebraska, North Carolina, Oklahoma, South
    Carolina, Tennessee, Texas, Virginia, and West Virginia. The proposed
    Pacific Northwest compact would include California, Oregon, and Washington.
    The proposed Intermountain compact would include Colorado, Nevada, and Utah.

    Page 11 GAO- 01- 866 Impacts of Dairy Compacts

    bill, would provide the compact commissions with broad flexibility to carry
    out their objective of ensuring the continued viability of the dairy
    industry in their states. Therefore, it cannot be known in advance whether
    commissions for these new compacts would regulate milk pricing in their
    respective states in a manner similar to the way that the NEDC commission
    has regulated milk pricing.

    In addition to federal and state programs and the NEDC, other entities
    affect prices paid for milk at the wholesale and retail levels. For example,
    about 83 percent of all raw milk produced in the United States is marketed
    through dairy cooperatives that are owned by farmer- members. Cooperatives
    perform services for their members and buyers of milk such as (1)
    transporting milk among different milk producing areas, (2) scheduling milk
    deliveries, (3) testing milk, and (4) paying members for their marketings.
    12 Costs for these services are paid by processors and dairy product
    manufacturers that purchase milk from the cooperatives at prices above
    federally specified minimum prices and then process or manufacture, package,
    and distribute fluid milk and manufactured dairy products to retailers. The
    costs that processors and manufacturers incur in purchasing raw milk from
    farmers or cooperatives and in processing or manufacturing, packaging, and
    distributing fluid milk and manufactured dairy products are included in
    prices charged to retailers for these products. Finally, the prices that
    retailers set for selling milk and dairy products are affected by the
    retailers? operating costs, such as labor, rent, and utilities; their
    strategies for pricing milk and manufactured dairy products; and the demand
    for those products. 13

    Although dairy sector indicators that we examined changed after the NEDC?s
    milk pricing regulations took effect in July 1997, it is difficult to
    determine how much of the change is attributable to the Compact. Such a
    determination is difficult because the Compact?s impact on these indicators
    cannot be easily isolated from the effects of other factors. For example,
    while retail milk prices increased by 15 to 20 cents per gallon in July
    1997, and there is general agreement that the Compact contributed to these
    increases, the lack of an economic model that fully accounts for the

    12 Some cooperatives also process milk and sell the products directly to
    retailers or consumers. 13 A detailed discussion of factors affecting milk
    prices is included in our report entitled

    Dairy Industry: Information on Milk Prices and Changing Market Structure
    (GAO- 01- 561, June 15, 2001). Other Factors Affecting

    Milk Prices Isolating the Intraregional Impacts of the NEDC Is Difficult

    Page 12 GAO- 01- 866 Impacts of Dairy Compacts

    influences of other factors, such as costs for processing fluid milk, makes
    it difficult to determine how much of that price increase can be attributed
    to the NEDC. Similarly, while the Compact has resulted in payments being
    made to dairy farmers that reflect the difference between USDA?s marketing
    order minimum prices and the NEDC?s minimum price, it is difficult to
    determine whether some portion or all of these payments would have been made
    to dairy farmers anyway, depending on market conditions. Although economic
    reasoning suggests that the Compact would be likely to cause increased milk
    production and reduced fluid milk consumption in the six NEDC states,
    analyses of relevant data on dairy farm structure, milk production, and milk
    consumption show little change in historic trends after the Compact?s
    implementation.

    Retail milk prices increased by as much as 20 cents per gallon immediately
    following the NEDC?s establishment- which is an amount comparable to the
    immediate increase in the minimum farm- level price for raw milk to be used
    for and sold as fluid milk in the six New England states when the NEDC?s
    price regulations became effective. For example, the NEDC minimum price of
    $1.46 per gallon was 18 cents higher than USDA?s June 1997 Class I price for
    Boston of $1. 28 per gallon and 26 cents higher than USDA?s July 1997 Class
    I price of $1.20 per gallon. While this might appear to be a substantial
    increase, when compared with USDA?s average Class I price of $1.41 per
    gallon during the prior year, the NEDC price did not actually represent such
    a large increase. However, without a model of farm- to- retail price
    transmission that accounts for how quickly and how fully farm- level price
    changes are passed on to wholesale and retail levels, we cannot estimate how
    much of the retail price change was due to the Compact.

    Furthermore, while retail milk prices in Boston and other selected cities in
    the NEDC states remain at the higher levels experienced since the Compact
    took effect, national average retail prices have also increased, but at
    rates lower than in the NEDC states. Even so, it is not certain what portion
    of the retail price increase in the NEDC states is attributable to the
    Compact, given that both the retail and farm- level prices for milk have
    fluctuated since July 1997. Some portion of the price increase could also be
    due to other factors, such as changes in the costs for processing or
    retailing milk, marketing strategies, or consumer demand. In addition, it is
    difficult to estimate the extent to which fluid milk processors would have
    paid more than the minimum farm- level price for milk without the NEDC; that
    is, we do not know the extent to which the NEDC price substituted for
    market- driven over- order premiums. Several studies analyzing the NEDC?s
    impact on retail milk prices concluded that the NEDC has

    Page 13 GAO- 01- 866 Impacts of Dairy Compacts

    increased prices. 14 However, the amount of the increase attributed to the
    NEDC varies from study to study, depending on assumptions made by the
    different researchers and the time periods that they examined. For example,
    estimates ranged from a low of 2.7 cents to as much as 20 cents per gallon.

    Data on farm income are limited, and while dairy farmers have received NEDC
    payments, 15 it is unclear to what extent these payments replaced market-
    driven over- order premiums that farmers might have been paid in the absence
    of the Compact. We estimate that through calendar year 2000, the NEDC
    payments made to dairy farmers in the six NEDC states totaled about $99
    million, assuming that all dairy farmers located in these states had their
    milk processed at fully regulated NEDC plants. 16 The NEDC payments that an
    average dairy farmer in one of the six states would have received would have
    fluctuated widely from month to month and from year to year, however,
    depending on the difference between USDA?s Class I price and the Compact
    price of $16.94 per hundredweight and the percentage of milk used for fluid
    milk in the NEDC states. For example, in 1998 the average NEDC over- order
    producer price payment was 67 cents per hundredweight. This would have
    provided dairy farmers supplying raw milk used to produce fluid milk sold in
    the NEDC states about 25 cents per hundredweight, based on the percentage of
    raw milk used for fluid milk. We estimate that these payments provided the
    average dairy farmer in the six NEDC states about $3,892 above the minimum
    amount that the farmer would have received in 1998 had USDA?s Class I price
    of $16.78 been in

    14 Office of Management and Budget, The Economic Effects of the Northeast
    Interstate Dairy Compact, Feb. 1998; Daniel A. Lass, Mawunyo Adanu, and P.
    Geoffrey Allen,

    ?Impacts of the Compact on Fluid Milk Retail Prices," The Northeast
    Interstate Dairy Compact: Milk Market Impacts, Research Report 73,
    Agricultural Experiment Station, University of Vermont, Mar. 2000; Kenneth
    Bailey, ?Report on the Operation and Performance of the Northeast Interstate
    Dairy Compact,? Department of Agricultural Economics and Rural Sociology,
    Pennsylvania State University, July 2000; testimony by Ronald W. Cotterill
    on The Impact of the Northeast Dairy Compact and Market Channel Pricing
    Strategies on the Performance of the New England Dairy Industry, before the
    U. S. Senate Committee on the Judiciary, July 25, 2001; and Ronald W.
    Cotterill and Andrew W. Franklin, The Public Interest and Private Economic
    Power: A Case Study of the Northeast Dairy Compact, Food Marketing Policy
    Center, Department of Agricultural and Resource Economics, University of
    Connecticut, May 2, 2001.

    15 An NEDC payment is the payment attributable to the difference between
    USDA?s minimum Class I price and the Compact price. 16 A fully regulated
    NEDC plant is one that is physically located within one of the six NEDC
    states and that receives, processes, or packages milk or dairy products.

    Page 14 GAO- 01- 866 Impacts of Dairy Compacts

    effect. 17 In 2000, the average NEDC over- order producer price payment was
    $2.14 per hundredweight. This amount would have provided a farmer supplying
    raw milk used to produce fluid milk sold in the NEDC states about 91 cents
    per hundredweight, based on the percentage of raw milk used for fluid milk.
    These payments provided an average dairy farmer in the six NEDC states about
    $15,301 above the minimum amount that the farmer would have received in 2000
    had USDA?s Class I price of $14.80 been in effect. These estimates are
    comparable to data developed by the Compact commission, which indicate that
    dairy farmers in the six NEDC states and New York received over- order
    payments totaling about $146 million from July 1997 through June 2001. In
    particular, the NEDC data indicate that about 4,200 dairy farmers, including
    1,300 in New York, received average annual payments of about $9,800. Whether
    these payments were sufficient to alter the financial health of dairy
    farmers supplying raw milk used to produce fluid milk sold in the NEDC
    states is difficult to determine, however. USDA data are inconclusive as to
    whether the Compact had a positive impact on NEDC dairy farmer income, while
    NEDC analyses conclude that the Compact stabilized and enhanced farmer
    income.

    A limited number of studies have been conducted on the Compact?s impact on
    farm income. In its 1998 report, the Office of Management and Budget (OMB)
    estimated a 6- to 8- percent increase in farm income from July through
    December 1997. In addition, an economist at the University of Vermont
    modeled the effect on Vermont dairy farmers of establishing a floor for
    Class I prices and concluded that stabilizing prices by having a price floor
    could have a positive impact on dairy farmer income. 18

    The NEDC?s impact on farm structure is unclear. The number of dairy farms
    decreased, and the average size of herds increased, both prior to and
    following the NEDC?s establishment in both the Compact states and the rest
    of the country. For example, the number of licensed dairy farms in the six
    NEDC states decreased by 32 percent between 1992 and 2000, from 4,079 to
    2,772, while the number of licensed dairy farms in the rest of the

    17 USDA?s Class I price was greater than the NEDC price in 4 months of 1998.
    In calculating the average annul NEDC over- order payment for 1998, the NEDC
    payment for those months was zero. Therefore, the difference between the
    average annual NEDC and USDA price s is not equal to the average annual NEDC
    over- order payment.

    18 Rick W. Wackernagel, ?Potential Economic Impacts of the Northeast
    Interstate Dairy Compact on Vermont Dairy Farms,? Agricultural and Resource
    Economics Review, Apr. 1998.

    Page 15 GAO- 01- 866 Impacts of Dairy Compacts

    country decreased by 37 percent during the same period, from 127,456 to
    80,253. Regarding herd size, the average herd in the six NEDC states
    increased 36 percent, from 58 to 79 milk cows, between 1992 and 2000. In the
    rest of the United States, the average herd increased 57 percent during the
    same period, from 56 to 88 milk cows. According to USDA, this decline in the
    number of farms, along with the increase in herd size, most likely reflects
    fundamental changes in dairy farming caused by such factors as technological
    and genetic advances.

    Although economic reasoning suggests that higher farm- level milk prices
    would result in increased raw milk production, we have no basis on which to
    estimate the specific impact that the Compact has had on milk production in
    the six NEDC states. Data on milk production show an increase in total milk
    produced and milk produced per dairy cow, but these trends began prior to
    the Compact?s establishment, making it difficult to estimate the specific
    impact of the NEDC. Farmers in the NEDC states increased their total milk
    production by 2.9 percent, from 4.5 billion pounds in 1993 to 4.7 billion
    pounds in 2000, while farmers in the rest of the nation increased production
    by 10.3 percent, from 148 billion pounds to 163.3 billion pounds during the
    same period. The average amount of milk produced per cow in the NEDC states
    increased by about 11.6 percent during the same period, from 15,633 pounds
    to 17,440 pounds. Milk production per cow in the rest of the United States
    increased by about 15.9 percent during this period, from 15,726 pounds to
    18,226 pounds. Studies of the NEDC?s impact on milk production, including
    OMB?s study and an analysis by researchers at the University of Vermont,
    estimated that the Compact has resulted in a slight increase in milk
    production in the NEDC states. 19

    We cannot estimate the specific impact that the Compact has had on fluid
    milk consumption in the six NEDC states, in part because we cannot estimate
    how much of the retail price change since July 1997 has been due to the
    Compact. Data on fluid milk consumption show a decrease in per capita milk
    consumption, which reflects trends both within the NEDC states and in the
    rest of the country that began prior to the NEDC?s establishment. Per capita
    consumption of fluid milk was higher in USDA?s New England Milk Marketing
    Order than in some other USDA marketing

    19 Charles F. Nicholson, Budy P. Resosudarmo, and Rick W. Wackernagel,
    ?Impacts of the Compact on New England Milk Supply,? The Northeast
    Interstate Dairy Compact: Milk Market Impacts, Research Report 73,
    Agricultural Experiment Station, University of Vermont, Mar. 2000.

    Page 16 GAO- 01- 866 Impacts of Dairy Compacts

    orders prior to the Compact. Even so, consumption of fluid milk had been
    slowly declining, both in that marketing order and in the rest of the
    country, as the consumption of other fluid beverages increased and as the
    population aged. For example, annual per capita milk consumption for the New
    England Milk Marketing Order declined by 4 percent from 1993 to 1999, or
    from about 233 to 223 pounds. Similarly, annual per capita milk consumption
    for all the other USDA marketing orders declined 6 percent from 1993 to
    1999, or from about 214 to 202 pounds. In its 1998 study, OMB?s analysis of
    the NEDC?s impact on fluid milk consumption during the last half of calendar
    year 1997 showed a 0.5- percent decline; while in a July 2000 study, an
    economist at Pennsylvania State University estimated that the NEDC had no
    appreciable impact from mid- 1997 through 1999. 20

    Additional details about the intraregional impacts of the NEDC are included
    in appendix III.

    According to USDA, the NEDC has not resulted in a net increase in the
    federal government?s costs for its milk price support program, while it is
    not certain whether it has affected federal costs for one of its major
    nutrition assistance programs. The Compact commission must, by law,
    compensate USDA for any estimated increase in costs to its price support
    program that are caused by the Compact, and the NEDC commission has done so.
    Regarding its nutrition assistance programs, USDA estimates that federal
    costs to its largest nutrition assistance program- the Food Stamp Program-
    could have increased but federal costs for its other nutrition assistance
    programs have likely not increased.

    As required by the 1996 farm bill, when the rate of increase in milk
    production in the NEDC states exceeds the rate of increase in national milk
    production, the Compact commission must compensate USDA for any additional
    costs to the milk price support program that result, and the commission has
    done so. 21 According to USDA officials, the NEDC did not result in a rate
    of increase in production greater than the national rate of

    20 OMB?s Feb. 1998 study; and Kenneth Bailey, Report on the Operation and
    Performance of the Northeast Interstate Dairy Compact, Pennsylvania State
    University, Department of Agricultural Economics and Rural Sociology, July
    2000.

    21 Neither the NEDC commission nor USDA must determine if the increase in
    the rate is attributable to the NEDC. The NEDC Has Not

    Increased Net Federal Costs for the Milk Price Support Program, but Its
    Impact on a Major Nutrition Assistance Program Is Less Certain

    Page 17 GAO- 01- 866 Impacts of Dairy Compacts

    increase in 1997, during the first 6 months of the Compact. USDA calculated
    that in 1998, milk production in the NEDC states was 1.8 percent greater
    than the average of the prior 2 years, compared with a national increase of
    1.3 percent. The NEDC compensated USDA $1.8 million for this higher rate of
    increase in production. USDA calculated that in 1999, milk production in the
    six states was 3.6 percent greater than the average of the prior 2 years,
    compared with a national increase of 3.2 percent. The NEDC compensated USDA
    $1.4 million for this higher rate of increase in production. USDA calculated
    that milk production in the six NEDC states increased by 0.1 percent in
    2000, compared with a national increase of 5.1 percent. Thus, compensation
    was not required.

    USDA is not certain whether the Compact has affected federal costs for the
    Food Stamp Program, which is USDA?s largest nutrition assistance program.
    According to USDA, if (1) retail milk prices in the NEDC states increased
    sufficiently to increase national average retail milk prices, and (2) the
    Compact was the cause of the full amount of the price increases in the NEDC
    states, then the Compact might have increased federal Food Stamp Program
    costs because program benefits are sensitive to the national average retail
    milk price. 22 Benefit levels and federal Food Stamp Program funding have
    increased since July 1997, because of, among other things, increased
    national average retail milk prices. However, according to USDA, it is
    difficult to establish the Compact?s impact on retail milk prices in the six
    NEDC states, and thus it is difficult to establish the Compact's role in
    affecting national average retail milk prices. If the Compact would have
    caused benefit levels to increase to the next dollar, USDA estimates that
    the Compact increased annual federal program costs by about $60 million. If
    the Compact did not cause benefit levels to increase to the next dollar, any
    increased retail milk prices caused by the Compact would have been absorbed
    by program participants in the NEDC states.

    Regarding USDA?s other major nutrition assistance programs, such as the
    Special Supplemental Nutrition Program for Women, Infants, and Children
    (WIC), and the National School Breakfast and Lunch Programs, USDA has
    concluded that federal costs have not increased as a result of the NEDC.
    Federal WIC program costs have not increased because WIC is a

    22 Food Stamp Program benefits are indexed to the cost of the Thrifty Food
    Plan- a nutritious low- cost model diet plan. Milk represents about 10
    percent of the value of the plan. Maximum program benefit levels are rounded
    down to the nearest dollar of the plan?s value.

    Page 18 GAO- 01- 866 Impacts of Dairy Compacts

    discretionary grant program. Federal school breakfast and lunch program
    costs have not increased because the level of federal reimbursements is
    based on the average price of a large variety of food items, which is
    relatively insensitive to changes in the retail price of milk. 23 Because
    federal funding for WIC and school breakfast and lunch programs have not
    increased, those state or local agencies or organizations that provide
    program benefits or program participants have had to absorb any increase in
    retail milk prices caused by the NEDC. Although the 1996 farm bill does not
    require the Compact to do so, the commission compensates the six states for
    the increased milk costs incurred by the WIC and school programs that are
    estimated to be attributable to the NEDC. Through December 2000, the NEDC
    provided state WIC programs a total of $3. 8 million, and the schools a
    total of $662,606.

    Should compacts be expanded to include additional states, smaller increases
    in retail milk prices within the compact states would be necessary to
    increase the national average retail milk price and, hence the level of Food
    Stamp Program benefits and federal funding. For example, USDA estimates that
    should retail milk prices increase by about 20 cents per gallon- an amount
    similar to the immediate increase in the NEDC states when the commission
    established an NEDC price- within a compact of states that represents 50
    percent of the nation?s fluid milk sales, monthly food stamp allotments
    would be forced up by, on average, $1 to $2. USDA estimates that these
    increases in monthly food stamp allotments would increase annual Food Stamp
    Program costs by $60 to $120 million. Nonfederal costs to its other major
    nutrition assistance programs, including WIC and the school programs, could
    also increase should compacts be expanded. While two studies analyzed the
    NEDC?s impact on USDA?s nutrition assistance programs, the studies relied on
    a limited amount of data on retail milk prices in the six NEDC states, and
    their results are inconclusive. 24

    Additional details about the NEDC?s impact on USDA?s milk price support and
    nutrition assistance programs are included in appendix IV.

    23 National School Lunch Program and School Breakfast Program reimbursements
    are indexed to the consumer price index for food- away- from- home for urban
    consumers. 24 OMB?s Feb. 1998 study; and Qingbin Wang, Zooyob Anne,
    Catherine Halbrendt, Charles Nicholson, and Jaimie Sung, ?Impacts of the
    Compact on the WIC Program: Evidence From Boston and Hartford,? The
    Northeast Interstate Dairy Compact: Milk Market Impacts,

    Research Report 73, Agricultural Experiment Station, University of Vermont,
    Mar. 2000.

    Page 19 GAO- 01- 866 Impacts of Dairy Compacts

    Our estimates of the interregional impacts of dairy compacts in 1999 on such
    measures as farm- level prices, milk production, and farm revenue range from
    minimal to somewhat larger, depending on the size of the compact and the
    assumptions that we used to run the economic model. The NEDC states account
    for only about 3 percent of the milk produced in the nation, and we estimate
    that in 1999 it had little to no impact in other regions of the country on
    farm- level prices or milk production and, hence, on farm revenue. An
    expanded NEDC would account for approximately 18 percent of the milk
    produced in the nation, and we estimate that in 1999 it would have had a
    larger but still relatively small impact on farm- level prices, milk
    production, and farm revenue in other regions of the country. An expanded
    NEDC, in conjunction with a southern compact, would account for
    approximately 27 percent of the quantity of milk produced in the nation, and
    we estimate that in 1999 it would have had a somewhat larger impact on farm-
    level prices, milk production, and revenue in other regions of the country.
    These estimates are comparable to other economists? estimates of the
    interregional impacts of dairy compacts of different sizes.

    In general, if dairy farmers located within a compact region received higher
    farm- level milk prices than they would otherwise have received, they would
    respond by increasing their raw milk production. Moreover, these higher
    farm- level milk prices would likely lead to higher fluid milk retail prices
    in the compact region- prices that would lower consumer purchases of fluid
    milk in that region. These two effects in the compact region- greater raw
    milk production and lower consumer fluid milk purchases- would increase the
    national supply of raw milk that was available for the manufacture of other
    dairy products, such as cheese, butter, and nonfat dry milk. In turn, this
    increase in the national supply of milk for manufacturing purposes would
    result in lower farm- level prices for raw milk to be used for manufacturing
    purposes. Because minimum Class I prices are based on the prices paid for
    raw milk to be used for manufacturing purposes, farmers in noncompact
    regions would receive lower farm- level prices for all classes of milk and,
    thus, lower blend prices. Other things being equal, dairy farmers in
    noncompact regions would respond to lower farm- level prices by reducing
    their milk production. 25 These two effects in noncompact regions- lower
    farm- level prices and reduced production- would cause farm revenue there to
    fall. This impact

    25 This reduction in production by dairy farmers in noncompact regions would
    keep the farm- level price for milk from falling further. Estimated 1999

    Interregional Impacts of Various Compact Alternatives Increased as Compacts
    Grew in Size

    Page 20 GAO- 01- 866 Impacts of Dairy Compacts

    would be particularly significant for dairy farmers in regions such as the
    Upper Midwest, where most milk is used for manufacturing purposes. Farmers
    in noncompact regions who ship their milk to compact regions may be eligible
    to receive the compact region?s farm- level price for that milk, which could
    offset the loss in revenue associated with lower farmlevel prices for milk.
    If the compact price is sufficiently high, any increased transportation or
    shipping costs could be offset.

    To assess the likely interregional impacts of each compact alternative or
    scenario, we derived an initial set of estimates that represents the impact
    of that alternative in 1999, given an initial set of assumptions. 26 We then
    changed key assumptions to analyze how sensitive our initial estimates were
    to such changes. In general, these sensitivity analyses demonstrated that
    our initial estimates were not very sensitive to changes in the key
    assumptions. (For a more detailed description of our initial and subsequent
    sets of assumptions, see app. II.) Accordingly, we present our estimates of
    the impacts of the different compact scenarios as ranges that include our
    initial set of estimates and the results of our sensitivity analyses. In
    addition, we present these estimates as changes from our 1999 baseline
    estimates, which represent the estimated values of farm- level and
    wholesale- level dairy indicators in that year in the absence of any dairy
    compact- our ?no- compact scenario.?

    Our estimates apply only to 1999, and they may not represent the
    interregional impacts of compacts in all years. In particular, these
    estimates are based on data for the period prior to USDA?s milk marketing
    order regulatory reforms in January 2000, which have affected some dairy
    sector indicators, such as farm- level milk prices. Furthermore, farm- level
    milk prices in 1999 were higher than they were in some other years, and we
    anticipate that, other things being equal, compacts have less of an impact
    in years when farm- level prices are relatively high. 27 In addition,

    26 These assumptions pertain to the (1) responsiveness of milk production to
    changes in farm- level milk prices, (2) responsiveness of demand to changes
    in wholesale- level dairy commodity prices, (3) level of market- driven
    over- order premiums, (4) ability of milk to be shipped between regions, (5)
    amount of the compact over- order producer price payment, and (6) amount of
    transportation costs.

    27 We included data from 2000 as one of our sensitivity analyses; however,
    we did not use 2000 as a base year for estimating the interregional impacts
    because complete data for that year are not yet available. Furthermore,
    modeling the impacts of compacts using 2000 data could produce estimates
    that are less reliable than estimates derived from 1999 data because the
    dairy industry was in the process of adjusting to USDA?s January 2000 milk
    marketing order reforms.

    Page 21 GAO- 01- 866 Impacts of Dairy Compacts

    although our estimated impacts of compacts on noncompact regions for both
    1999 and 2000 are relatively small, the impacts on some individual dairy
    farmers, such as small producers with marginal profitability, in noncompact
    regions could be significant.

    Finally, as in any modeling effort, there is some uncertainty about a
    model's structure and the data and assumptions used. In addition, the model
    that we used was limited in its ability to distinguish between shipments of
    bulk raw milk and packaged fluid milk into regions that import milk to meet
    their demand because the model is an annual model, and such shipments are
    frequently seasonal. (See app. II for a discussion of this as well as other
    modeling limitations.) Despite this uncertainty and limitation, we believe
    that the process for developing our estimates was rigorous and that the
    model is comprehensive and sound. Given these conditions, our estimates
    should be interpreted as indicative of the order of magnitude of changes in
    farm and wholesale economic values, rather than as precise estimates.

    Appendix V provides more detailed information about our estimates of the
    impacts of the three compact alternatives on 1999 farm- level prices,
    production, and revenue in noncompact regions, as well as on national
    average wholesale- level prices and national wholesale- level production and
    expenditures.

    We estimate that the NEDC resulted in small economic impacts in noncompact
    regions in 1999. Specifically, we estimate that the largest reductions in
    farm- level revenue under the NEDC compared with the nocompact scenario
    occurred in California and the Upper Midwest region: from $4 million to $11
    million and from $4 million to $9 million, respectively. 28 Table 3 provides
    our estimates of the extent to which the NEDC reduced farm- level revenue-
    that is, the value of all milk sold by

    28 In the University of Wisconsin- Madison dairy sector model, the Upper
    Midwest region is represented as Minnesota, North Dakota, and Wisconsin.
    Interregional Impacts of

    the NEDC in 1999 Were Small

    Page 22 GAO- 01- 866 Impacts of Dairy Compacts

    dairy farmers- in these two regions and in all noncompact regions combined.
    29

    Table 3: Estimated Reduction in 1999 Farm- Level Milk Revenue in Noncompact
    Regions as a Result of the NEDC

    Dollars in millions Estimated revenue reduction with the NEDC

    Region Estimated farm- level

    revenue under the nocompact scenario Dollars Percentage

    California $3,954 $4 to 11 0.10 to 0.28 Upper Midwest 4, 533 4 to 9 0. 09 to
    0.20 All noncompact regions 18,513 11 to 29 0.06 to 0.16

    Source: GAO analysis using the University of Wisconsin- Madison dairy model.

    These estimated impacts on farm- level revenue were small because dairy
    farmers in the NEDC states produced only about 3 percent of the nation?s
    milk supply. As a result, any increased supply of milk that was available
    for manufacturing purposes in 1999 from NEDC farmers was small compared with
    the nation?s total milk supply for manufacturing purposes. Therefore, the
    impact on farm- level prices and milk production, and hence on farm revenue,
    for producers outside the compact region was also small. For example, we
    estimate that, as a result of the NEDC, farm- level prices in all noncompact
    regions remained unchanged or fell by no more than 2 cents per
    hundredweight, or less than 0.20 percent, while milk production for all
    noncompact regions combined fell by less than 0.06 percent.

    We estimate that, in 1999, the NEDC?s impact on the national average
    wholesale prices of manufactured dairy products was also minimal. For

    29 For modeling purposes, the NEDC compact scenario is represented as being
    part of the University of Wisconsin- Madison dairy sector model?s northeast
    region. This region includes Connecticut, Delaware, the District of
    Columbia, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New
    York, Pennsylvania, Rhode Island, and Vermont. If the northeast region
    states that are not part of the NEDC were modeled as being in a noncompact
    region, our estimate of the NEDC?s impact on all noncompact regions combined
    would be a little larger than we report, except to the extent that NEDC
    payments to New York farmers who sell raw milk used for and sold as fluid
    milk to processors in New England affect the lower prices that non- NEDC
    producers in the northeast region receive for the remainder of their milk.

    Page 23 GAO- 01- 866 Impacts of Dairy Compacts

    example, we estimate that the wholesale prices per hundredweight for
    American cheese were 3 to 9 cents lower and for butter about 3 to 23 cents
    lower than they would have been under the no- compact scenario. 30 These
    estimated differences, even at the upper ends of these ranges, represent
    about 0.06 and 0.19 percent, respectively, of our estimated 1999 wholesale
    American cheese and butter prices under the nocompact scenario.

    We estimate that, in 1999, the interregional impacts of an expanded NEDC
    that included five additional states would have been a little larger than
    the impacts of the NEDC, but still small. Specifically, we estimate that,
    compared with our analyses using the no- compact scenario, dairy farm
    revenue in 1999 would have been reduced the most in the Upper Midwest
    region- by $13 million to $24 million. 31 Table 4 provides our estimates of
    the extent to which an expanded Northeast Compact would have reduced farm-
    level revenue in the Upper Midwest and in all noncompact regions combined.
    32

    Table 4: Estimated Reduction in 1999 Farm- Level Milk Revenue in Noncompact
    Regions as a Result of an Expanded NEDC

    Dollars in millions Estimated revenue reduction in farmlevel revenue with an
    expanded NEDC

    Region Estimated farm- level

    revenue under the no- compact scenario Dollars Percentage

    Upper Midwest $4,533 $13 to 24 0.29 to 0.53 All noncompact regions 18,513 30
    to 96 0.16 to 0.52

    Source: GAO analysis using the University of Wisconsin- Madison dairy model.

    30 This equates to 0.03 to 0. 09 cents per pound lower for American cheese
    and 0. 03 to 0.23 cents per pound lower for butter. 31 In one of the
    sensitivity analyses, farm- level revenue in California decreased by $33
    million, or by 0.8 percent. In general, however, our estimated impacts were
    smaller in California than in the Upper Midwest region.

    32 For modeling purposes, the expanded NEDC is represented as being the
    University of Wisconsin- Madison dairy sector model?s northeast region,
    which is roughly comparable to USDA?s Northeast Milk Marketing Order.
    Interregional Impacts of an

    Expanded NEDC in 1999 Would Also Have Been Relatively Small

    Page 24 GAO- 01- 866 Impacts of Dairy Compacts

    As under the NEDC scenario, we estimate that the impact of an expanded NEDC
    would have been relatively small because dairy farmers in the 11 states
    included in the expanded Compact produced only about 18 percent of the
    nation?s milk supply. As a result, any increased supply of milk that would
    have been available for manufacturing in 1999 from those farmers, although a
    little larger than with the NEDC, would have still been small compared with
    the nation?s total milk supply for manufacturing. Therefore, the impact on
    farm- level prices and milk production, and hence on farm revenues, for
    producers outside the expanded Compact region would have been small. For
    example, under the expanded NEDC scenario we estimate that, compared with
    our no- compact scenario, farm- level prices in noncompact regions would
    have fallen by no more than 6 cents per hundredweight or less than 0.5
    percent, while milk production for all noncompact regions combined would
    have been lower by about 0.21 percent or less.

    We estimate that, in 1999, the impact of an expanded NEDC on the national
    average wholesale prices of manufactured dairy products would have been a
    little larger than the impact of the NEDC, but still relatively small. For
    example, we estimate that the wholesale prices per hundredweight for
    American cheese would have been about 18 to 41 cents lower and for butter 46
    to 88 cents lower than under our no- compact scenario. 33 These differences,
    even at the upper ends of these ranges, represent less than 0.3 and 0.7
    percent, respectively, of our estimated 1999 wholesale American cheese and
    butter prices under the no- compact scenario.

    We estimate that, in 1999, the interregional impacts of an expanded NEDC in
    conjunction with a southern compact- a total of 23 states- would have been
    somewhat larger than the impact of our other compact scenarios.
    Specifically, under this scenario and using the same assumption about fluid
    milk trade between regions as used in the previous scenarios, compared with
    our no- compact scenario we estimate that dairy farm revenue in 1999 would
    have been reduced the most in California and in the Upper Midwest and
    Mideast regions: $26 million to $118 million, $26 million to $63 million,
    and $21 to $43 million, respectively. 34 , 35 Table 5

    33 This equates to about 0.18 to 0.41 cents per pound lower for American
    cheese and 0.46 to 0.88 cents per pound lower for butter. 34 In the
    University of Wisconsin- Madison dairy sector model, the Mideast region is
    represented as Indiana, Michigan, Ohio, and West Virginia. Interregional
    Impacts of an

    Expanded NEDC Combined With a Southern Compact in 1999 Would Have Been
    Somewhat Larger

    Page 25 GAO- 01- 866 Impacts of Dairy Compacts

    provides our estimates of the extent to which an expanded NEDC in
    conjunction with a southern compact would have reduced farm- level revenue
    for milk in these regions and for all noncompact regions combined, in 1999.
    36

    Table 5: Estimated Reduction in 1999 Farm- Level Milk Revenue in Noncompact
    Regions as a Result of an Expanded NEDC Combined With a Southern Compact

    Dollars in millions Estimated revenue reduction with an expanded NEDC and

    a southern compact Region

    Estimated farm- level revenue under the nocompact scenario Dollars
    Percentage

    California $3,954 $26 to 118 0. 66 to 2.98 Upper Midwest 4, 533 26 to 63
    0.57 to 1.39 Mideast 1, 792 21 to 43 1.17 to 2.40 All noncompact regions
    14,805 124 to 268 0. 84 to 1.81

    Source: GAO analysis using the University of Wisconsin- Madison dairy model.

    The estimated impact of the expanded NEDC in conjunction with a southern
    compact is relatively larger because dairy farmers in the states included in
    these compacts produced about 27 percent of the nation?s milk supply. As a
    result, any increased supply of milk that would have been available for
    manufacturing purposes in 1999 from farmers in these states would have been
    somewhat larger than under the previous scenarios. Therefore, the impact on
    farm- level prices and milk production, and hence on farm revenues, for
    producers outside the compact regions would have

    35 For one sensitivity analysis, in which we increased transportation costs
    for milk by 25 percent, our model produced an anomalous result: an increase
    in dairy farm revenue in California. Because our initial estimate and the
    results of all the other sensitivity analyses show farm revenue losses in
    California, we are omitting this result in reporting that California was one
    of the regions with the largest estimated declines in farm- level revenue.

    36 For modeling purposes, the expanded NEDC in conjunction with a southern
    compact is represented as being part of the University of Wisconsin- Madison
    dairy sector model?s Northeast, Appalachia, Southeast and Central regions.
    The Central region includes seven states, two of which are compact and five
    of which are noncompact states. If the five noncompact states in the Central
    region were modeled as being part of a noncompact region, our estimate of
    the impact of an expanded NEDC in conjunction with a southern compact on
    noncompact regions would be a little larger than we report, except to the
    extent that producers in these states might receive compact payments from
    selling raw milk used for and sold as fluid milk to processors in compact
    states that might offset the lower prices that producers in these states
    would receive for the rest of their milk. Noncompact regions include the
    remaining eight IRCM regions.

    Page 26 GAO- 01- 866 Impacts of Dairy Compacts

    been somewhat larger. For example, we estimate that farm- level prices in
    noncompact regions could have fallen by as much as 36 cents per
    hundredweight or about 2.6 percent compared with our no- compact scenario,
    while milk production for all noncompact regions combined could have fallen
    by as much as 0.75 percent.

    We estimate that, in 1999, the impacts of an expanded NEDC in conjunction
    with a southern compact on the national average wholesale prices of
    manufactured dairy products would have been somewhat larger than the impacts
    of our other scenarios. For example, compared with the estimated wholesale
    prices under our no- compact scenario, we estimate that the prices per
    hundredweight would have been about 62 cents to $1.41 lower for American
    cheese and between 21 cents higher and $6.53 lower for butter. 37 At the
    upper end of these ranges, these differences represent about 1.0 percent and
    5.5 percent, respectively, of our estimated 1999 wholesale American cheese
    and butter prices under our no- compact scenario.

    For the expanded NEDC plus a southern compact scenario, we found that our
    estimates of interregional impacts were sensitive to our assumption about
    how much milk can be shipped between noncompact and compact regions. In
    particular, our estimated impacts for 1999 of an expanded NEDC in
    conjunction with a southern compact on noncompact regions would have been
    greater if we had used a more restrictive assumption that limits the amount
    of milk that can be shipped from noncompact into compact regions. 38
    Specifically, we estimate that using a more restrictive

    37 This equates to about 0.62 cents to 1. 41 cents per pound lower for
    American cheese and between 6.53 cents per pound lower and 0. 21 cents per
    pound higher for butter. 38 In our initial estimates, we assumed that USDA
    milk marketing order regulations apply to milk movements between noncompact
    and compact regions. This assumption allows milk to move between compact and
    noncompact regions with relatively few restrictions, subject to USDA and
    compact requirements regarding when, and under what circumstances,
    processors must pay exporting as opposed to importing marketing order or
    compact minimum blend prices. In this sensitivity analysis, we used a more
    restrictive trade assumption. Under this assumption, we restricted the
    amount of milk that can move into a compact region to the amount of milk
    produced within a 100- mile radius surrounding a compact region. We
    performed this analysis because our data are aggregated at the regional
    level as opposed to being at the milk plant or dairy farm level. Therefore,
    our data on transportation costs of shipping milk are average cost data and
    do not apply to individual shipments. As a result, initial results may allow
    for more movement of milk between noncompact and compact regions than would
    actually occur. This sensitivity analysis shows the extent to which our
    estimates would be different if the movement of milk was more restricted.

    Page 27 GAO- 01- 866 Impacts of Dairy Compacts

    assumption increases our estimate of how much farm- level prices, milk
    production, and farm revenues in noncompact regions would have fallen in
    1999 under this scenario compared with under our no- compact scenario. Table
    6 shows our estimated reductions in farm revenues for raw milk in California
    and the Upper Midwest and Mideast regions, and all noncompact regions
    combined under our restricted fluid milk trade assumption compared with
    under our no- compact scenario. 39

    Table 6: Estimated Reduction in 1999 Farm- Level Milk Revenue in Noncompact
    Regions as a Result of an Expanded NEDC Combined With a Southern Compact
    Under a More Restrictive Fluid Milk Trade Assumption

    Dollars in millions Reduction in revenue as a result of an expanded NEDC and
    a southern

    compact using a more restrictive fluid milk trade assumption

    Region Estimated farm- level

    revenue under a nocompact scenario Dollars Percentage

    California $3,954 $70 to 145 1. 77 to 3.67 Upper Midwest 4, 533 103 to 133
    2. 27 to 2.93 Mideast 1, 792 34 to 45 1.90 to 2.51 All noncompact regions
    14,805 257 to 374 1. 74 to 2.53

    Source: GAO analysis using the University of Wisconsin- Madison dairy model.

    We also estimate that the impact in 1999 of an expanded NEDC in conjunction
    with a southern compact on the national average wholesale prices of some
    manufactured dairy products would have been greater under the more
    restrictive fluid milk trade assumption than without that restrictive trade
    assumption. For example, under the more restrictive trade assumption, we
    estimate that the price per hundredweight for American cheese would have
    been about $1.27 to $1.86 lower than under our no- compact scenario. 40
    However, for butter we estimate that the impact with the restrictive trade
    assumption would have been smaller than the estimated impact without the
    restrictive trade assumption. Under the

    39 We present our estimates of the interregional impacts under a more
    restrictive trade assumption only for the expanded NEDC in conjunction with
    a southern compact scenario because this more restrictive trade assumption
    had no effect on our estimates under our other compact scenarios.

    40 This equates to about 1.27 to 1.86 cents per pound lower for American
    cheese.

    Page 28 GAO- 01- 866 Impacts of Dairy Compacts

    restrictive trade assumption, we estimate that the price per hundredweight
    for butter would have changed from 7 cents higher to $2.80 lower than under
    our no- compact scenario. 41 At the upper end of these ranges, these
    differences represent about 1.3 and 2.3 percent, respectively, of our
    estimated 1999 wholesale prices for American cheese and butter under our no-
    compact scenario.

    As noted previously, the farm- level prices that we used in our model can
    affect our estimates of the impacts of compacts on dairy sector indicators
    such as farm- level revenue. In 1999, the national average blend price was
    $14.09 per hundredweight of milk; in 2000, the national average blend price
    was $12.11 per hundredweight of milk. With lower farm- level prices in 2000
    than in 1999, the difference between a compact price in our model and the
    federal milk marketing order Class I minimum price was larger in 2000 than
    in 1999. 42 As a result, the increase in milk production and decrease in
    fluid milk purchases that would have likely occurred within a compact region
    in 2000 would be expected to be greater than when farmlevel prices were
    higher, as they were in 1999. This situation, in turn, would imply a greater
    increase in the supply of milk available for manufacturing dairy products in
    2000, which, other things being equal, would lead to lower farm- level
    prices, reduced milk production, and lower farm- level revenue in noncompact
    regions.

    However, on the basis of preliminary data for 2000, we estimate that the
    impacts of our three compact scenarios, which are based on our initial set
    of assumptions, are generally similar to our initial estimates for each
    scenario in 1999. Even though our estimates are generally similar, when we
    impose our more restrictive fluid milk trade assumption on our scenario of
    an expanded NEDC in conjunction with a southern compact, our estimates of
    the impact on the Upper Midwest are slightly greater for 2000 than for 1999.
    The similarities between our 2000 and 1999 estimates suggest that other
    factors may be affecting our estimates for 2000.

    41 This equates to about 0.07 cents per pound higher to about 2. 8 cents per
    pound lower for butter. 42 That is, the difference will be larger as long as
    the compact price is expressed as a fixed amount per hundredweight, such as
    $16. 94 per hundredweight of milk as used by the NEDC, rather than as a
    fixed amount above any USDA milk marketing order Class I price. Using Farm-
    Level Prices

    for 2000 as Opposed to 1999 Has a Limited Influence on the Estimated Impacts
    of Compacts

    Page 29 GAO- 01- 866 Impacts of Dairy Compacts

    In those years when noncompact farm- level prices are lower than compact
    farm- level prices, a factor offsetting the potentially larger interregional
    impacts of compacts is the ability to market noncompact region milk in
    compact regions for use as fluid milk. Farmers in noncompact regions whose
    milk is marketed in compact regions for use as fluid milk may be eligible to
    receive the compact regions? farm- level blend price for that milk. When
    noncompact region farm- level blend prices are low, the gain to farmers from
    shipping milk to compact regions is greater than when noncompact region
    prices are high. This gain can partially offset the larger negative impact
    that compacts can have on revenue in noncompact regions when farm- level
    prices are low because of the increased supply of milk available for
    manufacturing purposes. Table 7 provides our estimates of the impacts of the
    compact scenarios on 2000 farm- level revenue in the Upper Midwest region
    and all noncompact regions. 43

    Table 7: Estimated Reduction in 2000 Farm- Level Milk Revenue in the Upper
    Midwest and in All Noncompact Regions Under the Compact Scenarios

    Dollars in millions Estimated reduction in 2000 farm- level revenue Upper
    Midwest All noncompact regions Compact scenario Dollars Percentage Dollars
    Percentage

    NEDC $5 0.13 $15 0.09 Expanded NEDC 17 0.44 67 0.41 Expanded NEDC and a
    southern compact 18 0. 46 111 0.84 Expanded NEDC and a southern compact
    using a more restrictive fluid milk trade assumption 185 4.74 307 2.33

    Source: GAO analysis using the University of Wisconsin- Madison dairy model.

    Appendix VI contains our estimates of the interregional impacts of compacts
    on 2000 farm- level and wholesale- level dairy sector indicators.

    43 We did not conduct sensitivity analyses on our 2000 estimates because of
    the preliminary nature of the 2000 data used to develop the estimates and
    because of potential data unreliability caused by dairy industry reactions
    to USDA?s milk marketing order regulatory reforms.

    Page 30 GAO- 01- 866 Impacts of Dairy Compacts

    We reviewed other studies of the interregional impacts of the NEDC and
    larger dairy compacts and found that the results are comparable with ours,
    even though they used different methodologies. In a 1999 analysis, USDA
    estimated that the impact of the NEDC on farm- level prices and dairy farm
    revenue in noncompact regions during the years 2000 through 2005 would have
    been minimal. 44 For example, USDA estimated that in 2000 the NEDC would
    either have no impact on producer prices in noncompact regions or reduce
    producer prices by about 1 cent per hundredweight of milk, or by about 0.07
    percent, depending on the noncompact region of the country. An analysis
    conducted by researchers at the University of California, Davis, also
    estimated that the NEDC reduced producer prices in noncompact regions by
    about 2 cents per hundredweight of milk, or by about 0.15 percent, on the
    basis of 1999 data. 45 The researchers concluded that the NEDC had such a
    small impact because the NEDC states produced such a small portion of the
    nation?s milk supply. They also estimated that if the Compact had been
    expanded to include additional states that produced 9 percent of the
    nation?s milk supply, producer prices in noncompact regions would have
    fallen by about 5 cents per hundredweight, or by about 0.35 percent. An
    analysis conducted by a researcher at Pennsylvania State University of an
    expanded NEDC in conjunction with a southern compact that produced 27
    percent of the U. S. milk supply also concluded that compacts have a
    relatively small impact. 46 Using a range of assumptions about milk prices
    and data for 1997, the researcher projected that in 2000, the compact would
    decrease producer prices in noncompact regions by 4 to 14 cents per
    hundredweight, or by about 0.3 to 1 percent. Researchers at the University
    of WisconsinMadison, using a 1997 version of the Interregional Dairy
    Competition Model that we used in our analysis, also estimated that the NEDC
    had a

    44 USDA Agricultural Marketing Service analysis provided to the Subcommittee
    on Livestock and Horticulture, Committee on Agriculture, U. S. House of
    Representatives, June 14, 1999.

    45 Joseph V. Balagtas and Daniel A. Sumner, ?The Effect of the Northeast
    Dairy Compact on Producers and Consumers, with Implications of Compact
    Contagion,? Department of Agricultural and Resource Economics, University of
    California, Davis, 200l.

    46 Kenneth W. Bailey, ?Evaluating the Economic Impacts of Regional Milk
    Pricing Authorities: The Case of Dairy Compacts,? Agricultural and Resource
    Economics Review,

    Vol. 29, No. 2, Oct. 2000, pp. 208- 219. Other Economic Analyses

    of Interregional Dairy Compacts Have Produced Similar Estimates

    Page 31 GAO- 01- 866 Impacts of Dairy Compacts

    small impact on producer prices. 47 This analysis estimated that farm- level
    prices would fall from 5 to 10 cents per hundredweight under an expanded
    NEDC scenario; 13 to 15 cents per hundredweight under a southern compact
    scenario; and 14 to 28 cents per hundredweight under a combined expanded
    NEDC and southern compact scenario. In an analysis of the impact of compacts
    prepared for the International Dairy Foods Association, one researcher
    estimated that the NEDC reduced farm- level revenue in noncompact regions in
    2000 by about $29 million, while an expanded 29- state compact would reduce
    farm- level revenue in noncompact regions by about $374 million. 48

    A more detailed discussion of these studies is included in appendix VII. By
    affecting the minimum prices that dairy farmers within the Compact region
    receive for their raw milk, the NEDC may have enhanced dairy farmer income
    in the six NEDC states, and other states such as New York, that supply raw
    milk used for and sold as fluid milk in the NEDC states. It is not certain,
    however, whether the NEDC will help ensure the continued vitality of dairy
    farming in the New England dairy region. Data indicate that the number of
    dairy farms in the six states continued to decrease following the NEDC's
    establishment in July 1997. With regard to retail prices, the NEDC
    contributed to increased retail fluid milk prices within the six states,
    although the extent of its contribution is uncertain. Even so, available
    evidence and analyses indicate that the NEDC has had little impact on dairy
    farmers or consumers in noncompact regions.

    Proposals are pending before the Congress for larger compacts. Our analysis
    shows that as the share of the U. S. milk supply covered by compacts
    increases, the estimated interregional impacts on farm- level prices and
    revenue increase as well. Furthermore, these estimated impacts could be
    different under new marketing conditions. Our estimates of the interregional
    impacts of compacts are based primarily on data from before January 2000,
    when USDA?s regulatory reforms took effect. Data since

    47 Tom Cox, Bob Cropp, and Will Hughes, ?Interregional Analysis of
    Interstate Dairy Compacts,? Department of Agricultural and Applied
    Economics, College of Agricultural and Life Sciences, University of
    Wisconsin- Madison, Marketing and Policy Briefing Paper No. 69, July 1999.

    48 Allen Rosenfeld, The Impacts of the Proposed Expansion of Dairy Compacts
    on Dairy Farm Revenue in Noncompact States, M& R Strategic Services,
    Washington, D. C., May 2001. The International Dairy Foods Association
    represents dairy food manufacturers. Concluding

    Observations

    Page 32 GAO- 01- 866 Impacts of Dairy Compacts

    January 2000 indicate that the dairy industry is in the process of adjusting
    to these substantial changes. Equally as important, our estimates of the
    interregional impacts are based on three compact scenarios, the largest of
    which includes fewer than the number of states currently being considered
    for inclusion in dairy compacts. A thorough understanding of the impacts of
    these other potential compacts on dairy sector indicators cannot be
    developed until sufficient data become available following the dairy
    industry?s adjustment to regulatory reform.

    We provided USDA and the Executive Director of the NEDC with a draft of this
    report for review and comment. On September 5, 2001, we met with USDA's
    Chief Economist, Dairy Programs, Agricultural Marketing Service, and other
    officials from USDA's Agricultural Marketing Service, Economic Research
    Service, Farm Service Agency, Food and Nutrition Service, National
    Agricultural Statistics Service, and the Department's Office of the Chief
    Economist to obtain their oral comments. USDA officials stated that they
    recognized the difficulty of undertaking a study of this nature and said
    that our work represents a reasonable effort to estimate the intraregional
    and interregional impacts of dairy compacts. They provided a number of
    technical corrections and suggestions, which we incorporated as appropriate.

    We also discussed the draft report with the NEDC Executive Director, who
    stated that we had dealt with the issues in a constructive and comprehensive
    manner. The NEDC Executive Director also provided us with written comments.
    While concurring with our estimate of the interregional impacts of the NEDC,
    the Executive Director expressed concern that the University of Wisconsin-
    Madison dairy model did not measure the benefits that New York dairy farmers
    receive when they supply milk to the NEDC states. We concur that the model
    does not measure the impacts of compacts on noncompact states that are
    within the same region as compact states. As the model is designed, New York
    and the NEDC states, as well as several other states, are included in the
    same (Northeast) region. The NEDC Executive Director's written comments and
    our detailed responses appear in appendix VIII.

    We performed our work between September 2000 and September 2001 in
    accordance with generally accepted government auditing standards. Appendix I
    contains a detailed description of our scope and methodology. Agency
    Comments

    and Our Response

    Page 33 GAO- 01- 866 Impacts of Dairy Compacts

    We are sending copies of this report to the Senate Committee on Agriculture,
    Nutrition, and Forestry; the House Committee on Agriculture; other
    appropriate congressional committees; the Secretary of Agriculture; the
    Executive Director of the NEDC; the Director, OMB; and other interested
    parties. We will also make copies available to others upon request.

    Please contact me at (202) 512- 3841 if you or your staff have any questions
    about this report. Another GAO contact and key contributors to this report
    are listed in appendix IX.

    Sincerely yours, Lawrence J. Dyckman Director, Natural Resources

    and Environment

    Appendix I: Objectives, Scope, and Methodology

    Page 34 GAO- 01- 866 Impacts of Dairy Compacts

    In May 2000, Senator Herbert Kohl requested that we examine the economic
    impacts of the Northeast Interstate Dairy Compact (NEDC) and other potential
    compacts on a variety of dairy sector indicators. Specifically, because
    legislation authorizing the Compact is to expire on September 30, 2001, and
    the Congress is considering legislative alternatives for reauthorizing the
    NEDC and authorizing other states to enter into such compact arrangements,
    Senator Kohl asked us to provide information on

     the intraregional impacts of the NEDC (that is, within the six NEDC states
    of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and
    Vermont) on dairy sector indicators such as (1) retail milk prices, (2) milk
    producer income, (3) dairy farm structure, (4) milk production, and (5) milk
    consumption;

     the impact of the NEDC on the costs to the federal government of its milk
    price support and nutrition assistance programs; 1 and

     the interregional impacts of the NEDC, an expanded NEDC, and an expanded
    NEDC in conjunction with a southern compact (that is, on noncompact milk-
    producing regions) on selected indicators such as farmlevel and wholesale-
    level indicators such as prices, production, and revenue. 2

    To determine the intraregional impacts of the NEDC, we sought, but did not
    find, a readily usable economic model that comprehensively estimates these
    impacts while holding constant other factors that also affect the selected
    dairy sector indicators. Further, due to time and resource constraints, we
    were not able to develop a model or series of models to estimate these
    impacts. As a result, we analyzed federal, state, and other

    1 The U. S. Department of Agriculture?s (USDA) milk price support program
    indirectly ensures a minimum price for milk. Under the program, USDA offers
    to purchase cheddar cheese, nonfat dry milk, and butter at specified prices.
    USDA?s nutrition assistance programs include the Special Supplemental
    Nutrition Program for Women, Infants, and Children; the School Breakfast and
    Lunch Programs; and the Food Stamp Program.

    2 For purposes of our analysis, the expanded NEDC includes the Compact?s
    current member states plus Delaware, Maryland, New Jersey, New York, and
    Pennsylvania. The southern compact would include Alabama, Arkansas, Georgia,
    Kansas, Kentucky, Louisiana, Missouri, Mississippi, North Carolina, South
    Carolina, Tennessee, and Virginia. As of the end of February 2001, these
    states had enacted laws authorizing their entry into such compacts should
    the Congress establish them. While West Virginia has also enacted such a
    law, we did not include that state in our analysis because of modeling
    difficulties. App. II provides a discussion of our model. Appendix I:
    Objectives, Scope, and

    Methodology NEDC?s Intraregional Impacts

    Appendix I: Objectives, Scope, and Methodology

    Page 35 GAO- 01- 866 Impacts of Dairy Compacts

    data on these indicators, for a period of time before and after the NEDC?s
    minimum pricing regulations became effective, to determine any changes in
    historic trends in the NEDC states. In each case, we also obtained these
    data for the rest of the United States so that we could compare trends in
    New England with those in the rest of the country. We also reviewed
    available studies on the NEDC?s potential impacts on the indicators.

    Specifically, to determine the impacts on retail milk prices, we obtained
    and analyzed retail milk price data from (1) A. C. Nielsen, a private data
    collection and analysis company, for the Boston market as well as for other
    major U. S. cities for November 1996 through September 2000; 3 (2) the
    departments of agriculture in Connecticut, Maine, and New Hampshire for
    November 1996 through October 2000; and (3) the International Association of
    Milk Control Agencies for those states that have independent milk pricing
    agencies for January 1994 through November 2000. We also reviewed available
    economic analyses of the NEDC?s impact on retail milk prices and interviewed
    USDA?s Agricultural Marketing Service and NEDC officials to obtain their
    views on the NEDC?s impact on retail milk prices.

    To examine the intraregional impacts of the NEDC on milk producer income, we
    compared USDA?s Economic Research Service balance sheet and income statement
    data from 1991 through 1999 for a representative composite dairy farmer in
    the Service?s northeastern region with data for a farmer located outside the
    northeastern region. The Economic Research Service?s northeastern region
    includes Connecticut, Delaware, Massachusetts, Maryland, Maine, New
    Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, and Vermont.
    States outside the northeastern region include all states with the exception
    of these 11 states and Alaska and Hawaii. The Service was not able to
    provide data for a representative composite farmer in the six NEDC states
    alone because the sample size was not sufficiently large to produce reliable
    balance sheet and income data. The Economic Research Service develops these
    data through surveys of sampled farm operations. It collects data on
    operating costs- such as feed, equipment purchases, and product
    distribution- as well as data on returns, such as income received from sales
    of field crops and livestock. The Service uses information obtained from
    sampled farms to estimate the

    3 We obtained these data in the course of our work on Dairy Industry:
    Information on Prices for Fluid Milk and the Factors That Influence Them
    (GAO/ RCED- 99- 4, Oct. 8, 1998) and Dairy Industry: Information on Milk
    Prices and Changing Market Structure (GAO01- 561, June 15, 2001).

    Appendix I: Objectives, Scope, and Methodology

    Page 36 GAO- 01- 866 Impacts of Dairy Compacts

    average costs of milk production in the United States and in various regions
    in the country. Costs can vary significantly from farm to farm because of
    differences in farm location, size, and production practices. As a result,
    the costs and returns for an individual farm can vary considerably from the
    average. In addition to using Economic Research Service data to estimate the
    impact of the NEDC on farm income, we also estimated the average payment a
    licensed dairy farmer in one of the six NEDC states may have received
    between July 1997 and the end of calendar year 2000 as a result of the NEDC.
    To do this, we used (1) monthly NEDC balance sheets that reflect the total
    amount of milk eligible for the NEDC milk price and NEDC over- order
    producer price payment amounts available for dairy farmers, (2) USDA?s
    National Agricultural Statistics Service milk production data for the six
    NEDC states, and (3) American Farm Bureau Federation data on the number of
    licensed dairies in the six states. To determine the average payment, we
    estimated what proportion of the milk eligible for the NEDC milk price could
    be attributed to a licensed NEDC dairy farmer?s milk. We also reviewed
    available economic analyses of the potential impacts of the NEDC on dairy
    farmer income. Last, we obtained data developed by the NEDC commission on
    amounts distributed to farmers as a result of the Compact, and its
    assessment of the Compact's impact on farmer income.

    To determine the intraregional impacts of the NEDC on dairy farm structure,
    we obtained National Agricultural Statistics Service data on the total
    number of cows in the NEDC and the rest of the United States, as well as
    state- by- state data on the number of farms having at least one milk cow
    between 1992 and 2000. We obtained data from the American Farm Bureau
    Federation on the number of licensed dairies in the United States, by state,
    between 1992 and 2000. We also reviewed information on factors that affect
    the structure of dairy farms, and interviewed officials from the
    Agricultural Marketing Service, the Economic Research Service, the National
    Agricultural Statistics Service, and the NEDC commission to obtain their
    views of the Compact?s impacts on farm structure.

    To determine the intraregional impacts of the NEDC on milk production, we
    reviewed National Agricultural Statistics Service data on the average amount
    of milk produced by state and the average amount of milk produced per dairy
    cow between 1993 and 2000. We also reviewed available economic analyses of
    the impacts that the NEDC may have had on milk production. In addition, we
    interviewed officials from the Agricultural Marketing Service, the National
    Agricultural Statistics Service, and the NEDC to obtain their views on the
    NEDC?s impact on milk production.

    Appendix I: Objectives, Scope, and Methodology

    Page 37 GAO- 01- 866 Impacts of Dairy Compacts

    To examine the intraregional impacts of the NEDC on milk consumption, we
    reviewed Agricultural Marketing Service data on the total amount of sales of
    packaged fluid milk products in federal milk marketing orders and California
    between 1996 and 1999. Such sales are representative of the consumption of
    fluid milk products and account for about 93 percent of fluid milk sales in
    the United States. In addition, we reviewed data on factors affecting milk
    consumption and available economic studies of the NEDC?s impact on milk
    consumption.

    To examine the impacts of the NEDC on the costs of the federal government?s
    milk price support program, we reviewed USDA Farm Service Agency analyses of
    estimated amounts of milk production in the six NEDC states compared with
    the rest of the United States. We also reviewed USDA and Compact data on
    payments made to USDA by the NEDC. In addition, we interviewed Farm Service
    Agency and NEDC officials to obtain information on payments made by the
    NEDC. To examine the intraregional impacts on nutrition assistance programs,
    we interviewed USDA Food and Nutrition Service officials and obtained that
    agency?s analyses of the potential impact of the NEDC on its programs. We
    also interviewed officials responsible for each of the six states? Special
    Supplemental Nutrition Program for Women, Infants and Children and school
    nutrition programs. Finally, we reviewed available economic analyses of the
    estimated impact of the NEDC on nutrition assistance programs.

    To examine the interregional impacts- that is, the economic impacts in other
    regions of the country- of the NEDC, an expanded NEDC, and an expanded NEDC
    in conjunction with a southern compact, we conducted policy simulations
    using the University of Wisconsin- Madison?s Dairy Sector Interregional
    Competition Model calibrated to reflect the dairy industry in 1999 (IRCM99).
    We contracted with the University to have Dr. Thomas L. Cox, Professor of
    Agricultural and Applied Economics and a primary developer of the model,
    conduct the policy simulations. Working with Dr. Cox and consulting with
    other prominent dairy economists from different regions of the country, we
    developed a set of parameters for use in simulating different compacts?
    impacts on dairy sector indicators.

    We modeled three different compacts- the NEDC, an expanded NEDC, and an
    expanded NEDC in conjunction with a southern compact- consisting of an
    increasing number of states. The states in the NEDC are Connecticut, Maine,
    Massachusetts, New Hampshire, Rhode Island, and NEDC?s Impacts on

    Federal Programs Compacts? Interregional Impacts

    Appendix I: Objectives, Scope, and Methodology

    Page 38 GAO- 01- 866 Impacts of Dairy Compacts

    Vermont. The states that we assumed to be included in the expanded NEDC are
    these six states and Delaware, Maryland, New Jersey, New York, and
    Pennsylvania. The states that we assumed to be included in the expanded NEDC
    in conjunction with a southern compact are the above 11 states and Alabama,
    Arkansas, Georgia, Kansas, Kentucky, Louisiana, Missouri, Mississippi, North
    Carolina, South Carolina, Tennessee, and Virginia. The above states included
    in an expanded NEDC and a southern compact were selected because they had
    enacted legislation, as of the end of February 2001, that authorized their
    entry into a dairy compact should the Congress establish one. While West
    Virginia had also enacted such legislation as of the end of February 2001,
    we did not include that state in a southern compact for the purposes of our
    analysis because of the difficulties associated with accounting for that
    state?s milk production in compact versus noncompact regions of the country.
    Furthermore, because West Virginia produces a relatively small amount of
    milk in comparison with other states included in compact regions, the effect
    of excluding West Virginia is negligible.

    The agricultural economists and other dairy experts with whom we consulted
    concerning model specifications and assumptions include the following:

     Kenneth W. Bailey, Associate Professor, Department of Agricultural
    Economics and Rural Sociology, the Pennsylvania State University;

     Joseph V. Balagtas, Research Assistant, Department of Agricultural and
    Resource Economics, University of California, Davis;

     Scott Brown, Research Assistant Professor, Food and Agricultural Policy
    Research Institute, the University of Missouri;

     Harold M. Harris, Jr., Professor, Department of Agricultural and Applied
    Economics, Clemson University;

     Harry Kaiser, Professor, Department of Applied Economics and Management,
    Cornell University;

     Richard L. Kilmer, Professor, Food and Resource Economics, the University
    of Florida;

     Leigh Maynard, Assistant Professor, Department of Agricultural Economics,
    the University of Kentucky;

     Neil Pelsue, Extension Associate Professor, Department of Community
    Development and Applied Economics, the University of Vermont;

     William A. Schiek, Economist, Dairy Institute of California;

     Mark Stephenson, Senior Extension Associate, Department of Applied
    Economics and Management, Cornell University;

     Daniel Sumner, Professor, Agricultural and Resource Economics Department,
    University of California at Davis;

    Appendix I: Objectives, Scope, and Methodology

    Page 39 GAO- 01- 866 Impacts of Dairy Compacts

     Cameron S. Thraen, Associate Professor, Agricultural, Environmental, and
    Development Economics, the Ohio State University; and

     Christopher Wolf, Assistant Professor, Department of Agricultural
    Economics, Michigan State University.

    In addition, we consulted with several agricultural economists at USDA,
    including economists in the Office of the Chief Economist and the Economic
    Research Service.

    Our process for developing the assumptions that we used to model the
    interregional impacts of dairy compacts included reviewing economic
    literature to identify estimates of (1) regional supply elasticities, (2)
    wholesale demand elasticities, (3) and transportation costs. We also
    obtained data on market over- order premiums and compact over- order
    producer prices. Finally, we interviewed USDA and other officials to obtain
    information on regulations governing milk shipments among federal marketing
    orders and noncompact and compact regions.

    After identifying assumptions for modeling the three different compact
    scenarios, we developed an initial estimate of the economic impacts of the
    different compacts. We then conducted sensitivity analyses by varying the
    values of our key assumptions. We provided our preliminary estimates to
    several agricultural economists to obtain their views, and incorporated many
    of their comments in subsequent modeling before developing our final range
    of estimates. Our final estimates of the impacts of the different compact
    scenarios are presented as ranges that include our initial estimates as well
    as estimates from our sensitivity analyses. (A detailed discussion of the
    model and assumptions, data, and data sources used is included in app. II.)

    In addition to modeling the interregional impacts of the different compact
    scenarios, we reviewed economic analyses that have been conducted on the
    potential interregional impacts of dairy compacts. We present these reviews
    in appendix VII.

    Appendix II: Methodology for Estimating the Interregional Impacts of Dairy
    Compacts

    Page 40 GAO- 01- 866 Impacts of Dairy Compacts

    This appendix describes our methodology for estimating the interregional
    impacts of three compact scenarios: the six- state NEDC, an expanded NEDC,
    and an expanded NEDC in conjunction with a southern compact. To estimate the
    interregional impacts, we contracted with the University of Wisconsin-
    Madison to use the Dairy Sector Interregional Competition Model (IRCM),
    which is an interregional spatial market equilibrium model of the U. S.
    dairy sector. This model is useful in estimating the impacts of different
    dairy policy options, such as dairy compacts. Dr. Thomas L. Cox, Professor
    of Agricultural and Applied Economics at the university and a primary
    developer of the model, conducted the policy simulations for us. This
    appendix describes

     the structure of the IRCM and how it estimates the interregional impacts
    of dairy compacts,

     data and data sources used for conducting policy simulations of different
    compact scenarios,

     how we calibrated a baseline for 1999,

     details of each scenario that we modeled,

     parameter values for our baseline and initial estimates,

     how we varied key assumptions to test the sensitivity of our initial
    estimates, and

     the limitations of the model. The results of our different policy
    simulations and sensitivity analyses are presented in appendixes V and VI.

    The IRCM is a hedonic spatial equilibrium model of the U. S. dairy sector
    that can be used to estimate the impacts of policy or program changes, such
    as the establishment of compacts. 1 The model allocates the production and
    consumption of raw milk and nine other different dairy commodities among 12
    regions of the country and solves for the trade flows of these commodities
    among those regions to achieve a spatial equilibrium. Using nonlinear
    programming techniques, the model solves to ensure an efficient regional
    distribution of the different dairy commodity

    1 A hedonic model is one that separates products, such as farm milk, fluid
    milk, and manufactured dairy commodities, into their components or
    characteristics. Milk and dairy commodities are composed of different
    amounts of milk fat, protein, and carbohydrates. The IRCM incorporates these
    components using a vertical markets approach that transforms the primary
    product- raw milk- into fluid milk and manufactured dairy commodities.
    Appendix II: Methodology for Estimating the

    Interregional Impacts of Dairy Compacts IRCM Structure

    Appendix II: Methodology for Estimating the Interregional Impacts of Dairy
    Compacts

    Page 41 GAO- 01- 866 Impacts of Dairy Compacts

    resources, given the demand for and supply of those resources at various
    prices.

    On a more technical basis, the model solution maximizes the sum of producer
    and consumer welfare minus processing, transportation, and U. S. Department
    of Treasury costs. 2 The model defines aggregate wholesale dairy product
    demand and farm- level milk supply functions as follows:

    (1a) D i = ik z 0

    d ik K

    k=1 (q) dq p

    and (1b) S i = i w

    0 (q) dq p s i

    where p i s (w i ) is the price- dependent supply function for milk in the
    i- th

    region, with p i / w i > 0, i = 1, ?, J, and p ik d (z ik ) is the price-
    dependent

    demand function for the k- th dairy product consumed in the i- th region,
    with p ik

    d / z ik < 0, i = 1, ?, J, k = 1, ?, K. Equation (1a) is the sum of the
    areas under the K demand curves in the i- th region. This can be interpreted
    as a measure of consumer benefits generated by the K commodities in the i-
    th region. Equation (1b) is the area under the supply curve, a measure of
    milk production cost in the i- th region. The term (D i - S i ), consumer
    benefits minus total production costs in the i- th region, minus
    transportation costs, is a measure of net social benefits to farmers and
    consumers in each region. Federal government costs are then subtracted. 3
    Two steps are used to create an IRCM that models the impact of compacts in
    1999: IRCM99. First, the model is calibrated to 1999 data so that baseline
    estimates of key dairy sector measures of prices, production,

    2 These last costs are incurred by the federal government through USDA?s
    milk price support program. Under this program, USDA purchases manufactured
    dairy commodities- such as cheese, butter, and nonfat dry milk- at specified
    prices, thereby indirectly supporting farm- level prices of milk used to
    manufacture these commodities.

    3 For a more complete technical description of the optimization process, see
    T. L. Cox and J. P. Chavas, ?An Interregional Analysis of Price
    Discrimination and Domestic Policy Reform in the U. S. Dairy Sector,?
    American Journal of Agricultural Economics, 83 (1): 89- 106.

    Appendix II: Methodology for Estimating the Interregional Impacts of Dairy
    Compacts

    Page 42 GAO- 01- 866 Impacts of Dairy Compacts

    consumption, and trade flows can be obtained on a regional basis. Second,
    simulation analyses are performed to estimate the impacts of the different
    compact scenarios.

    In the IRCM99, milk production and dairy product consumption in the country
    are divided into 12 regions that are based on the current 11 USDA federal
    milk marketing orders and California. In addition, the IRCM99 accounts for
    net private stocks, net government stocks/ removals, and U. S. imports and
    exports. 4 Table 8 compares the IRCM99 regions, the corresponding USDA
    marketing orders or states before January 2000, states included in the
    IRCM99 regions, and states that had enacted legislation as of February 2001
    authorizing entry into any congressionally authorized dairy compact. 5

    Table 8: USDA's Marketing Orders Before January 2000, States in the IRCM99
    Regions, and States That Had Authorized Entry Into a Compact by February
    2001

    IRCM99 regions (and pricing points) Federal milk marketing

    orders before January 2000 States included in the IRCM99 regions

    States that had enacted legislation authorizing entry into a compact as of
    February 2001

    Northeast (Boston) New England, New York- New Jersey, Mid- Atlantic
    Connecticut, Delaware, the

    District of Columbia, Maine, Maryland, Massachusetts, New Hampshire, New
    Jersey, New York, Pennsylvania, Rhode Island, Vermont

    Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New
    Jersey, New York, Pennsylvania, Rhode Island, Vermont

    Appalachia (Charlotte) Carolina, Tennessee Valley, Louisville- Lexington-
    Evansville Kentucky, North Carolina,

    South Carolina, Tennessee, Virginia

    Kentucky, North Carolina, South Carolina, Tennessee, Virginia Florida
    (Tampa) Upper Florida, Tampa Bay,

    Southeast Florida Florida a Southeast (Atlanta) Southeast Alabama, Arkansas,
    Georgia,

    Louisiana, Mississippi Alabama, Arkansas, Georgia, Louisiana, Mississippi

    4 U. S. dairy exports are assumed to face a perfectly elastic demand
    schedule at 1999 world prices; that is, the model assumes that the United
    States exhibits ?small country effects? with respect to world dairy exports.
    This assumption is made because U. S. exports are a small share of world
    dairy trade.

    5 In January 2000, USDA reorganized its milk marketing orders and
    reconfigured the thenexisting 31 orders into 11. The significance of this is
    that much of the dairy sector indicator data compiled before January 2000
    are organized into these 31 orders, which do not necessarily correspond to
    the 11 orders. USDA also revised its formulas for setting the minimum prices
    that processors must pay for milk.

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    Compacts

    Page 43 GAO- 01- 866 Impacts of Dairy Compacts

    IRCM99 regions (and pricing points) Federal milk marketing

    orders before January 2000 States included in the IRCM99 regions

    States that had enacted legislation authorizing entry into a compact as of
    February 2001

    Mideast (Cleveland) Michigan Upper Peninsula, southern Michigan, East
    OhioWest Pennsylvania, Ohio Valley, Indiana

    Indiana, Michigan, Ohio, West Virginia West Virginia

    Upper Midwest (Chicago) Chicago Regional, Upper Midwest Minnesota, North
    Dakota,

    Wisconsin a

    Central (Kansas City) Iowa, Nebraska- West Iowa, Eastern South Dakota,
    Central Illinois, Southern Illinois, East Missouri, Southwest Plains,
    Eastern Colorado, Greater Kansas City

    Colorado, Illinois, Kansas, Missouri, Nebraska, Oklahoma, South Dakota

    Kansas, Missouri Southwest (Dallas) Texas, New Mexico- West

    Texas New Mexico, Texas a Western (Salt Lake City) Southwest Idaho- Eastern

    Oregon, Great Basin, Western Colorado

    Idaho, Montana, Nevada, Utah, Wyoming

    a Pacific Northwest (Seattle) Pacific Northwest Oregon, Washington a
    Arizona- Las Vegas (Phoenix) Central Arizona Arizona a California (San
    Francisco) b California a

    a No states in this region had enacted legislation as of Feb. 2001
    authorizing entry into a compact. b California?s milk is not regulated under
    a USDA milk marketing order. Rather, the state regulates milk processed and
    sold in that state. Source: University of Wisconsin- Madison.

    Figure 1 shows USDA?s marketing orders, the corresponding IRCM99 regions,
    the corresponding states included in the IRCM 99 regions, and states that
    had enacted legislation authorizing entry into a compact as of February
    2001. With respect to modeling the impact of compacts, the states that have
    enacted legislation are part of four different federal milk marketing orders
    and their corresponding IRCM99 regions. Because of this, both compact and
    noncompact states are included in some IRCM99 regions when modeling some
    compact alternatives. This can influence the interpretation of modeled
    results. For example, some states that have enacted legislation authorizing
    entry into a dairy compact, such as West Virginia, which is part of the
    Mideast Marketing Order, produce only a small portion of the milk produced
    by dairy farmers in that marketing order and hence, estimating the effect of
    West Virginia?s participation in a compact, would be difficult.

    Appendix II: Methodology for Estimating the Interregional Impacts of Dairy
    Compacts

    Page 44 GAO- 01- 866 Impacts of Dairy Compacts

    Figure 1: USDA?s Milk Marketing Orders

    Source: USDA?s Agricultural Marketing Service.

    IRCM99 solves for regional prices and production levels for farm- level raw
    milk on the basis of three milk components: milk fat, protein, and
    carbohydrates (primarily lactose). The model also solves for regional
    wholesale- level price, supply, demand, and trade flows for the following
    dairy products: (1) fluid milk, (2) soft dairy products, (3) American
    cheese, (4) Italian cheese, (5) other cheese, (6) butter, (7) frozen dairy
    products,

    Appendix II: Methodology for Estimating the Interregional Impacts of Dairy
    Compacts

    Page 45 GAO- 01- 866 Impacts of Dairy Compacts

    (8) other manufactured dairy products (a residual product category), and (9)
    nonfat dry milk. The model uses a fixed component composition that converts
    farm milk into fluid milk and different types of manufactured dairy
    commodities, as shown in table 9.

    Table 9: IRCM99 Dairy Product Fixed Component Composition Milk component
    Dairy commodity Milk fat

    (percentage) Protein (percentage) Carbohydrates

    (percentage)

    Fluid milk 2.0 3. 3 4.7 Soft dairy products 11.4 4. 9 4.2 American cheese
    33.2 24.6 1. 5 Italian cheese 22.7 20.8 2. 4 Other cheese 28.1 25.7 2. 4
    Butter 81.1 0. 9 0.1 Frozen dairy products 9.5 3. 5 4.9 Other manufactured
    products 0.5 12.1 52.0 Nonfat dry milk 0.7 35.6 52.1

    Source: University of Wisconsin- Madison.

    The regional supply of milk components (milk fat, protein, and
    carbohydrates) must be greater than or equal to the regional utilization of
    these milk components by the processing sector to ensure regional component
    supply/ demand balance. The marginal value of this restriction (given by the
    corresponding Lagrange multiplier) measures the shadow value of each milk
    component in each region. 6 The model subsequently generates empirical
    estimates of regional shadow prices for each milk

    6 One approach for solving a constrained optimization problem is the
    Lagrange- multiplier method. This technique involves finding the maximum or
    minimum value of an objective function (such as utility maximization)
    subject to another expression that defines a constraint (i. e., a budget
    constraint). In general, given the objective function z = f( x, y) subject
    to the constraint, g( x, y) = c, the Lagrangean function is defined as Z =
    f( x, y) + [c -

    g( x, y)]. This augmented expression includes a variable called the Lagrange
    multiplier, . This method has many comparative static properties, including
    the fact that the Lagrange multiplier, , provides a measure of the
    sensitivity of Z, the objective function, to changes or shifts in the
    magnitude of the constraint. In a linear programming context, the Lagrange
    multiplier can be interpreted as a shadow price, or imputed price, the
    maximum amount that someone would be willing to pay for the next unit of an
    input. In the current analysis, the model solution is characterized as the
    saddle point of a Lagrangean function, in which the Lagrange multipliers
    correspond to trade flow constraints across regions (See footnote 3 in this
    appendix).

    Appendix II: Methodology for Estimating the Interregional Impacts of Dairy
    Compacts

    Page 46 GAO- 01- 866 Impacts of Dairy Compacts

    component. The model also generates market prices that are consistent with
    milk component pricing for each commodity in each region.

    The basic structure of the IRCM99 is consistent with a competitive market
    equilibrium, where, at the optimum, the market price equals the marginal
    cost of each commodity. However, USDA and California use a system of
    classified pricing for milk that influences pricing in ways that differ from
    the competitive outcome. Therefore, to incorporate the classified pricing
    system, price wedges are used in the model to represent the difference
    between the minimum price of milk in a particular class and the minimum
    price of milk in a reference class. In the model, the reference class for
    USDA?s milk marketing orders is Class III, and the reference class for
    California is 4b. 7 , 8 For example, the price wedge for raw milk used for
    fluid milk is the difference between the price for milk used for Class I
    (fluid) and the price for milk used for Class III (cheese), plus potential
    over- order premiums. 9 For USDA?s milk marketing orders in 1999, we
    calculated the price of raw milk used for manufacturing (Classes II, III,
    and IV) as the implicit price of milk used for Class II and Class III in the
    Upper Midwest Milk Marketing Order (portions of Illinois, Iowa, Michigan,
    Minnesota, North Dakota, South Dakota, and Wisconsin). USDA milk marketing
    order prices for nonfat dry milk and butterfat differentials are computed by
    using USDA formulas and wholesale commodity prices. California milk prices
    are calculated for milk used in fluid products (Class 1); milk used for
    heavy cream, cottage cheese, yogurt, and sterilized products (Class 2); milk
    used in ice cream and other frozen dairy products (Class 3); milk used in
    butter and nonfat dry milk (Class 4a); and milk used in cheese

    7 The reference class 4b is comparable to USDA?s Class III, which is the
    classification for milk used for manufacturing hard cheese. 8 California?s
    Class 4a is for milk used to manufacture butter and nonfat dry milk and
    corresponds to USDA?s Class IV. 9 When reviewing and commenting on our draft
    report, USDA officials suggested that a different method of calculating the
    Class I mover that took into account lags would be more consistent with the
    method that USDA uses. We did not use that method originally because the
    IRCM99 is an annual, not monthly, model. However, as a result of USDA
    officials' comments, we re- ran some specifications of the model using a
    method for calculating the Class I mover that more closely resembles USDA's
    method. The estimates of the impacts of the different compact scenarios that
    we obtained using 1999 and 2000 data were very similar to the estimates in
    our draft report and, therefore, we did not change the estimates in
    preparing our final report. In both sets of model runs, we used a consistent
    method for measuring the Class I mover in our baseline and in our compact
    scenarios. The choice of method for measuring the Class I mover, therefore,
    did not have a large impact because we are estimating the impacts of
    compacts by estimating deviations from a baseline. Modeling Classified

    Pricing

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    other than cottage cheese (Class 4b). We computed California price wedges by
    using administered formulas for the fat and solids- not- fat component
    prices by class. These component prices are computed from wholesale
    commodity prices for butter, nonfat dry milk, and cheese that are endogenous
    to the model. Because Class 4a prices were lower than Class 4b prices in
    1999, this method implies a negative price wedge in California for Class 4a.
    Finally, because dairy farmers are paid blend prices based on USDA and
    California?s classified pricing systems, we incorporated price wedges that
    represent these blend prices in each of the respective modeled regions.

    We took into account pooling regulations for both USDA and the NEDC in
    modeling ?producer settlement pools.? 10 The first step in this calculation
    is to compute total revenues from regional milk production under the
    assumption that all raw milk is pooled in the region where it is produced.
    This is done in each region by multiplying the price wedge for each
    commodity by the quantity of raw milk used to produce that commodity.
    However, by shipping some of their milk to another order, producers can
    sometimes become eligible to receive the minimum prices in the destination
    order for their milk, which might be higher than the minimum prices in their
    "home" order. As a result, in estimating how the proceeds from raw milk
    sales are distributed to producers, through producer settlement pools, the
    model can adjust its initial estimate to take into account that not all raw
    milk is pooled in the order where it is produced.

    When we estimated the impacts of the compact scenarios, no such adjustments
    were necessary because the model's solutions did not yield

    10 "Producer settlement pool" is the amount of money available for payment
    to producers. Processors pay into the pool amounts based on the class of
    product for which they use the milk. Producers draw from the pool an amount
    that is based on the blend price for milk within each marketing order. The
    blend price is the monthly weighted average of the prices of milk used in
    the different classes in that marketing order, with the weights determined
    by the amount of milk sold for each class of use. A producer's milk is
    qualified to be pooled on a particular federal milk marketing order by its
    association with a pool plant that is regulated by the order. Once a
    producer's milk is qualified to be pooled on the order, it is not necessary
    for all of that producer's milk to be delivered to a plant regulated by that
    specific order in order to qualify for the blend price. Each marketing order
    has its own regulations establishing the amount of milk that must be
    delivered to a regulated pool plant in order to qualify for the marketing
    order's blend price. The NEDC also regulates the amount of milk that must be
    delivered to plants within the six states and to plants outside the six
    states that ship milk to the NEDC states in order for the processors to
    qualify for the NEDC price. Modeling Producer

    Settlement Pools

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    Compacts

    Page 48 GAO- 01- 866 Impacts of Dairy Compacts

    any pooling of raw milk outside any home order. As a result, before taking
    into account further adjustments described below, the revenue received from
    milk sales from farmers in any order were the same as they would have been
    had no adjustment been made and all producers' receipts from milk sales were
    based on the prices in their home order. We recognize that some milk is
    pooled outside the order in which it is produced. However, we did not have
    data on shipments of raw milk by individual farmers or shipments of fluid
    milk or other dairy commodities by individual processing plants, which
    limited the model's ability to estimate raw milk movements across orders. 11
    Instead, the model solution includes substantial movement of packaged fluid
    milk to balance supply and demand across orders. If enough packaged fluid
    milk moves out of an order, the model's structure allows for further
    adjustments to be made in the producer settlement pools, but there was no
    region affected in this way. 12

    However, the producer settlement pools were adjusted for the movement of
    packaged fluid milk into compact regions under the various scenarios that we
    analyzed. These adjustments were made because processors in exporting
    regions shipping packaged fluid milk into compact regions are required to
    pay a compact premium on this milk. Similarly, these processors can return
    to their producers an amount equal to the compact premium multiplied by the
    percentage of the compact region's raw milk that is sold for Class I use.

    We obtained data for our analysis from several sources, including USDA, the
    state of California, academia, and research institutes. We obtained most of
    the price and production data from USDA and the California Department of
    Food and Agriculture. In particular, we obtained farm- level milk data from
    USDA?s Milk Production, Disposition and Income- 1999 Summary, and commodity
    production data from USDA?s Dairy Products- 1999 Summary. We obtained
    commodity price, stock, import, export, and

    11 Since we are estimating the impacts of compacts by estimating deviations
    from a baseline that include the same limitation, it is not clear that this
    limitation has much of an effect on our estimates.

    12 The model requires an adjustment to be made if more than 40 percent of
    the milk packaged in an order is exported to another region. This threshold
    was chosen as a proxy for the requirement that an adjustment be made if a
    plurality of an order's packaged milk was sold in another region. Data Used
    in the

    Model

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    Compacts

    Page 49 GAO- 01- 866 Impacts of Dairy Compacts

    government utilization data from monthly USDA Economic Research Service
    ?Livestock, Dairy, and Poultry? reports. We obtained federal milk marketing
    order data from USDA?s Agricultural Marketing Service Federal Market Order
    Milk Statistics- 1999 Annual Summary. In addition, we obtained data on price
    support levels from USDA?s Commodity Credit Corporation.

    We obtained regional projections of wholesale dairy product demand by using
    aggregate wholesale demand functions for the United States and regional
    population data. We obtained component yields- the amount of milk fat,
    protein, and carbohydrates per unit of milk and wholesale dairy product-
    from a component accounting exercise that fully allocates 1999 aggregate
    milk and dairy product production. 13 We obtained regional farmlevel milk
    supply elasticities from the Food and Agricultural Policy Research Institute
    and product demand elasticities from research conducted by Cox et al. 14 and
    USDA?s Economic Research Service. 15 These demand elasticities were
    estimated using USDA aggregate national time series data on commercial
    disappearance and wholesale prices. The estimates are consistent with a
    complete demand system specification covering all major food groups and
    products. We obtained data on refrigerated and nonrefrigerated
    transportation and assembly costs for farm milk from dairy researchers at
    Cornell University. 16 We used USDA estimates of dairy manufacturing costs
    to incorporate processing costs into our analysis.

    We calibrated the model to yield solutions that are close to the observed
    1999 data for farm- level and wholesale- level measures of prices and
    production and to link key regional prices to commodity reference prices
    used by USDA and California, such as those reported by the Chicago

    13 R. Selinsky, T. L. Cox, and E. V. Jesse, ?Estimation of U. S. Dairy
    Product Component Yields.? University of Wisconsin- Madison, Agricultural
    Economics Staff Paper No. 355, Sept. 1992.

    14 T. L. Cox, D. Lewis, and R. Selenski, Estimation of Wholesale Demand for
    U. S. Dairy Products, University of Wiscons- Madison, Department of
    Agricultural Economics Mimeo, 1992.

    15 K. S. Huang, A Complete System of U. S. Demand for Food, USDA, Economic
    Research Service, Technical Bulletin No. 1821, Sept. 1993. 16 The
    methodology used to generate these cost estimates is documented at http://
    cpdmp. cornell. edu/ CPDMP/ Pages/ Publications/ Pubs/ rb9709. pdf. 1999
    Baseline

    Calibration

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    Compacts

    Page 50 GAO- 01- 866 Impacts of Dairy Compacts

    Mercantile Exchange and USDA?s National Agricultural Statistics Service.
    Tables 10 through 13 compare the 1999 model solutions with actual 1999 data
    for farm- level prices, farm- level production, wholesale commodity prices,
    and wholesale commodity production, respectively. At the farm level, the
    simulated values calibrate closely with the actual data- all discrepancies
    are 0.5 percent or less, except for the farm- level price in California, for
    which the discrepancy is about 1 percent. At the wholesale level, the price
    discrepancies for major products (fluid milk, American and Italian cheeses,
    butter, and nonfat dry milk) are less than about 3 percent, while production
    discrepancies are 3.5 percent or less.

    Table 10: IRCM99 Farm- Level Price Calibration Farm- level prices in 1999
    (dollars per hundredweight) Difference between actual and

    modeled 1999 farm- level prices IRCM99 region Actual Modeled Dollars per

    hundredweight Percentage

    Northeast $15.21 $15.15 $( 0.06) (0.4) Appalachia 16.02 15.96 (0.06) (0.4)
    Florida 17.20 17.13 (0.07) (0.4) Southeast 16.07 16.00 (0.07) (0.4) Mideast
    14.70 14.64 (0.06) (0.4) Upper Midwest 13.88 13.81 (0.07) (0.5) Central
    14.27 14.21 (0.06) (0.4) Southwest 14.54 14.48 (0.06) (0.4) West 13.23 13.17
    (0.06) (0.5) Northwest 14.90 14.84 (0.06) (0.4) California 13.12 12.97
    (0.15) (1.1) Arizona 13.80 13.75 (0.05) (0.4) United States 14.27 14.23
    (0.04) (0.3)

    Note: Numbers in parentheses are negative. Source: University of Wisconsin-
    Madison.

    Table 11: IRCM99 Farm- Level Production Calibration Farm- level production
    in 1999

    (pounds in millions) Difference between actual and

    modeled 1999 farm- level production IRCM99 region Actual Modeled Pounds in

    millions Percentage

    Northeast 29,205 29,178 (27) (0.1) Appalachia 6, 450 6,435 (15) (0.2)
    Florida 2, 393 2,389 (4) (0.2) Southeast 3, 553 3,547 (6) (0.2)

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    Farm- level production in 1999 (pounds in millions)

    Difference between actual and modeled 1999 farm- level

    production IRCM99 region Actual Modeled Pounds in

    millions Percentage

    Mideast 12,253 12,237 (16) (0.1) Upper Midwest 32,848 32,798 (50) (0.2)
    Central 14,879 14,852 (27) (0.2) Southwest 10,292 10,276 (16) (0.2) West
    8,869 8,853 (16) (0.2) Northwest 7, 145 7,133 (12) (0.2) California 30,408
    30,451 (43) (0.1) Arizona 2, 918 2,914 (4) (0.1) United States 161,213
    161,063 (150) (0.1)

    Note: Numbers in parentheses are negative. Source: University of Wisconsin-
    Madison.

    Table 12: IRCM99 Aggregate Wholesale Commodity Price Calibration Wholesale
    commodity price

    in 1999 (dollars per hundredweight) Difference between actual and

    modeled 1999 commodity prices Dairy commodity Actual Modeled Dollars per

    hundredweight Percentage

    Fluid milk $15.07 $15.09 $0.02 0.1 Soft dairy products 27.30 27.29 (0.01) 0
    American cheese 139.84 139.20 (0.64) (0.5) Italian cheese 93.48 93.20 (0.28)
    (0.3) Other cheese 115.68 115.49 (0.19) (0.2) Butter 122.94 119.38 (3.56)
    (2.9) Frozen dairy products 21.41 21.38 (0.03) (0.1) Other manufactured
    products 27.36 27.68 0.32 1.2

    Nonfat dry milk 101.78 102.63 0.85 0.8 Note: Numbers in parentheses are
    negative. Source: University of Wisconsin- Madison.

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    Table 13: IRCM99 Aggregate Wholesale Commodity Production Calibration Level
    of production in 1999

    (pounds in millions) Difference between actual and

    modeled 1999 levels of production

    Dairy commodity Actual Modeled Pounds in millions Percentage

    Fluid milk 55,039 55,020 (19) 0 Soft dairy products 6,068 5,986 (82) (1.4)
    American cheese 3,577 3,539 (38) (1.1) Italian cheese 3,143 3,176 33 1.0
    Other cheese 578 598 20 3.5 Butter 1, 275 1,274 (1) (0.1) Frozen dairy
    products 12,166 12,134 (32) (0.3) Other manufactured products 4,351 4,270
    (81) (1.9)

    Nonfat dry milk 1,383 1,399 16 1.1 Note: Numbers in parentheses are
    negative. Source: University of Wisconsin- Madison.

    Because our baseline was calibrated to actual 1999 data, our original
    baseline values represented estimates for a time when the Compact was in
    place. As a result, we used the IRCM99 to estimate the impact of the NEDC by
    simulating the year 1999 without the NEDC and comparing those results with
    those obtained in our original baseline. That is, the estimated impacts of
    removing the Compact from our original baseline are interpreted as the
    estimated impacts of adding the Compact to a nocompact baseline, with the
    signs reversed. For each subsequent compact scenario, we used the IRCM99 to
    estimate the interregional impact of compacts. That is, we compared our
    estimates of farm- level and wholesale- level prices, production, and
    revenue in 1999 under each compact scenario with our estimates of what they
    would have been in that year without any compact. In effect, the no- compact
    scenario became our new baseline for comparison.

    We developed three compact scenarios: the NEDC, which includes Connecticut,
    Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont; an expanded
    NEDC that also includes Delaware, Maryland, New Jersey, New York, and
    Pennsylvania; and an expanded NEDC in conjunction with a southern compact
    that includes Alabama, Arkansas, Georgia, Kansas, Kentucky, Louisiana,
    Missouri, Mississippi, North Compact Scenarios

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    Carolina, South Carolina, Tennessee, and Virginia. These states were
    included in the expanded NEDC and the southern compact on the basis that
    they had enacted legislation as of the end of February 2001 that would allow
    them to enter into a dairy compact, should the Congress enact legislation
    allowing them to do so. While West Virginia had also enacted such
    legislation as of the end of February 2001, we did not include it in our
    analysis of an expanded NEDC in conjunction with a southern compact because
    of the difficulty of modeling West Virginia as part of a southern compact,
    given that it would have been the only state in USDA?s Mideast Marketing
    Order whose milk would fall under compact regulation. Since West Virginia
    produced less than 0.2 percent of the nation?s milk supply in 2000, we do
    not believe that its omission significantly affects our estimates of the
    impact of the southern compact.

    The IRCM99, as discussed previously, models different regions of the country
    based, in part, on USDA's milk marketing orders and California. Because of
    this, the states in the NEDC are incorporated as part of the IRCM99
    Northeast region. This region encompasses the following states: Connecticut,
    Delaware, Maine, Massachusetts, Maryland, New Hampshire, New Jersey, New
    York, Pennsylvania, Rhode Island, and Vermont (and the District of
    Columbia). To account for the NEDC, we calculated the amount of milk
    produced by the six NEDC states as a percentage of the total amount of milk
    produced within the Northeast Milk Marketing Order. Therefore, while we are
    able to estimate the impact of the NEDC on other noncompact regions of the
    country that do not contain any compact states, we could not estimate the
    NEDC's impacts on other noncompact states within the Northeast region.
    Further, because we defined the impacts of the NEDC scenario to be based on
    the amount of milk produced by the six NEDC states, the impacts of this
    scenario do not account for milk that noncompact states, such as New York,
    may ship into the NEDC states. Further, reductions in revenue in noncompact
    states are also not accounted for. Thus, our estimate of the NEDC's impact
    on noncompact regions is a little smaller than would be expected had we been
    able to isolate the effects of noncompact and compact states within the same
    region.

    Similarly, in our scenario of an expanded NEDC in conjunction with a
    southern compact, the IRCM99 has the compact region extending into four
    regions: the Appalachian, Central, Northeast, and Southeast. While this
    compact scenario fully includes the majority or all of the states
    encompassed by three of the four regions, one region- the Central- is not
    fully encompassed. The Central region includes the following seven states:
    Colorado, Illinois, Kansas, Missouri, Nebraska, Oklahoma, and South

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    Dakota. However, only two of these states- Kansas and Missouri- are assumed
    as part of a compact. As with our modeling of the NEDC, we calculated the
    amount of milk produced by the two states as a percentage of the total
    amount of milk produced within the Central region. Therefore, while we are
    able to estimate the impact of the expanded NEDC in conjunction with a
    southern compact on noncompact regions of the country that do not contain
    any compact states, we could not estimate this compact scenario's impact on
    the Central region. Similarly, under this compact scenario, we do not take
    into account the amount of milk that may be shipped into the compact states
    by bordering noncompact states in the Central region. Further, reductions in
    noncompact producer revenue in these noncompact states was also not
    accounted for. Thus, our estimate of the expanded NEDC in conjunction with a
    southern compact's impact on all noncompact regions combined is a little
    smaller than would be expected had we been able to isolate the effects of
    noncompact and compact states within the Central region.

    We used specific parameter values to arrive at our baseline, or nocompact,
    scenario and initial estimates of the impacts of the different compact
    scenarios. We also used key assumptions regarding the amount of market-
    driven over- order premiums, compact producer price payment levels, and
    transportation costs, and the ability of milk to move from region to region.

    Specifically, we used a milk price support payment amount, or price floor,
    of $9.90 per hundredweight of milk, which equates to $1.10 per pound for
    American cheese, 65 cents per pound for butter, and $1.01 per pound for
    nonfat dry milk. In addition, we assumed medium- term, or 5- year, wholesale
    demand elasticities for fluid milk and other dairy products, as shown in
    table 14.

    Table 14: Medium- Term Wholesale Demand Elasticities Used in Initial
    Estimates Dairy commodity Medium- term demand elasticity

    Fluid milk -0.144 Soft dairy products -0.42 American cheese -0.16 Italian
    cheese -0.251 Other cheese -0.477 Butter -0.243 Frozen dairy products -0.327

    Parameter Values for Our Baseline and Initial Estimates

    Appendix II: Methodology for Estimating the Interregional Impacts of Dairy
    Compacts

    Page 55 GAO- 01- 866 Impacts of Dairy Compacts

    Dairy commodity Medium- term demand elasticity

    Other manufactured products -0.276 Nonfat dry milk -0.449

    Source: Cox et al., 1992, and USDA?s Economic Research Service.

    We also assumed medium- term regional supply elasticities as shown in table
    15.

    Table 15: Medium- Term Regional Supply Elasticities Used in Initial
    Estimates IRCM99 region Medium- term supply elasticity

    Northeast 0.258 Appalachia 0. 641 Florida 0.408 Southeast 0.396 Mideast
    0.317 Upper Midwest 0. 312 Central 0.430 Southwest 0.388 West 0.424
    Northwest 0.430 California 0.433 Arizona 0.389

    Source: Food and Agricultural Policy Research Institute.

    We also assumed that within a compact region, there was no marketdriven
    over- order premium above the compact minimum price. This initial assumption
    represents a lower bound, and assumes that compact overorder producer price
    payments may have replaced, or become a substitute for, much of the market-
    driven over- order premiums in the compact region. We also assumed that the
    Class I price in a compact region, or the compact price, was $16.94 per
    hundredweight of milk.

    To better model the effect of pooling and to account for milk shipments from
    region to region and from noncompact to compact regions, we assumed that no
    more than 40 percent of any one region?s packaged fluid milk could be
    shipped to another region without being pooled in the receiving region. We
    also assumed that a processor had to pay the compact over- order producer
    price into a compact pool for milk shipped into a compact region in order to
    receive a compact blend price for these fluid shipments. With these
    assumptions, we did not restrict milk flows from region to region or from
    noncompact to compact regions. We also used transportation costs as
    developed by researchers at Cornell University, with no adjustment.

    Appendix II: Methodology for Estimating the Interregional Impacts of Dairy
    Compacts

    Page 56 GAO- 01- 866 Impacts of Dairy Compacts

    Following our initial analyses, we conducted additional analyses of the
    impacts of compacts by varying our initial parameter values or assumptions
    to determine how sensitive our initial estimates were to changes in key
    values or assumptions. Specifically, with respect to wholesale demand
    elasticities, we changed the medium- term elasticities used in our initial
    analyses to long- term, as shown in table 16, to determine what impact
    higher elasticities would have on our initial estimates.

    Table 16: Long- Term Wholesale Demand Elasticities Used in the Sensitivity
    Analyses

    Dairy commodity Long- term demand elasticity

    Fluid milk -0.30 Soft dairy products -0.907 American cheese -0.625 Italian
    cheese -0.741 Other cheese -0.477 Butter -0.42 Frozen dairy products -0.42
    Other manufactured products -0.45 Nonfat dry milk -0.60

    Source: GAO, based on an analysis of pertinent agricultural economics
    literature.

    In a separate analysis, we changed our regional supply elasticities to
    longterm, as shown in table 17, to determine if changes in long- term supply
    elasticities would affect our initial estimates.

    Table 17: Long- Term Regional Supply Elasticities Used in the Sensitivity
    Analyses IRCM99 region Long- term supply elasticity

    Northeast 0.431 Appalachia 0. 951 Florida 0.674 Southeast 0.629 Mideast
    0.517 Upper Midwest 0. 514 Central 0.666 Southwest 0.614 West 0.727
    Northwest 0.748 California 0.793 Arizona 0.605

    Source: Food and Agricultural Policy Research Institute.

    Sensitivity Analyses

    Appendix II: Methodology for Estimating the Interregional Impacts of Dairy
    Compacts

    Page 57 GAO- 01- 866 Impacts of Dairy Compacts

    In a separate analysis, we changed our assumption regarding the lack of any
    market- driven over- order premium within compact regions and added a 50-
    cent- per- hundredweight over- order premium above the compact's minimum
    price to determine what impact this would have on our initial estimates. We
    then simultaneously used long- term supply and demand elasticities in
    conjunction with the 50- cent over- order premium in compact regions to
    determine what combined effect these three changes taken together would have
    on our initial estimates.

    In a separate analysis, we inflated transportation costs that we obtained
    from Cornell University by 25 percent within each of the IRCM99 regions to
    determine what effect increased transportation costs would have on our
    initial estimates.

    In addition, we conducted a separate sensitivity analysis specific to the
    expanded Northeast Compact in conjunction with a southern compact scenario.
    In this analysis, we varied the assumption regarding the Class I minimum
    price, or compact price, in the compact region. We increased the minimum
    price from $16. 94 to $18.00 per hundredweight in the southern compact but
    retained the $16.94 minimum price in the expanded Northeast Compact. We
    conducted this analysis because data on cooperative pay prices in selected
    cities in USDA?s Appalachia, Southeast, and Central milk marketing orders
    were about a dollar higher in 1999 than in the Northeast Milk Marketing
    Order. 17

    We also analyzed how sensitive the model was to trade limitations across
    regions. Our initial estimates and previous sensitivity analyses assumed
    that milk flowed relatively freely between noncompact and compact regions.
    We revised this assumption by limiting the amount of milk that could flow
    into a compact region from a noncompact region to that amount of milk
    produced within 100 miles of a compact region?s border. Although we
    recognize that there are no regulations establishing such a limit, we
    performed this particular analysis to reflect the fact that the IRCM99 uses
    average transportation costs, on a regional basis, because of the lack of
    specific data on the location of processing plants for 1999. This limitation
    may lead to a model solution with unrealistically high interregional milk
    trade. We then compared the estimated impacts of the

    17 Each month, cooperative associations announce cooperative pay prices. A
    cooperative pay price is based on a blend price- a weighted- average value
    based on milk usage- plus the costs of services performed by the cooperative
    association and cooperative membership dues, and other costs such as the
    national advertising and promotion program.

    Appendix II: Methodology for Estimating the Interregional Impacts of Dairy
    Compacts

    Page 58 GAO- 01- 866 Impacts of Dairy Compacts

    different compact scenarios with the impacts of the no- compact scenario
    using this revised trade assumption. We also conducted the same sensitivity
    analyses discussed above to determine how sensitive these new estimates were
    to changes in key values and assumptions.

    We also conducted an analysis of how sensitive our initial estimates were to
    the magnitude of the difference between USDA and compact prices. We derived
    our initial estimates and our sensitivity analyses using 1999 pricing data
    because 1999 was the most recent year for which complete data were
    available. During 1999, the national average blend price of milk, or the
    average weighted minimum farm- level price, was $14.09 per hundredweight,
    which was higher than the prices observed in some other years, including
    2000. For example, the national average blend price of milk in 2000 was
    $12.11 per hundredweight. To determine how sensitive our 1999 estimates
    were, we used preliminary milk pricing data for 2000 to determine what
    impact this difference may have had. This required a new baseline for
    assessing the magnitude of change that compacts made, given the relative
    magnitude of change in compact and USDA prices. We did not, however, conduct
    a full range of sensitivity analyses regarding this change in assumptions
    because of the preliminary nature of the 2000 pricing data. Further, the
    2000 pricing data reflected regulatory reform measures implemented by USDA
    in January 2000, which posed potential data reliability concerns.

    We calibrated the model using dairy sector data for 2000 to simulate the
    impact of compacts during that year. The method used to develop the IRCM00
    was similar to the method used to develop the IRCM99, with two exceptions:

     We used data on 2000 regional farm production and milk prices; aggregate
    commodity supply/ demand balance (commodity production, imports, exports,
    and stocks) and prices; and component balance (using 2000 disaggregate
    commodity production data) to develop the base model.

     We incorporated revised January 2000 USDA milk marketing order pricing
    regulations into the model. These revisions include a methodology for
    computing (1) classified prices based on USDA?s ?Final Rule? multiple
    component pricing, (2) Class I prices based on the higher of the Class III
    or Class IV multiple component price, and (3) minimum Class II prices based
    on adding a 70- cent- per- hundredweight premium to Class IV prices.

    As in the IRCM99, all classified pricing commodity wedges are computed
    relative to Class III prices, so that if Class IV prices are higher than
    Class III prices, additional classified pricing premiums are added to Class
    I, II,

    Appendix II: Methodology for Estimating the Interregional Impacts of Dairy
    Compacts

    Page 59 GAO- 01- 866 Impacts of Dairy Compacts

    and IV prices. Tables 18 and 19 summarize the additional classified pricing
    premiums for USDA and California.

    Table 18: USDA?s Classified Prices, and the Difference Between These Prices
    and the Price for Cheese (USDA's Class III or California?s Class 4b) in 2000

    Dollars per hundredweight Class USDA's class price

    Difference between USDA's class price and USDA?s Class III

    price of $9.74 Difference between

    USDA's class price and California?s Class 4b

    price of $9.69

    I minimum $14.03 $4.29 $4.34 I actual 15.31 5.57 5.62 II 12.53 2.79 2.84 III
    9.74 0 0. 05 IV 11.83 2.09 2.14

    Source: USDA?s Agricultural Marketing Service.

    Table 19: California's Classified Prices, and the Difference Between These
    Prices and the Price for Cheese (USDA's Class III or California?s Class 4b)
    in 2000

    Dollars per hundredweight Class

    California's milk marketing program price

    Difference between California's milk marketing program price

    and USDA?s Class III price of $9.74

    Difference between California's milk marketing program price and
    California?s Class 4b price of $9. 69

    1 $13.38 $3.64 $3.69 2 12.34 2.60 2.65 3 12.20 2.46 2.51 4b 9.69 (0.05) 0 4a
    11.82 2.08 2.13

    Note: Numbers in parentheses are negative. Source: USDA?s Agricultural
    Marketing Service.

    USDA?s revised pricing regulations result in larger Class I and II premiums
    over Class III milk than occur under California?s pricing regulations, as
    shown in table 20.

    Appendix II: Methodology for Estimating the Interregional Impacts of Dairy
    Compacts

    Page 60 GAO- 01- 866 Impacts of Dairy Compacts

    Table 20: IRCM00 Classified Component Price Premiums in Federal Milk
    Marketing Orders and California

    Dollars per hundredweight Commodity premium

    Dairy commodity (Class)

    California Federal marketing order

    Fluid milk (I or 1) $3.92 $4.35 Soft dairy products (II or 2) 2.59 2.54
    Frozen dairy products (II or 3) 2.32 2.36 Butter (IV or 4a) 0.71 0.73 Nonfat
    dry milk (IV or 4a) 22.37 23.02 Residual (IV or 4a) 17.51 18.02

    Source: University of Wisconsin- Madison.

    USDA Class I and II premiums are also higher in 2000 than in 1999 because of
    lower Class III prices in 2000 relative to 1999, and the impact that Class
    IV prices had on Class I and II. Also, in modeling the impacts of compacts
    in 2000, we computed commodity premiums in producer price settlement pools
    on the basis of fat and skim- not- fat commodity components, using revised
    classified fat and skim- not- fat prices.

    As with any modeling exercise, the IRCM has certain limitations. These
    limitations include: (1) the model cannot identify individual shipments of
    raw milk from one milk marketing order to another because we do not have
    data on shipments of raw milk and packaged fluid milk by individual farmers
    and processors, respectively, (2) the model is static and does not take into
    account dynamic adjustments, (3) the model ignores some institutional and/
    or historical rigidities and capacity constraints (other than for the milk
    marketing orders and component flow constraints), (4) the model assumes the
    absence of farmer, processor, and/ or retailer market power, and (5) the
    model takes exports and imports as being exogenous to the model. IRCM
    Limitations

    Appendix III: NEDC?s Intraregional Impacts Page 61 GAO- 01- 866 Impacts of
    Dairy Compacts

    The intraregional impacts of the NEDC on (1) retail milk prices, (2) milk
    producer income, (3) dairy farm structure, (4) milk production, and (5) milk
    consumption are difficult to determine. Data indicate that retail milk
    prices increased when the NEDC?s alternative minimum pricing requirement
    took effect in July 1997, and prices continue to remain relatively high
    compared with retail milk prices in the rest of the country. However,
    because many factors affect retail milk prices, we were unable to determine
    what portion of the retail price increases in the NEDC states was due to the
    NEDC as opposed to other factors. With regard to milk producer income, when
    the NEDC price has been higher than the Class I price, dairy farmers have
    received payments that reflect the NEDC price- that is, the Class I price
    plus the difference between the Class I price and the NEDC price. (This
    difference is called an over- order payment.) However, it is likely that
    farmers would have received some portion of the difference even without the
    Compact in the form of market- driven overorder premiums. Data on the
    structure of dairy farms, milk production, and fluid milk consumption in the
    six NEDC states and data for the rest of the United States show similar
    trends, suggesting little or no change in the NEDC states following the
    Compact?s establishment.

    Retail milk prices increased in the NEDC states in July 1997, when the
    Compact?s alternative minimum price for raw milk to be used for and sold as
    fluid milk in the six states took effect, but not in the rest of the
    country. Data indicate that since July 1997, retail prices in Boston and
    other selected cities and towns in New England have remained relatively
    high, compared with prices in other major cities in the country. It is
    difficult to determine, however, what portion of the retail price increase
    can be attributed to the NEDC?s alternative minimum price as opposed to
    other factors that affect retail milk prices. Economic analyses of the
    NEDC?s impact on retail milk prices have concluded that retail milk prices
    increased following the Compact?s establishment, but the estimated amount
    attributable to the Compact?s higher alternative minimum price varies among
    the different studies.

    The retail price of milk in the New England states increased sharply during
    July 1997, when the NEDC began setting minimum prices that processors must
    pay for raw milk used for and sold as fluid milk- milk used for drinking
    purposes- in the NEDC states, but comparable increases did not occur in most
    other locations in the United States. In that month, the NEDC price-$ 1.46
    per gallon- was 26 cents higher than USDA?s milk marketing order Class I
    price of $1.20 per gallon. This 26- cent per gallon Appendix III: NEDC?s
    Intraregional Impacts

    Retail Milk Prices Increased in the NEDC States, but It Is Difficult to
    Determine the Amount Attributable to the Compact

    Retail Milk Prices Increased in July 1997 in New England but Not in the Rest
    of the Country

    Appendix III: NEDC?s Intraregional Impacts Page 62 GAO- 01- 866 Impacts of
    Dairy Compacts

    (or 22 percent) price increase appears to have been passed on to consumers
    at the retail level on fluid milk prices during the same month. Table 21
    shows the increase in retail prices according to data collected by the
    departments of agriculture in Connecticut, Maine, and New Hampshire; the
    International Association of Milk Control Agencies; 1 and A. C. Nielsen. 2

    Table 21: Retail Prices for a Gallon of Milk in NEDC States Before and
    Immediately Following the NEDC?s Establishment

    Organization collecting the data June 1997 July 1997

    Connecticut, Maine, and New Hampshire departments of agriculture $2.43 $2.58
    International Association of Milk Control Agencies a 2.49 2.66 A. C. Nielsen
    b 2.40 2.60 a Association data are an average for five cities or towns in
    Maine; Boston, Massachusetts; and three cities or towns in Vermont. b A. C.
    Nielsen data for Boston, Massachusetts, which we selected to represent the
    NEDC.

    Source: GAO analysis of data from Connecticut, Maine, and New Hampshire
    departments of agriculture; the International Association of Milk Control
    Agencies; and A. C. Nielsen.

    Data from the International Association of Milk Control Agencies indicate
    that between June and July 1997, the average retail price of a gallon of
    milk increased by about an average of 7 percent in nine cities in Maine,
    Massachusetts, and Vermont. A. C. Nielsen data for Boston indicate that
    retail milk prices increased by an average of about 8 percent during the
    same period.

    Our review of data for the rest of the United States indicates few increases
    in the retail price of milk in July 1997 that were comparable to what
    occurred in the New England states. For example, data from the International
    Association of Milk Control Agencies for 42 cities and regions outside the
    NEDC states indicate that only two of those cities or regions experienced
    retail price increases comparable to or larger than those observed in
    selected cities in Maine, Massachusetts, and Vermont in July 1997: Eastern
    Virginia had a 31- cent increase and Reno, Nevada had a

    1 The International Association of Milk Control Agencies is an organization
    whose members represent states and territories that regulate milk prices
    within their jurisdictions. Among other things, members collect data on
    retail milk prices for milk sold in selected cities within their
    jurisdictions.

    2 A. C. Nielsen is a private data collection and analysis company.

    Appendix III: NEDC?s Intraregional Impacts Page 63 GAO- 01- 866 Impacts of
    Dairy Compacts

    10- cent increase between June and July 1997. Moreover, data from A. C.
    Nielsen for 13 major cities outside the NEDC states show an increase in
    retail milk prices in only one city between June and July 1997: in Seattle,
    the price of milk rose from $2.91 to $3.01 a gallon. Elsewhere, retail milk
    prices declined, for example, in Cincinnati, from $1.43 to $1.35 per gallon
    between June and July 1997 and in Washington, D. C., from $2.47 to $2.44 per
    gallon.

    In the longer term, between July 1997 and September 2000, retail milk prices
    in most of the United States did not increase as much as they did in the
    NEDC states, according to A. C. Nielsen data, as shown in figure 2. 3 The
    average retail milk price in Boston increased by 18 percent between June
    1997 and September 2000, from $2.40 to $2.84 per gallon. The national
    average retail price of milk increased by 8 percent during the same period,
    from $2.49 to $2.68 per gallon.

    3 We are using A. C. Nielsen data for Boston to represent the NEDC states.
    From July 1997 to

    September 2000, Retail Milk Prices in the Rest of the Country Have Increased
    Less Than in the NEDC

    Appendix III: NEDC?s Intraregional Impacts Page 64 GAO- 01- 866 Impacts of
    Dairy Compacts

    Figure 2: Comparison of the Average Retail Price of a Gallon of Milk in
    Boston and in the United States, November 1996- September 2000

    Source: GAO analysis of data from A. C. Nielsen.

    A. C. Nielsen data for 13 major cities outside the NEDC indicate that retail
    milk prices increased between June 1997 and September 2000 in 10 of those
    cities as well. For example, retail prices increased by 3 percent in
    Phoenix, or from $2.21 to $2.27 per gallon; by 12 percent in Seattle, or
    from $2.91 to $3.26 per gallon; by 17 percent in New Orleans, from $2.58 to
    $3.03 per gallon. Data for one city- Cincinnati- show a greater price
    increase than in Boston: prices increased by 80 percent, from $1.43 to $2.57
    per gallon, between June 1997 and September 2000. However, data for
    Cincinnati indicate that between March 1997 and May 1998, retail milk prices
    were considerably lower than those in other major cities. In contrast to
    retail milk prices in cities such as Boston and Cincinnati, prices fell in
    Dallas, Denver, and San Diego.

    Data from the International Association of Milk Control Agencies also
    indicate that retail milk prices increased from June 1997 to November 2000
    in the NEDC states and the rest of the country. For example, retail prices
    increased by 17 percent, from $2.59 to $3. 04 in Burlington, Vermont; and

    Appendix III: NEDC?s Intraregional Impacts Page 65 GAO- 01- 866 Impacts of
    Dairy Compacts

    by 10 percent, from $2.18 to $2. 39 in Augusta, Maine, from June 1997 to
    November 2000. In the rest of the country, of the 29 cities or regions for
    which the Association had June 1997 and November 2000 data, retail milk
    prices increased in 21 of them. For example, retail milk prices increased by
    4 percent, from $2.76 to $2.88 per gallon in Philadelphia, Pennsylvania; and
    by 20 percent, from $2.55 to $3.05, in Salem, Oregon.

    Even though it is likely that the Compact caused some portion of the retail
    milk price increase in the NEDC states, it is difficult to determine the
    size of that portion. In part, this is because retail milk prices vary
    considerably in relation to the minimum farm- level price for raw milk. For
    example, after retail prices increased by about 20 cents per gallon in July
    1997, they fell by about 5 to 7 cents per gallon for a period of several
    months. In addition, even though the NEDC price remained stable at $1.46 per
    gallon between July 1997 and August 1998, data on retail milk prices for
    Boston indicate that retail prices fluctuated during that period from a high
    of $2.60 to a low of $2.53 per gallon. Figure 3 shows the relationship
    between the Class I or NEDC price and the average retail price of milk sold
    in Boston.

    Appendix III: NEDC?s Intraregional Impacts Page 66 GAO- 01- 866 Impacts of
    Dairy Compacts

    Figure 3: Comparison of the Average Retail Price of a Gallon of Milk in
    Boston and the USDA Class I or NEDC Price, November 1996- September 2000

    Note: The NEDC price took effect beginning in July 1997. The NEDC price per
    gallon is the higher of either USDA?s Class I price or the NEDC floor price
    of $1.46 per gallon.

    Source: GAO analysis of data from A. C. Nielsen, USDA?s Agricultural
    Marketing Service, and the NEDC.

    Between July 1997 and September 2000, the retail price in Boston varied
    between $2.53 and $2.90 per gallon. In September 1998 when the NEDC price
    increased by 9 cents, from $1.46 to $1.55 per gallon, the retail price
    increased by only 1 cent, from $2.55 to $2.56. As figure 3 shows, retail
    prices increased in early calendar year 1999 and again in late calendar year
    1999. In November 1999, the retail price of milk reached a high of $2.90,
    when the NEDC price was $1.68 per gallon.

    One of the reasons that there is not a close relationship between the NEDC
    price for milk and the retail price is that many factors affect the retail
    price of milk, including wholesalers? costs, state regulations,

    Appendix III: NEDC?s Intraregional Impacts Page 67 GAO- 01- 866 Impacts of
    Dairy Compacts

    consumer demand, and retailers? pricing strategies. 4 More specifically, the
    retail price of milk is affected by wholesalers? costs of acquiring and
    processing raw milk and packaging and distributing processed fluid milk to
    retail outlets. The retail price can also be affected by state regulations
    that, for example, dictate how and where milk can be distributed. Another
    factor is consumers? shrinking demand for milk products, as opposed to other
    beverages. This shrinking demand has created a need to advertise and improve
    products, which has increased retail costs. Finally, retail milk prices are
    affected by retail pricing strategies involving such factors as retail
    costs, competitor pricing, if and how milk prices are used to attract
    customers, shopping convenience, the image a store may want to project
    regarding quality or low prices, and the extent to which retailers exercise
    market power.

    Four studies have estimated the Compact?s impact on retail milk prices, and
    each has concluded that the NEDC has resulted in increased retail prices.
    Each study provides a different estimate of the amount that the NEDC has
    caused retail prices to increase, however, largely because of the different
    methodologies used and the time frames analyzed. The Office of Management
    and Budget (OMB) issued a study in 1998 that analyzed retail milk price data
    for the first 6 months that the NEDC was in effect. 5 OMB estimated that the
    Compact could have had a small impact (an increase of 5 to 10 cents per
    gallon), a medium impact (an increase of 10 to 15 cents per gallon), or a
    large impact (an increase of 15 to 20 cents per gallon) on retail prices,
    depending on the extent to which costs were passed on from the farm to the
    retail level, and the extent to which wholesalers and retailers absorbed or
    passed on any increased costs. However, OMB cautioned that its study was
    completed too soon after the Compact began operating in July 1997 to
    determine its economic impacts and implications with confidence or
    precision. OMB further cautioned that U. S. dairy industry economics are
    complex, and that producer, wholesale, and retail prices are affected by
    numerous proprietary, regional, and national factors. OMB concluded that
    retail price patterns have fluctuated in recent years and provide no
    definitive indication of the retail price levels that would have occurred
    without the Compact.

    4 A detailed discussion of these various factors is included in our report
    entitled Dairy Industry: Information on Milk Prices and Changing Market
    Structure (GAO- 01- 561, June 15, 2001).

    5 OMB?s The Economic Effects of the Northeast Interstate Dairy Compact, Feb.
    1998. Other Studies Estimate

    That the NEDC Has Increased Retail Prices

    Appendix III: NEDC?s Intraregional Impacts Page 68 GAO- 01- 866 Impacts of
    Dairy Compacts

    In 2000, economists (Lass et al.) at the University of Massachusetts issued
    a study that analyzed the NEDC?s impact on retail milk prices during the
    first year of the Compact. 6 For this study, which was conducted for the
    NEDC, Lass et al. used data from January 1982 through June 1996 to develop a
    model of farm- to- retail price behavior in two markets: Boston and
    Hartford. They then used data from an 18- month period- July 1996 through
    December 1997- to predict what the retail price for milk would have been
    without the Compact and to compare those predicted effects with the effects
    that actually occurred in New England. Lass et al. concluded that the NEDC
    caused an average retail milk price increase of about 7 cents per gallon in
    the Boston market and about 6 cents per gallon in the Hartford market. They
    also concluded that because this estimated retail price increase was less
    than the NEDC increase in costs to fluid milk processors (the over- order
    amount due to the NEDC), an amount less than the NEDC over- order amount was
    being passed on to consumers. The authors cautioned, however, that the model
    did not capture changes that may have occurred in the farm- to- retail price
    relationship from July through December 1997.

    A third study, issued in 2000 by an economist (Bailey) at Pennsylvania State
    University, analyzed the farm- to- retail markup for fluid milk over the
    period January 1996 through December 1999. 7 Using a simple but direct
    markup model to evaluate the impact of the NEDC on retail fluid milk prices
    in Boston and Hartford, Bailey concluded that the retail price of milk
    increased after the Compact established its minimum price in July 1997.
    Specifically, Bailey concluded that the retail price of milk rose 24 cents
    per gallon from July 1997 to December 1999 over the average price in effect
    from January 1996 to June 1997. According to Bailey, the majority of this
    24- cent per gallon increase- 17 cents per gallon- was attributable to the
    Compact, while the rest was attributable to other factors. 8 Finally,
    studies issued in 2001 by economists (Cotterill and Franklin) at the
    University of Connecticut examined specific factors that

    6 Daniel A. Lass, Mawunyo Adanu, and P. Geoffrey Allen, ?Impacts of the
    Compact on Fluid Milk Retail Prices,? The Northeast Interstate Dairy
    Compact: Milk Market Impacts,

    Research Report 73, Agricultural Experiment Station, University of Vermont,
    Mar. 2000. 7 Kenneth Bailey, Report on the Operation and Performance of the
    Northeast Interstate Dairy Compact, Department of Agricultural Economics and
    Rural Sociology, Pennsylvania State University, July 2000.

    8 The increase in the retail price of milk was partially offset by a 3-
    cent- per- gallon decline in the retail price of milk due to the reduction
    in the cooperative market over- order premium.

    Appendix III: NEDC?s Intraregional Impacts Page 69 GAO- 01- 866 Impacts of
    Dairy Compacts

    may have increased retail milk prices in four New England marketing areas-
    Boston, Providence, Hartford/ Springfield, and Northern New England-
    following the Compact?s establishment in July 1997. 9 Cotterill and Franklin
    compared retail price data from February 1996 through early July 1997 with
    retail price data from July 1997 through August 1998. The authors separated
    out retail price increases as caused by four factors: (1) the increased farm
    price of milk caused by the NEDC; (2) the increased farm price of milk
    caused by strong raw milk markets when the farm price spiked above the NEDC
    price; (3) nonmilk costs, such as increased processing costs other than
    costs for purchasing raw milk and increased distribution costs; and (4)
    changes in pricing at the wholesale and retail levels. Using this
    methodology, Cotterill and Franklin concluded that of the 29- cent increase
    in the retail price of a gallon of milk, on average, 2.7 cents per gallon
    were caused by the NEDC and 6.5 cents per gallon were caused by strong milk
    markets. 10

    While it is likely that the NEDC has stabilized producer income, it is
    difficult to determine how large of an impact it has had on producer income
    because of uncertainty about what dairy farmers in the six NEDC states would
    have been paid for their milk in the absence of the Compact. This
    uncertainty arises because NEDC payments made to dairy farmers may be, in
    part, substitutes for market- driven over- order premium payments. Even so,
    the NEDC commission has concluded that the Compact has had a positive effect
    on the financial status of dairy farmers in the six NEDC states and New
    York. USDA data on dairy farm income do not clearly indicate whether the
    improved financial status of an average dairy farmer in the NEDC states
    resulted from the NEDC. Finally, while two studies of the NEDC?s impact on
    farm income concluded that the NEDC could have a positive impact on farm
    income, they provide no definitive estimate of the size of this impact.

    9 Testimony by Ronald W. Cotterill on The Impact of the Northeast Dairy
    Compact and Market Channel Pricing Strategies on the Performance of the New
    England Dairy Industry before the U. S. Senate Committee on the Judiciary,
    July 25, 2001; and Ronald W. Cotterill and Andrew W. Franklin, The Public
    Interest and Private Economic Power: A Case Study of the Northeast Dairy
    Compact, Food Marketing Policy Center, Department of Agricultural and
    Resource Economics, University of Connecticut, May 2, 2001.

    10 Cotterill and Franklin, in their May 2001 study, attributed 4.5 cents of
    the 29- cent per gallon milk price increase to the NEDC. They revised this
    estimate to 2.7 cents in the July 2001 study. The 1. 8 cents- per- gallon
    reduction in the amount attributable to the NEDC was caused by a reduction
    in cooperative premiums. Limited Data Are

    Available to Estimate the Potential Impacts of the Compact on Producer
    Income

    Appendix III: NEDC?s Intraregional Impacts Page 70 GAO- 01- 866 Impacts of
    Dairy Compacts

    We cannot determine how much impact the NEDC has had on dairy farmer income
    because we do not know what dairy farmers? incomes would have been from July
    1997 to the present in the absence of the NEDC. While farmers would have
    received at least the minimum federal marketing order or state prices, in
    some cases it is likely that they would have received an amount greater than
    these prices even in the absence of the NEDC. According to USDA officials,
    dairy farmers in the NEDC states had received some market- driven over-
    order premiums prior to the NEDC?s establishment. For example, in 1996, the
    over- order Class I premium in the New England order averaged 76 cents per
    hundredweight. 11 Research conducted by economists at Cornell University
    indicates that after the compact began, producers receiving NEDC payments
    received no over- order premiums above the amount needed to compensate them
    for cooperative services. In one survey conducted in August 2000, dairy
    farmers in New York who received NEDC payments were receiving no market-
    driven over order premiums, while producers not shipping milk into the NEDC
    states received about 60 cents per hundredweight in market- driven over-
    order premiums. USDA officials concurred with this assessment. According to
    one USDA official, overorder charges decreased about 50 cents per
    hundredweight after the NEDC began setting its price for Class I milk, and
    were at levels indicative of the costs of services provided by cooperatives
    for handlers.

    We estimate, however, that dairy farmers supplying raw milk for use as fluid
    milk sold in the NEDC states have received revenue as a result of the
    Compact. We estimate that an average licensed dairy farmer located in one of
    the six NEDC states received annual payments of between $3,892 and $15,301
    since the NEDC regulations took effect in July 1997 through December 2000,
    as shown in table 22.

    11 The difference between the price actually paid for Class I milk and the
    Federal order minimum Class I price, called the "over- order premium," is
    negotiated between dairy cooperatives (which sell milk produced by their
    farmer members) and fluid milk processors. The over- order premium includes
    the price for cooperative services and any additional price that fluid milk
    processors must pay to obtain needed supplies that are driven by market
    forces (that is, supply and demand for Class I milk). NEDC Payments May Be,

    in Part, Substitutes for Market- Driven Premium Payments

    Appendix III: NEDC?s Intraregional Impacts Page 71 GAO- 01- 866 Impacts of
    Dairy Compacts

    Table 22: Average Annual NEDC Over- Order Payment Received by a Dairy Farmer
    Located in the Six NEDC States Calendar year Number of dairy farms in

    the NEDC states Milk produced within the

    NEDC states (pounds in millions)

    Average NEDC net producer price (dollars

    per hundredweight) Average annual dairy

    farm payment as a result of the NEDC (dollars per licensee)

    Last half of 1997 3,237 2,272.2 $. 93 $6,582 1998 3,049 4,663.0 .25 3,892
    1999 2,964 4,691.0 .49 7,931 2000 2,772 4,664.2 .91 15,301

    Source: GAO analysis of data from USDA and the NEDC.

    As table 22 shows, the dairy farm payment resulting from the difference
    between the USDA Class I price and the NEDC price (the over- order producer
    price payment) increased significantly in 2000, when the USDA Class I price
    was low-$ 14.80 per hundredweightative to the NEDC price of $16.94. 12

    Although we are unable to determine how much of an impact the NEDC has had
    on dairy farmer income in the six NEDC states, dairy farmers supplying milk
    and receiving over- order producer price payments have likely benefited from
    the NEDC. At a minimum, the NEDC has had a stabilizing impact on the prices
    paid to farmers for milk, irrespective of the amount of additional income it
    may have generated, because the $16.94 NEDC price per hundredweight has
    protected dairy farmer income when the minimum federal marketing order price
    has fallen below the NEDC price. This occurred in 35 of the 46 months
    between July 1997 and March 2001.

    NEDC commission data indicate that the difference between the Compact Class
    I price and the USDA minimum Class I price from July 1997 through June 2001,
    minus fees for administering the NEDC, totaled about $146 million. This
    amount was provided to 4,217 farms supplying the New England market, of
    which 1,300 are estimated to be located in New York. According to the NEDC,
    between July 1997 and June 2001, the NEDC resulted in annual payments of
    between $3, 900 and $14,700, to these

    12 The amounts available in the form of payments to farmers exclude fees
    collected by the NEDC commission for paying commission staff salaries, legal
    costs, and costs for compensating USDA and the states for estimated
    increased costs to milk price support and selected nutrition assistance
    programs. NEDC Data Indicate a

    Positive Impact on Net Farm Income, but USDA Data Are Less Clear

    Appendix III: NEDC?s Intraregional Impacts Page 72 GAO- 01- 866 Impacts of
    Dairy Compacts

    farms, depending on herd size. The average annual payment was $9, 812 per
    farm. According to the NEDC commission, this additional income helped
    stabilize and enhance farm- level prices for farmers in the six NEDC states
    as well as New York, some of whom have historically been part of the New
    England milk shed.

    Similarly, NEDC data indicate that net farm earnings improved as a result of
    the Compact. For example, the NEDC commission estimated that in 1997, the
    Compact increased net farm earnings of those supplying the New England milk
    shed by about $6,800, from about $11,000 to about $17,800. The NEDC
    commission estimated that in 2000, the Compact increased net earnings by
    about $15,200, from about $8,100 to about $23,300. The NEDC commission also
    estimated that in 2000, the percentage of dairy farms that experienced
    financial stress was 20 percent lower than it would have been in the absence
    of the Compact: About 50 percent of farms experienced some degree of
    financial stress, compared with 70 percent that would have experienced some
    degree of financial stress without the NEDC. These figures led the NEDC
    commission to conclude that the overall reduction in financial stress
    resulted in a significant reduction in the likely net loss of dairy
    operations in the Northeast.

    While USDA data indicate that the net farm income of an average dairy farmer
    in the northeastern region has increased slightly more than the net income
    of an average farmer in other regions between 1991 and 1999, the data also
    indicate that net farm income in the northeastern region was lower than that
    of farmers in other regions during the same time period. 13 , 14 Figure 4
    shows that the net farm income of average dairy farmers in the northeastern
    region and other regions in the country has increased between 1991 and 1999,
    but that the trend increased at a lower rate in the northeastern region than
    in other regions in the country. Regarding the northeastern region, the data
    indicate that an average dairy farmer?s net farm income increased by 36
    percent, from $34,064 in 1996 to $46,415 in 1999. In the rest of the United
    States, an average dairy farmer?s net farm income increased by 61 percent,
    from $45,650 in 1996 to $73,486 in 1999. It

    13 USDA?s Economic Research Service defines net farm income as total accrual
    receipts minus total accrual expenses when cash income is adjusted for
    changes in crop and livestock inventories.

    14 The northeastern region includes Connecticut, Delaware, Maine, Maryland,
    Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode
    Island, and Vermont.

    Appendix III: NEDC?s Intraregional Impacts Page 73 GAO- 01- 866 Impacts of
    Dairy Compacts

    is difficult to determine, however, the specific impact of the NEDC, because
    many factors influence dairy farm income, and USDA?s northeastern region
    includes other states in addition to the six NEDC states.

    Figure 4: Net Farm Income of a Representative Dairy Farmer in the
    Northeastern Region and in Other U. S. Regions, 1991- 99

    Notes: The northeastern region includes Connecticut, Delaware, Maine,
    Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania,
    Rhode Island, and Vermont. The other U. S. regions exclude these 11 states,
    Alaska, and Hawaii.

    Net farm income is in 1999 constant dollars. Source: GAO analysis of data
    from USDA?s Economic Research Service.

    USDA data also indicate that between 1991 and 1999, the percentage of
    northeastern dairy farms having favorable solvency 15 grew more than the
    percentage of dairy farms with favorable solvency in other regions of the

    15 Dairy farms having a favorable solvency have debt- to- asset ratios of
    less than 0.40 and positive net farm incomes.

    Appendix III: NEDC?s Intraregional Impacts Page 74 GAO- 01- 866 Impacts of
    Dairy Compacts

    country. 16 Figure 5 shows that the percentage of dairy farms having
    favorable solvency in other regions of the country remained relatively
    constant.

    Figure 5: Comparison of the Percentage of Dairy Farms Having Favorable
    Solvency in the Northeastern Region With the Percentage in Other Regions,
    1991- 99

    Note: The northeastern region includes Connecticut, Delaware, Maine,
    Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania,
    Rhode Island, and Vermont. The other U. S. regions exclude these 11 states,
    Alaska, and Hawaii.

    Source: GAO analysis of data from USDA?s Economic Research Service.

    About 61 percent of the dairy farms in the northeastern region had favorable
    solvency in 1991, in comparison with about 69 percent of the dairy farms in
    the rest of the U. S. regions. About 82 percent of the dairy farms in the
    northeastern region had favorable solvency in 1999, in

    16 USDA?s Economic Research Service uses favorable solvency as an indicator
    of the financial position of a farm business based on a combination of
    income (net farm income) and solvency (debt/ asset ratio) measures.

    Appendix III: NEDC?s Intraregional Impacts Page 75 GAO- 01- 866 Impacts of
    Dairy Compacts

    comparison with about 73 percent of the dairy farms in the rest of the U. S.
    regions. Whether the NEDC caused the percentage of dairy farms in the
    northeastern region having a favorable solvency to grow faster is difficult
    to determine because, as noted previously, the six NEDC states form only a
    portion of the northeastern region.

    Two studies have analyzed the NEDC?s impact on dairy farmer income and
    concluded that the Compact has the potential to improve farmer finances.
    OMB?s 1998 analysis was limited by the fact that the Compact had been in
    effect for only about 6 months when OMB conducted its study. 17 To estimate
    the NEDC?s impact on farm income, OMB developed two alternative scenarios of
    what milk prices would have been had the Compact not been established. Under
    the first scenario, OMB assumed that the Class I price would have averaged
    $15.92 per hundredweight in 1997; under the second scenario, OMB assumed
    that the Class I price would have been $16.10 per hundredweight, taking into
    account the decline in the market- driven over- order premium when the NEDC
    took effect. OMB then compared these prices with a minimum NEDC price of
    $16.94 per hundredweight. Using $16.94 as a basis for calculating a blend
    price, OMB estimated that in 1997, the NEDC generated an average increase in
    gross farm income of $5,650 under the first scenario and $4,770 under the
    second scenario. Regarding the NEDC's overall impact on dairy farmers'
    income, OMB concluded that, if other factors affecting dairy farmers were
    held constant, higher milk prices would not be expected to greatly alter the
    long- term trend toward fewer, but larger and more efficient dairy
    operations in New England.

    In 1998, an economist (Wackernagel) at the University of Vermont issued a
    study on the potential impact of the dairy Compact that used computer models
    to simulate characteristics of Vermont dairy farms under different milk
    pricing policies. 18 The models varied with respect to factors such as farm
    size, farm profitability, productivity growth rate, and milk prices.
    Although no one model specifically simulated the impact of the NEDC,
    Wackernagel concluded that using his compact scenarios, the impact of

    17 OMB, Feb. 1998. 18 Rick W. Wackernagel, ?Potential Economic Impacts of
    the Northeast Interstate Dairy Compact on Vermont Dairy Farms,? Agricultural
    and Resource Economics Review, Apr. 1998. Two Studies Provide

    Limited Information on the NEDC?s Impact on Income

    Appendix III: NEDC?s Intraregional Impacts Page 76 GAO- 01- 866 Impacts of
    Dairy Compacts

    stabilizing prices could increase farmer cash reserves and net worth, but he
    estimated that such gains would be more limited than those that would be
    achieved by having a higher farm- level price that varied from month to
    month. Wackernagel also concluded that gains associated with price
    stabilization would be limited unless a Compact?s policies recognized the
    impact of inflation as well as the variability and level of milk prices.

    Data on the number of farms and herd size show similar trends in the NEDC
    and other states before and after the NEDC was established, suggesting
    little or no change in the NEDC states due to the Compact. Moreover, the
    data suggest that the trends are caused by other factors, such as major
    technological advancements in dairy farming.

    The number of dairy farms in the NEDC and the rest of the United States has
    been decreasing, as measured by both the number of farms having at least one
    dairy cow and the number of licensed dairies. In the NEDC states, the number
    of farms having at least one milk cow decreased by 33 percent between 1992
    and 2000, from 5,050 to 3,370. In the rest of the United States, the number
    of farms having at least one milk cow decreased by 39 percent in that same
    period, from 166,510 to 101,880. Given that some of the farms with at least
    one milk cow may not produce milk for sale to dairy processors, we also
    looked at the number of farms licensed to sell milk to dairy processors.
    Between 1992 and 2000, the number of licensed dairy farms in the six NEDC
    states decreased by 32 percent, or from 4,079 to 2,772, while the number of
    licensed dairy farms in the rest of the country decreased by 37 percent
    during that same time period, or from 127,456 to 80,253 (see fig. 6). From
    1992 to 1998, the percentage decrease in the number of licensed dairy farms
    in the NEDC states was greater each year than in the rest of the United
    States; in 1998, the percentage decrease in the rest of the United States
    became greater each year. With respect to the change from 1997 to 2000, the
    number of licensed dairy farms The NEDC?s Impacts

    on Farm Structure, Milk Production, and Milk Consumption Are Difficult to
    Determine

    The Number of Farms Has Continued to Decline as Herd Size Has Increased

    Appendix III: NEDC?s Intraregional Impacts Page 77 GAO- 01- 866 Impacts of
    Dairy Compacts

    decreased by 14 percent in the NEDC states, or from 3,237 to 2,772 farms;
    while the number of licensed dairy farms decreased by 17 percent in the rest
    of the country, or from 96, 176 to 80,253 farms. It is not known whether
    this change in trends was caused by the NEDC or some other factors.

    Figure 6: Decline in the Number of Licensed Dairy Farms in the NEDC States
    and in the Rest of the United States, 1992- 2000

    Source: GAO analysis of data from the American Farm Bureau Federation.

    Between 1992 and 2000, the average herd size in the NEDC states increased by
    36 percent, from 58 to 79 milk cows, while in the rest of the United States,
    average herd size increased by 57 percent, from 56 to 88 milk cows. As shown
    in figure 7, although average herd size has increased in the NEDC states,
    this increase consistently lagged behind the increases in the rest of the
    United States.

    Appendix III: NEDC?s Intraregional Impacts Page 78 GAO- 01- 866 Impacts of
    Dairy Compacts

    Figure 7: Average Number of Cows per Farm in the NEDC States and in the Rest
    of the United States, 1992- 2000

    Source: GAO analysis of data from USDA?s National Agricultural Statistics
    Service.

    One of the reasons for the declines in herd size is that over the past 50
    years, technological developments have significantly altered both dairy
    farming itself and the way farm products are processed and distributed.
    Farming has changed from an operation that was historically dependent on
    human and animal labor to one in which most operations are mechanized. As a
    result, at every level, economies of scale (the lower cost of large- scale
    versus small- scale operations) have led to fewer and larger farms. The
    number of farms in general, and dairy farms in particular, has been
    shrinking since the Depression. While dairy farms with 100 cows were
    considered large in 1950, today dairy farms as large as 1,500 to 3, 000 are
    emerging in the western, northwestern, and midwestern regions of the
    country. This trend, along with the pressure to convert land used for
    agriculture into land used for nonagricultural purposes, will likely result
    in a continued increase in the size of farms with a commensurate decline in
    the total number of farms in the Northeast.

    Appendix III: NEDC?s Intraregional Impacts Page 79 GAO- 01- 866 Impacts of
    Dairy Compacts

    Milk production increased in the six NEDC states and the rest of the country
    both before and after the NEDC was established. This trend toward greater
    milk production has occurred at the same time as the total number of milk
    cows has declined, reflecting a greater amount of milk produced per cow.
    These trends make it difficult to determine what impact, if any, the Compact
    has had on milk production. Two studies have analyzed the NEDC?s impact on
    milk production and concluded that while the NEDC may have caused an
    increase in production, any increase was small in relation to the total
    amount of milk produced in the NEDC states.

    Milk production has increased in the NEDC states and the rest of the
    country, as measured by both total milk produced and milk produced per cow.
    From 1993 to 2000, total milk produced in the NEDC states increased 2.9
    percent, from 4.545 billion pounds to 4.678 billion pounds, while production
    in the rest of the country increased 10.3 percent from 146.091 to 163.274
    billion pounds. With respect to the change from 1997 to 2000, production
    increased by 2.5 percent in the NEDC states, or from about 4.6 billion
    pounds to 4.7 billion pounds; while production increased 7.8 percent in the
    rest of the country, or from about 151.5 billion pounds to 163.3 billion
    pounds. Much of this growth reflected an increase in milk production per
    cow. Figure 8 shows that from 1993 to 2000 the average amount of milk
    produced per cow in the NEDC states increased by 11.6 percent, from 15,633
    pounds to 17,440 pounds, while production per cow in the rest of the United
    States increased 15.9 percent, or from 15,726 pounds to 18, 226 pounds.
    Production Has Continued

    to Increase

    Appendix III: NEDC?s Intraregional Impacts Page 80 GAO- 01- 866 Impacts of
    Dairy Compacts

    Figure 8: Pounds of Milk Produced per Cow in the NEDC States and in the Rest
    of the United States, 1993- 2000

    Source: GAO analysis of data from USDA?s National Agricultural Statistics
    Service.

    Whether the increase in milk production per cow was dramatically influenced
    by the NEDC, however, is not clear. The data on milk production per cow do
    not show a large difference in upward trend between the NEDC states and
    states in the rest of the country between 1997 and 2000. Specifically,
    during this period production per cow increased by 6.6 percent in the NEDC
    states, or from 16,360 pounds to 17,440 pounds; while production per cow
    increased by 7.9 percent in the rest of the country, or from 16,887 pounds
    to 18,226 pounds. Increases in production per cow, and increased efficiency
    in all of the states, has more likely resulted from fundamental changes in
    the structure of dairy farming throughout the country, such as the increased
    cost of labor; new improved machinery; artificial breeding services; better
    feed and forage; adoption of different strains of livestock; and careful use
    of fertilizer, irrigation, and chemicals. The overall impact drastically
    increased production per cow, which has led to the need for fewer cows to
    supply the market.

    Appendix III: NEDC?s Intraregional Impacts Page 81 GAO- 01- 866 Impacts of
    Dairy Compacts

    Both of the studies that analyzed the NEDC?s impact on milk production were
    based on a limited amount of data. OMB?s 1998 study found that from July
    through December 1997, New England milk production was up 3 percent from the
    same period in the previous year, while national milk production was up 2
    percent during the same period. 19 Given this increase in New England milk
    production and using USDA?s dairy economic model, OMB estimated that the
    Compact commission?s price of $16.94 per hundredweight for raw milk used for
    and sold as fluid milk would have caused milk marketings to increase from
    5.38 billion pounds to 5.40 billion pounds, or by about 0.4 percent ,
    between July and December 1998. OMB cautioned, however, that the analysis
    addressed only the first 6 months of the NEDC.

    At the request of the NEDC, economists (Nicholson et al.) at the University
    of Vermont also used a model to estimate the impact of higher Compact prices
    on milk production. 20 Their study, issued in 2000, used state quarterly
    all- milk prices for each of the six Compact states as a basis to estimate
    what milk prices would have been without a Compact. In Vermont, these prices
    ranged from $12.85 to $15.09 per hundredweight. On the basis of their
    analysis of milk production data for the period July 1997 to June 1998,
    Nicholson et al. concluded that the NEDC caused milk production to increase
    by 45 million pounds, or about 1 percent. Nicholson et al. estimated that
    the Compact resulted in increased production in each of the six NEDC states,
    with the largest increase occurring in Vermont. Nicholson et al. postulated
    that without the NEDC milk production in that state would have declined.

    The impact of the NEDC on milk consumption in the six NEDC states is
    difficult to determine because even though the data indicate that per capita
    consumption of fluid milk was higher in the NEDC states than in much of the
    rest of the United States between 1993 and 1999, consumption slowly declined
    during that period, both within the NEDC states and throughout much of the
    rest of the country, suggesting little or no change

    19 OMB, Feb. 1998. 20 Charles F. Nicholson, Budy P. Resosudarmo, and Rick W.
    Wackernagel, ?Impacts of the Compact on New England Milk Supply,? The
    Northeast Interstate Dairy Compact: Milk Market Impacts, Research Report 73,
    Agricultural Experiment Station, University of Vermont, Mar. 2000. Milk
    Consumption Has

    Continued to Decrease

    Appendix III: NEDC?s Intraregional Impacts Page 82 GAO- 01- 866 Impacts of
    Dairy Compacts

    as a result of the NEDC. On the other hand, one study that analyzed the
    impact of the NEDC on milk consumption concluded that the Compact could have
    caused a slight reduction in milk consumption in the NEDC states in the
    latter part of 1997.

    As figure 9 shows, from 1993 to 1999 annual per capita milk consumption in
    the New England Milk Marketing Order declined by about 4 percent, from about
    233 pounds to about 223 pounds. 21 This decline is equivalent to a reduction
    from about 27 gallons to 26 gallons. Similarly, annual per capita milk
    consumption in the rest of the milk marketing orders in the United States
    for the same time period declined by about 6 percent, from about 214 pounds
    to about 202 pounds. This is equivalent to a reduction from about 25 gallons
    to 23 gallons.

    21 Because data are not available on milk consumption in the six NEDC
    states, we used data for USDA?s New England Milk Marketing Order. The New
    England Milk Marketing Order includes Connecticut, Massachusetts, New
    Hampshire, Rhode Island, and Vermont, or portions thereof. In January 2000,
    this marketing order was dissolved and a larger Northeast Marketing Order,
    which incorporates additional states, replaced it.

    Appendix III: NEDC?s Intraregional Impacts Page 83 GAO- 01- 866 Impacts of
    Dairy Compacts

    Figure 9: Per Capita Fluid Milk Consumption in the New England Milk
    Marketing Order and in All Other Milk Marketing Orders, 1993- 99

    Source: GAO analysis of data from USDA?s National Agricultural Statistics
    Service.

    This slow decline in milk consumption began in the late 1970s, probably as
    the result of such factors as increasing consumption of other beverages,
    such as fruit beverages, bottled water, and carbonated soft drinks; growing
    dietary concerns about fat and cholesterol; and an aging U. S. population.
    USDA estimated that without marketing efforts undertaken by the milk
    industry, such as advertising and product innovation, milk consumption would
    have been lower than it was by as much as 1.4 percent from 1996 to 1999. 22

    OMB?s 1998 study found that from July to December 1997, fluid milk sales in
    New England totaled 1.3 billion pounds, which was down 0.7 percent

    22 USDA Report to Congress on the Dairy Promotion Programs, 2000.

    Appendix III: NEDC?s Intraregional Impacts Page 84 GAO- 01- 866 Impacts of
    Dairy Compacts

    from the same period 1 year earlier. 23 Nationally, fluid milk sales
    increased by 0.2 percent in the last half of calendar year 1997. OMB noted
    that studies on the relationship between retail prices and consumption
    suggest that a 10- percent increase in retail fluid milk prices reduces
    consumption by 1 to 2 percent. Using USDA?s model, OMB estimated that the
    average retail price in the Compact states would have been $2.46 per gallon
    without the NEDC price regulations, and that with the NEDC price regulations
    retail prices increased by 3.7 percent to $2.55 per gallon. Given the retail
    price and consumption relationship found in other studies, and the NEDC?s
    impact on retail milk prices, OMB concluded that the NEDC?s price
    regulations reduced fluid milk consumption in the NEDC states by about 10
    million pounds, or about 0.5 percent, between July and December 1997.

    Bailey?s July 2000 study also analyzed the NEDC?s impact on retail fluid
    milk consumption. 24 Bailey examined Class I sales in the New England
    Marketing Milk Marketing Order from 1996 through 1999 and observed a retail
    milk price increase of 24 cents per gallon in the Hartford and Boston
    markets over that period. He attributed this increase to an average 10-
    centper- gallon Compact obligation and a general rise in the farm- to-
    retail markup. Even though retail prices increased, Bailey concluded that
    total fluid milk consumption did not change appreciably after introduction
    of the Compact: He estimated that the amount of milk consumed decreased by
    less than 0.3 percent in 1998 and 1999.

    23 OMB, Feb. 1998. 24 Kenneth Bailey, July 2000.

    Appendix IV: NEDC?s Impacts on Federal Program Costs

    Page 85 GAO- 01- 866 Impacts of Dairy Compacts

    According to USDA, the NEDC has not increased the net federal costs of the
    milk price support program, and the agency is not certain whether the
    Compact has increased costs of the nutrition assistance programs
    administered by USDA. Net costs for USDA's milk price support program have
    not increased because the 1996 farm bill requires that the NEDC commission
    compensate USDA for any additional dairy commodity purchases to the extent
    that the percentage change in milk production in the NEDC states exceeds the
    national average. 1 Regarding nutrition assistance programs, according to
    USDA, federal costs for its Food Stamp Program may have increased as a
    result of the NEDC, but federal costs for its other nutrition assistance
    programs have not increased because of how these programs are funded or
    because of how federal program benefits are calculated for them. According
    to USDA officials, regardless of whether federal costs for its other
    nutrition assistance programs have increased, increased retail milk prices
    caused by the Compact have been borne by agencies or organizations that
    provide program benefits or by program participants in the NEDC states. The
    NEDC commission directly reimburses the NEDC states for increased costs
    incurred by selected nutrition assistance programs. While two studies
    assessed the NEDC?s impacts on selected nutrition assistance programs, study
    results are inconclusive as to whether the NEDC has impacted these programs.

    Even though USDA estimates that the NEDC states? rates of increase in milk
    production have exceeded the national rates of increase in 2 of the 4 years
    since the Compact began setting the price of milk used for and sold as fluid
    milk in the NEDC states in July 1997, net federal milk price support program
    costs have not increased. The price support program, created in 1949,
    supports farm- level prices by providing a standing offer from the
    government to purchase butter, cheese, and nonfat dry milk at specified
    prices. The 1996 farm bill requires that the Compact commission compensate
    USDA when the estimated rate of increase in milk production in the six NEDC
    states is greater than the estimated rate of increase in national milk
    production. The NEDC commission is required to compensate USDA before the
    end of any fiscal year in which the NEDC states? estimated rate of increase
    in production is greater than the national rate of increase for the
    preceding fiscal year. Neither the NEDC nor USDA

    1 Federal Agriculture Improvement and Reform Act of 1996 (P. L. 104- 127,
    Apr. 4, 1996). Appendix IV: NEDC?s Impacts on Federal

    Program Costs Federal Net Costs for the Milk Price Support Program Have Not
    Increased

    Appendix IV: NEDC?s Impacts on Federal Program Costs

    Page 86 GAO- 01- 866 Impacts of Dairy Compacts

    must determine whether the greater rate of increase, or what portion of the
    greater rate of increase, is attributable to the NEDC.

    According to USDA officials, milk production in the NEDC states did not
    increase at a greater rate than the national rate of increase between July
    and September 1997. However, in 1998, USDA estimated that milk production in
    the NEDC states increased 1.8 percent, based on its analysis of the average
    amount of milk produced in the six states during 1997 and 1998, as compared
    to a national average increase in production of 1.3 percent. On the basis of
    these two rates, USDA estimated that it purchased about $1.8 million of
    nonfat dry milk that was attributable to the NEDC?s greater rate of increase
    in production. In 1999, USDA estimated that milk production in the NEDC
    states increased 3.6 percent, based on its analysis of the states? average
    milk production in 1998 and 1999, compared with a national average rate of
    increase of 3.2 percent. On the basis of these two rates, USDA estimated
    that it purchased about $1.4 million of nonfat dry milk that was
    attributable to the NEDC?s greater rate of increase in production. The NEDC
    commission compensated the federal government these amounts for these 2
    fiscal years. The Compact commission was not required to compensate USDA for
    fiscal year 2000 because USDA concluded that the average rate of increase in
    milk production in the NEDC states (0.1 percent) was less than the average
    national rate (5.1 percent).

    USDA analyzed the Compact?s impact on federal nutrition assistance program
    costs and concluded that it is uncertain whether the federal costs of one of
    its major programs- the Food Stamp Program- have increased, while federal
    costs of its other programs most likely have not. Food Stamp Program costs
    may have increased to the extent that the NEDC caused retail milk prices to
    increase nationally and to the extent that the agencies or organizations
    that provide or receive program benefits are not reimbursed. USDA?s Food and
    Nutrition Service is responsible for nutrition assistance programs, which
    include the Food Stamp Program; the Special Supplemental Nutrition Program
    for Women, Infants and Children (WIC); school programs such as the National
    School Breakfast and Lunch Programs and the Special Milk Program; the Child
    and Adult Care Food Program; and several small food distribution programs
    for Indian reservations, the elderly, pregnant women, and children. These
    programs are carried out at the state and local level by state and local
    agencies and organizations, such as day care centers or schools. It Is
    Unclear Whether

    Federal Net Costs for Nutrition Assistance Programs Have Increased

    Appendix IV: NEDC?s Impacts on Federal Program Costs

    Page 87 GAO- 01- 866 Impacts of Dairy Compacts

    Regarding the Food Stamp Program, USDA officials said that federal costs may
    have increased as a result of the NEDC, but they do not know because it is
    difficult to determine (1) how much of the increased retail milk price in
    the NEDC states was caused by the Compact, and (2) to what extent that
    portion of the increased retail milk price caused an increase in the
    national average cost of food items used to determine program benefits. The
    Food Stamp Program is operated by state and local welfare offices. Under the
    program, food stamp recipients spend their benefits (in the form of paper
    coupons or electronic benefits on debit cards), to buy eligible food in
    authorized retail food stores. Program benefits under this program are
    indexed to the cost of a selected group of foods, which is sensitive to the
    changes in the national average retail price of milk. 2 Benefit levels have
    increased since July 1997, because of, among other things, increased
    national average retail milk prices. USDA officials said that the retail
    milk price increases in the six NEDC states caused by the Compact had the
    potential to increase the index used to set benefit levels and, thus,
    federal costs, but it is not certain whether they did so. Further, it is
    difficult to determine what portion of the retail milk price increases was
    attributable to the Compact. USDA estimates that if the NEDC caused a 16-
    cent per gallon increase in the national average retail milk price, there is
    a 50 percent chance that Food Stamp Program benefits increased by $1 per
    program participant per month and annual federal Food Stamp Program costs
    increased by about $60 million. USDA officials also noted that even if the
    increased price of milk attributable to the NEDC was enough to increase
    national food stamp benefit levels, some portion of the increased retail
    milk costs have been borne by participants located in the six NEDC states.

    Regarding WIC, USDA officials said that the Compact has not increased
    federal costs to the program because of the discretionary nature of its
    funding. Even so, because approximately 30 percent of the funds spent on WIC
    foods are used to buy fluid milk, any increase in retail milk prices can
    significantly affect the food package cost per participant and these higher
    costs, unless offset, would reduce the potential number of participants. WIC
    is administered by state agencies, most of whom provide WIC participants
    checks or food instruments to purchase specific foods each month at
    authorized retailers. While the 1996 farm bill does not require the Compact
    commission to reimburse the WIC program, NEDC regulations

    2 This selected group of foods is the core of the Thrifty Food Plan- a
    nutritious, low- cost model diet plan. Milk makes up about 10 percent of the
    value of this plan.

    Appendix IV: NEDC?s Impacts on Federal Program Costs

    Page 88 GAO- 01- 866 Impacts of Dairy Compacts

    specify that the Compact commission is to compensate New England state
    agencies that administer WIC for any increased costs due to the Compact. The
    amount of compensation equals the over- order producer price payment
    multiplied by the volume of milk used by program participants in a given
    month. 3 For example, in January of 1998 when the Vermont WIC program
    purchased 52, 403 gallons of milk, the difference between the NEDC Class I
    milk price and the minimum USDA Class I price was 74 cents per
    hundredweight. Given that a hundredweight is equivalent to about 11.6
    gallons of milk, the Compact commission compensated Vermont about $3,343 for
    that month. In total, the Compact commission compensated the six states? WIC
    programs $3.8 million from 1997 through 2000 for increased milk costs due to
    the NEDC.

    According to state WIC officials, the programs used to administer WIC are
    being held harmless by the NEDC. These officials said that the NEDC has not
    resulted in increased WIC program costs or reduced program participation.
    One state WIC official said that the NEDC has done everything it can to
    ensure that the WIC programs in the six states remain unharmed by
    reimbursing the states the full difference between the NEDC?s minimum Class
    I producer price and the milk marketing order minimum Class I price on all
    WIC milk purchases.

    Regarding school programs, according to USDA officials, it is likely that
    federal costs to these programs have not increased as a result of the NEDC
    because program benefits are based on a broad index of food prices that is
    relatively insensitive to changes in the price of milk in the six NEDC
    states. 4 Thus, any increases in milk prices caused by the Compact would
    either have to be absorbed by the schools or passed on to paying students.
    Programs such as the School Lunch Program are usually administered by state
    education agencies, which operate the program through agreements with local
    school districts. NEDC regulations specify that the Compact will reimburse
    schools for any Compact- related increased costs of fluid milk

    3 The memorandum of agreement between the NEDC commission and the state WIC
    agencies specifies that reimbursement shall be an amount equal to the over-
    order obligation for each month per hundredweight multiplied by the actual
    number of hundredweight equivalents of milk provided to WIC participants in
    each month.

    4 Under the school lunch and breakfast programs, meal reimbursements are
    indexed to the consumer price index for food- away- from- home for urban
    consumers. Under the Special Milk Program, reimbursements are indexed to the
    producer price index for milk.

    Appendix IV: NEDC?s Impacts on Federal Program Costs

    Page 89 GAO- 01- 866 Impacts of Dairy Compacts

    sold in 8- ounce containers by schools in the six NEDC states. 5 This
    commitment applies to all milk served in 8- ounce containers by schools,
    including milk provided under such child nutrition programs as the school
    lunch and breakfast programs and the Special Milk Program. The NEDC
    commission requires that school food authorities submit claim forms at the
    end of each school year that identify the number of 8- oz. cartons of milk
    purchased during the school year on these forms. School authorities document
    whether part of the price for the 8- ounce milk containers is attributable
    to the NEDC over- order premium and, if so, how much on the basis of milk
    vendor submissions. Our review of school food authority claim data indicates
    that the portion of the contract price that milk vendors have attributed to
    the NEDC varies. For example, Connecticut school food authorities attributed
    from .2 cents to 1. 37 cents per 8- ounce container to the NEDC over- order
    premium during the 1999- 2000 school year.

    The NEDC commission then verifies that amounts claimed do not exceed the
    NEDC?s average over- order premium for the school year and compensates
    school food authorities either the average over- order premium or the amount
    vendors attributed to the NEDC over- order premium, whichever is less. Thus,
    the amounts paid to school food authorities vary depending on the amount
    that they attributed to the NEDC and the amount of milk purchased. For
    example, one school food authority in Massachusetts was compensated $308.35
    for 146,835 cartons of milk purchased during the 1999- 2000 school year,
    while another school food authority in that state was compensated $316.33
    for 31,633 cartons of milk purchased for the same year. In total, the NEDC
    commission reimbursed the states $662,606 for the 1998- 1999 and 1999- 2000
    school years.

    Although the amounts paid varied from school to school, officials in the six
    states? departments of education generally said that schools claiming and
    receiving compensation were not, in the end, spending additional funds for
    milk or having to charge higher prices for milk sold to students. However,
    these officials also said that many school food authorities have chosen not
    to seek compensation because some school food authorities view the claim
    process as burdensome and not worth the effort given the relatively small
    amounts of money that they would receive.

    5 The regulations cover fluid milk sold in 8- ounce containers distributed
    by handlers under open competitive bid contracts and sold by schools.

    Appendix IV: NEDC?s Impacts on Federal Program Costs

    Page 90 GAO- 01- 866 Impacts of Dairy Compacts

    As is the case with the school programs, according to USDA officials it is
    likely that federal costs of the Child and Adult Care Food Program also have
    not increased as a result of the NEDC because program benefits are based on
    a broad index of retail food prices that is relatively insensitive to
    changes in the price of milk. 6 State education or health departments
    administer the program, with independent centers and sponsoring
    organizations entering into agreements with these departments to operate the
    program. Under the program, USDA provides eligible centers and sponsoring
    organizations, such as family day care homes and child- care centers,
    reimbursements for meals served. According to USDA, it has no data on the
    amount of milk purchased under the program, and it would be prohibitively
    labor- intensive for the NEDC to establish a method for compensating
    thousands of individual homes and centers for any increased retail milk
    prices.

    Regarding USDA?s food distribution programs, according to USDA officials,
    USDA has not estimated the potential NEDC- related increased costs to these
    programs. USDA officials said, however, that any increased costs would be
    relatively small, given the small size of these programs compared with
    programs such as WIC. Furthermore, because most of these programs are not
    entitlement programs and thus federal funding is not mandatory, any
    increased costs due to the NEDC would have to be borne by program providers
    and could result in fewer participants being served.

    According to USDA, if the NEDC is expanded to include additional states or
    if a southern compact is also created, it is more likely that federal costs
    for the Food Stamp Program would increase than with the existing NEDC: The
    likely increase in retail milk prices in more states would have a more
    direct impact on the index used to set program benefits.

    USDA estimated that if retail milk prices in the states of an expanded NEDC
    and a southern compact increased by about 20 cents per gallon- an amount
    that USDA noted is possible given the NEDC experience- food stamp
    participants in compact states would spend about $93 million a year more to
    purchase milk. If this price increase did not cause the national

    6 Under the Child and Adult Care Food Program, meal reimbursements are
    indexed to the cost of the consumer price index for food- away- from- home
    for urban consumers. If Compacts Are

    Expanded, Federal Food Stamp Program Costs Could Increase, as Could
    Nonfederal Costs for Other Nutrition Assistance Programs

    Appendix IV: NEDC?s Impacts on Federal Program Costs

    Page 91 GAO- 01- 866 Impacts of Dairy Compacts

    price increase to rise sufficiently to increase program benefits, Food Stamp
    Program participants would have to absorb this cost. However, if the 20-
    cent- per- gallon price increase resulted in a sufficiently large national
    average retail milk price increase to cause a $1- to $2- perparticipant
    increase in Food Stamp Program benefits, USDA estimated that federal Food
    Stamp Program costs could increase by as much as $60 to $120 million per
    year- an amount that would have to be federally funded. 7 Moreover, if the
    NEDC is expanded and a southern compact is established, and if the NEDC does
    not provide reimbursements, increased retail milk costs could result in
    fewer participants being served by state WIC programs. Given these
    assumptions, it is also likely that costs to school programs would have to
    be absorbed by school food authorities and program participants because of
    the index used to establish benefits under these programs. Table 23
    summarizes the additional costs that USDA estimated could be incurred under
    the above assumptions in fiscal year 2000 by food stamp, WIC, and school
    program providers or participants in compact states if the NEDC is expanded
    and a southern compact is established, and if retail milk prices increase in
    the compact states. 8

    7 USDA used 2000 as a base year for developing its estimate of increased
    program costs. 8 For purposes of its analysis, USDA included Connecticut,
    Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New
    York, Ohio, Pennsylvania, Rhode Island, and Vermont in an expanded NEDC, and
    Alabama, Arkansas, Florida, Georgia, Kansas, Kentucky, Louisiana, Missouri,
    Mississippi, North Carolina, South Carolina, Tennessee, Oklahoma, Texas,
    Virginia, and West Virginia in a southern compact.

    Appendix IV: NEDC?s Impacts on Federal Program Costs

    Page 92 GAO- 01- 866 Impacts of Dairy Compacts

    Table 23: Estimated Impact on Food Stamp, WIC, and School Feeding Program
    Participants if Retail Milk Prices Increase 10, 15, or 20 Cents per Gallon
    Under an Expanded NEDC and a Southern Compact

    Increase in the retail price of a gallon of milk in an expanded NEDC and
    southern compact Annual impact on the program 10 cents 15 cents 20 cents
    Increased Food Stamp Program costs a $46,676,933 $70,015,399 $93,353,866
    Increased cost to maintain level of WIC participation that existed before
    the NEDC expanded (number of participants that would leave WIC if funding
    remained constant) 15,586,611

    (42,498) 23,379,916 (63,429) 31,173,222

    (84,153) Increased cost to National School Breakfast and Lunch Programs
    20,315,004 30,472,505 41,630,007

    Total increased cost $82,578,547 $123,867,821 $165,157,094

    a Increased costs are borne by Food Stamp Program participants if federal
    benefits do not increase. If federal benefits increase, increased costs
    would be borne by participants in the first year of the compact until
    federal program benefits are reindexed in the year following the compact?s
    establishment. According to USDA officials, even if federal benefits
    increase, the increase in program benefits may not be sufficient to fully
    offset increased retail milk prices in compact states. Further, households
    in noncompact states would receive higher benefits, even though retail milk
    price increases would be limited to compact states.

    Source: USDA?s Food and Nutrition Service.

    Two studies- one prepared by the Office of Management and Budget (OMB) and
    the other by University of Vermont researchers- offer inconclusive results
    on the NEDC?s potential impacts on USDA?s nutrition assistance programs.
    Both studies were conducted early in the Compact?s existence and relied on
    limited retail milk price data. For example, OMB?s 1998 study began before
    the NEDC commission and the states entered into agreements for compensating
    states? WIC and school programs and relied on only 6 months of retail price
    data- from July through December 1997. 9 Because of this, the study
    projected either a low (5- to 10- cent), medium (10- to 15- cent), or high
    (15- to 20- cent) impact on retail milk prices, as reflected in an increased
    price for a gallon of milk. Assuming no NEDC reimbursements and a medium
    impact on retail milk prices, OMB estimated that a 15- cent increase in the
    retail price of milk in the first 6 months of the NEDC would increase state
    WIC program costs by about $721,300, which would require a reduction in
    program participation of about 3,000 people if the states did not spend the
    additional money. OMB also estimated that school lunch and breakfast program
    costs would increase by $1.2 million during the first 6 months of the NEDC-
    an increase that would have to be absorbed by schools or passed on to

    9 OMB?s The Economic Effects of the Northeast Interstate Dairy Compact, Feb.
    1998. Two Studies of the

    NEDC?s Impact on Nutrition Assistance Programs Provide Inconclusive Results

    Appendix IV: NEDC?s Impacts on Federal Program Costs

    Page 93 GAO- 01- 866 Impacts of Dairy Compacts

    families who pay for meals and snacks. For the same period, OMB also
    estimated that participants in USDA?s Food Stamp Program who reside in the
    NEDC states would pay an additional estimated $2.4 million because of
    increased retail milk prices- an amount that the federal government would
    not be required to pay because it is likely that national average milk
    prices would not have increased sufficiently to warrant an increase in
    benefits. Even if the price increase were large enough to trigger an
    increase in the index used to establish program benefits, only a small
    portion of the additional program benefits would go to food stamp recipients
    in the NEDC states, because all recipients nationwide would receive the
    increase.

    Researchers at the University of Vermont, who were asked by the NEDC
    commission to conduct the study, also relied on limited data. 10 Wang et al.
    focused on the NEDC?s potential impact on the WIC program and analyzed
    retail milk price and program participation data for the period between June
    1997 and February 1998. They accounted for NEDC reimbursements to the
    states? WIC programs and examined retail milk prices in Boston and Hartford.
    Their analysis concluded that WIC program participation had not been
    significantly affected by the NEDC during the time frame analyzed. The study
    also concluded that retail milk prices in Hartford increased significantly
    more than in Boston, an increase that might be explained by differences in
    market concentration and competition. However, the authors concluded that
    their study results had two principal limitations: (1) their analysis was
    limited to Boston and Hartford and (2) the NEDC had been in effect only
    since July 1997, thus providing a small amount of data for the analysis.

    10 Qingbin Wang, Zooyob Anne, Catherine Halbrendt, Charles Nicholson, and
    Jaimie Sung,

    ?Impacts of the Compact on the WIC Program: Evidence From Boston and
    Hartford,? The Northeast Interstate Dairy Compact: Milk Market Impacts,
    Research Report 73, Agricultural Experiment Station, University of Vermont,
    Mar. 2000.

    Appendix V: Interregional Impacts of Three Compact Alternatives in 1999

    Page 94 GAO- 01- 866 Impacts of Dairy Compacts

    This appendix provides our 1999 estimates of the interregional farm- and
    wholesale- level impacts of the NEDC, an expanded NEDC, and an expanded NEDC
    combined with a southern compact on various dairy sector indicators. To
    develop our estimates, we first estimated the impact of each compact
    scenario on the basis of certain assumptions, such as transportation costs
    and supply and demand elasticities. We then varied these assumptions to test
    the sensitivity of our initial estimates. (See app. II for a detailed
    discussion of our methodology; a description of the IRCM; a list of the
    states included in the different compact scenarios; values for parameters
    used, such as the responsiveness of consumers to changing commodity prices;
    and a summary of the data used and sources for these data.)

    We present the data in a series of tables that summarize (1) the range of
    estimates that we obtained using our initial and subsequent sets of
    assumptions across the various compact scenarios for each of the dairy
    sector indicators that we analyzed; (2) our initial estimates of farm- level
    and wholesale- level impacts of the NEDC scenario, and the results of our
    sensitivity analyses for that scenario; (3) our initial estimates of farm-
    level and wholesale- level impacts of the expanded NEDC scenario, and the
    results of our sensitivity analyses for that scenario; (4) our initial
    estimates of farm- level and wholesale- level impacts of the expanded NEDC
    scenario combined with a southern compact, and the results of our
    sensitivity analyses for that scenario; and (5) the results of our
    sensitivity analysis for the expanded NEDC scenario combined with a southern
    compact using a more restrictive trade assumption. In all instances, we
    present the estimated impacts of the various compact scenarios as changes to
    our nocompact baseline values for 1999. Appendix V: Interregional Impacts of
    Three

    Compact Alternatives in 1999

    Appendix V: Interregional Impacts of Three Compact Alternatives in 1999

    Page 95 GAO- 01- 866 Impacts of Dairy Compacts

    Table 24: Range of Estimated Impacts on 1999 Farm- Level Prices Across
    Different Compact Scenarios Dollars per hundredweight

    Farm- level prices IRCM99 region No- compact

    baseline in 1999 Change to

    baseline with the NEDC

    Change to baseline with

    an expanded NEDC

    Change to baseline with an expanded NEDC

    and a southern compact

    Change to baseline with an expanded NEDC, a southern compact, and a 100-
    mile import constraint

    Northeast $15.07 $0.07 to 0. 12 $0.30 to 0. 48 $0.22 to 0. 41 $0.26 to 0. 45
    Appalachia 15.97 (0.01) to 0 (0.05) to (0.02) 1.10 to 1.85 1.16 to 1.96
    Florida 17.14 (0.02) to 0 (0.05) to (0.02) (0.02) to 0.04 (0.07) to 0
    Southeast 16.01 (0.02) to 0.02 (0.05) to 0.02 0.79 to 1.66 2.99 to 4.51
    Mideast 14.64 (0.02) to 0 (0.05) to (0.03) (0.24) to (0.13) (0.28) to (0.21)
    Upper Midwest 13.82 (0.02) to (0.01) (0.05) to (0.03) (0.11) to (0.06)
    (0.30) to (0.24) Central 14.22 (0.01) to 0 (0.05) to (0.02) 0.10 to 0.27
    0.15 to 0.33 Southwest 14.49 ( 0.01) to 0 (0.04) to (0.02) (0.17) to (0.05)
    (0.16) to (0.05) Western 13.18 (0.01) to 0 (0.04) to (0.02) (0.14) to (0.09)
    (0.19) to (0.12) Northwest 14.85 (0.01) to 0 (0.04) to (0.03) (0.13) to 0.03
    (0.17) to (0.10) California 12.98 (0.02) to (0.01) (0.06) to 0.02 (0.18) to
    0.18 (0.27) to (0.16) Arizona 13.76 (0.01) to 0 (0.04) to 0.03 (0.36) to
    0.06 (0.09) to 0.06

    Note: Numbers in parentheses are negative. Source: GAO?s analysis using the
    IRCM99.

    Table 25: Range of Estimated Impacts on 1999 Farm- Level Production Across
    Different Compact Scenarios Pounds in millions

    Farm- level production

    IRCM99 region

    No- compact baseline in 1999

    Change to baseline with

    the NEDC Change to

    baseline with an expanded

    NEDC Change to

    baseline with an expanded NEDC

    and a southern compact

    Change to baseline with an expanded NEDC, a southern compact, and a 100-
    mile import constraint

    Northeast 29,138 36 to 90 150 to 383 106 to 313 127 to 255 Appalachia 6, 437
    (6) to (1) (19) to (7) 283 to 504 300 to 533 Florida 2, 390 (1) to 0 (4) to
    (2) (1) to 9 (4) to 0 Southeast 3, 548 (3) to 0 (7) to 2 70 to 164 261 to
    534

    Range of Estimates Obtained Across Different Compact Scenarios

    Appendix V: Interregional Impacts of Three Compact Alternatives in 1999

    Page 96 GAO- 01- 866 Impacts of Dairy Compacts

    Pounds in millions Farm- level production

    IRCM99 region

    No- compact baseline in 1999

    Change to baseline with

    the NEDC Change to

    baseline with an expanded

    NEDC Change to

    baseline with an expanded NEDC

    and a southern compact

    Change to baseline with an expanded NEDC, a southern compact, and a 100-
    mile import constraint

    Mideast 12,238 (7) to 0 (16) to (7) (100) to (35) (101) to (56) Upper
    Midwest 32,803 (20) to (4) (54) to (20) (152) to (43) (326) to (180) Central
    14,855 (5) to 0 (22) to (12) 45 to 121 103 to 186 Southwest 10,278 (3) to 0
    (15) to (5) (45) to (13) (46) to (15) Western 8, 854 (3) to (1) (20 ) to (7)
    (64) to (28) (83) to (35) Northwest 7, 134 (2) to 0 (12) to (5) (42) to 5
    (51) to (23) California 30,459 (35) to (7) (112) to 21 (400) to 185 (491) to
    (168) Arizona 2, 914 (1) to 0 (3) to 3 (29) to 6 (7) to 7

    Note: Numbers in parentheses are negative. Source: GAO?s analysis using the
    IRCM99.

    Table 26: Range of Estimated Impacts on 1999 Farm- Level Revenue Across
    Different Compact Scenarios Dollars in millions

    Farm- level revenue IRCM99 region No- compact

    baseline in 1999 Change to

    baseline with the NEDC

    Change to baseline with

    an expanded NEDC

    Change to baseline with an expanded NEDC

    and a southern compact

    Change to baseline with an expanded NEDC, a southern compact, and a 100-
    mile import constraint

    Northeast $4,391 $26 to 46 $110 to 193 $80 to 159 $95 to 165 Appalachia 1,
    028 (2) to 0 (6) to (2) 119 to 204 126 to 217 Florida 410 (1) to 0 (2) to
    (1) (1) to 5 (2) to 0 Southeast 568 (1) to 1 (3) to 1 40 to 85 165 to 242
    Mideast 1, 792 (2) to 0 (8) to (5) (43) to (21) (45) to (34) Upper Midwest
    4, 533 (9) to (4) (24) to (13) (63) to (26) (133) to (103) Central 2, 112
    (2) to 0 (10) to (5) 21 to 58 37 to 67 Southwest 1, 489 (1) to 0 (6) to (3)
    (24) to (7) (23) to (7) Western 1, 167 (1) to 0 (6) to (3) (20) to (13) (26)
    to (15) Northwest 1, 059 (1) to 0 (4) to (3) (15) to 3 (17) to (11)
    California 3, 954 (11) to (4) (33) to 9 (118) to 80 (145) to (70) Arizona
    401 0 (2) to 1 (14) to 2 (4) to 3

    Note: Numbers in parentheses are negative. Source: GAO?s analysis using the
    IRCM99.

    Appendix V: Interregional Impacts of Three Compact Alternatives in 1999

    Page 97 GAO- 01- 866 Impacts of Dairy Compacts

    Table 27: Range of Estimated Impacts on 1999 National Average Wholesale-
    Level Prices Across Different Compact Scenarios Dollars per hundredweight

    Wholesale- level prices Dairy commodity No- compact

    baseline in 1999 Change to

    baseline with the NEDC

    Change to baseline with

    an expanded NEDC

    Change to baseline with an expanded NEDC

    and a southern compact

    Change to baseline with an expanded NEDC, a southern compact, and a 100-
    mile import constraint

    Fluid milk $15.04 $0.04 to 0. 07 $0.16 to 0. 27 $0.39 to 0. 63 $0.66 to 0.
    93 Soft dairy products 27.31 (0.10) to (0.02) (0.19) to (0.08) (0.55) to
    (0.17) (0.52) to (0.18) American cheese 139.24 (0.09) to (0.03) (0.41) to
    (0.18) (1.41) to (0.62) (1.86) to (1.27) Italian cheese 93.24 (0.08) to
    (0.03) (0.31) to (0.13) (1.11) to 0.36 (1.36) to (0.95) Other cheese 115.58
    (0.21) to 0.06 (0.44) to (0.05) (1.11) to 0.69 (1.65) to (0.75) Butter
    119.52 (0.23) to (0.03) (0.88) to (0.46) (6.53) to 0.21 (2.80) to 0.07
    Frozen dairy products 21.40 (0.02) to 0 (0.11) to (0.05) (0.53) to (0.10)
    (0.65) to (0.38) Other manufactured products 27.68 (0.03) to 0.04 (0.01) to
    0.07 (0.11) to 1.04 (0.18) to 0.08 Nonfat dry milk 102.63 (0.01) to 0 (0.06)
    to (0.02) (1.22) to (0.07) (0.05) to 0.01

    Note: Numbers in parentheses are negative. Source: GAO?s analysis using the
    IRCM99.

    Table 28: Range of Estimated Impacts on 1999 Wholesale- Level Production
    Across Different Compact Scenarios Pounds in millions

    Wholesale- level production Dairy commodity No- compact

    baseline in 1999 Change to

    baseline with the NEDC

    Change to baseline with

    an expanded NEDC

    Change to baseline with an expanded NEDC

    and a southern compact

    Change to baseline with an expanded NEDC, a southern compact, and a 100-
    mile import constraint

    Fluid Milk 55,043 (69) to (22) (293) to (86) (647) to (233) (778) to (313)
    Soft dairy products 5,984 1 to 4 8 to 20 27 to 51 29 to 50 American cheese
    3,539 0 to 1 1 to 6 1 to 20 5 to 25 Italian cheese 3,175 0 to 2 1 to 8 (3)
    to 21 8 to 33 Other cheese 598 0 to 1 0 to 1 (1) to 4 3 to 5 Butter 1, 274 0
    to 1 1 to 3 (1) to 17 0 to 8 Frozen dairy products 12,131 2 to 4 13 to 20 26
    to 98 41 to 79 Other manufactured products 4,270 (2) to 3 (2) to 1 (56) to
    15 (3) to 9 Nonfat dry milk 1,396 1 to 4 9 to 23 22 to 98 27 to 54

    Note: Numbers in parentheses are negative. Source: GAO?s analysis using the
    IRCM99.

    Appendix V: Interregional Impacts of Three Compact Alternatives in 1999

    Page 98 GAO- 01- 866 Impacts of Dairy Compacts

    Table 29: Range of Estimated Impacts on 1999 Wholesale- Level Expenditures
    Across Different Compact Scenarios Dollars in millions

    Wholesale- level expenditures

    Dairy commodity No- compact baseline in 1999

    Change to baseline with

    the NEDC Change to

    baseline with an expanded

    NEDC Change to

    baseline with an expanded NEC and a southern

    compact Change to baseline

    with an expanded NEDC, a southern compact, and a 100- mile import constraint

    Fluid Milk $8,220 $18 to 33 $69 to 126 $144 to 293 $259 to 438 Soft dairy
    products 1,626 (5) to 0 (9) to (1) (19) to (2) (19) to 3 American cheese
    4,823 (3) to (1) (11) to (2) (41) to (15) (55) to (16) Italian cheese 3,028
    (2) to (1) (8) to (3) (25) to 9 (33) to (12) Other cheese 792 (1) to 0 (3)
    to 1 (4) to 4 (7) to (2) Butter 1, 495 (2) to 1 (7) to (2) (64) to 1 (27) to
    1 Frozen dairy products 2,570 (2) to 0 (9) to (3) (43) to (6) (62) to (37)
    Other manufactured products 1,199 (1) to 1 0 to 3 (1) to 28 (5) to 3 Nonfat
    dry milk 1,012 0 (1) to 0 (1) to 1 0

    Note: Numbers in parentheses are negative. Source: GAO?s analysis using the
    IRCM99.

    To obtain our initial estimates of the effects of the NEDC in 1999, we used
    the following assumptions (our no- compact baseline includes the first three
    assumptions):

     No more than 40 percent of any one region?s milk may be shipped to another
    region without being subject to the receiving region?s pricing requirements.
    This assumption is used to simulate USDA milk marketing order regulations
    regarding minimum pricing requirements for milk shipped between marketing
    orders. This threshold was chosen as a proxy for the requirement that an
    adjustment be made if a plurality of an order's packaged milk was sold in
    another region.

     Supply elasticities are medium- term (that is, 5 years).

     Demand elasticities are medium- term.

     The Class I minimum price in the Compact region is the higher of the
    Compact price of $16.94 per hundredweight of milk, or the USDA milk
    marketing order price.

     Market- driven over- order premiums are zero in the Compact region. This
    initial assumption represents a lower bound, and assumes that all
    marketdriven over- order premiums in NEDC states are replaced by Compact
    over- order producer price payments. The Economic

    Impacts of the NEDC in 1999

    Appendix V: Interregional Impacts of Three Compact Alternatives in 1999

    Page 99 GAO- 01- 866 Impacts of Dairy Compacts

     A handler must pay the compact over- order producer price into the Compact
    pool for milk shipped into the Compact region in order to receive the
    compact price.

    We then performed a series of sensitivity analyses by varying key
    assumptions to test the ?robustness? of these initial estimates- that is,
    whether, and if so by how much, our initial estimates would change when we
    used different assumptions. Tables 30 through 39 present our initial and
    subsequent estimates of the impacts of the NEDC in 1999 compared to a no-
    compact scenario on farm- and wholesale- level indicators.

    Table 30: Initial Estimates of the NEDC?s Impacts on 1999 Farm- Level
    Indicators Farm- level prices (dollars per

    hundredweight) Farm- level production (pounds in millions) Farm- level
    revenue (dollars in

    millions) IRCM99 region No- compact

    baseline in 1999 Change to baseline No- compact

    baseline in 1999 Change to baseline No- compact

    baseline in 1999 Change to baseline

    Northeast $15.07 $0.08 29,138 40 $4,391 $29 Appalachia 15.97 (0.01) 6,437
    (2) 1, 028 (1) Florida 17.14 (0.01) 2,390 (1) 410 0 Southeast 16.01 (0.01)
    3,548 (1) 568 (1) Mideast 14.64 0 12,238 (1) 1,792 0 Upper Midwest 13.82
    (0.01) 32,803 (5) 4,533 (4) Central 14.22 (0.01) 14,855 (3) 2,112 (2)
    Southwest 14.49 (0.01) 10,278 (2) 1,489 (1) Western 13.18 (0.01) 8,854 (1)
    1, 167 (1) Northwest 14.85 (0.01) 7,134 (1) 1, 059 (1) California 12.98
    (0.01) 30,459 (8) 3,954 (4) Arizona 13.76 (0.01) 2,914 0 401 0 All
    noncompact regions combined

    a a 131,910 (25) 18,513 (15) Note: Numbers in parentheses are negative. a
    Because farm- level prices are regional, an ?all noncompact regions
    combined? price is not

    meaningful. Source: GAO analysis using the IRCM99.

    Initial Estimates of the NEDC?s Impacts

    Appendix V: Interregional Impacts of Three Compact Alternatives in 1999

    Page 100 GAO- 01- 866 Impacts of Dairy Compacts

    Table 31: Initial Estimates of the NEDC?s Impacts on 1999 Wholesale- Level
    Indicators Wholesale- level prices (dollars

    per hundredweight) Wholesale- level production (pounds in millions)
    Wholesale- level expenditures

    (dollars in millions) Dairy commodity No- compact

    baseline in 1999 Change to baseline No- compact

    baseline in 1999 Change to baseline No- compact

    baseline in 1999 Change to baseline

    Fluid milk $15.04 $0.05 55,043 (23) $8,220 $24 Soft dairy products 27.31
    (0.02) 5,984 2 1, 626 (1) American cheese 139.24 (0.04) 3,539 0 4, 823 (1)
    Italian cheese 93.24 (0.04) 3,175 1 3, 028 (1) Other cheese 115.58 (0.09)
    598 0 792 (1) Butter 119.52 (0.14) 1,274 0 1, 495 (2) Frozen dairy products
    21.40 (0.02) 12,131 3 2,570 (2) Other manufactured products 27.68 0 4, 270 0
    1, 199 0 Nonfat dry milk 102.63 0 1, 396 3 1, 012 0

    Note: Numbers in parentheses are negative. Source: GAO?s analysis using the
    IRCM99.

    Tables 32 through 37 display the results of our sensitivity analyses for
    1999 farm- and wholesale- level indicators. In comparison with our initial
    estimates, we used (1) 10- year regional supply elasticities as opposed to
    5year; (2) long- term (i. e., higher), as opposed to medium- term, commodity
    demand elasticities, (3) higher market- driven over- order premiums as
    opposed to zero; (4) a combination of the previous three assumptions; and
    (5) an overall 25- percent increase in transportation costs. 1

    1 In tables 32 through 37, as well as in comparable tables showing our
    estimates of the impacts of other compact scenarios, we include a column
    showing our baseline estimates for our no- compact scenario to provide a
    context for assessing the estimated changes due to the compacts under the
    assumptions used in each sensitivity analysis. In conducting each of the
    separate sensitivity analyses, we developed a separate baseline for our
    farmand wholesale- level variables. For presentation purposes, however, we
    include only our baseline estimates developed for our initial estimates for
    each compact scenario because they were very similar to the baselines for
    each sensitivity analysis. Sensitivity Analyses for the

    NEDC Scenario

    Appendix V: Interregional Impacts of Three Compact Alternatives in 1999

    Page 101 GAO- 01- 866 Impacts of Dairy Compacts

    Table 32: Estimated Change in 1999 Farm- Level Prices Using Different
    Assumptions Under the NEDC Scenario Dollars per hundredweight

    Estimated change to baseline farm- level prices using different assumptions
    IRCM99 region

    No- compact Baseline farmlevel price in 1999

    10- year regional supply elasticities

    Higher commodity

    demand elasticities

    Higher overorder premiums Combined

    assumptions a Transportation

    costs increase 25 percent

    Northeast $15.07 $0.08 $0.08 $0.12 $0.11 $0.07 Appalachia 15.97 0 (0.01)
    (0.01) (0.01) 0 Florida 17.14 (0.01) (0.01) (0.01) (0.02) 0 Southeast 16.01
    0 (0.01) (0.01) (0.02) 0.02 Mideast 14.64 (0.01) (0.01) (0.01) (0.02) 0
    Upper Midwest 13.82 (0.01) (0.01) (0.01) (0.02) (0.01) Central 14.22 0 0
    (0.01) 0 0 Southwest 14.49 0 0 (0.01) (0.01) (0.01) Western 13.18 0 (0.01)
    (0.01) 0 0 Northwest 14.85 0 (0.01) (0.01) (0.01) (0.01) California 12.98
    (0.02) (0.01) (0.01) (0.02) (0.01) Arizona 13.76 0 0 (0.01) 0 (0.01)

    Note: Numbers in parentheses are negative. a The combined assumptions
    include the previous three assumptions: (1) 10- year long- term regional

    supply elasticities, (2) higher commodity demand elasticities, and (3)
    higher over- order premiums. Source: GAO analysis using the IRCM99.

    Table 33: Estimated Change in 1999 Farm- Level Production Using Different
    Assumptions Under the NEDC Scenario Pounds in millions

    Estimated change to baseline farm- level production using different
    assumptions IRCM99 region

    No- compact baseline farm- level production in 1999

    10- year regional supply elasticities

    Higher commodity

    demand elasticities

    Higher overorder premiums Combined

    assumptions a Transportation

    costs increase 25 percent

    Northeast 29,138 61 37 60 90 36 Appalachia 6, 437 (3) (2) (2) (6) (1)
    Florida 2, 390 0 (1) (1) (1) (1) Southeast 3, 548 0 (1) (2) (3) 2 Mideast
    12,238 (3) (3) (3) (7) 0 Upper Midwest 32,803 (9) (4) (7) (20) (6) Central
    14,855 (1) (3) (5) 0 (2) Southwest 10,278 (2) 0 (3) (2) (2) Western 8, 854
    (3) (3) (3) (2) (1) Northwest 7, 134 0 (2) (2) (2) (1) California 30,459
    (33) (7) (11) (35) (11) Arizona 2, 914 (1) (1) (1) 0 0

    Appendix V: Interregional Impacts of Three Compact Alternatives in 1999

    Page 102 GAO- 01- 866 Impacts of Dairy Compacts

    Note: Numbers in parentheses are negative. a The combined assumptions
    include the previous three assumptions: (1) 10- year long- term regional

    supply elasticities, (2) higher commodity demand elasticities, and (3)
    higher over- order premiums. Source: GAO analysis using the IRCM99.

    Table 34: Estimated Change in 1999 Farm- Level Revenue Using Different
    Assumptions Under the NEDC Scenario Dollars in millions

    Estimated change to baseline farm- level revenue using different assumptions
    IRCM99 region

    No- compact baseline farm- level

    revenue in 1999 10- year regional

    supply elasticities

    Higher commodity

    demand elasticities

    Higher overorder premiums Combined

    assumptions a Transportation

    costs increase 25 percent

    Northeast $4,391 $33 $29 $44 $46 $26 Appalachia 1, 028 0 (1) (1) (2) 0
    Florida 410 0 0 0 (1) 0 Southeast 568 0 (1) (1) (1) 1 Mideast 1, 792 (2) (2)
    (2) (3) 0 Upper Midwest 4, 533 (5) (4) (4) (9) (4) Central 2, 112 0 0 (2) 0
    0 Southwest 1, 489 0 0 (1) (1) (1) Western 1, 167 0 (1) (1) (0) (0)
    Northwest 1, 059 0 (1) (1) (1) (1) California 3, 954 (10) (4) (4) (11) (5)
    Arizona 4010 0 0 0 0

    Note: Numbers in parentheses are negative. a The combined assumptions
    include the previous three assumptions: (1) 10- year long- term regional

    supply elasticities, (2) higher commodity demand elasticities, and (3)
    higher over- order premiums. Source: GAO analysis using the IRCM99.

    Table 35: Estimated Change in 1999 National Average Wholesale- Level Prices
    Using Different Assumptions Under the NEDC Scenario

    Dollars per hundredweight Estimated change to baseline wholesale- level
    prices using different assumptions

    Dairy commodity

    No- compact baseline wholesalelevel price in 1999

    10- year regional supply elasticities

    Higher commodity

    demand elasticities

    Higher overorder premiums Combined

    assumptions a Transportation

    costs increase 25 percent

    Fluid milk $15.04 $0.04 $0.05 $0.07 $0.07 $0.05 Soft dairy products 27.31
    (0.08) (0.02) (0.03) (0.10) (0.02) American cheese 139.24 (0.03) (0.07)
    (0.08) (0.09) (0.05) Italian cheese 93.24 (0.03) (0.06) (0.05) (0.08) (0.04)
    Other cheese 115.58 (0.21) 0.06 (0.10) (0.12) (0.15)

    Appendix V: Interregional Impacts of Three Compact Alternatives in 1999

    Page 103 GAO- 01- 866 Impacts of Dairy Compacts

    Dollars per hundredweight Estimated change to baseline wholesale- level
    prices using different assumptions

    Dairy commodity

    No- compact baseline wholesalelevel price in 1999

    10- year regional supply elasticities

    Higher commodity

    demand elasticities

    Higher overorder premiums Combined

    assumptions a Transportation

    costs increase 25 percent

    Butter 119.52 (0.12) (0.03) (0.23) (0.06) (0.12) Frozen dairy products 21.40
    (0.01) 0 (0.02) (0.01) (0.01) Other manufactured products 27.68 (0.02) 0.04
    0.01 (0.03) 0.01

    Nonfat dry milk 102.63 0 (0.01) 0 (0.01) (0.01) Note: Numbers in parentheses
    are negative. a The combined assumptions include the previous three
    assumptions: (1) 10- year long- term regional

    supply elasticities, (2) higher commodity demand elasticities, and (3)
    higher over- order premiums. Source: GAO analysis using the IRCM99.

    Table 36: Estimated Change in 1999 Wholesale- Level Production Using
    Different Assumptions Under the NEDC Scenario Pounds in millions

    Estimated change to baseline wholesale- level production using different
    assumptions Dairy commodity

    No- compact baseline wholesalelevel production in

    1999 10- year regional

    supply elasticities

    Higher commodity

    demand elasticities

    Higher overorder premiums Combined

    assumptions a Transportation

    costs increase 25 percent

    Fluid milk 55,043 (23) (46) (36) (69) (22) Soft dairy products 5,984 1 2 3 4
    2 American cheese 3,539 0 1 0 1 0 Italian cheese 3,175 0 1 1 2 0 Other
    cheese 598 0 1 0 0 0 Butter 1, 274 0 1 1 0 0 Frozen dairy products 12,131 3
    2 4 3 2 Other manufactured products 4,270 1 (2) 0 3 (1)

    Nonfat dry milk 1,396 1 4 4 3 2 Note: Numbers in parentheses are negative. a
    The combined assumptions include the previous three assumptions: (1) 10-
    year long- term regional

    supply elasticities, (2) higher commodity demand elasticities, and (3)
    higher over- order premiums. Source: GAO analysis using the IRCM99.

    Appendix V: Interregional Impacts of Three Compact Alternatives in 1999

    Page 104 GAO- 01- 866 Impacts of Dairy Compacts

    Table 37: Estimated Change in 1999 Wholesale- Level Expenditures Using
    Different Assumptions Under the NEDC Scenario Dollars in millions

    Estimated change to baseline wholesale- level expenditures using different
    assumptions Dairy commodity

    No- compact Baseline wholesalelevel expenditures

    in 1999 10- year regional

    supply elasticities

    Higher commodity

    demand elasticities

    Higher overorder premiums Combined

    assumptions a Transportation

    costs increase 25 percent

    Fluid milk $8,220 $18 $20 $33 $28 $24 Soft dairy products 1,626 (4) 0 (1)
    (5) (1) American cheese 4,823 (1) (1) (3) (2) (2) Italian cheese 3,028 (1)
    (1) (2) (1) (1) Other cheese 792 (1) 0 (1) (1) 0 Butter 1, 495 (2) 1 (2) (1)
    (2) Frozen dairy products 2,570 (1) 0 (2) (1) (1) Other manufactured
    products 1,199 (1) 1 0 0 0

    Nonfat dry milk 1,012 0 0 0 0 0 Note: Numbers in parentheses are negative. a
    The combined assumptions include the previous three assumptions: (1) 10-
    year long- term regional

    supply elasticities, (2) higher commodity demand elasticities, and (3)
    higher over- order premiums. Source: GAO analysis using the IRCM99.

    Tables 38 and 39 summarize the results of our initial estimates and
    sensitivity analyses by presenting the range of estimates of the changes
    from our no- compact scenario that we obtained from our various analyses.

    Table 38: Summary of Estimated Changes in 1999 Farm- Level Indicators Using
    Our Initial and Subsequent Sets of Assumptions Under the NEDC Scenario

    IRCM99 region Change in farm

    level prices (dollars per hundredweight)

    Change in farm- level production (pounds

    in millions) Change in farm

    level revenue (dollars in millions)

    Northeast $0.07 to 0. 12 36 to 90 $26 to 46 Appalachia (0.01) to 0 (6) to
    (1) (2) to 0 Florida (0.02) to 0 (1) to 0 (1) to 0 Southeast (0.02) to 0.02
    (3) to 0 (1) to 1 Mideast (0.02) to 0 (7) to (0) (2) to 0 Upper Midwest
    (0.02) to (0.01) (20) to (4) (9) to (4) Central (0.01) to 0 (5) to 0 (2) to
    0 Southwest (0.01) to 0 (3) to 0 (1) to 0 Western (0.01) to 0 (3) to (1) (1)
    to 0

    Summary of the Estimated Impacts of the NEDC

    Appendix V: Interregional Impacts of Three Compact Alternatives in 1999

    Page 105 GAO- 01- 866 Impacts of Dairy Compacts

    IRCM99 region Change in farmlevel

    prices (dollars per hundredweight)

    Change in farm- level production (pounds

    in millions) Change in farmlevel

    revenue (dollars in millions)

    Northwest (0.01) to 0 (2) to 0 (1) to 0 California (0.02) to (0.01) (35) to
    (7) (11) to (4) Arizona (0.01) to 0 (1) to 0 0

    Note: Numbers in parentheses are negative. Source: GAO analysis using the
    IRCM99.

    Table 39: Summary of Estimated Changes in 1999 Wholesale- Level Indicators
    Using Our Initial and Subsequent Sets of Assumptions Under the NEDC Scenario

    Dairy commodity

    Change in wholesale- level prices (dollars per

    hundredweight) Change in

    wholesale- level production (pounds

    in millions) Change in

    wholesale- level expenditures (dollars in millions)

    Fluid milk $0.04 to 0. 07 (69) to (22) $18 to 33 Soft dairy products (0.10)
    to (0.02) 1 to 4 (5) to 0 American cheese (0.09) to (0.03) 0 to 1 (3) to (1)
    Italian cheese (0.08) to (0.03) 0 to 2 (2) to (1) Other cheese (0.21) to
    0.06 0 to 1 (1) to 0 Butter (0.23) to (0.03) 0 to 1 (2) to 1 Frozen dairy
    products (0.02) to 0.00 2 to 4 (2) to 0 Other manufactured products (0.03)
    to 0.04 (2) to 3 (1) to 1

    Nonfat dry milk (0.01) to 0 1 to 4 0 Note: Numbers in parentheses are
    negative. Source: GAO analysis using the IRCM99.

    To obtain our initial estimates of the impacts of an expanded NEDC in 1999,
    we used the same set of assumptions that we used under our nocompact
    scenario. We also used the same assumptions that we used in developing our
    initial estimates of the impacts of the NEDC. We then performed the same
    series of sensitivity analyses as under the NEDC scenario. Tables 40 through
    49 present our initial and subsequent estimates of the impacts of an
    expanded NEDC in 1999 compared with a no- compact scenario. The Economic

    Impacts of an Expanded NEDC in 1999

    Appendix V: Interregional Impacts of Three Compact Alternatives in 1999

    Page 106 GAO- 01- 866 Impacts of Dairy Compacts

    Table 40: Initial Estimates of an Expanded NEDC?s Impacts on 1999 Farm-
    Level Indicators Farm- level prices (dollars per hundredweight)

    Farm- level production (pounds in millions)

    Farm- level revenue (dollars in millions)

    IRCM99 region No- compact baseline in 1999 Change to

    baseline No- compact baseline in 1999 Change to

    baseline No- compact baseline in1999 Change to

    baseline

    Northeast $15.07 $0.32 29,138 154 $4,391 $117 Appalachia 15.97 (0.04) 6,437
    (10) 1,028 (4) Florida 17.14 (0.03) 2,390 (2) 410 (1) Southeast 16.01 (0.03)
    3,548 (3) 568 (2) Mideast 14.64 (0.03) 12,238 (9) 1,792 (5) Upper Midwest
    13.82 (0.04) 32,803 (27) 4,533 (17) Central 14.22 (0.04) 14,855 (14) 2,112
    (8) Southwest 14.49 (0.03) 10,278 (9) 1,489 (4) Western 13.18 (0.03) 8,854
    (9) 1, 167 (4) Northwest 14.85 (0.03) 7,134 (6) 1, 059 (3) California 12.98
    0 30,459 7 3,954 1 Arizona 13.76 (0.03) 2,914 (2) 401 (1) All noncompact
    regions combined a a 131,910 (91) 18,513 (49)

    Note: Numbers in parentheses are negative. a Because farm- level prices are
    regional, an ?all noncompact regions combined? price is not

    meaningful. Source: GAO analysis using the IRCM99.

    Table 41: Initial Estimates of an Expanded NEDC?s Impacts on 1999 Wholesale-
    Level Indicators Wholesale- level prices (dollars per hundredweight)
    Wholesale- level production

    (pounds in millions) Wholesale- level expenditures (dollars in millions)

    Dairy commodity No- compact baseline in 1999 Change to

    baseline No- compact baseline in 1999 Change to

    baseline No- compact baseline in 1999 Change to

    baseline

    Fluid milk $15.04 $0.17 55,043 (88) $8,220 $80 Soft dairy products 27.31
    (0.18) 5,984 8 1, 626 (9) American cheese 139.24 (0.32) 3,539 1 4, 823 (10)
    Italian cheese 93.24 (0.23) 3,175 2 3, 028 (6) Other cheese 115.58 (0.18)
    598 1 792 (1) Butter 119.52 (0.56) 1,274 1 1, 495 (6) Frozen dairy products
    21.40 (0.07) 12,131 13 2, 570 (6) Other manufactured products 27.68 0.01
    4,270 0 1, 199 0

    Initial Estimates of the Expanded NEDC?s Impacts

    Appendix V: Interregional Impacts of Three Compact Alternatives in 1999

    Page 107 GAO- 01- 866 Impacts of Dairy Compacts

    Wholesale- level prices (dollars per hundredweight) Wholesale- level
    production

    (pounds in millions) Wholesale- level expenditures (dollars in millions)

    Dairy commodity No- compact baseline in 1999 Change to

    baseline No- compact baseline in 1999 Change to

    baseline No- compact baseline in 1999 Change to

    baseline

    Nonfat dry milk 102.63 (0.02) 1,396 0 1, 012 0 Note: Numbers in parentheses
    are negative. Source: GAO?s analysis using the IRCM99.

    Table 42: Estimated Change in 1999 Farm- Level Prices Using Different
    Assumptions Under an Expanded NEDC Scenario Dollars per hundredweight

    Estimated change to baseline farm- level prices using different assumptions
    IRCM99 region

    No- compact baseline farm- level

    price in 1999 10- year regional

    supply elasticities

    Higher commodity

    demand elasticities

    Higher over- order

    premiums Combined assumptions a

    Transportation costs increase

    25 percent

    Northeast $15.07 $0.30 $0.30 $0.48 $0.46 $0.32 Appalachia 15.97 (0.04)
    (0.03) (0.05) (0.05) (0.02) Florida 17.14 (0.04) (0.03) (0.05) (0.05) (0.02)
    Southeast 16.01 (0.04) (0.02) (0.05) (0.04) 0.02 Mideast 14.64 (0.04) (0.03)
    (0.05) (0.04) (0.03) Upper Midwest 13.82 (0.04) (0.03) (0.05) (0.05) (0.03)
    Central 14.22 (0.03) (0.02) (0.05) (0.03) (0.03) Southwest 14.49 (0.03)
    (0.02) (0.04) (0.03) (0.03) Western 13.18 (0.03) (0.03) (0.04) (0.04) (0.02)
    Northwest 14.85 (0.03) (0.03) (0.04) (0.03) (0.03) California 12.98 (0.01)
    0.02 (0.01) (0.06) (0.02) Arizona 13.76 (0.02) (0.02) (0.04) 0.03 (0.03)

    Note: Numbers in parentheses are negative. a The combined assumptions
    include the previous three assumptions: (1) 10- year long- term regional

    supply elasticities, (2) higher commodity demand elasticities, and (3)
    higher over- order premiums. Source: GAO?s analysis using the IRCM99.

    Sensitivity Analyses for the Expanded NEDC Scenario

    Appendix V: Interregional Impacts of Three Compact Alternatives in 1999

    Page 108 GAO- 01- 866 Impacts of Dairy Compacts

    Table 43: Estimated Change in 1999 Farm- Level Production Using Different
    Assumptions Under an Expanded NEDC Scenario Pounds in millions

    Estimated change to baseline farm- level production using different
    assumptions IRCM99 region

    No- compact baseline farmlevel production

    in 1999 10- year regional supply elasticities

    Higher commodity

    demand elasticities

    Higher over- order

    premiums Combined assumptions a

    Transportation costs increase

    25 percent Northeast 29,138 248 150 237 383 160 Appalachia 6,437 (17) (8)
    (13) (19) (7) Florida 2, 390 (3) (2) (3) (4) (2) Southeast 3,548 (5) (2) (5)
    (7) 2 Mideast 12,238 (16) (7) (12) (15) (7) Upper Midwest 32,803 (49) (20)
    (37) (54) (21) Central 14,855 (22) (12) (21) (21) (12) Southwest 10,278 (15)
    (5) (12) (11) (7) Western 8, 854 (16) (8) (13) (20) (7) Northwest 7,134 (12)
    (6) (9) (10) (5) California 30,459 (20) 21 (7) (112) (26) Arizona 2,914 (3)
    (2) (3) 3 (2)

    Note: Numbers in parentheses are negative. a The combined assumptions
    include the previous three assumptions: (1) 10- year long- term regional

    supply elasticities, (2) higher commodity demand elasticities, and (3)
    higher over- order premiums. Source: GAO?s analysis using the IRCM.

    Table 44: Estimated Change in 1999 Farm- Level Revenue Using Different
    Assumptions Under an Expanded NEDC Scenario Dollars in millions

    Estimated change to baseline farm- level revenue using different assumptions
    IRCM99 region

    No- compact baseline farm- level

    revenue in 1999 10- year regional

    supply elasticities

    Higher commodity

    demand elasticities

    Higher over order premiums Combined

    assumptions a Transportation

    costs increase 25 percent

    Northeast $4,391 $125 $110 $177 $193 $118 Appalachia 1, 028 (5) (3) (5) (6)
    (2) Florida 410 (1) (1) (2) (2) (1) Southeast 568 (2) (1) (3) (3) 1 Mideast
    1, 792 (7) (5) (8) (7) (5) Upper Midwest 4, 533 (20) (13) (21) (24) (13)
    Central 2, 112 (8) (5) (10) (7) (6) Southwest 1, 489 (5) (3) (6) (5) (4)
    Western 1, 167 (5) (4) (5) (6) (3) Northwest 1, 059 (4) (3) (4) (4) (3)
    California 3, 954 (6) 9 (4) (33) (10) Arizona 401 (1) (1) (2) 1 (1)

    Appendix V: Interregional Impacts of Three Compact Alternatives in 1999

    Page 109 GAO- 01- 866 Impacts of Dairy Compacts

    Note: Numbers in parentheses are negative. a The combined assumptions
    include the previous three assumptions: (1) 10- year long- term regional

    supply elasticities, (2) higher commodity demand elasticities, and (3)
    higher over- order premiums. Source: GAO?s analysis using the IRCM99.

    Table 45: Estimated Change in 1999 National Average Wholesale- Level Prices
    Using Different Assumptions Under an Expanded NEDC Scenario

    Dollars per hundredweight Estimated change to baseline wholesale- level
    prices using different assumptions

    Dairy commodity No- compact

    baseline wholesale- level

    price in 1999 10- year

    regional supply elasticities

    Higher commodity

    demand elasticities

    Higher overorder premiums Combined

    assumptions a Transportation

    costs increase 25 percent

    Fluid milk $15.04 $0.16 $0.18 $0.27 $0.27 $0.19 Soft dairy products 27.31
    (0.18) (0.08) (0.15) (0.19) (0.09) American cheese 139.24 (0.30) (0.23)
    (0.41) (0.35) (0.18) Italian cheese 93.24 (0.25) (0.19) (0.30) (0.31) (0.13)
    Other cheese 115.58 (0.44) (0.05) (0.31) (0.21) (0.44) Butter 119.52 (0.54)
    (0.46) (0.88) (0.52) (0.66) Frozen dairy products 21.40 (0.07) (0.05) (0.11)
    (0.07) (0.07) Other manufactured products 27.68 (0.01) 0.07 0.04 0.06 0.07
    Nonfat dry milk 102.63 (0.02) (0.04) (0.02) (0.06) (0.03)

    Note: Numbers in parentheses are negative. a The combined assumptions
    include the previous three assumptions: (1) 10- year long- term regional
    supply elasticities, (2) higher commodity demand elasticities, and (3)
    higher over- order premiums. Source: GAO?s analysis using the IRCM99.

    Table 46: Estimated Change in 1999 Wholesale- Level Production Using
    Different Assumptions Under an Expanded NEDC Scenario

    Pounds in millions Estimated change in baseline wholesale- level production
    using different assumptions

    Dairy commodity No- compact

    baseline wholesale- level

    production in 1999

    10- year regional supply elasticities

    Higher commodity

    demand elasticities Higher over order premiums Combined

    assumptions a Transportation

    costs increase 25 percent

    Fluid milk 55,043 (86) (189) (141) (293) (94) Soft dairy products 5,984 8 14
    13 20 8 American cheese 3,539 1 4 2 6 1 Italian cheese 3,175 2 5 3 8 1 Other
    cheese 598 1 1 1 1 0 Butter 1, 274 1 3 3 2 1

    Appendix V: Interregional Impacts of Three Compact Alternatives in 1999

    Page 110 GAO- 01- 866 Impacts of Dairy Compacts

    Pounds in millions Estimated change in baseline wholesale- level production
    using different assumptions

    Dairy commodity No- compact

    baseline wholesale- level

    production in 1999

    10- year regional supply elasticities

    Higher commodity

    demand elasticities Higher overorder premiums Combined

    assumptions a Transportation

    costs increase 25 percent

    Frozen dairy products 2,131 14 13 20 17 13 Other manufactured products 4,270
    1 (2) 0 0 (2) Nonfat dry milk 1,396 9 18 16 23 12

    Note: Numbers in parentheses are negative. a The combined assumptions
    include the previous three assumptions: (1) 10- year long- term regional

    supply elasticities, (2) higher commodity demand elasticities, and (3)
    higher over- order premiums. Source: GAO?s analysis using the IRCM99.

    Table 47: Estimated Change in 1999 Wholesale- Level Expenditures Using
    Different Assumptions Under an Expanded NEDC Scenario

    Dollars in millions Estimated change in baseline wholesale- level
    expenditures using different assumptions

    Dairy commodity No- compact

    baseline wholesale- level expenditures in

    1999 10- year regional

    supply elasticities

    Higher commodity

    demand elasticities Higher overorder premiums Combined

    assumptions a Transportation

    costs increase 25 percent

    Fluid milk $8,220 $74 $69 $126 $103 $89 Soft dairy products 1,626 (9) (1)
    (6) (6) (3) American cheese 4,823 (9) (2) (11) (4) (5) Italian cheese 3,028
    (6) (3) (8) (3) (3) Other cheese 792 (3) 1 (1) 0 (2) Butter 1, 495 (6) (2)
    (7) (4) (7) Frozen dairy products 2,570 (6) (3) (9) (5) (5) Other
    manufactured products 1,199 0 2 1 3 2 Nonfat dry milk 1,012 0 0 0 (1) 0

    Note: Numbers in parentheses are negative. a The combined assumptions
    include the previous three assumptions: (1) 10- year long- term regional
    supply elasticities, (2) higher commodity demand elasticities, and (3)
    higher over- order premiums. Source: GAO?s analysis using the IRCM99.

    Appendix V: Interregional Impacts of Three Compact Alternatives in 1999

    Page 111 GAO- 01- 866 Impacts of Dairy Compacts

    Tables 48 and 49 summarize the results of our initial estimates and
    sensitivity analyses by presenting a range of estimates of the changes from
    our no- compact scenario that we obtained in our various analyses.

    Table 48: Summary of Estimated Changes in Farm- Level Indicators Using Our
    Initial and Subsequent Sets of Assumptions Under an Expanded NEDC Scenario

    IRCM99 region Change in farmlevel

    prices (dollars per hundredweight)

    Change in farm- level production (pounds

    in millions) Change in farmlevel

    revenue (dollars in millions)

    Northeast $0.30 to 0. 48 150 to 383 $110 to 193 Appalachia (0.05) to (0.02)
    (19) to (7) (6) to (2) Florida (0.05) to (0.02) (4) to (2) (2) to (1)
    Southeast (0.05) to 0.02 (7) to 2 (3) to 1 Mideast (0.05) to (0.03) (16) to
    (7) (8) to (5) Upper Midwest (0.05) to (0.03) (54) to (20) (24) to (13)
    Central (0.05) to (0.02) (22) to (12) (10) to (5) Southwest (0.04) to (0.02)
    (15) to (5) (6) to (3) Western (0.04) to (0.02) (20 ) to (7) (6) to (3)
    Northwest (0.04) to (0.03) (12) to (5) (4) to (3) California (0.06) to 0.02
    (112) to 21 (33) to 9 Arizona (0.04) to 0.03 (3) to 3 (2) to 1

    Note: Numbers in parentheses are negative. Source: GAO?s analysis using the
    IRCM99.

    Table 49: Summary of Estimated Changes in 1999 Wholesale- Level Indicators
    Using Our Initial and Subsequent Sets of Assumptions Under an Expanded NEDC
    Scenario

    Dairy commodity Change in

    wholesale- level prices (dollars

    per hundredweight)

    Change in wholesale- level

    production (pounds in

    millions) Change in

    wholesale- level expenditures (dollars in millions)

    Fluid milk $0.16 to 0. 27 (293) to (86) $69 to 126 Soft dairy products
    (0.19) to (0.08) 8 to 20 (9) to (1) American cheese (0.41) to (0.18) 1 to 6
    (11) to (2) Italian cheese (0.31) to (0.13) 1 to 8 (8) to (3) Other cheese
    (0.44) to (0.05) 0 to 1 (3) to 1 Butter (0.88) to (0.46) 1 to 3 (7) to (2)
    Frozen dairy products (0.11) to (0.05) 13 to 20 (9) to (3) Other
    manufactured products (0.01) to 0.07 (2) to 1 0 to 3 Nonfat dry milk (0.06)
    to (0.02) 9 to 23 (1) to 0

    Summary of the Estimated Impacts of the Expanded NEDC

    Appendix V: Interregional Impacts of Three Compact Alternatives in 1999

    Page 112 GAO- 01- 866 Impacts of Dairy Compacts

    Note: Numbers in parentheses are negative. Source: GAO?s analysis using the
    IRCM99.

    As with the other compact scenarios, we developed initial estimates of the
    effects of an expanded NEDC in conjunction with a southern compact in 1999
    by using a set of key assumptions and conducting subsequent sensitivity
    analyses. In addition to conducting the same sensitivity analyses that we
    conducted under the previous two compact scenarios, we also varied the
    assumption regarding the Class I minimum price, or compact price, in the
    compact region. For that analysis, we increased the minimum price from $16.
    94 to $18.00 per hundredweight in the southern compact but retained the
    $16.94 minimum price in the expanded NEDC. We used this higher minimum
    southern compact price because cooperative pay prices in selected cities in
    USDA?s Appalachian, Southern, and Central milk marketing orders averaged
    about a dollar higher than in the Northeast Marketing Order in 1999. 2 Under
    this scenario we conducted an additional analysis in which we assume that
    fluid trade movements into compact regions are limited to the amount of milk
    that is produced within a 100- mile radius surrounding a compact region. 34
    Because this analysis represents a variation of the model, we also conducted
    a separate set of sensitivity analyses.

    2 Cooperative pay prices in each marketing order are related to the blend
    prices for those marketing orders. However, they also reflect the costs of
    certain services performed by the cooperative associations as well as other
    costs such as membership dues.

    3 We modified the model for each of the three compact scenarios to account
    for this additional fluid milk trade restriction. The model results under
    the NEDC and the expanded NEDC scenarios did not change when this
    restriction was added, but results were different for the expanded NEDC in
    conjunction with a southern compact scenario. Therefore, we are including
    the results of this additional modeling effort only for the expanded NEDC in
    conjunction with a southern compact scenario.

    4 We performed this analysis because our data are at the regional level as
    opposed to the milk plant or dairy farm level. Therefore, our transportation
    cost data are average cost data and do not apply to individual shipments. As
    a result, our initial results may reflect more movement of milk between
    regions than would actually occur. The Economic

    Impacts of an Expanded NEDC in Conjunction With a Southern Compact in 1999

    Appendix V: Interregional Impacts of Three Compact Alternatives in 1999

    Page 113 GAO- 01- 866 Impacts of Dairy Compacts

    Table 50: Initial Estimates of the Impacts of the Expanded NEDC in
    Conjunction With a Southern Compact on 1999 Farm- Level Indicators

    Farm- level prices (dollars per hundredweight) Farm- level production

    (pounds in millions) Farm- level revenue

    (dollars in millions) IRCM99 region No- compact

    baseline in 1999 Change to baseline No- compact

    baseline in 1999 Change to baseline No- compact

    baseline in 1999 Change to baseline

    Northeast $15.07 $0.27 29,138 130 $4,391 $99 Appalachia 15.97 1.35 6,437 348
    1,028 147 Florida 17.14 0.04 2,390 2 410 1 Southeast 16.01 0.80 3,548 70 568
    40 Mideast 14.64 (0.18) 12,238 (49) 1,792 (29) Upper Midwest 13.82 (0.07)
    32,803 (52) 4,533 (30) Central 14.22 0.10 14,855 45 2, 112 21 Southwest
    14.49 (0.10) 10,278 (27) 1,489 (14) Western 13.18 (0.10) 8,854 (28) 1,167
    (13) Northwest 14.85 (0.09) 7,134 (19) 1,059 (9) California 12.98 (0.06)
    30,459 (63) 3,954 (26) Arizona 13.76 (0.11) 2,914 (8) 401 (4) All noncompact
    regions combined a a 107,070 (246) 14,805 (125)

    Note: Numbers in parentheses are negative. a Because farm- level prices are
    regional, an ?all noncompact regions combined? price is not

    meaningful. Source: GAO analysis using the IRCM99.

    Table 51: Initial Estimates of the Impacts of the Expanded NEDC in
    Conjunction With a Southern Compact on 1999 WholesaleLevel Indicators

    Wholesale- level prices (dollars per hundredweight) Wholesale- level
    production

    (pounds in millions) Wholesale- level expenditures (dollars in millions)

    Dairy commodity No- compact baseline in 1999 Change to

    baseline No- compact baseline in 1999 Change to

    baseline No- compact baseline in 1999 Change to

    baseline

    Fluid milk $15.04 $0.47 55,043 (248) $8,220 $218 Soft dairy products 27.31
    (0.33) 5,984 32 1,626 (11) American cheese 139.24 (0.93) 3,539 4 4, 823 (27)
    Italian cheese 93.24 (0.62) 3,175 6 3, 028 (16) Other cheese 115.58 (0.66)
    598 2 792 (2) Butter 119.52 (2.55) 1,274 6 1, 495 (25)

    Initial Estimates of the Impacts of the Expanded NEDC in Conjunction With a
    Southern Compact

    Appendix V: Interregional Impacts of Three Compact Alternatives in 1999

    Page 114 GAO- 01- 866 Impacts of Dairy Compacts

    Wholesale- level prices (dollars per hundredweight) Wholesale- level
    production

    (pounds in millions) Wholesale- level expenditures (dollars in millions)

    Dairy commodity No- compact baseline in 1999 Change to

    baseline No- compact baseline in 1999 Change to

    baseline No- compact baseline in 1999 Change to

    baseline

    Frozen dairy products 21.40 (0.30) 12,131 55 2, 570 (24) Other manufactured
    products 27.68 0.20 4,270 (8) 1, 199 6 Nonfat dry milk 102.63 (0.09) 1,396
    40 1,012 (1)

    Note: Numbers in parentheses are negative. Source: GAO?s analysis using the
    IRCM99.

    Tables 52 through 57 present the results of our sensitivity analyses for
    1999 farm and wholesale- level economic variables.

    Table 52: Estimated Change in 1999 Farm- Level Prices Using Different
    Assumptions Under an Expanded NEDC in Conjunction With a Southern Compact
    Scenario

    Dollars per hundredweight Estimated change to baseline farm- level prices
    using different assumptions

    IRCM9 region No- compact

    baseline farmlevel prices in

    1999 10- year

    regional supply elasticities

    Higher commodity

    demand elasticities

    Higher over order

    premiums Combined assumptions a

    $18.00 minimum

    southern compact price

    Transportation costs increase

    25 percent

    Northeast $15.07 $0.26 $0.26 $0.41 $0.38 $0.22 $0.25 Appalachia 15.97 1.13
    1.10 1.50 1.32 1.85 1.24 Florida 17.14 0.04 0.03 (0.01) (0.01) (0.02) 0.16
    Southeast 16.01 0.79 0.80 1.19 1.18 1.66 0.89 Mideast 14.64 (0.19) (0.18)
    (0.24) (0.23) (0.24) (0.13) Upper Midwest 13.82 (0.08) (0.08) (0.11) (0.13)
    (0.10) (0.06) Central 14.22 0.11 0.12 0.14 0.14 0.17 0.27 Southwest 14.49
    (0.09) (0.05) (0.12) (0.07) (0.13) (0.17) Western 13.18 (0.09) (0.10) (0.12)
    (0.13) (0.14) (0.10) Northwest 14.85 (0.08) (0.09) (0.11) (0.12) (0.13) 0.03
    California 12.98 (0.13) (0.18) (0.17) (0.22) (0.18) 0.18 Arizona 13.76
    (0.03) 0.06 (0.05) 0.05 (0.05) (0.36)

    Note: Numbers in parentheses are negative. a The combined assumptions
    include the previous three assumptions: (1) 10- year long- term regional
    supply elasticities, (2) higher commodity demand elasticities, and (3)
    higher over- order premiums. Source: GAO?s analysis using the IRCM99.

    Sensitivity Analyses for the Expanded NEDC in Conjunction With a Southern
    Compact Scenario

    Appendix V: Interregional Impacts of Three Compact Alternatives in 1999

    Page 115 GAO- 01- 866 Impacts of Dairy Compacts

    Table 53: Estimated Change in 1999 Farm- Level Production Using Different
    Assumptions Under an Expanded NEDC in Conjunction With a Southern Compact
    Scenario

    Pounds in millions Estimated change to baseline farm- level production using
    different

    assumptions IRCM99 region

    No- compact baseline farm- level production in

    1999 10- year

    regional supply elasticities

    Higher commodity

    demand elasticities

    Higher over order

    premiums Combined assumptions a

    $18.00 minimum

    southern compact price

    Transportation costs increase

    25 percent

    Northeast 29,138 212 126 203 313 106 126 Appalachia 6, 437 429 283 388 504
    478 319 Florida 2, 390 4 2 (1) (1) (1) 9 Southeast 3, 548 111 70 104 164 145
    78 Mideast 12,238 (79) (48) (63) (100) (65) (35) Upper Midwest 32,803 (90)
    (60) (81) (152) (74) (43) Central 14,855 74 51 64 96 80 121 Southwest 10,278
    (41) (13) (33) (29) (34) (45) Western 8, 854 (47) (30) (34) (64) (39) (28)
    Northwest 7, 134 (31) (20) (23) (42) (26) 5 California 30,459 (245) (183)
    (173) (400) (186) 185 Arizona 2, 914 (4) 4 (4) 6 (3) (29)

    Note: Numbers in parentheses are negative. a The combined assumptions
    include the previous three assumptions: (1) 10- year long- term regional
    supply elasticities, (2) higher commodity demand elasticities, and (3)
    higher over- order premiums. Source: GAO?s analysis using the IRCM99.

    Table 54: Estimated Change in 1999 Farm- Level Revenue Using Different
    Assumptions Under an Expanded NEDC in Conjunction With a Southern Compact
    Scenario

    Dollars in millions Estimated change in baseline farm- level revenue using
    different assumptions

    IRCM99 region No- compact

    baseline farm- level revenue in

    1999 10- year

    regional supply elasticities

    Higher commodity

    demand elasticities

    Higher over- order

    premiums Combined assumptions a

    $18.00 minimum

    southern compact price

    Transportation costs increase

    25 percent

    Northeast 4,391 108 95 151 159 80 92 Appalachia 1, 028 146 119 164 172 204
    135 Florida 410 2 1 0 0 (1) 5 Southeast 568 47 40 60 70 85 45 Mideast 1, 792
    (35) (29) (38) (43) (39) (21) Upper Midwest 4, 533 (39) (34) (47) (63) (43)
    (26) Central 2, 112 27 25 30 35 37 58 Southwest 1, 489 (15) (7) (17) (11)
    (18) (24)

    Appendix V: Interregional Impacts of Three Compact Alternatives in 1999

    Page 116 GAO- 01- 866 Impacts of Dairy Compacts

    Dollars in millions Estimated change in baseline farm- level revenue using
    different assumptions

    IRCM99 region No- compact

    baseline farm- level revenue in

    1999 10- year

    regional supply elasticities

    Higher commodity

    demand elasticities

    Higher over- order

    premiums Combined assumptions a

    $18.00 minimum

    southern compact price

    Transportation costs increase

    25 percent

    Western 1, 167 (14) (13) (15) (20) (17) (13) Northwest 1, 059 (10) (9) (11)
    (15) (13) 3 California 3, 954 (71) (78) (74) (118) (79) 80 Arizona 401 (1) 2
    (2) 2 (2) (14)

    Note: Numbers in parentheses are negative. a The combined assumptions
    include the previous three assumptions: (1) 10- year long- term regional

    supply elasticities, (2) higher commodity demand elasticities, and (3)
    higher over- order premiums. Source: GAO?s analysis using the IRCM99.

    Table 55: Estimated Change in 1999 National Average Wholesale- Level Prices
    Using Different Assumptions Under an Expanded NEDC in Conjunction With a
    Southern Compact Scenario

    Dollars per hundredweight Estimated change to baseline wholesale- level
    prices using different assumptions

    Dairy commodity

    No- compact baseline wholesalelevel price in

    1999 10- year

    regional supply elasticities

    Higher commodity

    demand elasticities

    Higher over- order

    premiums Combined assumptions a

    $18.00 minimum

    southern compact price

    Transportation costs increase

    25 percent

    Fluid milk $15.04 $0.44 $0.39 $0.61 $0.57 $0.59 $0.63 Soft dairy products
    27.31 (0.36) (0.17) (0.38) (0.24) (0.43) (0.55) American cheese 139.24
    (0.91) (1.00) (1.25) (1.24) (1.41) (0.62) Italian cheese 93.24 (0.62) (0.86)
    (0.93) (1.11) (1.02) 0.36 Other cheese 115.58 (0.67) (0.56) (1.01) (1.11)
    (1.08) 0.69 Butter 119.52 (2.01) 0.21 (2.32) (0.22) (2.38) (6.53) Frozen
    dairy products 21.40 (0.26) (0.10) (0.33) (0.16) (0.34) (0.53) Other
    manufactured products 27.68 0.06 0.04 0.02 (0.11) 0.07 1.04

    Nonfat dry milk 102.63 (0.07) (0.07) (0.08) (0.09) (0.09) (1.22) Note:
    Numbers in parentheses are negative. a The combined assumptions include the
    previous three assumptions: (1) 10- year long- term regional

    supply elasticities, (2) higher commodity demand elasticities, and (3)
    higher over- order premiums. Source: GAO?s analysis using the IRCM99.

    Appendix V: Interregional Impacts of Three Compact Alternatives in 1999

    Page 117 GAO- 01- 866 Impacts of Dairy Compacts

    Table 56: Estimated Change in 1999 Wholesale- Level Production Using
    Different Assumptions Under an Expanded NEDC in Conjunction With a Southern
    Compact Scenario

    Pounds in millions Estimated change in baseline wholesale- level production
    using different assumptions

    Dairy commodity

    No- compact baseline wholesalelevel

    production in 1999

    10- year regional

    supply elasticities

    Higher commodity

    demand elasticities

    Higher over- order

    premiums Combined assumptions a

    $18.00 minimum

    southern compact price

    Transportation costs increase

    25 percent

    Fluid milk 55,043 (233) (445) (330) (647) (328) (324) Soft dairy products
    5,984 27 27 35 43 37 51 American cheese 3,539 3 16 5 20 6 1 Italian cheese
    3,175 5 21 8 28 9 (3) Other cheese 598 2 3 3 4 3 (1) Butter 1,274 4 (1) 6 0
    5 17 Frozen dairy products 12,131 51 26 62 41 65 98 Other manufactured
    products 4,270 (1) 3 2 15 (2) (56) Nonfat dry milk 1,396 32 22 40 34 42 98

    Note: Numbers in parentheses are negative. a The combined assumptions
    include the previous three assumptions: (1) 10- year long- term regional

    supply elasticities, (2) higher commodity demand elasticities, and (3)
    higher over- order premiums. Source: GAO?s analysis using the IRCM99.

    Table 57: Estimated Change in 1999 Wholesale- Level Expenditures Using
    Different Assumptions Under an Expanded NEDC in Conjunction With a Southern
    Compact Scenario

    Dollars in millions Estimated change in baseline wholesale- level
    expenditures using different assumptions

    Dairy commodity

    No- compact baseline wholesalelevel

    expenditures in 1999

    10- year regional

    supply elasticities

    Higher commodity

    demand elasticities

    Higher over- order

    premiums Combined assumptions a

    $18.00 minimum

    southern compact price

    Transportation costs increase

    25 percent

    Fluid milk $8,220 $205 $144 $282 $211 $271 $293 Soft dairy products 1,626
    (14) (3) (13) (2) (16) (19) American cheese 4,823 (27) (12) (36) (15) (41)
    (20) Italian cheese 3,028 (15) (9) (23) (11) (25) 9 Other cheese 792 (2) 0
    (3) (4) (4) 4

    Appendix V: Interregional Impacts of Three Compact Alternatives in 1999

    Page 118 GAO- 01- 866 Impacts of Dairy Compacts

    Dollars in millions Estimated change in baseline wholesale- level
    expenditures using different assumptions

    Dairy commodity

    No- compact baseline wholesalelevel

    expenditures in 1999

    10- year regional

    supply elasticities

    Higher commodity

    demand elasticities

    Higher over- order

    premiums Combined assumptions a

    $18.00 minimum

    southern compact price

    Transportation costs increase

    25 percent

    Butter 1, 495 (20) 1 (22) (3) (24) (64) Frozen dairy products 2,570 (20) (6)
    (27) (10) (27) (43) Other manufactured products 1,199 2 3 1 (1) 2 28

    Nonfat dry milk 1,012 (1) (1) (1) (1) (1) 1 Note: Numbers in parentheses are
    negative. a The combined assumptions include the previous three assumptions:
    (1) 10- year long- term regional supply elasticities, (2) higher commodity
    demand elasticities, and (3) higher over- order premiums. Source: GAO?s
    analysis using the IRCM99.

    Tables 58 and 59 summarize the results of our initial estimates and
    sensitivity analyses by presenting the range of estimates of the changes
    from our no- compact scenario that we obtained from our various analyses.

    Table 58: Summary of Range of Estimated Changes in Farm- Level Indicators
    Using Our Initial and Subsequent Sets of Assumptions Under an Expanded NEDC
    in Conjunction With a Southern Compact Scenario

    IRCM99 region Change in farm- level

    prices (dollars per hundredweight)

    Change in farm- level production (pounds

    in billions) Change in farm

    level revenue (dollars in millions)

    Northeast $0.22 to 0. 41 106 to 313 $80 to 159 Appalachia 1. 10 to 1.85 283
    to 504 119 to 204 Florida (0.02) to 0.04 (1) to 9 (1) to 5 Southeast 0. 79
    to 1.66 70 to 164 40 to 85 Mideast (0.24) to (0.13) (100) to (35) (43) to
    (21) Upper Midwest (0.11) to (0.06) (152) to (43) (63) to (26) Central 0. 10
    to 0.27 45 to 121 21 to 58 Southwest (0.17) to (0.05) (45) to (13) (24) to
    (7) Western (0.14) to (0.09) (64) to (28) (20) to (13) Northwest (0.13) to
    0.03 (42) to 5 (15) to 3 California (0.18) to 0.18 (400) to 185 (118) to 80
    Arizona (0.36) to 0.06 (29) to 6 (14) to 2

    Note: Numbers in parentheses are negative.

    Summary of the Estimated Impacts of the Expanded NEDC in Conjunction With a
    Southern Compact

    Appendix V: Interregional Impacts of Three Compact Alternatives in 1999

    Page 119 GAO- 01- 866 Impacts of Dairy Compacts

    Source: GAO?s analysis using the IRCM99.

    Table 59: Summary of Range of Estimated Changes in 1999 Wholesale- Level
    Indicators Using Our Initial and Subsequent Sets of Assumptions Under an
    Expanded NEDC in Conjunction With a Southern Compact Scenario

    Dairy commodity Change in

    wholesale- level prices (dollars per

    hundredweight) Change in

    wholesale- level production (pounds in

    millions) Change in

    wholesale- level expenditures (dollars in millions)

    Fluid milk $0.39 to 0. 63 (647) to (233) $144 to 293 Soft dairy products
    (0.55) to (0.17) 27 to 51 (19) to (2) American cheese (1.41) to (0.62) 1 to
    20 (41) to (15) Italian cheese (1.11) to 0.36 (3) to 21 (25) to 9 Other
    cheese (1.11) to 0.69 (1) to 4 (4) to 4 Butter (6.53) to 0.21 (1) to 17 (64)
    to 1 Frozen dairy products (0.53) to (0.10) 26 to 98 (43) to (6) Other
    manufactured products (0.11) to 1.04 (56) to 15 (1) to 28 Nonfat dry milk
    (1.22) to (0.07) 22 to 98 (1) to 1

    Note: Numbers in parentheses are negative. Source: GAO?s analysis using the
    IRCM99.

    Tables 60 and 61 provide our initial estimates obtained by modifying the
    IRCM to include a more restrictive trade assumption about fluid milk.

    Table 60: Initial Estimates of 1999 Regional Farm- Level Indicators Using a
    More Restrictive Fluid Milk Trade Assumption Under an Expanded NEDC in
    Conjunction With a Southern Compact Scenario

    Farm- level prices (dollars per hundredweight) Farm- level production

    (pounds in millions) Farm- level revenue

    (dollars in millions)

    IRCM99 region No- compact baseline in 1999 Change to

    baseline No- compact baseline in 1999 Change to

    baseline No- compact baseline in 1999 Change to

    baseline

    The Economic Impacts of an Expanded NEDC in Conjunction With a Southern
    Compact Using a More Restrictive Fluid Milk Trade Assumption

    Appendix V: Interregional Impacts of Three Compact Alternatives in 1999

    Page 120 GAO- 01- 866 Impacts of Dairy Compacts

    Farm- level prices (dollars per hundredweight) Farm- level production

    (pounds in millions) Farm- level revenue

    (dollars in millions)

    IRCM99 region No- compact baseline in 1999 Change to

    baseline No- compact baseline in 1999 Change to

    baseline No- compact baseline in 1999 Change to

    baseline

    Northeast $15.07 $0.28 29,138 138 $4,391 $103 Appalachia 15.97 1.35 6,437
    349 1,028 147 Florida 17.14 (0.02) 2,390 (2) 410 (1) Southeast 16.01 2.99
    3,548 261 568 156 Mideast 14.64 (0.24) 12,238 (64) 1,792 (39) Upper Midwest
    13.82 (0.26) 32,803 (195) 4,533 (112) Central 14.22 0.33 14,855 151 2,112 71
    Southwest 14.49 (0.12) 10,278 (32) 1,489 (17) Western 13.18 (0.12) 8,854
    (34) 1,167 (15) Northwest 14.85 (0.11) 7,134 (22) 1,059 (11) California
    12.98 (0.16) 30,459 (168) 3,954 (70) Arizona 13.76 (0.04) 2,914 (2) 401 (1)
    All noncompact regions combined a a 107,070 (519) 14,805 (266)

    Note: Numbers in parentheses are negative. a Because farm- level prices are
    regional, an ?all noncompact regions combined? price is not

    meaningful. Source: GAO?s analysis using the IRCM99.

    Table 61: Initial Estimates of 1999 Wholesale- Level Indicators Using a More
    Restrictive Fluid Milk Trade Assumption Under an Expanded NEDC in
    Conjunction With a Southern Compact Scenario

    Wholesale- level prices (dollars per hundredweight) Wholesale- level
    production

    (pounds in millions) Wholesale- level expenditures (dollars in millions)

    Dairy commodity No- compact baseline in 1999 Change to

    baseline No- compact baseline in 1999 Change to

    baseline No- compact baseline in 1999 Change to

    baseline

    Fluid milk $15.04 $0.71 55,043 (336) $8,220 $335 Soft dairy products 27.31
    (0.48) 5,984 37 1,626 (19) American cheese 139.24 (1.30) 3,539 5 4, 823 (38)
    Italian cheese 93.24 (0.95) 3,175 8 3, 028 (23) Other cheese 115.58 (1.19)
    598 3 792 (5) Butter 119.52 (2.48) 1,274 6 1, 495 (24) Frozen dairy products
    21.40 (0.51) 12,131 65 2, 570 (48) Other manufactured products 27.68 (0.08)
    4,270 2 1, 199 (3) Nonfat dry milk 102.63 0.01 1,396 42 1,012 0

    Note: Numbers in parentheses are negative. Source: GAO?s analysis using the
    IRCM99.

    Tables 62 through 67 present the results of our sensitivity analyses using a
    more restrictive fluid trade assumption.

    Appendix V: Interregional Impacts of Three Compact Alternatives in 1999

    Page 121 GAO- 01- 866 Impacts of Dairy Compacts

    Table 62: Change in 1999 Farm- Level Prices Using Different Assumptions and
    a More Restrictive Fluid Milk Trade Assumption Under an Expanded NEDC in
    Conjunction With a Southern Compact Scenario

    Dollars per hundredweight Estimated change in baseline farm- level prices
    using different assumptions

    IRCM99 region No- compact

    baseline farm- level price in 1999

    10- year regional

    supply elasticities

    Higher commodity

    demand elasticities

    Higher overorder premiums Combined

    assumptions a $18.00

    minimum southern

    compact price

    Transportation costs increase

    25 percent

    Northeast $15.07 $0.28 $0.28 $0.45 $0.31 $0.26 $0.27 Appalachia 15.97 1.18
    1.16 1.59 1.39 1.96 1.24 Florida 17.14 (0.01) 0.00 (0.06) (0.02) (0.07) 0.00
    Southeast 16.01 3.01 3.16 3.81 3.84 4.51 3.20 Mideast 14.64 (0.24) (0.21)
    (0.27) (0.23) (0.28) (0.24) Upper Midwest 13.82 (0.26) (0.24) (0.29) (0.27)
    (0.30) (0.27) Central 14.22 0.27 0.23 0.26 0.15 0.29 0.25 Southwest 14.49
    (0.10) (0.05) (0.15) (0.07) (0.16) (0.11) Western 13.18 (0.12) (0.13) (0.17)
    (0.17) (0.19) (0.12) Northwest 14.85 (0.10) (0.11) (0.15) (0.14) (0.17)
    (0.13) California 12.98 (0.19) (0.20) (0.21) (0.27) (0.24) (0.21) Arizona
    13.76 (0.01) 0.06 (0.05) 0.06 (0.05) (0.09)

    Note: Numbers in parentheses are negative. a The combined assumptions
    include the previous three assumptions: (1) 10- year long- term regional
    supply elasticities, (2) higher commodity demand elasticities, and (3)
    higher over- order premiums. Source: GAO?s analysis using the IRCM99.

    Table 63: Change in 1999 Farm- Level Production Using Different Assumptions
    and a More Restrictive Fluid Milk Trade Assumption Under an Expanded NEDC in
    Conjunction With a Southern Compact Scenario

    Pounds in millions Estimated change in baseline farm- level production using
    different assumptions

    IRCM99 region No- compact

    baseline farm- level production in

    1999 10- year

    regional supply elasticities

    Higher commodity

    demand elasticities

    Higher overorder premiums Combined

    assumptions a $18.00

    minimum southern

    compact price

    Transportation costs increase

    25 percent

    Northeast 29,138 225 139 220 255 127 135 Appalachia 6, 437 448 300 412 533
    507 320 Florida 2, 390 (1) 0 (3) (2) (4) 0 Southeast 3, 548 418 277 333 534
    395 281 Mideast 12,238 (101) (56) (71) (101) (75) (63) Upper Midwest 32,803
    (314) (180) (214) (326) (223) (195) Central 14,855 186 104 117 103 130 110
    Southwest 10,278 (46) (15) (40) (31) (43) (30) Western 8, 854 (61) (37) (48)
    (83) (53) (35)

    Appendix V: Interregional Impacts of Three Compact Alternatives in 1999

    Page 122 GAO- 01- 866 Impacts of Dairy Compacts

    Pounds in millions Estimated change in baseline farm- level production using
    different assumptions

    IRCM99 region No- compact

    baseline farm- level production in

    1999 10- year

    regional supply elasticities

    Higher commodity

    demand elasticities

    Higher overorder premiums Combined

    assumptions a $18.00

    minimum southern

    compact price

    Transportation costs increase

    25 percent

    Northwest 7, 134 (39) (23) (31) (51) (34) (26) California 30,459 (348) (211)
    (218) (491) (249) (224) Arizona 2, 914 (2) 5 (4) 7 (4) (7)

    Note: Numbers in parentheses are negative. a The combined assumptions
    include the previous three assumptions: (1) 10- year long- term regional
    supply elasticities, (2) higher commodity demand elasticities, and (3)
    higher over- order premiums. Source: GAO?s analysis using the IRCM99.

    Table 64: Change in 1999 Farm- Level Revenue Using Different Assumptions and
    a More Restrictive Fluid Milk Trade Assumption Under an Expanded NEDC in
    Conjunction With a Southern Compact Scenario

    Dollars in millions Estimated change in baseline farm- level revenue using
    different assumptions

    IRCM99 region No- compact

    baseline farm- level revenue in

    1999 10- year

    regional supply elasticities

    Higher commodity

    demand elasticities

    Higher over- order

    premiums Combined assumptions a

    $18.00 minimum

    southern compact

    price Transportation

    costs increase 25 percent

    Northeast 4,391 116 103 165 130 95 99 Appalachia 1, 028 153 126 175 182 217
    135 Florida 410 0 0 (2) (1) (2) 0 Southeast 568 186 165 201 242 241 168
    Mideast 1, 792 (44) (34) (43) (43) (45) (38) Upper Midwest 4, 533 (128)
    (103) (124) (133) (129) (115) Central 2, 112 67 49 56 37 62 53 Southwest 1,
    489 (17) (7) (21) (12) (23) (16) Western 1, 167 (19) (16) (21) (26) (24)
    (15) Northwest 1, 059 (13) (11) (15) (17) (17) (13) California 3, 954 (103)
    (88) (92) (145) (105) (93) Arizona 401 (1) 2 (2) 3 (2) (4)

    Note: Numbers in parentheses are negative. a The combined assumptions
    include the previous three assumptions: (1) 10- year long- term regional

    supply elasticities, (2) higher commodity demand elasticities, and (3)
    higher over- order premiums. Source: GAO?s analysis using the IRCM99.

    Appendix V: Interregional Impacts of Three Compact Alternatives in 1999

    Page 123 GAO- 01- 866 Impacts of Dairy Compacts

    Table 65: Change in 1999 National Average Wholesale- Level Prices Using
    Different Assumptions and a More Restrictive Fluid Milk Trade Assumption
    Under an Expanded NEDC in Conjunction With a Southern Compact Scenario

    Dollars per hundredweight Estimated change in baseline wholesale- level
    prices using different assumptions

    Dairy commodity No- compact

    baseline wholesalelevel price in

    1999 10- year

    regional supply elasticities

    Higher commodity

    demand elasticities

    Higher overorder premiums Combined

    assumptions a $18.00

    minimum southern

    compact price

    Transportation costs increase

    25 percent

    Fluid milk $15.04 $0.69 $0.66 $0.91 $0.80 $0.93 $0.69 Soft dairy products
    27.31 (0.44) (0.24) (0.48) (0.18) (0.52) (0.31) American cheese 139.24
    (1.32) (1.27) (1.68) (1.51) (1.86) (1.38) Italian cheese 93.24 (0.99) (1.08)
    (1.24) (1.33) (1.36) (1.11) Other cheese 115.58 (1.25) (0.75) (1.41) (1.33)
    (1.50) (1.65) Butter 119.52 (2.08) (0.11) (2.80) 0.07 (2.78) (1.08) Frozen
    dairy products 21.40 (0.51) (0.38) (0.64) (0.41) (0.65) (0.53) Other
    manufactured products 27.68 0.01 (0.05) 0.08 0 0. 06 (0.18) Nonfat dry milk
    102.63 (0.01) (0.02) (0.03) (0.05) (0.03) 0

    Note: Numbers in parentheses are negative. a The combined assumptions
    include the previous three assumptions: (1) 10- year long- term regional
    supply elasticities, (2) higher commodity demand elasticities, and (3)
    higher over- order premiums. Source: GAO?s analysis using the IRCM.

    Table 66: Change in 1999 Wholesale- Level Production Using Different
    Assumptions and a More Restrictive Fluid Milk Trade Assumption Under an
    Expanded NEDC in Conjunction With a Southern Compact Scenario

    Pounds in millions Estimated change in baseline wholesale- level production
    using different

    assumptions Dairy commodity

    No- compact baseline wholesalelevel

    production in 1999

    10- year regional

    supply elasticities

    Higher commodity

    demand elasticities

    Higher overorder premiums Combined

    assumptions a $18.00

    minimum southern

    compact price

    Transportation costs increase

    25 percent

    Fluid milk 55,043 (323) (646) (433) (778) (440) (313) Soft dairy products
    5,984 35 43 45 50 47 29 American cheese 3,539 5 20 7 25 7 6 Italian cheese
    3,175 8 26 11 33 12 10 Other cheese 598 3 4 4 5 4 3 Butter 1, 274 5 2 8 0 7
    3 Frozen dairy products 12,131 62 41 77 44 79 49 Other manufactured products
    4,270 (1) 7 (3) 5 (3) 9 Nonfat dry milk 1,396 40 39 54 45 54 27

    Appendix V: Interregional Impacts of Three Compact Alternatives in 1999

    Page 124 GAO- 01- 866 Impacts of Dairy Compacts

    Note: Numbers in parentheses are negative. a The combined assumptions
    include the previous three assumptions: (1) 10- year long- term regional

    supply elasticities, (2) higher commodity demand elasticities, and (3)
    higher over- order premiums. Source: GAO?s analysis using the IRCM99.

    Table 67: Change in 1999 Wholesale- Level Expenditures Using Different
    Assumptions and a More Restrictive Fluid Milk Trade Assumption Under an
    Expanded NEDC in Conjunction With a Southern Compact Scenario

    Dollars in millions Estimated change in wholesale- level expenditures using
    different assumptions

    Dairy commodity

    No- compact baseline wholesalelevel

    expenditures in 1999

    10- year regional

    supply elasticities

    Higher commodity

    demand elasticities

    Higher overorder premiums Combined

    assumption a $18.00

    minimum southern

    compact price

    Transportation costs increase

    25 percent

    Fluid milk $8,220 $326 $259 $428 $313 $438 $327 Soft dairy products 1,626
    (17) (2) (17) 3 (18) (11) American cheese 4,823 (39) (16) (49) (18) (55)
    (39) Italian cheese 3,028 (25) (12) (31) (14) (33) (27) Other cheese 792 (5)
    (2) (5) (5) (6) (7) Butter 1, 495 (20) 1 (26) 1 (27) (10) Frozen dairy
    products 2,570 (48) (37) (61) (40) (62) (54) Other manufactured products
    1,199 0 0 3 1 2 (5) Nonfat dry milk 1,012 0 0 0 0 0 0

    Note: Numbers in parentheses are negative. a The combined assumptions
    include the previous three assumptions: (1) 10- year long- term regional

    supply elasticities, (2) higher commodity demand elasticities, and (3)
    higher over- order premiums. Source: GAO?s analysis using the IRCM99.

    Tables 68 and 69 summarize the results of our initial estimates and
    sensitivity analyses by presenting the range of estimates of the changes
    from our no- compact scenario that we obtained from our various analyses
    using a more restrictive trade assumption.

    Appendix V: Interregional Impacts of Three Compact Alternatives in 1999

    Page 125 GAO- 01- 866 Impacts of Dairy Compacts

    Table 68: Summary of Estimated Changes in 1999 Farm- Level Indicators Using
    Our Initial and Subsequent Sets of Assumptions and a More Restrictive Fluid
    Milk Trade Assumption Under an Expanded NEDC in Conjunction With a Southern
    Compact Scenario

    IRCM99 region Change in farmlevel

    prices (dollars per hundredweight)

    Change in farm- level production (pounds in millions)

    Change in farmlevel revenue (dollars in millions)

    Northeast $0.26 to .45 127 to 255 $95 to 165 Appalachia 1. 16 to 1.96 300 to
    533 126 to 217 Florida (0.07) to 0 (4) to 0 (2) to 0 Southeast 2. 99 to 4.51
    261 to 534 156 to 242 Mideast (0.28) to (0.21) (101) to (56) (45) to (34)
    Upper Midwest (. 30) to (. 24) (326) to (180) (133) to (103) Central 0. 15
    to 0.33 103 to 186 37 to 71 Southwest (0.16) to (0.05) (46) to (15) (23) to
    (7) Western (0.19) to (0.12) (83) to (34) (26) to (15) Northwest (0.17) to
    (0.10) (51) to (22) (17) to (11) California (0.27) to (0.16) (491) to (168)
    (145) to (70) Arizona (. 09) to .06 (7) to 7 (4) to 3

    Note: Numbers in parentheses are negative. Source: GAO?s analysis using the
    IRCM99.

    Table 69: Summary of Estimated Changes in 1999 Wholesale- Level Indicators
    Using Our Initial and Subsequent Sets of Assumptions and a More Restrictive
    Fluid Milk Trade Assumption Under an Expanded NEDC in Conjunction With a
    Southern Compact Scenario

    Dairy commodity Change in wholesale

    level prices (dollars per hundredweight)

    Change in wholesale- level

    production (pounds in

    millions) Change in

    wholesale- level expenditures (dollars in millions)

    Fluid milk $0.66 to 0. 93 (778) to (313) $259 to 438 Soft dairy products
    (0.52) to (0.18) 29 to 50 (19) to 3 American cheese (1.86) to (1.27) 5 to 25
    (55) to (16) Italian cheese (1.36) to (0.95) 8 to 33 (33) to (12) Other
    cheese (1.65) to (0.75) 3 to 5 (7) to (2) Butter (2.80) to 0.07 0 to 8 (27)
    to 1 Frozen dairy products (0.65) to (0.38) 41 to 79 (62) to (37) Other
    manufactured products (0.18) to 0.08 (3) to 9 (5) to 3

    Appendix V: Interregional Impacts of Three Compact Alternatives in 1999

    Page 126 GAO- 01- 866 Impacts of Dairy Compacts

    Dairy commodity Change in wholesalelevel

    prices (dollars per hundredweight)

    Change in wholesale- level

    production (pounds in

    millions) Change in

    wholesale- level expenditures (dollars in millions)

    Nonfat dry milk (0.05) to 0.01 27 to 54 0 Note: Numbers in parentheses are
    negative. Source: GAO?s analysis using the IRCM99.

    Appendix VI: Interregional Impacts of Three Compact Alternatives in 2000

    Page 127 GAO- 01- 866 Impacts of Dairy Compacts

    We present our estimates of the three compact scenarios? impacts on 2000
    farm- level and wholesale- level indicators when compared with a nocompact
    scenario in the following tables. As with our 1999 analysis, we calibrated
    the Interregional Dairy Sector Competition Model (IRCM) using 2000 data to
    develop a baseline- an IRCM00. However, we did not conduct a series of
    sensitivity analyses for the 2000 estimates for several reasons:

     The data for 2000 were preliminary when we conducted these analyses in
    July 2001.

     The dairy industry was undergoing a period of adjustment following USDA?s
    regulatory changes to its milk marketing order program in January 2000.
    Because the IRCM is a spatial equilibrium model, and the dairy markets
    appeared to be in disequilibrium in 2000, we questioned whether 2000 could
    be used to accurately estimate the impacts of dairy compacts.

     The sensitivity analyses performed for the 1999 estimates indicated that
    the IRCM99 model was robust- that is, the estimates that we obtained when we
    used different assumptions were similar to the initial estimates that we
    obtained using our initial set of assumptions. As a result, we did not think
    that another series of sensitivity analyses would provide much additional
    information.

    The following tables provide baseline estimates of the dairy sector
    indicators under our no- compact scenario and the estimates of the impacts
    of the three different compact alternatives. As with our 1999 estimates, we
    present estimates under both less restrictive and more restrictive fluid
    trade assumptions for the expanded NEDC in conjunction with a southern
    compact scenario. Our baseline estimates for 2000 also include the effects
    that USDA?s milk marketing order regulatory reforms had on farm- level and
    wholesale- level dairy sector indicators. As a result, the baseline
    estimates for 2000 are not comparable to those for 1999.

    We used the same set of assumptions to develop our 2000 estimates as we did
    to develop our 1999 baseline and initial estimates:

     No more than 40 percent of any one region?s milk may be shipped to another
    region without being subject to the receiving region?s pricing requirements.
    This assumption is used to simulate USDA milk marketing order regulations
    regarding minimum pricing requirements for milk shipped between marketing
    orders. This threshold was chosen as a proxy for the requirement that an
    adjustment be made if a plurality of an order's packaged milk was sold in
    another region.

     Supply elasticities are medium- term (that is, 5 years). Appendix VI:
    Interregional Impacts of Three

    Compact Alternatives in 2000

    Appendix VI: Interregional Impacts of Three Compact Alternatives in 2000

    Page 128 GAO- 01- 866 Impacts of Dairy Compacts

     Demand elasticities are medium- term.

     The Class I minimum price in the compact region, or the compact price, is
    $16.94 per hundredweight of milk.

     Market- driven over- order premiums are zero in the compact region. This
    initial assumption represents a lower bound, and assumes that all
    marketdriven over- order premiums in NEDC states are replaced by Compact
    over- order producer price payments.

     A handler must pay the compact over- order producer price into the compact
    pool for milk shipped into the compact region in order to receive the
    compact price.

    Using these assumptions, tables 70 through 75 compare our no- compact
    baseline scenario with our estimated changes in farm- level and
    wholesalelevel indicators across different compact scenarios for 2000.

    Table 70: Range of Estimated Impacts on 2000 Farm- Level Prices Across
    Different Compact Scenarios Dollars per hundredweight

    Farm- level prices IRCM00 region No- compact

    baseline in 2000 Change to baseline with the NEDC

    Change to baseline with an expanded NEDC

    Change to baseline with an expanded NEDC

    and a southern compact

    Change to baseline with an expanded NEDC, a southern compact, and 100- mile
    import constraint

    Northeast $13.39 $0.12 $0.47 $0.41 $0.36 Appalachia 14.35 (0.01) (0.04) 0.46
    0.42 Florida 15.64 (0.02) (0.04) 0.03 0.03 Southeast 13.52 (0.02) (0.04)
    1.35 2.25 Mideast 12.84 (0.01) (0.04) (0.12) (0.14) Upper Midwest 11.82
    (0.01) (0.04) (0.04) (0.43) Central 12.14 (0.01) (0.03) 0.08 0.77 Southwest
    12.95 0 (0.03) (0.08) (0.10) Western 10.82 0 0. 01 (0.03) (0.17) Northwest
    12.83 0 (0.03) (0.09) (0.12) California 11.05 (0.01) (0.05) (0.10) (0.10)
    Arizona 11.93 0 (0.03) (0.09) (0.10)

    Note: Numbers in parentheses are negative. Source: GAO?s analysis using the
    IRCM00.

    Appendix VI: Interregional Impacts of Three Compact Alternatives in 2000

    Page 129 GAO- 01- 866 Impacts of Dairy Compacts

    Table 71: Range of Estimated Impacts on 2000 Farm- Level Production Across
    Different Compact Scenarios Pounds in millions

    Farm- level production IRCM00 region No- compact

    baseline in 2000 Change to baseline with the NEDC

    Change to baseline with an expanded NEDC

    Change to baseline with an expanded NEDC

    and a southern compact

    Change to baseline with an expanded NEDC, a southern compact, and a 100-
    mile import constraint

    Northeast 29,165 66 262 231 203 Appalachia 6, 493 (5) (12) 132 122 Florida
    2, 461 0 (2) 2 2 Southeast 3, 505 (1) (4) 139 232 Mideast 12,704 (5) (13)
    (39) (45) Upper Midwest 33,104 (15) (34) (41) (375) Central 15,753 (5) (19)
    43 420 Southwest 10,920 (3) (11) (29) (33) Western 9, 709 (3) 1 (14) (67)
    Northwest 7, 233 (1) (8) (23) (30) California 32,093 (7) (56) (129) (127)
    Arizona 3, 006 0 (3) (9) (9)

    Note: Numbers in parentheses are negative. Source: GAO?s analysis using the
    IRCM00.

    Table 72: Range of Estimated Impacts on 2000 Farm- Level Revenue Across
    Different Compact Scenarios Dollars in millions

    Farm- level revenue IRCM00 region No- compact

    baseline in 2000 Change to baseline with the NEDC

    Change to baseline with an expanded NEDC

    Change to baseline with an expanded NEDC

    and a southern compact

    Change to baseline with an expanded NEDC, a southern compact, and a 100-
    mile import constraint

    Northeast $3,905 $44 $173 $152 $133 Appalachia 931 (1) (4) 50 46 Florida 384
    0 (1) 2 2 Southeast 474 (1) (2) 68 115 Mideast 1, 631 (2) (7) (20) (24)
    Upper Midwest 3, 913 (5) (17) (18) (185) Central 1, 912 (2) (7) 18 176
    Southwest 1, 414 0 (4) (12) (15) Western 1, 050 0 1 (4) (23) Northwest 928 0
    (3) (9) (12) California 3, 546 (4) (22) (46) (46) Arizona 359 0 (1) (4) (4)

    Note: Numbers in parentheses are negative.

    Appendix VI: Interregional Impacts of Three Compact Alternatives in 2000

    Page 130 GAO- 01- 866 Impacts of Dairy Compacts

    Source: GAO?s analysis using the IRCM00.

    Table 73: Range of Estimated Impacts on 2000 National Average Wholesale-
    Level Prices Across Different Compact Scenarios Dollars per hundredweight

    Wholesale- level prices Dairy commodity No- compact

    baseline in 2000 Change to

    baseline with the NEDC

    Change to baseline with

    an expanded NEDC

    Change to baseline with

    an expanded NEDC and a

    southern compact

    Change to baseline with an expanded NEDC, a southern compact, and a 100-
    mile import constraint

    Fluid milk $13.55 $0.07 $0.26 $0.47 $0.58 Soft dairy products 27.44 (0.03)
    (0.14) (0.29) (0.28) American cheese 140.13 (0.08) (0.27) (0.88) (2.20)
    Italian cheese 99.58 (0.08) (0.23) (0.70) (1.71) Other cheese 126.23 (0.09)
    (0.28) (0.84) (1.77) Butter 123.04 (0.17) (0.99) (2.22) (1.51) Frozen dairy
    products 21.61 (0.03) (0.12) (0.24) (0.17) Other manufactured products 32.49
    (0.04) 0.01 0.03 0.66 Nonfat dry milk 102.1 (0.02) (0.02) (0.17) (0.34)

    Note: Numbers in parentheses are negative. Source: GAO?s analysis using the
    IRCM00.

    Table 74: Range of Estimated Impacts on 2000 Wholesale- Level Production
    Across Different Compact Scenarios Pounds in millions

    Wholesale- level production Dairy commodity No- compact

    baseline in 2000 Change to

    baseline with the NEDC

    Change to baseline with

    an expanded NEDC

    Change to baseline with

    an expanded NEDC and a

    southern compact

    Change to baseline with an expanded NEDC, a southern compact, and a 100-
    mile import constraint

    Fluid milk 55,549 (37) (155) (313) (371) Soft dairy products 6,134 2 13 31
    29 American cheese 3,610 0 1 3 8 Italian cheese 3,300 0 2 6 15 Other cheese
    613 0 1 3 7 Butter 1, 251 0 2 5 3 Frozen dairy products 12,015 4 21 43 32
    Other manufactured products 4, 115 2 1 1 (23) Nonfat dry milk 1,507 3 17 36
    41

    Note: Numbers in parentheses are negative.

    Appendix VI: Interregional Impacts of Three Compact Alternatives in 2000

    Page 131 GAO- 01- 866 Impacts of Dairy Compacts

    Source: GAO?s analysis using the IRCM00.

    Table 75: Range of Estimated Impacts on 2000 Wholesale- Level Expenditures
    Across Different Compact Scenarios Dollars in millions

    Wholesale- level expenditures Dairy commodity No- compact

    baseline in 2000 Change to

    baseline with the NEDC

    Change to baseline with an expanded NEDC

    Change to baseline

    with an expanded NEDC and a southern

    compact Change to baseline

    with an expanded NEDC, a southern compact, and a 100- mile import constraint

    Fluid milk $ 7,467 $34 $122 $216 $268 Soft dairy products 1,672 (1) (5) (9)
    (9) American cheese 4,962 (3) (8) (26) (67) Italian cheese 3,315 (3) (7)
    (19) (44) Other cheese 995 (1) (1) (4) (7) Butter 1,502 (2) (10 (21 (15)
    Frozen dairy products 2,574 (2) (9) (19) (13) Other manufactured products
    1,347 (1) 1 2 20 Nonfat dry milk 721 0 0 0 1

    Note: Numbers in parentheses are negative. Source: GAO?s analysis using the
    IRCM00.

    Appendix VII: Studies of the Interregional Economic Impacts of Various Dairy
    Compact Alternatives

    Page 132 GAO- 01- 866 Impacts of Dairy Compacts

    We reviewed and analyzed five studies that provide estimates of the
    interregional economic impacts of various compact alternatives. These
    studies used a variety of economic models, assumptions about model
    parameters such as demand elasticities, and data sets. The compact
    alternatives that they examined also varied. Despite these differences, the
    results of these studies on the impacts of relatively small compacts, such
    as the NEDC, on dairy farmers in noncompact regions were generally
    comparable to ours. In addition, these studies agree with ours that, as
    compacts expand in size, the economic impacts on dairy farmers in noncompact
    regions increase.

    A study issued in 1999 by USDA estimated the interregional impacts that the
    NEDC would have on noncompact regions. 1 USDA used a model derived, in part,
    from a national dairy sector model developed by USDA?s Economic Research
    Service and dairy sector data from 1999 to forecast the impact of the NEDC
    from 2000 through 2005. 2 The parameters used in the analysis were not
    directly estimated, but instead, were drawn from the Economic Research
    Service model. The Service?s national dairy sector model is an annual, time-
    series dairy model that is estimated as a system of equations using a three-
    stage, least squares regression analysis. USDA modified the Service?s model
    to allow for a multiregional analysis. The modified model used to estimate
    the interregional impacts of the NEDC consisted of five sections: (1) milk
    supply, (2) dairy product supply, (3) dairy product demand, (4) market
    equilibrium conditions, and (5) regional market utilization and pricing. 3
    The major features of USDA?s analysis and model included the following:

     The model used an iterative process to solve a system of simultaneous
    dairy demand and supply equations.

     The model used 36 regions, including the former 32 federal milk marketing
    orders; California; and three other nonfederally regulated regions.

     The model did not provide for milk movements between regions. 1 USDA
    Agricultural Marketing Service analysis provided to the Subcommittee on
    Livestock and Horticulture, Committee on Agriculture, U. S. House of
    Representatives, June 14, 1999. 2 The NEDC comprises Connecticut, Maine,
    Massachusetts, New Hampshire, Rhode Island, and Vermont. 3 For further
    discussion of the USDA regional dairy model, see Federal Milk Marketing
    Order Reform: New England, Final Decision, Regulatory Impact Analysis,
    USDA?s Agricultural Marketing Service, Mar. 1999. Appendix VII: Studies of
    the Interregional

    Economic Impacts of Various Dairy Compact Alternatives

    USDA (1999)- A Study Using an Annual, Time- Series Dairy Sector Model

    Appendix VII: Studies of the Interregional Economic Impacts of Various Dairy
    Compact Alternatives

    Page 133 GAO- 01- 866 Impacts of Dairy Compacts

     USDA adjusted parameters developed for the Economic Research Service model
    to reflect regional differences in the dairy industry.

     USDA used 1999 data to project the NEDC?s impacts in each of 6 years- 2000
    through 2005- and the average annual impact over the same period.

    USDA used two different scenarios to estimate the NEDC?s impacts: (1) the
    NEDC price of $16. 94 per hundredweight of milk would remain constant during
    the years 2000 through 2005 and (2) the NEDC price of $16.94 per
    hundredweight would remain in effect only in 2000, after which time the NEDC
    price would change to the USDA federal milk marketing order Class I price
    for Boston plus $1.30 per hundredweight.

    Table 76 summarizes USDA?s estimates of the 6- year average annual impact of
    the NEDC in (1) noncompact regions of the country affected the most by the
    NEDC, (2) all 32 marketing orders combined, (3) California, and (4) the
    country as a whole. These estimated impacts are expressed as changes to
    average production levels, farm- level prices, and farm- level revenue from
    levels that would be expected in the absence of the NEDC.

    Table 76: USDA Estimates of the NEDC?s Interregional Impacts on Average
    Annual Production Levels and Farm- Level Prices and Revenue, 2000- 05

    Amount without the

    NEDC Change due to the NEDC using a

    $16.94 over- order compact price in 2000- 05

    Change due to the NEDC using a $16.94 over- order compact price

    in 2000 and a Boston Class I price plus $1. 30 in 2001- 05 Region Baseline
    Amount Percentage Amount Percentage New York- New Jersey

    Production (pounds in millions) 12,028 (1.6) (0.01) (2.4) (0.02) Farm- level
    price (dollars per hundredweight) $15.15 0 0 (0.01) (0.07) Farm- level
    revenue (dollars in millions) $1,822 (0.5) (0.03) (1.6) (0.09)

    Southeast

    Production (pounds in millions) 5, 690 (0.5) (0.01) (0.8) (0.01) Farm- level
    price (dollars per hundredweight) $16.56 0 0 (0.01) (0.06) Farm- level
    revenue (dollars in millions) $943 0 0 (0.4) (0.04)

    Southern Michigan

    Production (pounds in millions) 4, 606 (0.4) (0.01) (0.7) (0.02) Farm- level
    price (dollars per hundredweight) $15.24 0 0 (0.01) (0.07) Farm- level
    revenue (dollars in millions) $703 0 0 (0.4) (0.06)

    Chicago

    Production (pounds in millions) 14,777 (1.6) (0.07) (2.1) (0.01)

    Appendix VII: Studies of the Interregional Economic Impacts of Various Dairy
    Compact Alternatives

    Page 134 GAO- 01- 866 Impacts of Dairy Compacts

    Amount without the

    NEDC Change due to the NEDC using a

    $16.94 over- order compact price in 2000- 05

    Change due to the NEDC using a $16.94 over- order compact price

    in 2000 and a Boston Class I price plus $1. 30 in 2001- 05 Region Baseline
    Amount Percentage Amount Percentage

    Farm- level price (dollars per hundredweight) $14.60 (0.01) (0.01) (0.07)
    (0.07) Farm- level revenue (dollars in millions) $2,154 (1.3) (0.06) (1.7)
    (0.08)

    Southwest Plains

    Production (pounds in millions) 3, 059 (0.3) (0.01) (0.4) (0.01) Farm- level
    price (dollars per hundredweight) $15.08 0 0 (0.01) (0.07) Farm- level
    revenue (dollars in millions) $461 (0.1) (0.02) (0.3) (0.07)

    Texas

    Production (pounds in millions) 6, 353 (0.6) (0.01) (0.9) (0.01) Farm- level
    price (dollars per hundredweight) $15.16 0 0 (0.01) (0.07) Farm- level
    revenue (dollars in millions) $963 (0.1) (0.01) (0.6) (0.06)

    Great Basin

    Production (pounds in millions) 2, 635 (0.2) (0.01) (0.3) (0.01) Farm- level
    price (dollars per hundredweight) $14.25 (0.01) (0.07) (0.01) (0.07) Farm-
    level revenue (dollars in millions) $377 (0.2) (0.05) (0.3) (0.08)

    Pacific Northwest

    Production (pounds in millions) 7, 619 (0.5) (0.01) (0.8) (0.01) Farm- level
    price (dollars per hundredweight) $14.37 0 0 (0.1) (0.07) Farm- level
    revenue (dollars in millions) $1,098 1 (0.01) (0.6) (0.05)

    All federal order markets

    Production (pounds in millions) 112,739 20.5 0. 02 30.7 0. 03 Farm- level
    price (dollars per hundredweight) $15.04 0.01 0.07 0.01 0.07 Farm- level
    revenue (dollars in millions) $16,944 12 0. 07 19.5 0. 12

    State of California

    Production (pounds in millions) 32,666 (2.2) (0.01) (3.4) (0.01) Farm- level
    price (dollars per hundredweight) $14.25 0 0 (0.01) (0.07) Farm- level
    revenue (dollars in millions) $4,667 (0.9) (0.02) (3.3) (0.07)

    United States

    Production (pounds in millions) 165,157 16.3 0. 01 24.8 0. 02 Farm- level
    price (dollars per hundredweight) $14.73 0 0 0.01 0.07 Farm- level revenue
    (dollars in millions) $24,369 8. 6 0.04 13.2 0. 05

    Note: Numbers in parentheses are negative. Source: USDA study.

    Appendix VII: Studies of the Interregional Economic Impacts of Various Dairy
    Compact Alternatives

    Page 135 GAO- 01- 866 Impacts of Dairy Compacts

    USDA also reported on the interregional impacts in each of its thenexisting
    32 milk marketing orders and in all noncompact regions combined. For
    example, under the first scenario, for which it used a $16.94 NEDC price for
    each of the 6 years, USDA estimated that the average allmilk price in all
    noncompact regions would decline by less than 1 cent per hundredweight
    during the years 2000 through 2005. 4 With regard to its individual
    marketing orders, such as the Upper Midwest Marketing Order, USDA estimated
    that the all- milk price would decline by 1 cent per hundredweight in 2000,
    2001, 2004, and 2005.

    A study issued by Cox, Cropp, and Hughes in 1999 estimated the impacts of an
    expanded NEDC and an expanded NEDC in conjunction with a southern compact on
    noncompact regions. 5 Cox et al. used a spatial market equilibrium model and
    dairy sector data for 1997 to estimate the potential impacts of compacts in
    that year. For purposes of the analysis, the expanded NEDC included the six
    New England states, New Jersey, New York, Maryland, and Pennsylvania. The
    southern compact consisted of 10 states. 6

    The spatial market equilibrium model also incorporated two additional
    modeling features: It simulated the processing of dairy commodities in a
    vertical marketing sector and used price wedges, or mark- ups, for each
    dairy commodity to simulate USDA?s classified pricing system and compacts. 7
    To generate a competitive spatial market equilibrium, the model maximized
    producer and consumer surpluses in each region, minus transportation costs,
    for the different commodities, subject to certain trade- flow and other
    constraints. In addition, the model allowed for

    4 The all- milk price is the weighted average farm price of milk that meets
    the more stringent federal standards for milk to be used as fluid milk
    (although some is used for manufacturing purposes), and milk that meets less
    stringent federal standards and can only be used for manufactured dairy
    products.

    5 Tom Cox, Bob Cropp, and Will Hughes, ?Interregional Analysis of Interstate
    Dairy Compacts,? Department of Agricultural and Applied Economics, College
    of Agricultural and Life Sciences, University of Wisconsin- Madison,
    Marketing and Policy Briefing Paper No. 69, July 1999.

    6 The southern compact included Alabama, Arkansas, Florida, Georgia, Kansas,
    Kentucky, Louisiana, Mississippi, Missouri, and North Carolina. 7 The
    vertical market portion of the model transformed raw milk into dairy
    products consistent with how milk components (protein, fat, and
    carbohydrates) are allocated and priced. Cox et al. (1999)- A

    Study Using a Spatial Market Equilibrium Model

    Appendix VII: Studies of the Interregional Economic Impacts of Various Dairy
    Compact Alternatives

    Page 136 GAO- 01- 866 Impacts of Dairy Compacts

    classified pricing so that raw milk used for fluid milk attracted a higher
    price than raw milk used for manufactured dairy commodities. Using an
    iterative technique, the model solved for regional farm- level milk prices
    and production, wholesale- level dairy prices and production, and
    interregional trade flows. This model- the IRCM97- is an earlier version of
    the model that we used for our analysis of interregional impacts.

    The model assumed intermediate- run (3- to 5- year) supply and demand
    functions for 12 geographic regions of the country (the current 11 USDA milk
    marketing orders and California), representing different milk and dairy
    product supply and demand regions. In addition, Cox et al. used component
    yield data from other researchers. 8 Features of their analysis follow:

     The model was an interregional, spatial equilibrium model.

     The model prohibited fluid milk trade between compact and noncompact
    regions.

     Twelve demand relationships for dairy products were developed for the 12
    regions in the model; these demand relationships were based on consumer
    demand for nine distinct dairy products using national estimates of per
    capita wholesale demand.

     To link prices among the 12 regions, the model used 1995 transportation
    cost estimates provided by researchers at Cornell University.

     The model used 1997 price and production data obtained from USDA for
    developing a 1997 base year.

     The model added a price wedge of $2 per hundredweight to the 1997 Class I
    differentials in each compact region.

     All scenarios assumed no Commodity Credit Corporation milk price supports
    because these were set to expire in 2000.

    Under the model assumptions used, the researchers estimated the impacts of
    dairy compacts on farm- level prices and revenue, and commodity prices and
    expenditures. Tables 77 and 78 provide the study?s results.

    8 R. Selinsky, T. L. Cox, and E. V. Jesse, ?Estimation of U. S. Dairy
    Product Component Yields,? College of Agricultural and Life Sciences,
    University of Wisconsin- Madison, Staff Paper No. 355, Sept. 1992.

    Appendix VII: Studies of the Interregional Economic Impacts of Various Dairy
    Compact Alternatives

    Page 137 GAO- 01- 866 Impacts of Dairy Compacts

    Table 77: Cox et al. Estimates of the Interregional Impacts of Compacts on
    Farm- Level Prices and Revenue in 1997 Expanded NEDC Expanded NEDC in
    conjunction with a southern

    compact IRCM97 region

    Change in farm- level price (dollars per

    hundredweight) Change in farm- level

    revenue (dollars in millions)

    Change in farm- level price (dollars per

    hundredweight) Change in farm- level

    revenue (dollars in millions)

    Northeast $0.66 $237 $0.53 $190 Appalachia (0.09) (10) 0.86 99 Florida
    (0.08) (3) 1. 48 53 Southeast (0.08) (4) 1. 32 74 Mideast (0.10) (16) (0.26)
    (42) Upper Midwest (0.10) (42) (0.22) (92) Central (0.07) (15) (0.24) (52)
    Southwest (0.05) (7) 0. 58 79 Western (0.08) (8) (0.21) (22) Northwest
    (0.08) (8) (0.14) (14) California (0.08) (31) (0.28) (110) Arizona (0.05)
    (2) (0.22) (8) United States 0.06 91 0.09 156

    Note: Numbers in parentheses are negative. Source: Cox et al., 1999.

    Table 78: Cox et al. Estimates of the Interregional Impacts of Compacts on
    Commodity Prices and Expenditures in 1997 Expanded NEDC Expanded NEDC in
    conjunction with a southern

    compact Dairy commodity

    Change in commodity price (dollars per

    hundredweight) Change in commodity

    expenditures (dollars in millions)

    Change in commodity price (dollars per

    hundredweight) Change in commodity

    expenditures (dollars in millions)

    Fluid milk $0.32 $148 $0.70 $326 Soft dairy products (0.10) (3) (0.30) (8)
    American cheese (0.70) (19) (1.74) (48) Italian cheese (0.70) (15) (1.14)
    (32) Other cheese (0.52) (4) (0.72) (5) Butter 0. 67 6 0.51 7 Frozen dairy
    products (0.06) (5) (0.12) (17) Other manufactured products (0.30) (9)
    (0.52) (28) Nonfat dry milk (1.15) (6) (1.76) (21)

    Note: Numbers in parentheses are negative. Source: Cox et al., 1999.

    Appendix VII: Studies of the Interregional Economic Impacts of Various Dairy
    Compact Alternatives

    Page 138 GAO- 01- 866 Impacts of Dairy Compacts

    In 2000, Kenneth Bailey, an agricultural economist at Pennsylvania State
    University, issued a study that estimated the interregional economic impacts
    of a large compact on noncompact states. 9 Bailey used a static equilibrium
    model, similar in structure to the constant elasticity functional form
    policy models developed by Gardner. 10 , 11 In his 2000 study, Bailey relied
    on 1997 data to forecast the impact of compacts in 2000. The compact
    simulation included those states in USDA?s Appalachian, Florida, Northeast,
    and Southeast milk marketing orders. 12 The model was multiregional to
    reflect milk supply, allocation, and class prices in federal milk marketing
    orders. However, overall supply and demand for dairy products were modeled
    at the national level, as opposed to on a marketing order basis. The model
    also relied on medium- run supply and demand elasticities as reported in
    agricultural economics literature. The data sources for the model included
    USDA?s Agricultural Marketing Service, federal milk marketing order
    administrators, and the California Department of Agriculture.

    The model incorporated several significant aspects of USDA?s milk marketing
    order reform that were adopted in January 2000, including component pricing.
    13 As specified in milk marketing order reform, the model based the Class I
    price on the higher of the Class III or IV price. The model posited 13
    regions: 11 federal marketing orders, California, and an

    9 Kenneth W. Bailey, ?Evaluating the Economic Impacts of Regional Milk
    Pricing Authorities: The Case of Dairy Compacts,? Agricultural and Resource
    Economics Review,

    Vol. 29, No. 2 (Oct. 2000), pp. 208- 19. 10 A constant elasticity functional
    form policy model is one in which the elasticity of supply or demand is
    assumed to be constant over the relevant range of the function. 11 Bruce L.
    Gardner, The Economics of Agricultural Policies (New York, N. Y.: MacMillan
    Publishing Company, 1987). 12 In Bailey?s model, the northern dairy compact
    consisted of the following states or portions thereof: Connecticut,
    Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New
    York, Pennsylvania, Rhode Island, and Vermont; and the District of Columbia.
    The Mid- Atlantic compact consisted of the following states or portions
    thereof: Georgia, Indiana, Kentucky, North Carolina, South Carolina,
    Tennessee, Virginia, and West Virginia. The southern dairy compact consisted
    of the following states or portions thereof: Alabama, Florida, Georgia,
    Kentucky, Louisiana, Mississippi, Missouri, and Tennessee.

    13 Even though the model incorporated changes included in USDA?s January
    2000 milk marketing order reform, the model used ?Option 1B? Class I fluid
    milk pricing differentials that were initially proposed by USDA, as opposed
    to ?Option 1A? milk pricing differentials, which were adopted in the Final
    Rule. The use of Option 1B as opposed to Option 1A resulted in different
    prices for the various classes of milk. Bailey (2000)- A Study

    Using a Regional Economic Simulation Model

    Appendix VII: Studies of the Interregional Economic Impacts of Various Dairy
    Compact Alternatives

    Page 139 GAO- 01- 866 Impacts of Dairy Compacts

    ?unregulated? region representing all areas of the country that did not fall
    under federal marketing orders or California?s milk pricing plan.

    Bailey analyzed the impacts of a large multiregional dairy compact
    accounting for about 27 percent of all milk marketed in the model. This
    compact scenario was evaluated relative to a no- compact baseline. Bailey
    also conducted additional analyses by varying retail fluid milk demand
    elasticities (from -0.32 to -0.23) and by using a fixed- percentage farm-
    toretail milk markup instead of a fixed- dollar markup. The major features
    of Bailey?s analysis and model follow:

     The model did not allow for trade between regions.

     The model estimated supply, price, and demand for fluid milk and three
    dairy commodities: butter, cheese, and nonfat dry milk.

     Both a $1 and a $2 fixed amount per hundredweight were used to model an
    effective compact over- order producer price payment.

     The assumption about the amount of the market- driven over- order premium
    was varied to reflect either the full amount of the market- driven over-
    order premium as that in the no- compact baseline or half the amount in the
    no- compact baseline.

     The model estimated demand for fluid milk at the retail level and demand
    for manufactured dairy products at the wholesale level. In addition, the
    model used various farm- to- retail markup assumptions.

    Table 79 summarizes Bailey?s estimates of the multiregion compact on farm-
    level milk prices, revenue, and production in 2000.

    Table 79: Bailey?s Estimates of the Interregional Impacts of a Multiregional
    Compact on Farm- Level Prices, Revenue, and Production in 2000

    Impact in all noncompact regions Farm- level milk price (dollars per
    hundredweight) Farm- level revenue

    (dollars in millions) Milk production (pounds in millions)

    Modeling assumptions Baseline and

    change to baseline Percentage

    change Baseline and

    change to baseline Percentage

    change Baseline and

    change to baseline Percentage

    change

    No- compact baseline $12.94 $15,402.40 $119,042.20 Compact using a $1
    compact producer price payment; full over- order premium (0.07) (0.06)
    (114.3) (0.7) (212.3) (0.2)

    Compact using a $1 compact producer price payment; one- half over- order
    premium (0.04) (0.03) (56.4) (0.4) (106.2) (0.1)

    Appendix VII: Studies of the Interregional Economic Impacts of Various Dairy
    Compact Alternatives

    Page 140 GAO- 01- 866 Impacts of Dairy Compacts

    Impact in all noncompact regions Farm- level milk price (dollars per
    hundredweight) Farm- level revenue

    (dollars in millions) Milk production (pounds in millions)

    Modeling assumptions Baseline and

    change to baseline Percentage

    change Baseline and

    change to baseline Percentage

    change Baseline and

    change to baseline Percentage

    change

    Compact using a $2 compact producer price payment; full over- order premium
    (0.14) (1.1) (217.8) (1.4) (406.6) (0.3)

    Compact using a $2 compact producer price payment; one- half over- order
    premium (0.10) (0.8) (163.0) (1.1) (305.6) (0.3)

    Note: Numbers in parentheses are negative. Source: Bailey, Oct. 2000.

    In addition to estimating the multiregional compact?s impact on farm- level
    milk prices, revenue, and production, Bailey also estimated changes within
    the compact region, and the impact that these changes would have on all
    noncompact regions. Bailey estimated that milk production within the compact
    region would increase by 0.4 to 1.4 percent, causing lower wholesale prices
    for butter (by 0.3 to 1.0 percent), cheese (by 0.5 to 1.7 percent), and
    nonfat dry milk (by 0.3 to 0.8 percent) in all federal milk marketing
    orders.

    A study conducted in 2001 by Balagtas and Sumner estimated the interregional
    effects of the NEDC and an expanded NEDC on noncompact regions. 14 Balagtas
    and Sumner used an annual, national- level supply and demand simulation
    model to estimate the effects of the Compact on the U. S. dairy sector,
    based on 1999 data. 15 For purposes of this analysis, the expanded NEDC
    included the NEDC states and New Jersey and New York.

    The model simulated class and blend prices that would be announced by USDA?s
    milk marketing orders in the absence of any compact. The model's parameters
    were established by using milk marketing order and Compact

    14 Joseph V. Balagtas and Daniel A. Sumner, ?The Effect of the Northeast
    Dairy Compact on Producers and Consumers, with Implications of Compact
    Contagion,? Department of Agricultural and Resource Economics, University of
    California, Davis, 2001.

    15 The model built on a price discrimination framework developed by Ippolito
    and Masson, which assumed linear supply and demand schedules for milk across
    regions. See R. A. Ippolito and R. T. Masson, ?The Social Cost of Government
    Regulation of Milk,? Journal of Law and Economics, Vol. 21 (Apr. 1978), pp.
    33- 65. Balagtas and Sumner

    (2001)- A Study Using a Price Discrimination Framework

    Appendix VII: Studies of the Interregional Economic Impacts of Various Dairy
    Compact Alternatives

    Page 141 GAO- 01- 866 Impacts of Dairy Compacts

    commission data and intermediate- run (3- to 6- year) supply and demand
    elasticities. The model also used national- level, as opposed to
    regionallevel, supply elasticities.

    The major features of the model follow:

     The model included two aggregate milk categories- fluid milk and
    manufactured dairy products- as opposed to four milk classes.

     The model estimated the interregional impacts of the two different
    compacts in four noncompact regions: California, Wisconsin, Minnesota, and a
    combined rest of the United States that excluded the NEDC states.

     The model calculated the elasticity of demand for manufactured dairy
    products in the New England region.

    Table 80 summarizes the results of Balagtas and Sumner?s estimates of the
    interregional impacts of the NEDC and an expanded NEDC on farm- level milk
    prices and production in noncompact regions.

    Table 80: Balagtas and Sumner?s Estimates of the Interregional Impacts of
    the NEDC and an Expanded NEDC on Farm- Level Prices and Production in 1999

    Noncompact region Baseline

    amount with no NEDC

    Change to baseline due

    to the NEDC Percentage

    change due to the NEDC

    Change to baseline due to an

    expanded NEDC Percentage

    change due to an expanded NEDC California

    Farm- level price (dollars per hundredweight) $13.47 $( 0.02) (0.16) $(
    0.05) (0.40) Production (pounds in million hundredweight) 304.57 (0.49)
    (0.16) (1.16) (0.40)

    Wisconsin

    Farm- level price (dollars per hundredweight) 13.88 (0.02) (0.16) (0.05)
    (0.37) Production (pounds in million hundredweight) 228.34 (0.35) (0.16)
    (0.84) (0.37)

    Minnesota

    Farm- level price (dollars per hundredweight) 14.01 (0.02) (0.15) (0.05)
    (0.36) Production (pounds in million hundredweight) 93.87 (0.14) (0.15)
    (0.34) (0.36)

    All noncompact regions

    Farm- level price (dollars per hundredweight) 14.36 (0.02) (0.15) (0.05)
    (0.35) Production (pounds in million hundredweight) 1,562.63 (2.34) (0.15)
    (5.37) (0.34)

    Note: Numbers in parentheses are negative. Source: Balagtas and Sumner,
    2001.

    Appendix VII: Studies of the Interregional Economic Impacts of Various Dairy
    Compact Alternatives

    Page 142 GAO- 01- 866 Impacts of Dairy Compacts

    Balagtas and Sumner also estimated the interregional impacts on the price of
    milk used for manufactured dairy commodities and farm- level revenue. They
    estimated that in 1999, the price of milk used for manufactured dairy
    commodities would fall in noncompact regions by about 2 cents per
    hundredweight, which would have translated into producer surplus losses for
    noncompact producers of about $34 million in 1999.

    A study issued by Allen Rosenfeld in 2001 estimated the interregional
    impacts of the NEDC and a larger compact on noncompact states. 16 Rosenfeld
    used a classified pricing model and dairy sector data from 2000 to predict
    potential impacts in that year. For purposes of the analysis, the larger
    compact included a total of 29 states located in the Northeast and the
    South. 17 These 29 states accounted for about 62 percent of Class I milk
    consumption in 2000.

    The model used supply and demand analysis within the context of traditional
    modeling of classified pricing. Rosenfeld used supply and demand
    elasticities from the dairy economics literature to estimate the increase in
    milk production and the decrease in milk consumption in the compact regions
    caused by a higher compact minimum price for milk used for and sold as fluid
    milk. Rosenfeld then used these elasticities to estimate the decrease in the
    price of milk used for manufacturing purposes, which he then used to
    estimate the decline in dairy farm revenue in noncompact states.

    The major features of Rosenfeld?s analysis and model follow:

     The model used a compact Class I over- order premium for both compact
    scenarios of 18.5 cents per gallon of milk.

     The model used a supply elasticity of 0.227 to estimate the impact of a
    higher blend price within the compact region on milk production. The model
    subsequently used a higher elasticity (0.35) in a sensitivity analysis.

    16 Allen Rosenfeld, ?The Impacts of the Proposed Expansion of Dairy Compacts
    on Dairy Farm Revenue in Noncompact States,? M& R Strategic Services,
    Washington, D. C., May 2001.

    17 The expanded scenario included the six NEDC states in conjunction with
    Alabama, Arkansas, Delaware, Florida, Georgia, Kansas, Kentucky, Louisiana,
    Maryland, Mississippi, Missouri, Nebraska, New Jersey, New York, North
    Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas,
    Virginia, and West Virginia. Rosenfeld (2001)- A

    Study Using an Economic Model of Classified Pricing

    Appendix VII: Studies of the Interregional Economic Impacts of Various Dairy
    Compact Alternatives

    Page 143 GAO- 01- 866 Impacts of Dairy Compacts

     The model used a wholesale demand elasticity of -0.144 for Class I milk
    and a wholesale demand elasticity of -0.261 for all other classes of milk to
    estimate the impact of price changes on consumption.

     The model did not allow for decreased production by farmers in noncompact
    states in response to lower prices.

     The study did not discuss interregional trade. Table 81 summarizes
    Rosenfeld?s estimates of the interregional impacts of the NEDC and a larger
    compact on dairy farm revenue in noncompact states for 2000.

    Table 81: Rosenfeld?s Estimates of the Interregional Impacts of Compacts on
    FarmLevel Revenue in 2000

    Dollars in thousands Reduction in farm- level revenue under different
    compact

    scenarios Noncompact state NEDC scenario Expanded 29- state

    compact scenario

    Arizona $735 $9,510 California 9, 170 118,610 Colorado 475 6,145 Idaho 1,920
    24,805 Illinois 520 6,690 Indiana 445 5,730 Iowa 970 12,565 Michigan 1,070
    13,825 Minnesota 2, 785 36,020 Montana 55 705 Nevada 120 1,565 New Mexico
    1,010 13,075 North Dakota 125 1,615 Oregon 415 5,375 South Dakota 440 5,710
    Utah 450 5,795 Washington 1,370 17,735 Wisconsin 6, 825 88,250 Wyoming 20
    230

    Total $28,920 $373,645

    Source: Rosenfeld, 2001.

    Rosenfeld noted that his use of 2000 data may have overstated the estimates
    of the impact of the NEDC and an expanded compact because, in 2000, the
    difference between the Class 1 milk marketing order price and the NEDC price
    of $16.94 was larger than in other years since the NEDC

    Appendix VII: Studies of the Interregional Economic Impacts of Various Dairy
    Compact Alternatives

    Page 144 GAO- 01- 866 Impacts of Dairy Compacts

    has been in effect. To account for this, he performed a sensitivity analysis
    by adjusting the compact Class I price to simulate the average amount of the
    NEDC over- order payment during the first 44 months of NEDC operations. The
    result was that the 29- state compact had a smaller impact on dairy farm
    revenue in noncompact states ($ 228 million as opposed to $374 million).

    The five studies we reviewed and analyzed used a variety of models,
    assumptions, and data sets. They also varied in terms of the dairy compact
    alternatives they examined. To allow a comparison, table 82 summarizes the
    key features of these studies.

    Table 82: Summary of Characteristics of Studies That Estimate the
    Interregional Economic Impacts of Dairy Compact Alternatives

    Study Study characteristic USDA Cox et al. Bailey Balagtas and

    Sumner Rosenfeld

    Type of model A 36- region timeseries dairy sector model that uses a
    multistage regression analysis technique

    An interregional spatial equilibrium hedonic model incorporating a vertical
    milk marketing sector

    A static equilibrium, 13- region, economic simulation model using a constant
    elasticity functional form

    An annual nationallevel supply and demand simulation model based on Ippolito
    and Masson?s price discrimination model

    A supply and demand simulation model based on price discrimination inherent
    in classified pricing

    Compact scenario NEDC An expanded NEDC and an expanded NEDC plus a southern
    compact

    A region encompassing the Northeast, Appalachian, Southeast, and Florida
    milk marketing orders

    The NEDC and an expanded NEDC The NEDC and a

    29- state compact Baseline year Forecasted for 2000

    through 2005 based on 1999 data

    1997 Forecasted to 2000 based on 1997 data 1999 2000

    Level of model aggregation Market equilibrium is

    determined at the national level for seven dairy commodities

    Supply and demand are modeled at the regional level for nine dairy
    commodities

    Supply and demand are modeled at the national level for four dairy
    commodities

    Supply and demand are modeled at the national level for milk used for fluid
    milk and manufactured products

    Supply and demand are modeled at the state level for raw milk used for fluid
    milk and manufactured products Trade assumption No trade between

    regions or compact and noncompact regions

    No trade between regions or compact and noncompact regions

    No trade between regions or compact and noncompact regions

    Not a regional model Not a regional

    model

    Comparison of Studies Reviewed

    Appendix VII: Studies of the Interregional Economic Impacts of Various Dairy
    Compact Alternatives

    Page 145 GAO- 01- 866 Impacts of Dairy Compacts

    Study Study characteristic USDA Cox et al. Bailey Balagtas and

    Sumner Rosenfeld

    Compact price assumption Two price scenarios:

    either $16. 94 per hundredweight for the 6 forecasted years or $16.94 per
    hundredweight in 2000 followed by $1.30 per hundredweight above the USDA
    Class I price in the subsequent years

    Price wedge of $2 over- order producer price payment per hundredweight of
    milk

    Price wedge of either $1 or $2 overorder producer price payment per
    hundredweight of milk

    Price wedge of $1.20 over- order producer price payment per hundredweight of
    milk

    A compact Class I over- order premium of 18.5 cents per gallon for both
    compact scenarios.

    Other key assumptions Parameterized

    supply response Intermediate supply and demand

    elasticities Intermediate supply

    and demand elasticities; sensitivity analyses include (1) both 100- percent
    baseline and 50- percent over- order premiums, (2) lower retail fluid demand
    elasticity, and (3) an alternative farm- toretail mark- up assumption

    Intermediate supply and demand elasticities; supply elasticity of 1. 0;
    fluid demand elasticity of -0.2; national manufacturing demand elasticity of
    -0.2; an estimated demand elasticity for the Northeast of -39; and assumes
    no over- order premiums

    Supply elasticity of 0.227 and demand elasticities of -0.144 for Class I
    milk and -0.261 for milk used for manufacturing purposes

    Source: GAO analysis of cited studies.

    Appendix VIII: Comments From the Executive Director, NEDC

    Page 146 GAO- 01- 866 Impacts of Dairy Compacts

    Appendix VIII: Comments From the Executive Director, NEDC

    Note: GAO comments supplementing those in the report text appear at the end
    of this appendix.

    Appendix VIII: Comments From the Executive Director, NEDC

    Page 147 GAO- 01- 866 Impacts of Dairy Compacts

    See comment 3. See comment 2. Now on p. 2. See comment 1.

    Appendix VIII: Comments From the Executive Director, NEDC

    Page 148 GAO- 01- 866 Impacts of Dairy Compacts

    See comment 5. See comment 3.

    See comment 3. See comment 3.

    See comment 4.

    Appendix VIII: Comments From the Executive Director, NEDC

    Page 149 GAO- 01- 866 Impacts of Dairy Compacts

    See comment 6. See comments 2 and 4.

    See comment 2.

    Appendix VIII: Comments From the Executive Director, NEDC

    Page 150 GAO- 01- 866 Impacts of Dairy Compacts

    See comment 11. See comment 10.

    See comment 9. Now on pp. 77 to 78. See comment 8. See comment 7.

    Now on p. 76.

    Appendix VIII: Comments From the Executive Director, NEDC

    Page 151 GAO- 01- 866 Impacts of Dairy Compacts

    Page 152 GAO- 01- 866 Impacts of Dairy Compacts

    The following are GAO's comments on the NEDC's written response dated
    September 7, 2001, to our draft report.

    1. We recognize that the National Agricultural Statistics Service revised
    its estimates of New England's milk production for 2000. However, our
    estimates of the impacts of the NEDC are based primarily on 1999 data. While
    we also used preliminary data for 2000 to estimate the impacts for that
    year, we note that these data are preliminary and as a result, we did not
    conduct sensitivity analyses for that year. Further, a 2- percent adjustment
    in New England's milk production would be unlikely to affect our estimates
    of the NEDC's impact on noncompact regions in the country.

    2. We recognize that before USDA's milk marketing order regulatory reforms
    took effect in January 2000, New York was in a different milk marketing
    order than were the New England states. However, we do not model New York as
    being in a different milk marketing order. Rather, the dairy model that we
    used to estimate the impact of compacts aggregates states on a regional
    basis. As discussed in appendix II, the states included in the model's
    Northeast region include the six NEDC states, Delaware, the District of
    Columbia, Maryland, New Jersey, New York, and Pennsylvania. Because the
    model is a regional model, the NEDC is represented as being part of the
    Northeast region. As a result, the model is unable to estimate the impact of
    compact states on noncompact states within the same region.

    3. We disagree that the report misrepresents the regulation's design and
    function. We state that all raw milk used for and sold as fluid milk in the
    six NEDC states is subject to the NEDC's regulations, not just milk produced
    by dairy farmers in the six NEDC states. We have revised the report to
    explicitly state that farmers in New York may receive NEDC payments.
    However, the impact of the NEDC on dairy farmers in New York was beyond the
    scope of work that we agreed to perform for Senator Kohl.

    4. We concur that New York dairy farmers have received NEDC payments, based
    on data developed by the NEDC commission. The report, however, does not
    state that $50 million has been provided to New York dairy farmers. We have
    revised the report to include data published by the NEDC that indicates that
    about 1,300 New York dairy GAO Comments

    Page 153 GAO- 01- 866 Impacts of Dairy Compacts

    farmers have received NEDC payments that have averaged, on an annual basis,
    $9,812 since the NEDC began in July 1997. 1

    5. We disagree that the model omits from consideration the regulatory
    treatment of plants located outside New England that sell packaged milk in
    New England- partially regulated plants. The model provides for shipments of
    packaged milk between compact and noncompact regions. A discussion of how
    this is modeled is included in appendix II.

    6. USDA officials and other dairy economists who have analyzed the NEDC's
    impact on the premium structure in New England told us that the NEDC has had
    the effect of eroding much of the market- driven over- order premium that
    processors had been paying prior to the NEDC's establishment, as opposed to
    premiums that cover services provided by cooperatives or handlers. This
    effect would vary, however, depending upon market forces. Such market forces
    could fluctuate from month to month and year to year. Much of the data
    needed to determine the specific impact that the NEDC has had on the premium
    structure in New England are proprietary in nature, and thus we do not have
    access to this data.

    7. The report states that the trends regarding farm attrition rates and
    production in the NEDC states and the rest of the country were similar, both
    before and after the compact. This is not to say that the percentage change
    in the NEDC states was identical to the percentage change in the rest of the
    country. Regarding attrition, the number of farms has been steadily
    declining both within the NEDC states and in the rest of the country, but at
    a slightly different rate.

    8. We disagree that the report concludes that the NEDC had no impact on farm
    attrition. We note that the percentage reduction declined slightly following
    the NEDC's establishment but conclude that it is difficult to determine the
    extent to which the NEDC, relative to other factors, may have changed farm
    attrition.

    9. We disagree that the herd size discussion is less helpful. We believe
    that providing a longer- term perspective that includes national trends
    provides a useful context for discussing dairy policy options.

    1 Testimony by Daniel Smith, Executive Director, Northeast Dairy Compact
    Commission, before the U. S. Senate Judiciary Committee, July 25, 2001.

    Page 154 GAO- 01- 866 Impacts of Dairy Compacts

    10. We agree that the NEDC's impact on retail milk prices is a complex
    question. Our report states that many factors affect retail prices, in
    addition to the farm- level price of milk. We revised the report to
    recognize that retail milk prices, after increasing by about 20 cents per
    gallon in July 1997, subsequently fell by as much as 5 to 7 cents per gallon
    for several months.

    11. We relied on USDA's Food and Nutrition Service's analysis of the NEDC's
    impact on the Food Stamp Program. On the basis of its analysis, USDA was
    unable to determine if the NEDC increased program benefit levels. According
    to USDA, if the NEDC's impact on retail milk prices in the NEDC states had
    caused a $1 increase in national benefit levels, this would have resulted in
    an additional $60 million in federal funding per year. Aside from the issue
    of whether the NEDC has increased federal costs, USDA indicated that the
    NEDC has increased Food Stamp Program participant costs.

    Page 155 GAO- 01- 866 Impacts of Dairy Compacts

    James R. Jones, Jr (202) 512- 9839 In addition to those named above, M.
    Shawn Arbogast, Venkareddy Chennareddy, Jay R. Cherlow, Nancy L. Crothers,
    Oliver H. Easterwood, Barbara J. El Osta, and Marcia B. McWreath made key
    contributions to this report. Appendix IX: GAO Contact and Staff

    Acknowledgments GAO Contact Staff Acknowledgments

    Page 156 GAO- 01- 866 Impacts of Dairy Compacts

    Dairy Industry: Information on Milk Prices and Changing Market Structure
    (GAO- 01- 561, June 15, 2001).

    Fluid Milk: Farm and Retail Prices and the Factors That Influence Them

    (GAO- 01- 730T, May 14, 2001).

    Dairy Products: Imports, Domestic Production, and Regulation of
    Ultrafiltered Milk (GAO- 01- 326, Mar. 5, 2001).

    Dairy Industry: Information on Prices for Fluid Milk and the Factors That
    Influence Them (GAO/ RCED- 99- 4, Oct. 8, 1998).

    Dairy Industry: Information on Marketing Channels and Prices for Fluid Milk
    (GAO/ RCED- 98- 70, Mar. 16, 1998). Related GAO Products

    (150192)

    Page 157 GAO- 01- 866 Impacts of Dairy Compacts

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