    Dairy Industry: Information on Milk Prices, Factors Affecting
    Prices, and Dairy Policy Options (29-DEC-04, GAO-05-50).

    In 2003, U.S. dairy farmers marketed nearly 19.7 billion gallons
    of raw milk, one-third of which were used in fluid milk products.
    Farmers, cooperatives, processors, and retailers receive a
    portion of the retail price of milk for their part in providing
    milk to consumers. During 2002 and 2003, farm prices fell while
    retail prices did not similarly decline. This pattern raised
    concerns about a growing spread between farm and retail prices.
    Farm prices have since increased, reaching record highs in April
    2004. As requested, GAO examined (1) the portion of retail milk
    prices received by farmers, cooperatives, processors, and
    retailers, how this changed over time, and the relationship
    between price changes at these levels; (2) how various factors
    influence prices and affect the transmission of price changes
    among levels; and (3) how federal dairy program changes and
    alternative policy options have affected or might affect farm
    income and federal costs, among other considerations.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-05-50
        ACCNO:   A14696
      TITLE:     Dairy Industry: Information on Milk Prices, Factors
    Affecting Prices, and Dairy Policy Options
         DATE:   12/29/2004
      SUBJECT:   Agricultural policies
    	     Agricultural products
    	     Cost analysis
    	     Dairy industry
    	     Dairy products
    	     Prices and pricing
    	     Farmers

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    GAO-05-50

                     United States Government Accountability Office

                         GAO Report to Congressional Requesters

    December 2004

    DAIRY INDUSTRY

     Information on Milk Prices, Factors Affecting Prices, and Dairy Policy Options

                                           a

    GAO-05-50

    Highlights of GAO-05-50, a report to congressional requesters

    In 2003, U.S. dairy farmers marketed nearly 19.7 billion gallons of raw
    milk, one-third of which were used in fluid milk products. Farmers,
    cooperatives, processors, and retailers receive a portion of the retail
    price of milk for their part in providing milk to consumers. During 2002
    and 2003, farm prices fell while retail prices did not similarly decline.
    This pattern raised concerns about a growing spread between farm and
    retail prices. Farm prices have since increased, reaching record highs in
    April 2004. As requested, GAO examined (1) the portion of retail milk
    prices received by farmers, cooperatives, processors, and retailers, how
    this changed over time, and the relationship between price changes at
    these levels; (2) how various factors influence prices and affect the
    transmission of price changes among levels; and (3) how federal dairy
    program changes and alternative policy options have affected or might
    affect farm income and federal costs, among other considerations.

    To continue informed decisionmaking, the Secretary of Agriculture should
    build on GAO's analysis of the potential effects of various policy options
    as USDA proposes future changes or provides information to the Congress.
    USDA expressed concern about the practicality of some of the dairy policy
    options discussed. USDA did not comment on the report's recommendation.

    www.gao.gov/cgi-bin/getrpt?GAO-05-50.

    To view the full product, including the scope and methodology, click on
    the link above. For more information, contact Lawrence J. Dyckman, (202)
    512-3841, dyckmanl@gao.gov.

    December 2004

    DAIRY INDUSTRY

    Information on Milk Prices, Factors Affecting Prices, and Dairy Policy Options

    Between October 2000 and May 2004, on average, farmers received about 46
    percent, cooperatives 6 percent, wholesale processors 36 percent, and
    retailers over 12 percent of the retail price of a gallon of 2 percent
    milk (the most common type of milk purchased) in the 15 U.S. markets GAO
    reviewed. During this period, in 12 of the 15 markets, the spread between
    farm and retail prices increased. However in some markets, the price
    spread between these levels increased and then moderated. Price changes at
    one level were most closely reflected in changes at adjacent levels of the
    marketing chain.

    Farm, cooperative, wholesale, and retail milk prices are determined by the
    interaction of a number of factors. For example, farm prices are affected
    by the supply of raw milk and the demand for milk products such as fluid
    milk, cheese, and butter, as well as by federal and state dairy programs.
    At the cooperative level, prices are influenced by the cost of services
    that cooperatives provide, and the relative bargaining power of
    cooperatives and milk processors. At the wholesale and retail levels,
    input costs such as labor and energy, and the continued consolidation of
    firms influence milk prices.

    Recent changes in federal dairy programs have affected farm income,
    federal costs, and other considerations. For example, the Milk Income Loss
    Contract program has supported some farm incomes but has exceeded initial
    cost estimates because of low farm prices. A number of options have been
    suggested to change federal dairy policies such as amending federal milk
    marketing orders and raising or eliminating the support price. In general,
    these options would have mixed effects depending upon whether milk prices
    were high or low over the short or long term. For example, options that
    increase farm income over the short term tend to increase milk production
    and lower farm prices over the long term. These options also tend to be
    costly for the federal government during periods of low prices.

    Farm and Retail 2 Percent Milk Prices, October 2000 to May 2004

    Contents

            Letter                                                              1
                                         Conclusions                            8
                             Recommendations for Executive Action               9
                              Agency Comments and Our Evaluation                9

    Appendixes

    Appendix I: Appendix II:

    Appendix III: Appendix IV:

    Appendix V:

    Appendix VI:

    Objectives, Scope, and Methodology 14

    Analysis of Prices at Four Marketing Levels for 2 Percent
    Milk in Selected Markets 24
    Portion Received by Farmers, Cooperatives, Wholesale Milk

    Processors and Retailers 24 Changes in Farm and Retail Prices and the
    Price Spread 26 Correlation between Price Changes at the Four Marketing

    Levels 27 Comparison of Average Annual and Monthly Prices for 2 Percent
    Milk 30

    Retail Prices for Four Kinds of Milk in Selected Markets 49

    Average Monthly and Annual Farm, Cooperative, Wholesale and Retail Milk
    Prices in Selected Markets 64

    Factors That Influence the Price of Milk as It Moves from the Farm to the
    Consumer 94 Market Forces, in Addition to Federal and State Policies,
    Influence

    Milk Prices at the Farm Level 94

    Services Provided by Cooperatives, Market Structure, and Collective Action
    Can Influence the Price of Milk at the Cooperative Level 108

    Input Costs, Service Levels, Innovations, and Market Structure Influence
    Wholesale Fluid Milk Prices 113 Retailing Costs, Consumer Demand, and
    Market Structure Changes Affect Retail Prices for Fluid Milk 120

    Economic Studies of Price Transmission in the U.S. Fluid
    Milk Market 131
    Summary of Recent Economic Studies of Price Transmission in the

    U.S. Fluid Milk Market 135 Results on the Extent of Farm-to-Retail Price
    Transmission and Price Transmission Asymmetry 150 Results on
    Farm-to-Retail Speed of Adjustment and Price Transmission Asymmetry 153

                                        Contents

    Results for Retail-to-Farm Price Transmission and Price Transmission
    Asymmetry 154 Possible Causes of Asymmetry in the Extent and Speed of
    Price Transmission 154

    Appendix VII:	Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options 159 Recent Changes in Federal Dairy Programs
    Vary in Their Effects on

    Policy Considerations We Identified 159 Effects of Alternative Dairy
    Policies Differ under Various Scenarios 176

    Appendix VIII:	Comments from the U.S. Department of Agriculture 237 GAO
    Comments 242

    Appendix IX:	GAO Contacts and Staff Acknowledgments 246 Contacts 246
    Acknowledgments 246

    Related GAO Products

    Tables Table 1:

    Table 2: Table 3:

    Table 4:

    Table 5: Table 6:

    Portion of the Retail Price of a Gallon of 2 Percent Milk
    Received by Farmers, Cooperatives, Wholesale
    Processors, and Retailers for 15 Markets, October 2000
    through May 2004 25
    Changes in the Farm-to-Retail Price Spread for a Gallon of
    2 Percent Milk for 15 Markets, October 2000 through May
    2004 26
    Correlation between Farm Price Changes and Changes in
    Cooperative, Wholesale, and Retail Prices for a Gallon of 2
    Percent Milk for 15 Markets, October 2000 through May
    2004 28
    Correlation between Cooperative Price Changes and
    Changes in Wholesale and Retail Prices for a Gallon of 2
    Percent Milk for 15 Markets, October 2000 through May
    2004 29
    Correlation between Wholesale and Retail Price Changes
    for a Gallon of 2 Percent Milk for 15 Markets, October 2000
    through May 2004 30
    Average Annual Farm, Cooperative, Wholesale, and Retail
    Prices for a Gallon of 2 Percent Milk in Selected Markets,
    2000 31

    Contents

    Table 7:	Average Annual Farm, Cooperative, Wholesale, and Retail Prices
    for a Gallon of 2 Percent Milk in Selected Markets, 2001 31

    Table 8:	Average Annual Farm, Cooperative, Wholesale, and Retail Prices
    for a Gallon of 2 Percent Milk in Selected Markets, 2002 32

    Table 9:	Average Annual Farm, Cooperative, Wholesale, and Retail Prices
    for a Gallon of 2 Percent Milk in Selected Markets, 2003 33

    Table 10: Average Annual Farm, Cooperative, Wholesale, and Retail Prices
    for a Gallon of 2 Percent Milk in Selected Markets, 2004 33

    Table 11: Prices for a Gallon of Milk in Atlanta, Georgia, October 2000
    through May 2004 64 Table 12: Prices for a Gallon of Milk in Boston,
    Massachusetts, October 2000 through May 2004 66 Table 13: Prices for a
    Gallon of Milk in Charlotte, North Carolina, October 2000 through May 2004
    68 Table 14: Prices for a Gallon of Milk in Cincinnati, Ohio, October 2000
    through May 2004 70 Table 15: Prices for a Gallon of Milk in Dallas,
    Texas, October 2000 through May 2004 72 Table 16: Prices for a Gallon of
    Milk in Denver, Colorado, October 2000 through May 2004 74 Table 17:
    Prices for a Gallon of Milk in Miami, Florida, October 2000 through May
    2004 76 Table 18: Prices for a Gallon of Milk in Milwaukee, Wisconsin,
    October 2000 through May 2004 78 Table 19: Prices for a Gallon of Milk in
    Minneapolis, Minnesota, October 2000 through May 2004 80 Table 20: Prices
    for a Gallon of Milk in New Orleans, Louisiana, October 2000 through May
    2004 82 Table 21: Prices for a Gallon of Milk in Phoenix, Arizona, October
    2000 through May 2004 84 Table 22: Prices for a Gallon of Milk in Salt
    Lake City, Utah, October 2000 through May 2004 86 Table 23: Prices for a
    Gallon of Milk in San Diego, California, October 2000 through May 2004 88
    Table 24: Prices for a Gallon of Milk in Seattle, Washington, October 2000
    through May 2004 90 Table 25: Prices for a Gallon of Milk in Washington,
    D.C., October 2000 through May 2004 92

                                        Contents

    Table 26: Average Ownership and Operating Costs by Region and

    Herd Size, 2000 96 Table 27: USDA's Milk Classes Used for Setting Milk
    Prices 102 Table 28: Change in Costs for Fluid Milk Processing Plants in
    Maine,

    1993 through 2000 115 Table 29: Supermarket Operating Costs as a
    Percentage of Sales and Gross Margin, 2003 121 Table 30: Growth of
    Supermarket Sales and Expenses during the Last Decade, 1993 through 2003
    122 Table 31: Market Share of the Top Four Food Retailers in Selected
    Markets, 2003 127 Table 32: Overview of Fluid Milk Price Transmission
    Studies and Results on Price Transmission Asymmetry/Symmetry 132 Table 33:
    Recent Price Transmission Studies of the Fluid Milk Market 136

    Figures	Figure 1: Figure 2: Figure 3: Figure 4: Figure 5: Figure 6: Figure
    7: Figure 8:

    Selected Milk Markets, Corresponding Defense Commissaries Used for Our
    Analysis, and Federal Milk Marketing Order Areas Prior to April 2004 19
    Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of 2 Percent
    Milk for Atlanta, Georgia, October 2000 through May 2004 34 Farm,
    Cooperative, Wholesale, and Retail Prices for a Gallon of 2 Percent Milk
    for Boston, Massachusetts, October 2000 through May 2004 35 Farm,
    Cooperative, Wholesale, and Retail Prices for a Gallon of 2 Percent Milk
    for Charlotte, North Carolina, October 2000 through May 2004 36 Farm,
    Cooperative, Wholesale, and Retail Prices for a Gallon of 2 Percent Milk
    for Cincinnati, Ohio, October 2000 through May 2004 37 Farm, Cooperative,
    Wholesale, and Retail Prices for a Gallon of 2 Percent Milk for Dallas,
    Texas, October 2000 through May 2004 38 Farm, Cooperative, Wholesale, and
    Retail Prices for a Gallon of 2 Percent Milk for Denver, Colorado, October
    2000 through May 2004 39 Farm, Cooperative, Wholesale, and Retail Prices
    for a Gallon of 2 Percent Milk for Miami, Florida, October 2000 through
    May 2004 40

    Contents

    Figure 9:	Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of
    2 Percent Milk for Milwaukee, Wisconsin, October 2000 through May 2004 41

    Figure 10: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of
    2 Percent Milk for Minneapolis, Minnesota, October 2000 through May 2004
    42

    Figure 11: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of
    2 Percent Milk for New Orleans, Louisiana, October 2000 through May 2004
    43

    Figure 12: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of
    2 Percent Milk for Phoenix, Arizona, October 2000 through May 2004 44

    Figure 13: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of
    2 Percent Milk for Salt Lake City, Utah, October 2000 through May 2004 45

    Figure 14: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of
    2 Percent Milk for San Diego, California, October 2000 through May 2004 46

    Figure 15: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of
    2 Percent Milk for Seattle, Washington, October 2000 through May 2004 47

    Figure 16: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of
    2 Percent Milk for Washington, D.C., October 2000 through May 2004 48

    Figure 17: Retail Prices in Atlanta, Georgia, for Whole, 2 Percent, 1
    Percent, and Skim Milk, October 2000 through May 2004 49

    Figure 18: Retail Prices in Boston, Massachusetts, for Whole, 2 Percent, 1
    Percent, and Skim Milk, October 2000 through May 2004 50

    Figure 19: Retail Prices in Charlotte, North Carolina, for Whole, 2
    Percent, 1 Percent, and Skim Milk, October 2000 through May 2004 51

    Figure 20: Retail Prices in Cincinnati, Ohio, for Whole, 2 Percent, 1
    Percent, and Skim Milk, October 2000 through May 2004 52

    Figure 21: Retail Prices in Dallas, Texas, for Whole, 2 Percent, 1
    Percent, and Skim Milk, October 2000 through May 2004 53

    Figure 22: Retail Prices in Denver, Colorado, for Whole, 2 Percent, 1
    Percent, and Skim Milk, October 2000 through May 2004 54

    Contents

    Figure 23: Retail Prices in Miami, Florida, for Whole, 2 Percent, 1
    Percent, and Skim Milk, October 2000 through May 2004 55

    Figure 24: Retail Prices in Milwaukee, Wisconsin, for Whole, 2 Percent, 1
    Percent, and Skim Milk, October 2000 through May 2004 56

    Figure 25: Retail Prices in Minneapolis, Minnesota, for Whole, 2 Percent,
    1 Percent, and Skim Milk, October 2000 through May 2004 57

    Figure 26: Retail Prices in New Orleans, Louisiana, for Whole, 2 Percent,
    1 Percent, and Skim Milk, October 2000 through May 2004 58

    Figure 27: Retail Prices in Phoenix, Arizona, for Whole, 2 Percent, 1
    Percent, and Skim Milk, October 2000 through May 2004 59

    Figure 28: Retail Prices in Salt Lake City, Utah, for Whole, 2 Percent, 1
    Percent, and Skim Milk, October 2000 through May 2004 60

    Figure 29: Retail Prices in San Diego, California, for Whole, 2 Percent, 1
    Percent, and Skim Milk, October 2000 through May 2004 61

    Figure 30: Retail Prices in Seattle, Washington, for Whole, 2 Percent, 1
    Percent, and Skim Milk, October 2000 through May 2004 62

    Figure 31: Retail Prices in Washington, D.C., for Whole, 2 Percent, 1
    Percent, and Skim Milk, October 2000 through May 2004 63

    Figure 32: Map of Federal Milk Marketing Orders 101 Figure 33: Number of
    Fluid Milk Processing Plants and Volume of Milk Processed per Plant, 1980
    through 2002 119 Figure 34: Percentage of Retail Food Sales by Market
    Segment, 1993 and 2003 129 Figure 35: Marketing Chain and Price
    Transmission for the U.S. Fluid Milk Industry 134 Figure 36: Potential
    Effects of Options to Change FMMOs on Various Policy Considerations 178
    Figure 37: Potential Effects of Options to Change the Price Support
    Program on Various Policy Considerations 194 Figure 38: Potential Effects
    of Options to Extend MILC on Various Policy Considerations 204 Figure 39:
    Potential Effects of Adopting the NDEA on Various Policy Considerations
    211

    Contents

    Figure 40: Potential Effects of Changing Trade Restrictions and

    Export Incentives on Various Policy Considerations 217 Figure 41:
    Potential Effects of Options to Facilitate Risk

    Management on Various Policy Considerations 228 Figure 42: Potential
    Effects of Options to Manage Raw Milk Supplies

    on Various Policy Considerations 233

    Abbreviations

    AMS Agricultural Marketing Service
    CCC Commodity Credit Corporation
    DEIP Dairy Export Incentive Program
    FMMO federal milk marketing order
    FSA Farm Service Agency
    MILC Milk Income Loss Contract
    NDEA National Dairy Equity Act
    NEDC Northeast Interstate Dairy Compact
    NYC New York City
    UNY Upstate New York
    USDA U.S. Department of Agriculture
    WTO World Trade Organization

    This is a work of the U.S. government and is not subject to copyright
    protection in the United States. It may be reproduced and distributed in
    its entirety without further permission from GAO. However, because this
    work may contain copyrighted images or other material, permission from the
    copyright holder may be necessary if you wish to reproduce this material
    separately.

    A

    United States Government Accountability Office Washington, D.C. 20548

    December 29, 2004

    Congressional Requesters:

    In 2003, U.S. dairy farmers marketed nearly 19.7 billion gallons of raw
    milk for which they received approximately $21.2 billion. Roughly
    one-third of these 19.7 billion gallons were ultimately sold to consumers
    as fluid milk (milk) products. The milk marketing chain that moves milk
    from the dairy farm to the consumer is composed of farmers, dairy
    cooperatives,1 wholesale milk processors,2 and retailers, and entities at
    each level receive a portion of the retail price of a gallon of milk for
    the functions they perform. These functions include producing, processing,
    distributing, and selling milk. During 2002 and 2003, farm prices were the
    lowest since 1979, while retail milk prices generally did not experience a
    similar decline.3 This disparity raised concerns about a growing price
    spread between farm and retail milk prices. However, in 2004, farm price
    trends have reversed, with farm prices reaching record highs.

    Since the 1930s, the U.S. Department of Agriculture (USDA) and some states
    have operated programs designed to support dairy farmers by ensuring that
    farm prices do not fall below minimum levels. These programs include,
    among others, federal milk marketing orders (FMMOs), which use formulas to
    establish minimum farm prices in different marketing areas of the country;
    a price support program to sustain farm prices through a standing offer to
    purchase certain milk products at set prices; and trade restrictions or
    export subsidies to protect the U.S. milk industry from competition from
    foreign milk products or reduce supplies.

    Low farm prices have generated interest in new federal policies to provide
    assistance to dairy farmers; however, the cost of these programs during
    periods of low prices has raised concerns. For example, in the Farm

    1Dairy cooperatives are member-owned organizations that assist producers
    in marketing their milk. Cooperatives provide a variety of services for
    their members such as ensuring adequate raw milk supplies to meet
    processors' needs, transporting milk, quality assurance, and standardizing
    milk composition.

    2Wholesale milk processors include bottlers and major retail food chains
    with bottling plants, and cooperatives that process, package, and
    distribute fluid milk for sale to retailers. Our review did not include
    other entities that market milk at the wholesale level.

    3In this report, farm prices are the prices paid for raw milk supplies.
    After the milk has been processed into a fluid milk beverage, references
    to "milk prices" are retail milk prices.

    Security and Rural Investment Act of 2002 (the 2002 Farm Bill), Congress
    authorized USDA to establish the Milk Income Loss Contract (MILC) program,
    which provides supplemental payments to farmers during periods of low
    prices.4 Depressed farm prices triggered $1.8 billion in MILC payments to
    dairy farmers in fiscal year 2003. Additionally, USDA spent over $1.5
    billion in fiscal years 2001 through 2003 attempting to maintain minimum
    farm prices at a legislatively set level through the price support
    program.

    Recent changes in milk prices have illustrated the volatility of milk
    price cycles. For example, as of April 2004, farm prices reached record
    highs as USDA announced a minimum price for raw milk used in manufacturing
    cheese that was approximately 36 percent higher, at $19.66 per
    hundredweight, than the March price of $14.49 per hundredweight, an
    increase of nearly $0.45 per gallon of milk.5 This increase reflected a
    number of changed market conditions that decreased the amount of raw milk
    production, while also increasing the demand for some manufactured dairy
    products.6 However, high farm prices create incentives for farmers to
    produce more milk, which then tends to depress milk prices over the long
    term, thereby increasing concerns about farm viability in the future.

    At your request, this report examines (1) what portion of the retail price
    of fluid milk is received by dairy farmers, dairy cooperatives, wholesale
    milk processors, and retailers in selected markets throughout the United
    States, how this distribution has changed over the period of our review
    (October 2000 through May 2004), and the relationships among price changes
    at these levels; (2) how various factors, such as costs, influence the
    price of milk as it moves from the farm to the consumer, as well as how
    these and other factors affect the extent to which changes in price are
    transmitted among levels as milk moves from the farm to the consumer; and
    (3) how changes in dairy policies and alternative policy options have
    affected or

    4Pub. L. No. 107-171, 116 Stat. 134 (2002).

    5A hundredweight is a unit of measure equal to 100 pounds of, in this
    case, raw milk. Approximately 11.6 gallons of fluid milk can be made from
    100 pounds of raw milk.

    6Recent evidence suggests that retail milk prices have also begun rising
    with the recovering farm prices.

    might affect farm income, federal costs, economic efficiency,7 and
    consumer prices, among other policy considerations. It also updates other
    information on milk prices included in our June 2001 report.8

    To update our information on the pricing distribution among the various
    levels of the milk marketing chain, we analyzed milk prices in 15 selected
    markets nationwide, ensuring that (1) these markets provided national
    geographic coverage; (2) at least one market was located in each of the
    federal milk marketing order areas, as they existed during the majority of
    the period from October 2000 through May 2004; (3) the selected markets
    included both state and federally regulated markets; and (4) these areas
    represented similar marketing areas for which we reported information in
    our June 2001 report.9 For these 15 markets, we obtained data from USDA,
    the cognizant state milk control agency, the Department of Defense's
    Commissary Agency, and a private data collection company on the prices
    received by farmers, cooperatives, wholesale milk processors, and
    retailers.10 We limited our data collection efforts to whole, skim, 2
    percent, and 1 percent milk as sales of these milk types constitute over
    93 percent of fluid milk sales annually. We also confined our analysis to
    the prices of these milk types sold in gallon containers as milk sold in
    gallon containers

    7There can be different kinds of economic efficiency effects. Government
    policies may be more or less economically efficient depending upon the
    extent to which they prevent the transmission of market price signals and
    lead to a misallocation of resources into excess production. Policies may
    also be more or less efficient depending upon the extent to which they
    affect the distribution of production between farmers with high or low
    costs of production.

    8GAO, Dairy Industry: Information on Milk Prices and Changing Market
    Structure, GAO01-561 (Washington, D.C.: June 15, 2001).

    9The beginning of our period of analysis corresponds to the end of the
    data presented in our previous report, GAO-01-561. The end point
    represents the most recent month for which data were available from all of
    our sources.

    10We were unable to obtain actual data on the prices received by wholesale
    milk processors because these data are considered proprietary. As a proxy
    for these data we used data obtained from the Defense Commissary Agency on
    the prices at which it sold milk. Commissary prices reflect a 5 percent
    markup above the prices at which the commissaries purchase milk from
    wholesale suppliers. We obtained data from 39 different commissary
    locations near the 15 markets in our analysis.

    accounts for about 65 percent of fluid milk products sold under FMMOs.11
    We focused our detailed data analysis on 2 percent milk sold in gallon
    containers, the largest volume of reduced-fat milk sold nationwide. As a
    result, our analysis may not reflect pricing trends for all types of milk
    and package sizes.

    To update our information on factors influencing milk prices, explore
    price transmission within the milk marketing chain, and examine the
    effects of federal dairy policy changes and alternative policy options, we
    contacted a number of national dairy experts in academia or representing
    federal and state agencies, cooperatives, processors, retailers, or
    industry groups. We also reviewed relevant legislation, studies, and other
    publications. We qualitatively analyzed the effects of recent changes in
    federal dairy programs, as well as alternative policy options, on various
    policy considerations as identified in previous GAO reports, relevant
    studies, and legislation, as well as through our conversations with dairy
    policy experts. These policy considerations included farm income, milk
    production, federal costs, price volatility, economic efficiency, and
    consumer prices. Different stakeholders in the dairy policy arena may have
    alternative views on the relative importance of these policy
    considerations, as well as other considerations that we did not include,
    which could lead to differing perspectives on these options. We conducted
    our review from September 2003 through October 2004 in accordance with
    generally accepted government auditing standards. We did not independently
    verify the data we received from various sources. However, we discussed
    with these sources the measures they take to ensure the accuracy of data,
    and these measures seemed reasonable. Appendix I provides additional
    information on the scope and methodology of our review.

    In summary, we found the following:

    o 	Between October 2000 and May 2004, on average, farmers received 45.9
    percent, cooperatives 6.1 percent, wholesale milk processors 35.6 percent,
    and retailers 12.5 percent of the retail price of a gallon of 2 percent
    milk in the 15 markets we reviewed. However, these percentages varied
    widely depending on the specific market. For example, the farmers' portion
    ranged from 36.0 percent to about 58.6 percent.

    11This estimate is based on USDA data for the month of November for
    selected years between 1991 and 2001, which were the most recent data we
    could obtain.

    o 	Furthermore, during this time period, the price spread between farm and
    retail prices increased in 12 of the 15 markets we examined. However, in
    some of the 12 markets, the spread between farm and retail milk prices
    increased dramatically, and then moderated. In 9 of the 15 markets, retail
    prices showed a statistically significant increase. In 4 of the remaining
    markets, retail prices decreased over time, while in the other 2 markets,
    retail prices showed no statistically significant change. At the same
    time, farm prices decreased in 12 of the 15 markets and increased in the
    remaining 3 markets during the 44-month period. However, declines in farm
    prices, in most cases, began to reverse during the latter months of our
    period of analysis. Price changes generally correlated across levels in
    the marketing chain, with the strongest correlations occurring between
    adjacent levels. For example, in most of the markets we analyzed, changes
    in cooperative prices correlated strongly with changes in wholesale
    prices. However, changes in cooperative prices correlated less strongly
    with changes in retail prices.

    o 	Prices at all levels of the milk marketing chain are determined by the
    interaction of a number of factors. For example, farm prices are
    determined primarily by factors affecting the supply of raw milk, such as
    costs of production; the demand for milk products, such as fluid milk,
    cheese and butter; and the effects of federal and state dairy programs. At
    the cooperative level, the difference between what cooperatives pay
    farmers for raw milk and the prices at which they sell raw milk to
    wholesale fluid milk processors is influenced by the types of services the
    cooperatives provide, the relative bargaining power of cooperatives and
    milk processors, as well as collective action taken by dairy cooperatives.
    Factors that affect the difference between what processors pay for this
    raw milk and the prices at which they sell fluid milk products to
    retailers include input costs, such as labor, energy, transportation and
    packaging; the level of services they provide to retailers; innovations in
    processing technology; and changes in the structure of the fluid milk
    processing industry, such as increases in the consolidation and market
    share of some firms. At the retail level, costs such as labor and energy,
    along with other factors such as consumer demand and the structure of the
    market, help determine the difference between what retailers pay for fluid
    milk products and the prices they charge consumers for those products.

    o 	While price changes at one level of the milk marketing chain are
    generally reflected in price changes at other levels, several factors can
    influence the extent or speed at which these changes are reflected and

    whether price increases and decreases are reflected differently. For
    example, increasing concentration, resulting in greater market power at
    successive levels of the milk marketing chain, may provide entities an
    opportunity to influence how changes in prices are transmitted among the
    different levels. In addition, other factors, such as federal and state
    dairy policies, can affect prices in ways that can cause market
    participants to alter the way they transmit price changes between
    marketing levels. Some recent economic studies of the U.S. fluid milk
    market have found that these and other factors may cause retail milk
    prices to react more completely and quickly to farm price increases than
    to decreases.

    o 	Recent changes in the FMMO program, adjustments to the prices of
    products purchased under the price support program, and the establishment
    of the MILC program have had various impacts on policy considerations such
    as dairy farm income, federal costs, and price volatility. Reforms to the
    FMMO system had mixed effects on farm income depending on the geographic
    location of the farmer, while the overall effects on all farmers are less
    clear. Further, recent adjustments to the prices of products purchased
    under the price support program have generally decreased federal costs but
    also decreased farm income during periods of low prices. Finally,
    government payments introduced through the MILC program have kept some
    small dairy farms in business, but the program has exceeded initial
    federal cost estimates because farm prices during 2002 and 2003 were lower
    than anticipated.

    o 	A number of options that would modify existing policies or introduce
    alternative policies have been proposed or discussed. While we examined
    the potential impacts of these options on a range of policy considerations
    related to the dairy sector, we did not assess their overall economic or
    budgetary impacts or their consistency with U.S. international trade
    commitments or positions in ongoing negotiations. As a result, the purpose
    of this analysis is not to take a position for or against any of these
    options, but simply to discuss their likely effects on the policy
    considerations we identified. Various policy options could affect dairy
    policy considerations in different ways under different scenarios, such as
    periods of high or low prices. Also, short-term effects may differ from
    long-term effects. In general, options that increase farm income over the
    short term also tend to increase milk production and thus the potential
    for oversupply and lower average farm prices over the long term. For
    example, the dairy support price could be raised, which would limit the
    fall of farm prices and increase farm income in the short

    term. However, it would spur additional production and therefore reduce
    average farm prices over the long term. Such options also tend to be
    costly for the federal government during periods of low prices. Thus,
    extending the MILC program, which is scheduled to expire at the end of
    September 2005, would allow the federal government to continue to support
    farm income but could also increase federal costs if farm prices trend
    downward in the future. In some cases, options that increase the economic
    efficiency of federal dairy programs also increase price volatility
    because they allow clearer transmission of market price signals. For
    example, eliminating the price support program would increase volatility
    by removing the price floor on manufactured dairy products, but it would
    also increase economic efficiency by reducing incentives to allocate
    resources to surplus production. Also, to the extent that price changes at
    the wholesale level are passed through to the retail level, a number of
    options would likely have mixed effects on consumer prices depending upon
    the particular product under consideration (e.g., butter, cheese, or fluid
    milk).

    As a result of recent farm bills, such as those in 1996 and 2002, USDA has
    studied different aspects of dairy policy, either to implement program
    changes mandated by the Congress or to provide information to the Congress
    on the effects of various dairy programs. For example, the 2002 farm bill
    required USDA to conduct studies of dairy policy issues, including an
    economic evaluation of the effects of various elements of the national
    dairy policy and of terminating federal dairy programs relating to milk
    price support and supply management. One study required by this
    legislation, which addressed the subject of changing standards for fluid
    milk, was issued in August 2003.12 A second study, which included both an
    evaluation of the effects of various elements of the national dairy policy
    and the termination of federal milk price support and supply management
    programs, was provided to the Congress in September 2004.13

    12USDA/Agricultural Marketing Service, Raising the Minimum Nonfat Solids
    Standard to the National Average in Raw Milk: A Study of Fluid Milk
    Identity Standards (Washington, D.C.: August 2003).

    13USDA, Economic Effects of U.S. Dairy Policy and Alternative Approaches
    to Milk Pricing, (Washington, D.C.: July 2004). This study combined the
    results of work by more than 20 researchers from 10 universities, as well
    as information provided by researchers at USDA.

    This report is divided into nine appendixes. Appendix I describes in
    detail our objectives, scope, and methodology. Appendix II provides
    information on average milk prices at the farm, cooperative, wholesale,
    and retail levels; changes in farm and retail milk prices and how they
    affect the farmto-retail price spread; and the extent to which price
    changes at one level of the milk marketing chain correlate with price
    changes at other levels. Appendix III compares retail prices of whole, 2
    percent, 1 percent, and skim milk. Appendix IV provides the average
    monthly prices and annual prices of the four types of milk at each level
    of the milk marketing chain. Appendix V describes the factors that
    influence prices as milk moves from the farmer to the consumer. Appendix
    VI provides a technical review of recent research examining price
    transmission within the milk marketing chain. Appendix VII provides a
    qualitative analysis of the effects of recent changes in federal dairy
    programs and alternative dairy policy options that have been proposed or
    discussed. Appendix VIII presents USDA's comments and our evaluation of
    them. Appendix IX lists GAO contacts and contributors to this report.

    Conclusions	The difference in price between what farmers receive for their
    raw milk and what consumers pay for fluid milk products has increased in
    recent years. This growing spread between farm and retail prices may be
    attributable to a number of factors at each level of the milk marketing
    chain, including supply and demand forces, changes in input costs to
    processing and retailing, and the continued concentration of cooperatives,
    wholesale milk processors, and retailers. A variety of federal policies
    exist to influence the prices that farmers receive. However, the effects
    of these policies may not be uniform; they can affect different sizes of
    farms or regions of the country in different ways. Moreover, policies that
    benefit farm income may adversely affect other policy considerations such
    as economic efficiency and federal costs. Given the complexity of federal
    dairy policy, the decision to change existing policies or introduce new
    policies requires consideration of a variety of these potential effects.
    Examining the effects of policy alternatives on a variety of different
    policy considerations will help the Congress formulate federal dairy
    policy based on comprehensive analyses that consider these alternatives in
    relation to their effects on different considerations, farm sizes, and
    regions of the country. In addition, although recent USDA studies have
    examined some policy options, there are other potential policy options to
    consider, as discussed in this report.

    Recommendations for 	To continue the facilitation of informed decision
    making by USDA and the Congress, we recommend that the Secretary of
    Agriculture build on GAO's

    Executive Action	analysis of the potential effects of various dairy policy
    options as USDA proposes future changes to current dairy laws or
    regulations or provides information to the Congress in response to
    congressional proposals.

    Agency Comments and Our Evaluation

    We provided a draft of this report to USDA and DOD for their review and
    comment. We received written comments from USDA's Under Secretary for Farm
    and Foreign Agricultural Services and Under Secretary for Marketing and
    Regulatory Programs, which are presented in appendix VIII. USDA also
    provided suggested technical corrections, which we have incorporated into
    this report, as appropriate. These technical corrections were offered by
    several USDA agencies, including the Agricultural Marketing Service,
    Economic Research Service, Farm Service Agency, and Office of the Chief
    Economist. DOD had no comments on the draft report.

    In its written comments, USDA said the information provided in the report
    on milk prices at the farm, cooperative, and retail levels is valid.
    However, USDA said it has reservations regarding our use of prices paid
    for fluid milk at commissaries as an indicator of the wholesale price of
    fluid milk and that we should make clear the weaknesses of using
    commissary price data. USDA acknowledged, however, that there seems to be
    no viable alternative. During the course of our work, we were unable to
    obtain wholesale price data because these data are considered proprietary
    by industry officials. After consulting with USDA officials and other
    dairy experts, we determined that commissary price data were the best
    surrogate because commissaries generally sell milk at a standard 5 percent
    markup from cost. Based on USDA's comments, we expanded the discussion in
    the report of the potential limitations of using commissary data.

    USDA said it largely agrees with the report's discussion of the factors
    that influence the price of milk as it moves from the farm to the consumer
    and the report's characterization of economic studies of price
    transmission in the U.S. fluid milk market. However, USDA expressed some
    concerns regarding the report's discussion of recent federal dairy program
    changes and alternative policy options. First, USDA said that this
    discussion appears to be a compilation of policy recommendations that are
    examined independently and qualitatively within the existing program
    structure. Our discussion of dairy policy options are not policy
    recommendations. As stated in the report, to identify these policy options
    and their potential

    impacts we relied heavily on a synthesis of the views of leading dairy
    experts and the results of an extensive literature search, including our
    review of more than 50 studies and other publications. Time and resource
    constraints for completing our work precluded us from developing or
    contracting for the use of an economic model that would have provided
    quantitative estimates of these potential impacts. In addition, some of
    the policy options would have been difficult to model and quantify, such
    as the potential impacts of accelerating USDA's hearing and rulemaking
    process for amending FMMOs. The report also notes that we compared the
    policy options identified against a baseline scenario of policies in place
    as of August 2004. This baseline scenario existed at the start of our work
    and was needed to provide a consistent context for our analysis.

    Second, USDA suggested that we make clear the caveats of this type of
    analysis. As noted in the report, we examined the impact of federal dairy
    program changes and policy options on six policy considerations: farm
    income, milk production, federal costs, price volatility, economic
    efficiency, and consumer prices. We acknowledge that other stakeholders
    may have different views on the importance of these policy considerations,
    or other considerations that we did not include in our analysis. The
    report also states that the potential effects of policy options on these
    considerations could vary depending upon economic conditions and other
    policy decisions. In this regard, we did not assess the options' overall
    economic or budgetary impacts, or their consistency with U.S.
    international trade commitments or positions in ongoing negotiations. In
    addition, the report does not identify a preferred option or combination
    of options. As indicated in the report, each option has varying potential
    impacts on the policy considerations used in our analysis. Despite these
    caveats, we believe this analysis is informative and helpful to
    congressional decision makers who must weigh competing interests in
    determining dairy policy.

    USDA also said that in some cases the report mischaracterizes the
    operation of current programs and the effects that changes to current
    programs or the introduction of new programs would have on program
    outlays, producers, and consumers. For example, USDA noted that the report
    offers several options for improving the operation of the Dairy Export
    Incentive Program (DEIP), including expanding the use of this program.
    However, USDA indicated that expanding the use of DEIP is not a legitimate
    option because, under World Trade Organization (WTO) rules, DEIP is bound
    by quantitative and monetary caps and product-specific restrictions that
    limit its use to the current range of eligible dairy

    commodities. We do not agree that we mischaracterized the operation of
    this program. The report clearly states that USDA has announced and
    awarded subsidies under DEIP to the limits allowed by WTO rules for nonfat
    dry milk and various cheeses. Regarding expansion, the report discusses
    options suggested by dairy experts for the additional use of this program
    as an effective marketing tool, and does not call for expanding its use to
    exceed relevant WTO caps or restrictions. However, we have adjusted the
    language in the report to make this distinction clearer.

    USDA also offered several comments regarding the FMMO program. Among
    these, USDA said that the report is incorrect in stating that the
    objective of this program is "to ensure an adequate level of milk
    production." According to USDA, this objective is associated with the
    Dairy Price Support Program. We have revised the report to reflect this
    clarification and added language suggested by USDA to better describe the
    FMMO program's objectives.

    In addition, USDA raised concerns about the practicality of implementing
    some of the options discussed in the report, particularly (1) adopting a
    competitive pay price to establish class prices under the FMMO program and
    (2) combining Class III and Class IV into a single manufacturing class.14
    Regarding the first, USDA said that it and a committee of academicians
    spent considerable time several years ago trying to devise a competitive
    price series that could be used to establish minimum class prices.
    However, this effort was unsuccessful. USDA said that our report does not
    identify or indicate how to create such a price series. Similarly,
    regarding combining Class III and Class IV, USDA notes that no specifics
    are offered in the report as to how milk in such a class would be priced.
    We acknowledge that the report does not explain how a competitive price
    series could be created or how milk would be priced if the classes were
    merged. However, these options were identified by stakeholders during the
    course of our work. Other options discussed in the report also may present
    challenging implementation issues and in many cases the report discusses
    those issues.

    14Under the FMMO program, a classified pricing plan provides different
    classes and minimum prices for milk depending on how it is used. Milk used
    in fluid products is placed in Class I. Milk used for various manufactured
    products is placed in Classes II through IV. Class II includes soft
    products, such as cottage cheese, ice cream, and yogurt. Class III
    includes spreadable and hard cheeses. Class IV includes butter and dried
    milk products, such as nonfat dry milk.

    Finally, USDA said that it does not believe the hearing and rulemaking
    process it uses to modify FMMOs inhibits its ability to respond to
    changing market conditions or the marketing of new dairy products.
    However, as discussed in the report, some stakeholders cited the slowness
    of this process as a concern. In addition, the report discusses USDA's
    efforts to improve this process to more quickly respond to problems or
    needed changes while ensuring the promulgation of economically sound
    regulation.

    USDA did not comment on the report's recommendation.

    As agreed with your offices, unless you publicly announce its contents
    earlier, we plan no further distribution of this report until 30 days from
    the date of this letter. We will then send copies of the report to the
    Senate Committee on Agriculture, Nutrition, and Forestry; the House
    Committee on Agriculture; other appropriate congressional committees;
    interested Members of Congress; the Secretary of Agriculture; the
    Secretary of Defense; the Director of the Office of Management and Budget;
    and other interested parties. Copies will also be made available to others
    upon request. In addition, the report will be available at no charge on
    GAO's Web site at http://www.gao.gov.

    If you or your staff have any questions about this report, please contact
    me at (202) 512-3841. Key contributors to this report are listed in
    appendix IX.

    Lawrence J. Dyckman Director, Natural Resources

    and Environment

    List of Requesters

    The Honorable Olympia J. Snowe
    Chair
    Committee on Small Business & Entrepreneurship
    United States Senate

    The Honorable Hillary Rodham Clinton United States Senate

    The Honorable Susan Collins United States Senate

    The Honorable Christopher J. Dodd United States Senate

    The Honorable James M. Jeffords United States Senate

    The Honorable Edward M. Kennedy United States Senate

    The Honorable John F. Kerry United States Senate

    The Honorable Patrick Leahy United States Senate

    The Honorable Barbara A. Mikulski United States Senate

    The Honorable John D. Rockefeller IV United States Senate

    The Honorable Paul S. Sarbanes United States Senate

    The Honorable Charles E. Schumer United States Senate

    The Honorable Arlen Specter United States Senate

    Appendix I

                           Objectives, Scope, and Methodology

    In March 2003, Senator Snowe, Chair, Committee on Small Business and
    Entrepreneurship, joined by Senators Clinton, Collins, Dodd, Jeffords,
    Kennedy, Kerry, Leahy, Mikulski, Rockefeller IV, Sarbanes, Schumer, and
    Specter requested that GAO examine a number of issues concerning the
    pricing and marketing of milk in the United States. Specifically, they
    asked us to update the information contained in our 2001 report, entitled
    Dairy Industry: Information on Milk Prices and Changing Market Structure

    (GAO-01-561, June 15, 2001), and to address other issues. This report
    examines (1) what portion of the retail price of fluid milk is received by
    dairy farmers, dairy cooperatives, wholesale milk processors, and
    retailers in selected markets throughout the United States, how this
    distribution has changed over the period of our review, and the
    relationships among price changes at these levels; (2) how various
    factors, such as costs, influence the price of milk as it moves from the
    farm to the consumer, as well as how these and other factors affect the
    extent to which changes in price are transmitted among levels as milk
    moves from the farm to the consumer; and (3) how changes in dairy policies
    and alternative policy options have affected or might affect farm income,
    federal costs, economic efficiency, and consumer prices, among other
    policy considerations.1 It also updates other information on milk prices
    included in our June 2001 report.

    To update our information on the price distribution among the various
    levels of the milk marketing chain, we analyzed milk prices in 15 selected
    markets nationwide: Atlanta, Georgia; Boston, Massachusetts; Charlotte,
    North Carolina; Cincinnati, Ohio; Dallas, Texas; Denver, Colorado; Miami,
    Florida; Milwaukee, Wisconsin; Minneapolis, Minnesota; New Orleans,
    Louisiana; Phoenix, Arizona; Salt Lake City, Utah; San Diego, California;
    Seattle, Washington; and Washington, D.C.2 In selecting these markets, we
    ensured that (1) they provided national geographic coverage; (2) at least
    one market was located in each of the federal milk marketing orders
    (FMMOs) as they existed during most of the period from October 2000
    through May 2004; (3) the selected markets included both state and
    federally regulated markets; and (4) these areas represented similar
    marketing areas for which we reported information in our June 2001 report.
    For the 15 markets, we collected data on the prices received by

    1This report does not specifically address consolidation and concentration
    trends in the dairy industry and what is known about the impact of
    concentration on milk prices, as the 2001 report did. However, the report
    discusses market concentration as one of the factors that influence the
    price of milk as it moves from the farm to the consumer. (See app. V.)

    2Portions of some of these market areas lie in adjacent states.

    Appendix I
    Objectives, Scope, and Methodology

    farmers, cooperatives, wholesale milk processors, and retailers for
    October 2000 through May 2004. We limited our data collection efforts to
    the prices of whole, 2 percent, 1 percent, and skim milk because sales of
    these milk types constitute over 93 percent of fluid milk sales annually.
    We also confined our analysis to the prices of these milk types sold in
    gallon containers because milk sold in gallon containers accounts for
    about 65 percent of fluid milk products sold under FMMOs.3

    There is no precise method for calculating the price that farmers receive
    for raw milk that is ultimately processed and sold in fluid milk products
    because dairy farmers receive a blend price for their milk, which is the
    average price for milk used for fluid and manufactured products.
    Therefore, any calculation of the value received by farmers for raw milk
    that is to be used for fluid milk products is necessarily only
    approximate. To estimate a farm price for raw milk used in fluid milk
    products, we used data provided by the U.S. Department of Agriculture's
    (USDA) Agricultural Marketing Service (AMS). AMS developed an adjustment,
    which accounts for various charges such as hauling and marketing fees,
    that we subtracted from the announced cooperative Class I price to obtain
    the estimated farm price for raw milk used in fluid milk products for each
    of the selected markets in our review except San Diego, which is not part
    of the FMMO system.4 AMS's adjustment accounts for farm-to-plant hauling
    costs, cooperative dues and capital assessment, mandatory advertising and
    promotion costs, competitive and receiving credits, and a representative
    estimate of the value of reimbursements to cooperatives for the services
    performed for handlers and for transportation costs not covered by the
    order minimum price.5 Most of the items that make up the adjustment are
    not available for the specific fluid milk market that we selected, but
    rather are based on information collected for milk used over wider
    geographical areas. Therefore, an order-wide value used for any of these
    items provides an estimate rather than the actual value for this item.
    Also, the values for

    3This estimate is based on USDA data for the month of November for
    selected years between 1991 and 2001. It was the most recent data we could
    obtain.

    4Under the federal milk marketing orders, a classified pricing plan
    provides different classes and minimum prices for milk depending on how
    the milk is used. Milk used in fluid products is placed in Class I, which
    is the highest-priced class. Milk used for various manufactured products
    is placed in lower-priced classes.

    5Handler is the federal order term for cooperatives, processors, or
    dealers of milk who commonly purchase raw milk and sell pasteurized milk
    and milk products. See 7 C.F.R. S:1000.9 for a more complete definition.

    Appendix I
    Objectives, Scope, and Methodology

    two of the adjustment items-reimbursements to cooperatives for services
    performed for handlers and for transportation costs not covered by the
    order minimum price-were not readily available so they were estimated
    indirectly based on other reported data and, in some cases, on anecdotal
    information provided by industry members. However, despite these
    limitations, AMS believes that the estimated farm price is a good
    representation of the price that dairy farmers receive for raw milk used
    in fluid milk products. For the farm price for San Diego-a state-regulated
    market-we used mailbox price data collected by the California Department
    of Food and Agriculture. The mailbox price is the weighted average of the
    prices received by dairy farmers in the market for all of their raw milk
    sold and therefore is computed as the total net dollars received for milk
    divided by the total pounds of milk marketed.6 This price is likely to be
    lower than the price received for milk used for fluid purposes because the
    prices for milk used for manufacturing purposes are generally lower.
    However, it is the best measure we could obtain.

    To determine cooperative prices, we used AMS data on announced cooperative
    prices to represent prices that wholesale milk processors paid to
    cooperatives. Wholesale milk processors in federally regulated markets
    generally purchase milk from cooperatives and pay the federal minimum
    price for milk plus premiums that are negotiated between cooperatives and
    wholesale milk processors. The announced cooperative price is the Class I
    milk price announced by the major cooperative in each of the markets. This
    price does not apply to all Class I sales in federally regulated markets
    and is not necessarily the price actually received for all of the milk
    sold by the major cooperative; the announced cooperative prices have not
    been verified by USDA as actually having been paid by processors. For San
    Diego, we used the minimum fluid prices established by the state of
    California. Data on the premiums paid in excess of these minimums were not
    available for this market. (See app. V for a detailed discussion of
    overorder premiums.)

    To determine wholesale prices, we used the prices paid at Department of
    Defense Commissary Agency locations. The Defense Commissary Agency
    purchases milk under competitive and noncompetitive contracts with

    6The mailbox price information collected by the California Department of
    Food and Agriculture does not account for all of the various factors that
    influence farm prices. As a result, it does not provide as good a measure
    of the price that farmers receive based on the value of their milk as the
    AMS adjustment does for the FMMO markets where it is available.

    Appendix I
    Objectives, Scope, and Methodology

    wholesalers. We used commissary prices as surrogates for privately
    established wholesale prices because (1) defense commissaries sell
    groceries at a standard 5 percent markup from cost to active and retired
    military personnel and (2) wholesale price data are considered proprietary
    by industry officials and were not available to us. The commissary network
    of stores ranks twelfth in the United States in sales volume for
    supermarket chains. We selected 39 different commissary locations near the
    15 markets we reviewed, and the Defense Commissary Agency provided us with
    weekly prices paid by consumers at these locations for gallons of whole, 2
    percent, 1 percent, and skim milk.7 We averaged these weekly prices to
    obtain monthly prices. We then adjusted these monthly prices to account
    for the 5 percent markup. Where we had multiple commissary locations for a
    market, we averaged the adjusted monthly prices to obtain a wholesale
    price for the market. We recognize that these locations may not provide an
    ideal match with other price data analyzed for a given location; for
    example, in some markets the available commissary locations were not in
    close proximity to the selected marketing areas. Also, wholesale
    processors may provide these commissary locations with different levels of
    service than they do for retailers in these markets.8 In such cases, the
    prices paid by these commissaries for fluid milk may have been different
    than the prices that retailers in the selected markets paid to their
    wholesale suppliers. However, these were the best wholesale data that we
    could obtain. In those locations where commissaries sold more than one
    brand of milk, we used the price for the brand that had the highest sales
    volume for a particular period.

    For retail prices, we contracted with Information Resources, Inc., a
    private data collection and analysis company, to obtain average weekly
    retail prices for whole, 2 percent, 1 percent, and skim milk sold in
    gallon containers. These data represented a weighted average of prices at
    supermarkets with yearly sales exceeding $2 million for the markets
    included in our analysis. We then averaged these weekly prices to obtain
    monthly prices. We were unable to obtain data from some types of
    nonsupermarket retailers such as mass merchandisers, thus the retail

    7The 39 commissary locations were selected either because they were within
    the marketing area for one of our 15 selected markets (as defined by our
    source for retail pricing data, Information Resources, Inc.), or because
    they were the closest location available.

    8In addition to shipping the products to stores, some wholesalers provide
    in-store services, including unloading the milk on the store dock,
    restocking the dairy case, and removing outdated or leaking containers.

    Appendix I
    Objectives, Scope, and Methodology

    pricing data that we present may not be representative of fluid milk
    prices at those locations. Figure 1 shows the locations of the 15 selected
    markets, the corresponding commissaries, and the federal milk marketing
    order areas.

                                       Appendix I
                           Objectives, Scope, and Methodology

    Figure 1: Selected Milk Markets, Corresponding Defense Commissaries Used
    for Our Analysis, and Federal Milk Marketing Order Areas Prior to April
    2004

    Source: GAO, based on USDA and Defense Commissary Agency information.

    Appendix I
    Objectives, Scope, and Methodology

    Note: The Western Order was terminated as of April 1, 2004. However,
    because the order existed during the majority of our period of analysis we
    chose to include the data in this report. Farm and cooperative level
    prices for this order for April and May 2004 were provided by USDA based
    on what they would have been had the order still existed.

    To determine (1) the portion of the retail price of a gallon of milk
    received by farmers, cooperatives, wholesale milk processors, and
    retailers; (2) how changes in retail and farm prices affect the
    farm-to-retail price spread; and (3) how price changes at any level of the
    marketing chain correlate to changes in prices at other levels, we limited
    our analysis to 2 percent milk, which currently represents the largest
    volume of reduced-fat milk sold nationwide. Therefore, our analysis of 2
    percent prices may not necessarily reflect pricing patterns and trends for
    the other three kinds of milk. Appendix II includes graphs that show the
    relationships among the farm, cooperative, wholesale, and retail prices
    for a gallon of 2 percent milk for each of the 15 markets. Because farm
    and cooperative prices reflect a higher milkfat content than that in 2
    percent milk, we adjusted these prices to reflect the value of removing
    milkfat and replacing it with skim milk.9 This adjustment allowed us to
    use farm and cooperative prices that were comparable to the wholesale and
    retail prices for our analysis.

    To determine the degree that farm and retail prices had changed and the
    effect these changes had on the farm-to-retail price spread from October
    2000 through May 2004 for each of the 15 markets, we used a statistical
    procedure to estimate farm-level and retail prices at the beginning and
    end of the period.10 We relied on estimated rather than actual prices to
    reduce the influence of the starting and ending months and years selected
    for our analysis in markets in which milk prices varied from month to
    month. We

    9For San Diego, we used prices that were adjusted for 2 percent milkfat
    and 10 percent nonfat milk solids so that they were comparable with the
    prices of retail milk sold in California.

    10We used a regression procedure for each market to determine whether the
    price could be reliably predicted as a function of time for both
    farm-level and retail prices. This procedure allowed us to estimate
    initial and final prices for farm-level and retail prices that take into
    account the variability in these price series during the 44-month period.
    This regression procedure was done on time and time-squared because we
    observed that prices generally fell for part of the period and then rose.
    Including the time-squared variable in the regression provided a better
    fit for the data. A statistically significant relationship indicates that
    we found a consistent association, either up or down, between price and
    time. For statistically significant relationships, we calculated a final
    price estimate (computed for the last month of our data series) and
    compared to an estimated price calculated for the first month. In the
    absence of a statistically significant relationship-when no consistent
    association was found-we treated initial and final estimates of price the
    same, even if actual beginning and final prices differ.

    Appendix I
    Objectives, Scope, and Methodology

    used the differences between the estimated initial and final prices to
    represent the changes during the period. When our statistical procedure
    did not find a consistent association between prices and time, we treated
    the difference in the estimated initial and final prices as zero. We
    calculated the change in the farm-to-retail price spread as the estimated
    retail price difference minus the estimated farm price difference.

    To describe the relationship between price changes at any given level in
    the milk marketing chain and price changes at the other levels, we tested
    for correlations between price changes at the various levels for each of
    the 15 markets included in our analysis. Specifically, we calculated
    coefficients describing the degree of correlation between changes in farm
    prices and price changes at the cooperative, wholesale, and retail levels;
    price changes at the cooperative level and price changes at the wholesale
    and retail levels; and price changes at the wholesale and retail levels.
    In appendix II, we report those correlation coefficients and indicate
    which are statistically different from zero at the 95 percent confidence
    level.

    To update information provided in our June 2001 report on the retail
    prices for four kinds of milk, we analyzed the retail price data that we
    obtained from Information Resources, Inc. We array these data in appendix
    III for each of the selected 15 markets for October 2000 through May 2004.

    To update information provided in our June 2001 report on average monthly
    and annual farm and cooperative prices, and wholesale and retail prices
    for different kinds of milk, we analyzed data obtained from USDA, the
    California Department of Food and Agriculture, the Department of Defense
    Commissary Agency, and Information Resources, Inc. We report these data in
    appendix IV for each of the selected 15 markets for October 2000 through
    May 2004.

    To update our information on the major factors influencing milk prices and
    explore price transmission within the milk marketing chain, we conducted
    more than 50 interviews with national dairy experts working with the

    Appendix I
    Objectives, Scope, and Methodology

    federal and state governments,11 cooperatives,12 processors,13
    retailers,14 or industry groups,15 or in academia.16 We also reviewed a
    number of relevant studies and publications from USDA and other sources.
    Where possible, we obtained data on production costs, services provided by
    cooperatives, as well as inputs to processing and retailing. We also
    obtained information on concentration and market power at each level of
    the milk marketing chain. We present information on the factors
    influencing the price of milk in appendix V.

    To compare the results and methodologies of various studies looking at the
    issue of price transmission in fluid milk marketing from the farm to the
    retail level, we performed a technical review of 14 academic studies
    conducted over the past 10 years, looking at model descriptions,
    assumptions, and results. We also spoke with the economists involved in
    these studies concerning their model results and the causes of differences
    in fluid milk price transmission across markets. The scope of these
    studies encompassed national, regional, and city-level models of fluid
    milk price transmission. Appendix VI provides a summary of our review of
    price transmission and the various price transmission studies.

    To identify and examine the effects of federal dairy program changes and
    alternative policy options, we contacted many of the same dairy experts
    previously mentioned. We also conducted an extensive literature search and
    reviewed more than 50 relevant studies and other publications we
    identified. We qualitatively analyzed the effects of federal dairy program

    11Federal government sources included officials from USDA's AMS, Economic
    Research Service, and Farm Service Agency.

    12Cooperatives we contacted included Dairy Farmers of America; California
    Dairies, Inc.; Agri-Mark; Land O'Lakes, Inc.; and Prairie Farms.

    13Fluid milk processors and processors of manufactured dairy products that
    we contacted included HP Hood LLC and Leprino Foods, as well as
    cooperatives and retailers that process and manufacture these products.

    14Retailers that we contacted included Wal-Mart, Albertsons, the H. E.
    Butt Grocery Company, and Demoulas Super Markets, Inc.

    15Industry groups that we contacted included the National Milk Producers
    Federation, the International Dairy Foods Association, and the Food
    Marketing Institute.

    16Academic dairy experts that we contacted included professors from
    Cornell University, North Carolina State University, Ohio State
    University, Texas A&M University, University of Connecticut, University of
    Wisconsin-Madison, and the University of California-Davis.

    Appendix I
    Objectives, Scope, and Methodology

    changes and policy options we identified on six main policy
    considerations: farm income, milk production, federal costs, price
    volatility, economic efficiency, and consumer prices. We evaluated impacts
    on these policy considerations under both high-and low-price scenarios,
    over the short and long terms. We identified these policy considerations
    by reviewing previous GAO reports, relevant studies, and legislation, as
    well as through our conversations with dairy policy experts. Different
    stakeholders in the dairy policy arena may have alternative views on the
    relative importance of these policy considerations, as well as other
    considerations that we did not include, which could lead to differing
    perspectives on these options. In addition, the potential effects of
    policy options on these considerations could vary depending upon economic
    conditions and other policy decisions. We compared the dairy policy
    options we identified against a baseline scenario of the policies in place
    as of August 2004: FMMO regulations, a Milk Income Loss Contract (MILC)
    program that is scheduled to expire at the end of fiscal year 2005, a
    price support program at $9.90 per hundredweight, a Dairy Export Incentive
    Program (DEIP), trade restrictions, and milk regulatory policies in some
    states. We include a discussion of the effects of recent federal dairy
    program changes and alternative policy options in appendix VII.

    We conducted our review from September 2003 through October 2004 in
    accordance with generally accepted government auditing standards. We did
    not independently verify the data we received from various sources.
    However, we discussed with these sources the measures they take to ensure
    the accuracy of the data, and these measures seemed reasonable.
    Additionally, we consulted with the following dairy experts concerning the
    results of our analysis of price transmission within the milk marketing
    chain and the effects of changes in federal dairy programs and alternative
    policy options:

    o 	Ed Jesse, Ph.D., Professor, Department of Agricultural and Applied
    Economics, University of Wisconsin-Madison;

    o 	Daniel Lass, Ph.D., Professor, College of Natural Resources and the
    Environment, University of Massachusetts, Amherst;

    o 	Richard Sexton, Ph.D., Professor, Department of Agricultural and
    Resource Economics, University of California-Davis; and

    o 	Mark Stephenson, Ph.D., Senior Extension Associate, Department of
    Applied Economics and Management, Cornell University.

    Appendix II

    Analysis of Prices at Four Marketing Levels for 2 Percent Milk in Selected
    Markets

    This appendix reports on our analysis of prices at four marketing levels
    for a gallon of 2 percent milk in 15 selected markets for October 2000
    through May 2004. Our analysis includes information on (1) the portion of
    the retail price of a gallon of milk received by farmers, cooperatives,
    wholesale milk processors, and retailers; (2) how changes in farm and
    retail milk prices affect the farm-to-retail milk price spread; and (3)
    how price changes at any level of the marketing chain correlate with
    changes in prices at other levels.

    We limited our analysis to gallons of 2 percent milk because sales of milk
    with reduced fat content account for nearly 52 percent of all sales of
    fluid milk and sales of 2 percent milk account for about 62 percent of
    these reduced-fat sales. The farm and cooperative prices used in our
    analysis and presented in this appendix have been adjusted to reflect 2
    percent milkfat. This analysis may not reflect pricing patterns and trends
    for other kinds of milk. We present complete data for prices for all four
    types of milk-whole, 2 percent, 1 percent, and skim-in appendix III.

    Portion Received by Farmers, Cooperatives, Wholesale Milk Processors and
    Retailers

    Between October 2000 and May 2004, on average, our data suggest that
    farmers received 45.9 percent, cooperatives 6.1 percent, wholesale
    processors 35.6 percent, and retailers 12.5 percent of the retail price of
    a gallon of 2 percent milk in the 15 markets we reviewed.1 However, these
    percentages varied depending on the specific market. For example, the
    farmers' portion ranged from 36.0 percent to 58.6 percent, while retailers
    in 12 markets received anywhere from 3.5 percent to 44.1 percent.2 In
    comparison, the average percentages we reported in 2001 for the period
    March 1998 through September 2000 were 43 percent, 5 percent, 33 percent,
    and 19 percent, respectively, for farmers, cooperatives, wholesale
    processors, and retailers. Table 1 summarizes the price breakdown for each
    market.

    1These figures represent unweighted averages of the percentages for each
    market.

    2See explanatory note (a) to table 1. In some places (3 out of 15
    markets), retailers experienced negative returns.

                                      Appendix II
                      Analysis of Prices at Four Marketing Levels
                         for 2 Percent Milk in Selected Markets

    Table 1: Portion of the Retail Price of a Gallon of 2 Percent Milk
    Received by Farmers, Cooperatives, Wholesale Processors, and Retailers for
    15 Markets, October 2000 through May 2004

                                                                         Subtotal
                                                                         received
                                                  Percent                      by
                                                  received              wholesale
                             Percent Percent              by Percent   processors
                            received received      wholesale received         and
        Selected market   by farmers by           processors        by  retailers
                                     cooperatives            retailers
          Atlanta, Ga.          42.7          7.4       34.8      15.1
         Boston, Mass.          51.2          4.5       24.0      20.4
        Charlotte, N.C.         41.1          7.5       46.6       4.8
        Cincinnati, Ohio        45.8          7.6       39.0       7.7
          Dallas, Tex.          55.9          5.3       49.5   (10.7)a
         Denver, Colo.          39.4          4.5       25.7      30.3
          Miami, Fla.           50.8          9.5       45.0    (5.3)a
        Milwaukee, Wisc.        52.1          7.9       36.5       3.5
    Minneapolis, Minn.       58.6          7.8       64.1   (30.5)a
        New Orleans, La.        36.8          9.5       36.6      17.1
         Phoenix, Ariz.         42.5          3.3       34.8      19.4
        Salt Lake City,         44.8          3.6       43.0       8.6
              Utah
    San Diego, Calif.        36.0          6.8       28.1      29.1
               b
         Seattle, Wash.         36.7          3.2       16.0      44.1
        Washington, D.C.        53.4          3.3       10.2      33.1
    Average for the 15
            markets             45.9          6.1       35.6      12.5

    Source: GAO's analysis of farm and cooperative price data provided by USDA
    (for the San Diego market, the mailbox and Southern California Class I
    price data were provided by the California Department of Food and
    Agriculture), wholesale price data provided by the Defense Commissary
    Agency, and retail price data provided by Information Resources, Inc.

    Note: Percentages may not total 100 due to rounding.

    aOur analysis found that retailers in the Dallas, Miami, and Minneapolis
    markets received a negative return on a gallon of 2 percent milk for the
    44-month period. Officials with one major retailer in the Dallas market
    indicated that a price war was occurring in Dallas during this time
    period. We were unable to obtain explanations for the negative returns in
    Miami and Minneapolis. These negative returns may be the result of
    problems with comparability between commissary and supermarket data.

    bFigures for the San Diego market may understate the percent received by
    cooperatives and overstate the percent received by wholesale processors
    because the cooperative price data for this market did not include
    estimates of over-order premiums paid to cooperatives. On the other hand,
    figures for this market may overstate the percent received by cooperatives
    and understate the percent received by farmers because unlike the farm
    price data for other markets, the farm price data for San Diego represent
    a weighted average of milk sold for all uses. See appendix I.

                                      Appendix II
                      Analysis of Prices at Four Marketing Levels
                         for 2 Percent Milk in Selected Markets

    Changes in Farm and Retail Prices and the Price Spread

    From October 2000 through May 2004, the spread between farm and retail
    milk prices increased in 12 of the 15 markets.3 However, in some of the 12
    markets, the spread between farm and retail milk prices increased
    dramatically and then moderated. In 9 of the 15 markets, retail prices
    showed a statistically significant increase. In 4 of the remaining
    markets, retail prices decreased over time; in the other 2 markets, retail
    prices showed no statistically significant change. At the same time, farm
    prices decreased in 12 of the 15 markets and increased in the remaining 3
    markets over the 44-month period. However, these declining farm prices
    began to moderate, or, in most cases, began to rise during the latter
    months of our period of analysis. Table 2 provides these data for selected
    markets.4

    Table 2: Changes in the Farm-to-Retail Price Spread for a Gallon of 2
    Percent Milk for 15 Markets, October 2000 through May 2004

    Change in farm Change in retail Change in the farm-to-retail Selected
    market prices prices price spread

                         Atlanta, Ga.     $0.03            ($0.21)        ($0.24)
                        Boston, Mass.    (0.06)          0.12
                      Charlotte, N.C.    (0.05)          0.20
                     Cincinnati, Ohio    (0.07)         (0.12)             (0.05)
                         Dallas, Tex.     0.02           0.24
                        Denver, Colo.    (0.06)          0.16
                          Miami, Fla.    (0.01)          0.25
                     Milwaukee, Wisc.    (0.03)          0.05
                   Minneapolis, Minn.    (0.02)           a
                     New Orleans, La.    (0.10)          0.16
                       Phoenix, Ariz.    (0.07)         (0.01)

    3The price spread of a commodity represents differences in prices between
    two levels of the marketing chain. These differences reflect the costs
    incurred and profits received through adding value by processing,
    transporting, and distributing a commodity.

    4The values used to calculate the changes in farm and retail prices in
    table 2 are based on statistical estimates of initial and final prices for
    these two levels, not the actual prices recorded in the first and last
    month of the period for which we have data. The method for calculating
    these estimates is described in appendix I. The changes in the
    farm-to-retail price spread are the differences between the changes in
    retail and farm prices from October 2000 to May 2004 and consequently are
    determined from the statistically estimated initial and final prices for
    the retail and farm levels.

                                      Appendix II
                      Analysis of Prices at Four Marketing Levels
                         for 2 Percent Milk in Selected Markets

    (Continued From Previous Page)

                            Change in farm Change in retail

    Change in the farm-to-retail price spread

                             Selected market prices prices

                   Salt Lake City, Utah    (0.04)           a
                      San Diego, Calif.     0.03         (0.16)            (0.19)
                         Seattle, Wash.    (0.08)         0.10
                       Washington, D.C.    (0.03)         0.28

    Source: GAO's analysis of farm and cooperative price data provided by USDA
    (for the San Diego market, the mailbox and Southern California Class I
    price data were provided by the California Department of Food and
    Agriculture), wholesale price data provided by the Defense Commissary
    Agency, and retail price data provided by Information Resources, Inc.

    Note: Differences between changes in farm and retail prices may not add to
    the change in the farm-toretail price spread due to rounding.

    aNo statistically significant change was observed in the price spread over
    the 44-month period.

    Correlation between Price Changes at the Four Marketing Levels

    We found that price changes generally correlated across levels in the
    marketing chain, with the strongest correlations occurring between
    adjacent levels. The values of correlation coefficients presented are
    estimates of the degree that price changes at one level in the milk
    marketing chain are associated with price changes at other levels. The
    higher the coefficient, the closer the association between changes in
    prices at different levels. Changes in cooperative prices, in general,
    were strongly correlated with changes in wholesale prices.5 However,
    changes in cooperative prices correlated less strongly with changes in
    retail prices. As discussed in appendix V, many factors other than farm or
    wholesale prices influence the retail price of fluid milk.

    Correlation coefficients between prices at different marketing levels
    varied across markets. For example, correlations between cooperative and
    wholesale prices in individual markets range from a high of 0.982 to a low
    of -0.031. We ranked the 15 markets by the extent of correlation between
    cooperative and wholesale prices. The correlation coefficient for the

    5As discussed in appendix I, farm prices were estimated by subtracting out
    certain cost factors, provided by USDA, from the announced cooperative
    Class I prices. To the extent that these factors do not change much over
    time, it would be expected that price changes at the farm level would
    closely correlate with price changes at the cooperative level, except for
    San Diego. As discussed in appendix I, we estimated the farm and
    cooperative prices differently in San Diego because California is not part
    of the federal milk marketing order system. The approach that we used for
    San Diego would not be expected to generate a similarly close correlation
    between farm and cooperative prices. Because farm prices for raw milk used
    for fluid purposes are not directly observed but are derived from
    cooperative prices, correlations of wholesale and retail prices with
    cooperative prices provide a better picture of the price relationship
    across levels in the milk marketing chain.

    Appendix II
    Analysis of Prices at Four Marketing Levels
    for 2 Percent Milk in Selected Markets

    market that fell in the middle of this ranking was 0.788. In comparison,
    the market in the middle of a similar ranking for the time period analyzed
    in our 2001 report had a lower correlation coefficient between these
    prices, 0.716. Similarly, correlations between cooperative and retail
    prices in individual markets range from a high of 0.879 to a low of 0.214.
    We did a comparable ranking of the 15 markets by the extent of correlation
    between cooperative and retail prices. The correlation coefficient for the
    market that fell in the middle of this ranking was 0.588. In comparison,
    the market in the middle of a similar ranking for the time period
    presented in our 2001 report again had a lower correlation coefficient
    between these prices, 0.483. Tables 3 through 5 present data from our
    correlation analysis of price changes across marketing levels.

    Table 3: Correlation between Farm Price Changes and Changes in
    Cooperative, Wholesale, and Retail Prices for a Gallon of 2 Percent Milk
    for 15 Markets, October 2000 through May 2004

                                    Correlation      Correlation      Correlation
                               coefficients for coefficients for coefficients for
               Selected market cooperative      wholesale prices    retail prices
                               prices
                  Atlanta, Ga.           0.999*           0.525*           0.537*
                 Boston, Mass.           1.000*           0.691*           0.780*
               Charlotte, N.C.           0.995*           0.693*           0.778*
              Cincinnati, Ohio           1.000*           0.983*           0.589*
                  Dallas, Tex.           0.998*           0.813*           0.713*
                 Denver, Colo.           0.999*           0.932*           0.428*
                   Miami, Fla.           0.999*          (0.024)           0.826*
              Milwaukee, Wisc.           0.999*           0.683*           0.881*
            Minneapolis, Minn.           0.999*            0.220           0.503*
              New Orleans, La.           0.993*           0.784*           0.863*
                Phoenix, Ariz.           1.000*           0.542*            0.217
               Salt Lake City,
                          Utah           1.000*           0.829*           0.360*
             San Diego, Calif.           0.407*           0.432*           0.341*
                Seattle, Wash.           1.000*           0.939*            0.249
              Washington, D.C.           1.000*           0.962*           0.810*

    Source: GAO's analysis of farm and cooperative price data provided by USDA
    (for the San Diego market, the mailbox and Southern California Class I
    price data were provided by the California Department of Food and
    Agriculture), wholesale price data provided by the Defense Commissary
    Agency, and retail price data provided by Information Resources, Inc.

    Note: In calculating the correlation coefficients for each market, we
    omitted the months for which data were missing.

    Appendix II
    Analysis of Prices at Four Marketing Levels
    for 2 Percent Milk in Selected Markets

    *Indicates that the correlation coefficient estimated for this time period
    is statistically significant at the 5 percent level (i.e., the probability
    that the two price series are uncorrelated is less than 5 percent).

    Table 4: Correlation between Cooperative Price Changes and Changes in
    Wholesale and Retail Prices for a Gallon of 2 Percent Milk for 15 Markets,
    October 2000 through May 2004

                                 Correlation coefficients             Correlation
                                                      for        coefficients for
                 Selected market         wholesale prices           retail prices
                    Atlanta, Ga.                   0.546*                  0.543*
                   Boston, Mass.                   0.694*                  0.775*
                 Charlotte, N.C.                   0.697*                  0.778*
                Cincinnati, Ohio                   0.982*                  0.588*
                    Dallas, Tex.                   0.818*                  0.725*
                   Denver, Colo.                   0.939*                  0.436*
                     Miami, Fla.                  (0.031)                  0.823*
                Milwaukee, Wisc.                   0.682*                  0.879*
              Minneapolis, Minn.                    0.228                  0.499*
                New Orleans, La.                   0.788*                  0.861*
                  Phoenix, Ariz.                   0.540*                   0.214
            Salt Lake City, Utah                   0.830*                  0.360*
               San Diego, Calif.                   0.969*                  0.480*
                  Seattle, Wash.                   0.939*                   0.250
                Washington, D.C.                   0.962*                  0.809*

    Source: GAO's analysis of cooperative price data provided by USDA (for the
    San Diego market, the Southern California Class I price data were provided
    by the California Department of Food and Agriculture), wholesale price
    data provided by the Defense Commissary Agency, and retail price data
    provided by Information Resources, Inc.

    Note: In calculating the correlation coefficients for each market, we
    omitted the months for which data were missing.

    *Indicates that the correlation coefficient estimated for this time period
    is statistically significant at the 5 percent level (i.e., the probability
    that the two price series are uncorrelated is less than 5 percent).

                                      Appendix II
                      Analysis of Prices at Four Marketing Levels
                         for 2 Percent Milk in Selected Markets

    Table 5: Correlation between Wholesale and Retail Price Changes for a
    Gallon of 2 Percent Milk for 15 Markets, October 2000 through May 2004

               Selected market Correlation coefficients for retail prices

                                  Atlanta, Ga. 0.319*

                                  Boston, Mass. 0.348*

                                 Charlotte, N.C. 0.746*

                                Cincinnati, Ohio 0.544*

                                  Dallas, Tex. 0.802*

                                  Denver, Colo. 0.429*

                                  Miami, Fla. (0.003)

                                Milwaukee, Wisc. 0.744*

                                Minneapolis, Minn. 0.205

                                New Orleans, La. 0.734*

                                 Phoenix, Ariz. 0.419*

                               Salt Lake City, Utah 0.270

                                San Diego, Calif. 0.497*

                                  Seattle, Wash. 0.183

                                Washington, D.C. 0.778*

    Source: GAO's analysis of wholesale price data provided by the Defense
    Commissary Agency and retail price data provided by Information Resources,
    Inc.

    Note: In calculating the correlation coefficients for each market, we
    omitted the months for which data were missing.

    *Indicates that the correlation coefficient estimated for this time period
    is statistically significant at the 5 percent level (i.e., the probability
    that the two price series are uncorrelated is less than 5 percent).

    Comparison of Average Tables 6 through 10 show the average annual price
    for a gallon of 2 percent

    milk in the 15 markets for each of the four marketing levels during part
    ofAnnual and Monthly 2000, all of 2001, 2002, and 2003, and part of 2004.
    Figures 2 through 16 Prices for 2 Percent present average monthly data for
    the period October 2000 through May Milk 2004 on farm, cooperative,
    wholesale, and retail prices for gallons of 2

    percent milk in each of the 15 markets. Gaps in any of the lines shown in

    the figures indicate that data were unavailable for those months.

    Appendix II
    Analysis of Prices at Four Marketing Levels
    for 2 Percent Milk in Selected Markets

    Table 6: Average Annual Farm, Cooperative, Wholesale, and Retail Prices
    for a Gallon of 2 Percent Milk in Selected Markets, 2000

    Selected market Farm price Cooperative price Wholesale price Retail price

                         Atlanta, Ga.   $1.05      $1.25      $2.04         $2.67
                        Boston, Mass.    1.25       1.35       1.96          2.23
                      Charlotte, N.C.    1.09       1.25       2.06          2.58
                     Cincinnati, Ohio    1.03       1.21             a       2.24
                         Dallas, Tex.    1.08       1.20       2.05          1.74
                        Denver, Colo.    0.99       1.11       1.73          2.45
                          Miami, Fla.    1.22       1.44       2.50          2.33
                     Milwaukee, Wisc.    1.05       1.18       1.79          1.94
                   Minneapolis, Minn.    1.01       1.12       2.05          1.77
                     New Orleans, La.    1.02       1.22       2.25          2.61
                       Phoenix, Ariz.    1.01       1.09       1.83          2.09
                 Salt Lake City, Utah    0.98       1.06       1.97          2.25
                    San Diego, Calif.    0.92       1.16       1.90          2.54
                       Seattle, Wash.    1.02       1.10       1.47          2.56
                     Washington, D.C.    1.21       1.28       1.51          2.11

    Source: GAO's analysis of farm and cooperative price data provided by USDA
    (for the San Diego market, the mailbox and Southern California Class I
    price data were provided by the California Department of Food and
    Agriculture), wholesale price data provided by the Defense Commissary
    Agency, and retail price data provided by Information Resources, Inc.

    Note: Averages for 2000 were calculated using data from October through
    December, the portion of 2000 included in our analysis.

    aWe were unable to obtain data from the Defense Commissary Agency to
    represent wholesale prices for 2 percent milk in the Cincinnati market
    during 2000.

    Table 7: Average Annual Farm, Cooperative, Wholesale, and Retail Prices
    for a Gallon of 2 Percent Milk in Selected Markets, 2001

                                            Cooperative    Wholesale    Retail
           Selected market      Farm price          price       price    price
            Atlanta, Ga.             $1.14          $1.34       $2.50    $2.68
            Boston, Mass.             1.29           1.39        1.95     2.32
           Charlotte, N.C.            1.18           1.34        2.32     2.62
          Cincinnati, Ohio            1.15           1.32        2.24     2.28
            Dallas, Tex.              1.17           1.28        2.15     1.98
            Denver, Colo.             1.12           1.23        1.93     2.54
             Miami, Fla.              1.31           1.53        2.56     2.40

    Appendix II
    Analysis of Prices at Four Marketing Levels
    for 2 Percent Milk in Selected Markets

    (Continued From Previous Page)

                                                 Cooperative   Wholesale   Retail
                   Selected market  Farm price          price       price   price
                  Milwaukee, Wisc.         1.17          1.32        2.17    2.07
                Minneapolis, Minn.         1.14          1.27        2.21    1.73
                  New Orleans, La.         1.11          1.31        2.32    2.68
                    Phoenix, Ariz.         1.14          1.21        1.91    2.42
              Salt Lake City, Utah         1.10          1.18        2.11    2.24
                 San Diego, Calif.         1.05          1.25        2.04    2.84
                    Seattle, Wash.         1.11          1.20        1.66    2.73
                  Washington, D.C.         1.34          1.42        1.71    2.30

    Source: GAO's analysis of farm and cooperative price data provided by USDA
    (for the San Diego market, the mailbox and Southern California Class I
    price data were provided by the California Department of Food and
    Agriculture), wholesale price data provided by the Defense Commissary
    Agency, and retail price data provided by Information Resources, Inc.

    Table 8: Average Annual Farm, Cooperative, Wholesale, and Retail Prices
    for a Gallon of 2 Percent Milk in Selected Markets, 2002

    Selected market Farm price Cooperative price Wholesale price Retail price

                      Atlanta, Ga.    $1.04       $1.22       $2.01         $2.47
                     Boston, Mass.    1.11        1.21        1.77           2.33
                   Charlotte, N.C.    1.01        1.22        2.55           2.59
                  Cincinnati, Ohio    0.95        1.11        1.98           2.34
                      Dallas, Tex.    1.08        1.17        2.19           2.03
                     Denver, Colo.    0.93        1.05        1.66           2.56

    Miami, Fla. 1.17 1.41 2.56 2.36 Milwaukee, Wisc. 0.98 1.14 1.81 2.01
    Minneapolis, Minn. 0.95 1.10 2.38 1.95 New Orleans, La. 0.92 1.19 2.22
    2.70 Phoenix, Ariz. 0.94 1.02 1.88 2.59 Salt Lake City, Utah 0.91 0.99
    1.92 2.29 San Diego, Calif. 0.88 1.06 1.84 2.66 Seattle, Wash. 0.93 1.01
    1.39 2.74 Washington, D.C. 1.16 1.23 1.44 2.28

    Source: GAO's analysis of farm and cooperative price data provided by USDA
    (for the San Diego market, the mailbox and Southern California Class I
    price data were provided by the California Department of Food and
    Agriculture), wholesale price data provided by the Defense Commissary
    Agency, and retail price data provided by Information Resources, Inc.

    Appendix II
    Analysis of Prices at Four Marketing Levels
    for 2 Percent Milk in Selected Markets

    Table 9: Average Annual Farm, Cooperative, Wholesale, and Retail Prices
    for a Gallon of 2 Percent Milk in Selected Markets, 2003

    Selected market Farm price Cooperative price Wholesale price Retail price

                          Atlanta, Ga.   $1.07      $1.25      $2.02        $2.49
                         Boston, Mass.    1.14       1.25       1.79         2.33
                       Charlotte, N.C.    1.05       1.27       2.65         2.63
                      Cincinnati, Ohio    0.98       1.16       2.00         2.34
                          Dallas, Tex.    1.09       1.19       2.26         2.02
                         Denver, Colo.    0.97       1.08       1.68         2.55
                           Miami, Fla.    1.20       1.43       2.56         2.47
                      Milwaukee, Wisc.    1.01       1.19       1.87         2.00
                    Minneapolis, Minn.    0.99       1.13       2.36         1.62
                      New Orleans, La.    0.94       1.24       2.22         2.68
                        Phoenix, Ariz.    0.97       1.05       1.97         2.45
                  Salt Lake City, Utah    0.95       1.03       1.99         2.14
                     San Diego, Calif.    0.93       1.12       1.84         2.69
                        Seattle, Wash.    0.95       1.04       1.46         2.88
                      Washington, D.C.    1.19       1.27       1.46         2.33

    Source: GAO's analysis of farm and cooperative price data provided by USDA
    (for the San Diego market, the mailbox and Southern California Class I
    price data were provided by the California Department of Food and
    Agriculture), wholesale price data provided by the Defense Commissary
    Agency, and retail price data provided by Information Resources, Inc.

    Table 10: Average Annual Farm, Cooperative, Wholesale, and Retail Prices
    for a Gallon of 2 Percent Milk in Selected Markets, 2004

    Selected market Farm price Cooperative price Wholesale price Retail price

               Atlanta, Ga.          $1.18      $1.35      $2.21         $2.54
              Boston, Mass.          1.27        1.38       1.90          2.43
             Charlotte, N.C.         1.13        1.35       2.84          2.87
             Cincinnati, Ohio        1.09        1.27       2.21          1.95
               Dallas, Tex.          1.20        1.30       2.47          2.13
              Denver, Colo.          1.06        1.20       2.04          2.72
               Miami, Fla.           1.30        1.52       2.56          2.63
             Milwaukee, Wisc.        1.15        1.31       2.13          2.13
            Minneapolis, Minn.       1.14        1.29       2.43          1.93
             New Orleans, La.        1.03        1.33       2.15          2.87
              Phoenix, Ariz.         1.08        1.17       2.17          2.25

                                      Appendix II
                      Analysis of Prices at Four Marketing Levels
                         for 2 Percent Milk in Selected Markets

    (Continued From Previous Page)

    Selected market Farm price Cooperative price Wholesale price Retail price

                  Salt Lake City, Utah    1.07       1.14       2.16         2.19
                     San Diego, Calif.    1.12       1.22       1.92
                        Seattle, Wash.    1.06       1.15       1.74
                      Washington, D.C.    1.31       1.39       1.66

    Source: GAO's analysis of farm and cooperative price data provided by USDA
    (for the San Diego market, the mailbox and Southern California Class I
    price data were provided by the California Department of Food and
    Agriculture), wholesale price data provided by the Defense Commissary
    Agency, and retail price data provided by Information Resources, Inc.

    Note: The 2004 averages were calculated using data from January through
    May of that year, the portion of 2004 included in our analysis.

    Figure 2: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of
    2 Percent Milk for Atlanta, Georgia, October 2000 through May 2004

    Dollars per gallon

                                          Dec.

    .gAu

                                          Jan.

    Jan.

                               Feb. Dec. Sept.Oct.No Feb.

    .gAu

                                          Feb.

    .NoDec.

                                  Sept. Jan.Feb. Sept.

    Oct.

    .MarApr

    .gAu

                                          Oct.

    .Apr

                                       . Oct.No.

    .MarApr

    .yMa

                                           .

    .No

    .Mar

                                        Jan.Dec.

    .Mar

    .Apr

    en

                                         yMaJu

    enJu

    yl

    en

    lyJu

                                         yMaJu

    lyJu

                                         yMaJu

    2000 2001 2002 2003 2004

    Retail price

    Wholesale price

    Cooperative price

    Farm price

    Source: GAO analysis of data provided by USDA, the Defense Commissary
    Agency, and Information Resources, Inc.

    Note: For Atlanta, Georgia, the farm price is the USDA estimated farm
    Class I price adjusted to 2 percent milkfat content; the cooperative price
    is the announced cooperative Class I price for Atlanta adjusted to 2
    percent milkfat content; the wholesale price is the average of the prices
    paid by the commissaries at Fort Gillem and Fort McPherson, adjusted for a
    5 percent markup; and the retail price is the price collected by
    Information Resources, Inc., for the Atlanta market.

                                      Appendix II
                      Analysis of Prices at Four Marketing Levels
                         for 2 Percent Milk in Selected Markets

    Figure 3: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of
    2 Percent Milk for Boston, Massachusetts, October 2000 through May 2004

    Dollars per gallon Oct.

                                         Dec. .

    Dec.

                                    Feb. Jan. Sept.

    .yAprMa

                            Oct. Feb. Dec. Feb. Dec.Jan.Feb.

    Jan.

    .Apr

    .MarApr

                                       Sept.Oct.

    .No

    .MarApr

    .gAu

                                           .

    .No

                                         Jan. .

    .gAu

                                         Oct.No

    .Mar

    .Mar

    .gAu

                                         Sept.

    .No

    en

    en

    en

                                         yMaJu

    yl

    Ju

    yl

    Ju

                                       yMaJuyMaJu

    lyJu2000 2001 2002 2003 2004

    Retail price

    Wholesale price

    Cooperative price

    Farm price

    Source: GAO analysis of data provided by USDA, the Defense Commissary
    Agency, and Information Resources, Inc.

    Note: For Boston, Massachusetts, the farm price is the USDA estimated farm
    Class I price adjusted to 2 percent milkfat content; the cooperative price
    is the effective cooperative Class I price for Boston adjusted to 2
    percent milkfat content during the period that the Northeast Interstate
    Dairy Compact was effective (July 1997 through September 2001); the
    cooperative price after September 2001 is the announced cooperative Class
    I price for Boston adjusted to 2 percent milkfat content; the wholesale
    price is the price paid by the commissary at Hanscom Air Force Base,
    adjusted for a 5 percent markup; and the retail price is the price
    collected by Information Resources, Inc., for the Boston market.

                                      Appendix II
                      Analysis of Prices at Four Marketing Levels
                         for 2 Percent Milk in Selected Markets

    Figure 4: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of
    2 Percent Milk for Charlotte, North Carolina, October 2000 through May
    2004

    Dollars per gallon

                                       Jan. Sept.

    Oct.No

                                   Dec.Oct. Feb. Dec.

    Oct.

    .gAu

                                   Sept. Dec. . Feb.

    .No

                                          Feb.

    .Mar

                                       Sept. Jan.

    .gAu

                                         Oct.No

    .Mar

    .Apr

                                          Jan.

    .Apr

    .gAu

    Dec.

    Jan.

    .Mar

    .Apr

    .MarApr

                                          Feb.

    .yMa

    .No

                                           .

    en

    en

                                           e

    ynMaJu

                                         yMaJu

    yl

    Ju

    yl

    Ju

    lyJu

                                         yMaJu

    2000 2001 2002 2003 2004

    Retail price

    Wholesale price

    Cooperative price

    Farm price

    Source: GAO analysis of data provided by USDA, the Defense Commissary
    Agency, and Information Resources, Inc.

    Note: For Charlotte, North Carolina, the farm price is the USDA estimated
    farm Class I price adjusted to 2 percent milkfat content; the cooperative
    price is the announced cooperative Class I price for Charlotte adjusted to
    2 percent milkfat content; the wholesale price is the price paid by the
    Fort Bragg North Post Store, adjusted for a 5 percent markup; and the
    retail price is the price collected by Information Resources, Inc., for
    the Charlotte market.

                                      Appendix II
                      Analysis of Prices at Four Marketing Levels
                         for 2 Percent Milk in Selected Markets

    Figure 5: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of
    2 Percent Milk for Cincinnati, Ohio, October 2000 through May 2004

    Dollars per gallon Dec.

                                       Jan. Dec.

    Oct.

                                       Dec. Jan.

    .Apr

                             Sept. Feb.MarFeb. Sept.Oct.No

    .Mar

                                      Jan. Oct. .

    Jan.

    .Mar

    .gAu

                                         Sept.

    .No

                                      Feb. .AprMa

    .AprMa

                                         . Feb.

    .gAu

    .Mar

    .g

    .yAprMa

    .No

                                        Dec.Oct.

    .No

    enJu

                                           e

    yl

    en

    yJu

    yl

    Ju

    yJu

    ynMaJu

                                         lyJuAu

    2000 2001 2002 2003 2004

    Retail price

    Wholesale price

    Cooperative price

    Farm price

    Source: GAO analysis of data provided by USDA, the Defense Commissary
    Agency, and Information Resources, Inc.

    Note: For Cincinnati, Ohio, the farm price is the USDA estimated farm
    Class I price adjusted to 2 percent milkfat content; the cooperative price
    is the announced cooperative Class I price for Cincinnati adjusted to 2
    percent milkfat content; the wholesale price is the price paid by the
    commissary at Wright-Patterson Air Force Base, adjusted for a 5 percent
    markup; and the retail price is the price collected by Information
    Resources, Inc., for the Cincinnati market. We were unable to obtain data
    from the Defense Commissary Agency to represent wholesale prices for 2
    percent milk in the Cincinnati market during 2000 and for January and
    February 2001.

                                      Appendix II
                      Analysis of Prices at Four Marketing Levels
                         for 2 Percent Milk in Selected Markets

    Figure 6: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of
    2 Percent Milk for Dallas, Texas, October 2000 through May 2004

    Dollars per gallon

                                 Sept.Dec.Oct. Jan.Feb.

    .gAu

                                          Dec.

    .gAu

                                          Feb.

    Dec.

                                 Sept. Feb. Oct.No Jan.

    .gAu

    .Mar

                                          Dec.

    .

                                       Oct. Jan.

    ..MarApr

    .yAprMa

                                          Feb.

    .Apr

    .Apr

                                         Sept.

    Oct.No

    .Mar

    .No

    .No

    .MarJan.

                                         .yMaJu

    en

    en

    en

    yl

    Ju

                                         yMaJu

    lyJu

                                         yMaJu

    yl

    Ju2000 2001 2002 2003 2004

    Retail price

    Wholesale price

    Cooperative price

    Farm price

    Source: GAO analysis of data provided by USDA, the Defense Commissary
    Agency, and Information Resources, Inc.

    Note: For Dallas, Texas, the farm price is the USDA estimated farm Class I
    price adjusted to 2 percent milkfat content; the cooperative price is the
    announced cooperative Class I price for Dallas adjusted to 2 percent
    milkfat content; the wholesale price is the average of the prices paid by
    the two commissaries at Fort Hood, adjusted for a 5 percent markup; and
    the retail price is the price collected by Information Resources, Inc.,
    for the Dallas market.

                                      Appendix II
                      Analysis of Prices at Four Marketing Levels
                         for 2 Percent Milk in Selected Markets

    Figure 7: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of
    2 Percent Milk for Denver, Colorado, October 2000 through May 2004

    Dollars per gallon Oct. Jan.

                                          Feb.

    .MarApr

                                       Dec. Feb.

    .g

                                          Dec.

    .NoDec.

                                          Jan.

    .gAu

                                    Sept. Jan.Feb..

    .g

                             Sept.Oct. Jan. Sept. Feb. Oct.

    ..MarApr

    .Mar

    .Apr

                                       Oct. Dec.

    .No

    .No

    .Mar

    .Apr

    en

    .No

    en

                                         lyJuAu

                                         yMaJu

                                         lyJuAu

    en

                                         yMaJu

    lyJu

    yMa

                                         yMaJu

    2000 2001 2002 2003 2004

    Retail price Wholesale price Cooperative price Farm price

    Source: GAO analysis of data provided by USDA, the Defense Commissary
    Agency, and Information Resources, Inc.

    Note: For Denver, Colorado, the farm price is the USDA estimated farm
    Class I price adjusted to 2 percent milkfat content; the cooperative price
    is the announced cooperative Class I price for Denver adjusted to 2
    percent milkfat content; the wholesale price is the average of the prices
    paid by the commissaries at Fort Carson, Peterson Air Force Base, Buckley
    Air Force Base, and the U.S. Air Force Academy, adjusted for a 5 percent
    markup; and the retail price is the price collected by Information
    Resources, Inc., for the Denver market.

                                      Appendix II
                      Analysis of Prices at Four Marketing Levels
                         for 2 Percent Milk in Selected Markets

    Figure 8: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of
    2 Percent Milk for Miami, Florida, October 2000 through May 2004

    Dollars per gallon Oct.No

                                       Feb. Dec.

    .Mar

                                     Dec.Jan. Jan.

    .

                                       Feb. Feb.

    .gAu

    .No

                                       Sept.Oct.

    .MarApr

                                       Sept. Dec.

    .Apr

    .No

    .gAu

    .No

    .Mar

    .yAprMaJan.

    .gAu

    .Apr

                                         . Oct.

    Dec.

                                     Sept. Jan.Feb.

    .Mar

                                          Oct.

    en

    en

    lyJu

    en

    yl

    Ju

                                         yMaJu

                                       yMaJuyMaJu

    yl

    Ju2000 2001 2002 2003 2004

    Retail price Wholesale price Cooperative price Farm price

    Source: GAO analysis of data provided by USDA, the Defense Commissary
    Agency, and Information Resources, Inc.

    Note: For Miami, Florida, the farm price is the USDA estimated farm Class
    I price adjusted to 2 percent milkfat content; the cooperative price is
    the announced cooperative Class I price for Miami adjusted to 2 percent
    milkfat content; the wholesale price is the price paid by the commissary
    at the Naval Air Station, Key West, adjusted for a 5 percent markup; and
    the retail price is the price collected by Information Resources, Inc.,
    for the Miami market.

                                      Appendix II
                      Analysis of Prices at Four Marketing Levels
                         for 2 Percent Milk in Selected Markets

    Figure 9: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of
    2 Percent Milk for Milwaukee, Wisconsin, October 2000 through May 2004

    Dollars per gallon

                                       Jan. Sept.

    Jan.

    ..MarApr

                                  Dec. Oct. Dec. Feb.

    .NoDec.

                                     Feb. Oct. Dec.

    .Mar

    .gAu

                                          Feb.

    .Apr

    .gAu

                                       Sept.Oct.

    .No

                                        Jan.Feb.

    .Mar

    .Apr

    .No

                                       Jan.Sept.

    .No

    .gAu

    .Mar

    .yAprMaOct.

    en

    en

                                         yMaJu

    en

    yl

    Ju

                                         yMaJu

                                         yMaJu

    yl

    Ju

    yl

    Ju2000 2001 2002 2003 2004

    Retail price Wholesale price Cooperative price Farm price

    Source: GAO analysis of data provided by USDA, the Defense Commissary
    Agency, and Information Resources, Inc.

    Note: For Milwaukee, Wisconsin, the farm price is the USDA estimated farm
    Class I price adjusted to 2 percent milkfat content; the cooperative price
    is the announced cooperative Class I price for Milwaukee adjusted to 2
    percent milkfat content; the wholesale price is the price paid by the
    commissary at the Naval Station Great Lakes, adjusted for a 5 percent
    markup; and the retail price is the price collected by Information
    Resources, Inc., for the Milwaukee market.

                                      Appendix II
                      Analysis of Prices at Four Marketing Levels
                         for 2 Percent Milk in Selected Markets

    Figure 10: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of
    2 Percent Milk for Minneapolis, Minnesota, October 2000 through May 2004

    Dollars per gallon

    .gAu

    .gAu

    Jan.

                             Sept. Jan. Dec. Feb. Jan.Feb.

    Dec.

                                  Oct. Dec. Sept.Oct.

    .No

    .Mar

    .Apr

                                    Sept.Oct.NoDec.

    ..MarApr

                                       Feb. Feb.

    .Mar

                                          Jan.

    Oct.

    .gAu

    .No

    .Apr

                                          . .

    en

    .No

    en

    .MarApr

    en

    yl

    Ju

    yl

    Ju

                                         yMaJu

    yMa

                                         yMaJu

    lyJu

                                         yMaJu

    2000 2001 2002 2003 2004

    Retail price Wholesale price Cooperative price Farm price

    Source: GAO analysis of data provided by USDA, the Defense Commissary
    Agency, and Information Resources, Inc.

    Note: For Minneapolis, Minnesota, the farm price is the USDA estimated
    farm Class I price adjusted to 2 percent milkfat content; the cooperative
    price is the announced cooperative Class I price for Minneapolis adjusted
    to 2 percent milkfat content; the wholesale price is the price paid by the
    commissary at Fort McCoy, adjusted for a 5 percent markup; and the retail
    price is the price collected by Information Resources, Inc., for the
    Minneapolis market.

                                      Appendix II
                      Analysis of Prices at Four Marketing Levels
                         for 2 Percent Milk in Selected Markets

    Figure 11: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of
    2 Percent Milk for New Orleans, Louisiana, October 2000 through May 2004

    Dollars per gallon Oct.NoDec.Jan.

                             Feb. Jan. Jan. Sept.Oct.NoDec.

    .

    .AprMa

    .gAu

                                       Dec. Feb.

    .gAu

                                  Sept.Oct.NoDec. Feb.

    .gAu

                                        Jan.Feb.

    .Mar

                                      Sept.Oct. .

    ..MarApr

    .MarApr

    .No

                                           .

    .MarApr

                                           .

    .yMa

    en

    en

    yl

    Ju

    en

                                         yMaJu

    yJu

    yl

    Ju

    lyJu

                                         yMaJu

    2000 2001 2002 2003 2004

    Retail price Wholesale price Cooperative price Farm price

    Source: GAO analysis of data provided by USDA, the Defense Commissary
    Agency, and Information Resources, Inc.

    Note: For New Orleans, Louisiana, the farm price is the USDA estimated
    farm Class I price adjusted to 2 percent milkfat content; the cooperative
    price is the announced cooperative Class I price for New Orleans adjusted
    to 2 percent milkfat content; the wholesale price is the average of the
    prices paid by the Naval Support Activities, New Orleans; the Naval
    Construction Battalion Center, Gulfport; and Keesler Air Force Base
    commissaries, adjusted for a 5 percent markup; and the retail price is the
    price collected by Information Resources, Inc., for the New Orleans
    market.

                                      Appendix II
                      Analysis of Prices at Four Marketing Levels
                         for 2 Percent Milk in Selected Markets

    Figure 12: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of
    2 Percent Milk for Phoenix, Arizona, October 2000 through May 2004

    Dollars per gallon

    Oct.No

    Jan.

                         Dec.Jan.Feb. Sept.Oct. Dec. Feb. Feb.

    Dec.

                                     Feb.Mar Sept.

    .gAu

                                Jan. Sept.Oct.NoDec.Jan.

    .gAu

                                         Oct. .

    .gAu

    .MarApr

    .Apr

                                           .

    .Apr

    .No

    .No

    .Mar

    .MarApr

    .yMa

    .v

                                           .

    en

    en

    en

                                         yMaJu

                                       yMaJuyMaJu

    lyJu

    yl

    Ju

    lyJu2000 2001 2002 2003 2004

    Retail price Wholesale price Cooperative price Farm price

    Source: GAO analysis of data provided by USDA, the Defense Commissary
    Agency, and Information Resources, Inc.

    Note: For Phoenix, Arizona, the farm price is the USDA estimated farm
    Class I price adjusted to 2 percent milkfat content; the cooperative price
    is the announced cooperative Class I price for Phoenix adjusted to 2
    percent milkfat content; the wholesale price is the average of the prices
    paid by the commissaries at Luke Air Force Base and Davis-Monthan Air
    Force Base, adjusted for a 5 percent markup; and the retail price is the
    price collected by Information Resources, Inc., for the Phoenix market.

                                      Appendix II
                      Analysis of Prices at Four Marketing Levels
                         for 2 Percent Milk in Selected Markets

    Figure 13: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of
    2 Percent Milk for Salt Lake City, Utah, October 2000 through May 2004

    Dollars per gallon

                                        Dec.Jan.

    .gAu

    Dec.

                                       Oct. Feb.

    .gAu

                 Sept.Oct.NoDec.Jan. Sept. Dec.Jan.Feb. Sept. Feb. Feb.

    Jan.

    .MarApr

                                          Oct.

    .MarOct.No.

    .gAu

    .No

    .Mar

    .Apr

                                           .

    .yAprMa

                                          . .

    .MarApr

    .No

    en

    en

    en

                                       yMaJuyMaJu

    yl

    Ju

    yl

    Ju

                                         yMaJu

    lyJu2000 2001 2002 2003 2004

    Retail price

    Wholesale price

    Cooperative price

    Farm price

    Source: GAO analysis of data provided by USDA, the Defense Commissary
    Agency, and Information Resources, Inc.

    Note: For Salt Lake City, Utah, the farm price is the USDA estimated farm
    Class I price adjusted to 2 percent milkfat content; the cooperative price
    is the announced cooperative Class I price for Salt Lake City adjusted to
    2 percent milkfat content; the wholesale price is the price paid by the
    commissary at Hill Air Force Base, adjusted for a 5 percent markup; and
    the retail price is the price collected by Information Resources, Inc.,
    for the Salt Lake City market.

                                      Appendix II
                      Analysis of Prices at Four Marketing Levels
                         for 2 Percent Milk in Selected Markets

    Figure 14: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of
    2 Percent Milk for San Diego, California, October 2000 through May 2004

    Dollars per gallon Oct.No

                                          Feb.

    Dec.

    Jan.

    Feb.

              Sept.Oct. Dec.Jan. Sept.Oct. Dec.Jan. Sept.Oct. Dec.Jan.Feb.

    .gAu

                                          Feb.

    .gAu

    .Mar

    .yAprMa.

                                           .

    .Apr

    .Apr

    .gAu

    .Mar

    .Mar

    .No

    .MarApr

    .No

    .No

    en

    enJu

                                        yMaJuly

                                         yMaJu

    en

    lyJu

                                         yMaJu

    lyJu2000 2001 2002 2003 2004

    Retail price Wholesale price Cooperative price Farm price

    Source: GAO analysis of data provided by the California Department of Food
    and Agriculture, the Defense Commissary Agency, and Information Resources,
    Inc.

    Note: For San Diego, California, the farm price is the California
    Department of Food and Agriculture mailbox price adjusted to 2 percent
    milkfat content; the cooperative price is the Southern California Class I
    price adjusted to 2 percent milkfat content; the wholesale price is the
    average of the prices paid by the commissaries at the Naval Base, San
    Diego; Marine Corps Base, Camp Pendleton; Naval Outlying Landing Field,
    Imperial Beach; Marine Corps Air Station, Miramar; Naval Air Station,
    North Island; and by the San Onofre Commissary, Camp Pendleton, adjusted
    for a 5 percent markup; and the retail price is the price collected by
    Information Resources, Inc., for the San Diego market.

                                      Appendix II
                      Analysis of Prices at Four Marketing Levels
                         for 2 Percent Milk in Selected Markets

    Figure 15: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of
    2 Percent Milk for Seattle, Washington, October 2000 through May 2004

    Dollars per gallon

                                       Oct. Dec.

    Oct.

    Dec.

    Jan.

                                 Feb. Oct. Dec.Jan.Feb.

    .gAu

    .No

    .gAu

                                  Sept. Sept. Jan.Feb.

    .gAu

                                   Sept. Dec.Jan.Feb.

    .Mar

    .Apr

    .No

    .Mar

    .Apr

    .No

    .Mar

    .Apr

    .No

    .MarApr

    .yMa

    en

                                          Oct.

    en

    en

                                         yMaJu

    yl

    Ju

                                         yMaJu

    yl

    Ju

                                         yMaJu

    lyJu2000 2001 2002 2003 2004

    Retail price Wholesale price Cooperative price Farm price

    Source: GAO analysis of data provided by USDA, the Defense Commissary
    Agency, and Information Resources, Inc.

    Note: For Seattle, Washington, the farm price is the USDA estimated farm
    Class I price adjusted to 2 percent milkfat content; the cooperative price
    is the announced cooperative Class I price for Seattle adjusted to 2
    percent milkfat content; the wholesale price is the average of the prices
    paid by the commissaries at the Naval Station Everett, Smokey Point
    Support Center; Fort Lewis; and McChord Air Force Base, adjusted for a 5
    percent markup; and the retail price is the price collected by Information
    Resources, Inc., for the Seattle market.

                                      Appendix II
                      Analysis of Prices at Four Marketing Levels
                         for 2 Percent Milk in Selected Markets

    Figure 16: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of
    2 Percent Milk for Washington, D.C., October 2000 through May 2004

    Dollars per gallon Oct. Dec.Jan.

                     Feb. Oct. Dec.Jan.Feb. Sept.Oct. Jan.Feb. Feb.

    .Mar

    .gAu

                                Dec. Sept.Oct. Dec.Jan.

    .No

    .Apr

    .gAu

                                         Sept.

    .No

    .Mar

    .Apr

    .No

    .Mar

    .Apr

    .gAu

    .No

    .yMa

    .MarApr

    en

    en

    en

                                    yMaJuyMaJuyMaJu

    lyJu

    lyJu

    yl

    Ju2000 2001 2002 2003 2004

    Retail price Wholesale price Cooperative price Farm price

    Source: GAO analysis of data provided by USDA, the Defense Commissary
    Agency, and Information Resources, Inc.

    Note: For Washington, D.C., the farm price is the USDA estimated farm
    Class I price adjusted to 2 percent milkfat content; the cooperative price
    is the announced cooperative Class I price for Washington, D.C., adjusted
    to 2 percent milkfat content; the wholesale price is the average of the
    prices paid by the commissaries at Bolling Air Force Base; Walter Reed
    Army Medical Center; Fort Myer; Fort Belvoir; the Marine Corps Base,
    Quantico; Andrews Air Force Base; Aberdeen Proving Ground; the Naval
    Station, Annapolis; Fort Meade; and Fort Detrick, adjusted for a 5 percent
    markup; and the retail price is the price collected by Information
    Resources, Inc., for the Washington, D.C., market.

    Appendix III

    Retail Prices for Four Kinds of Milk in Selected Markets

    This appendix updates information provided in our June 2001 report on the
    average retail prices for whole, 2 percent, 1 percent, and skim milk in 15
    selected markets for October 2000 through May 2004. We found that retail
    pricing patterns varied significantly across markets. For example, in the
    Boston market from October 2000 through May 2004, the average price for 2
    percent milk was generally the same as the average price for 1 percent
    milk; however, whole and skim milk prices were generally lower. On the
    other hand, for this period in the San Diego market, the average price of
    2 percent milk was generally lower than the prices of whole and 1 percent
    milk, but higher than skim milk prices. Figures 17 through 31 provide
    information on the average retail price for the four kinds of milk in the
    15 selected markets for October 2000 through May 2004.

    Figure 17: Retail Prices in Atlanta, Georgia, for Whole, 2 Percent, 1
    Percent, and Skim Milk, October 2000 through May 2004 Dollars per gallon

    0.00

                                       Feb. Dec.

    Dec.

    Jan.

                                  Sept. Dec. Dec. Feb.

    .gAu

                              Oct.No Jan.Feb.Oct.No. Jan.

    .gAu

                                     Sept.Oct. Jan.

    .Apr

                                         Sept.

    .gAu

    Feb.

    .Mar

    .Mar

    .Apr

    .No

    .Mar

    .Mar

    .yAprMa

    .No

    .AprOct.

                                         .yMaJu

    en

    yl

    Ju

    enJu

                                         yMaJu

    yl

    yl

                                         yMaJu

    enJu2000 2001 2002 2003 2004

    Whole milk 2 percent milk 1 percent milk Skim milk

    Source: GAO analysis of data provided by Information Resources, Inc.

    Note: The retail price is the price collected by Information Resources,
    Inc., for the Atlanta market.

         Appendix III Retail Prices for Four Kinds of Milk in Selected Markets

    Figure 18: Retail Prices in Boston, Massachusetts, for Whole, 2 Percent, 1
    Percent, and Skim Milk, October 2000 through May 2004

    Dollars per gallon

                           Jan. Sept. Feb.Feb. Feb. Sept.Oct.

    .No

                                          Dec.

    .gAu

                                         Oct.No

    Jan.

    .Apr

    .gAu

                            Sept. Dec.Jan. . Feb. .Dec.Jan.

    Dec.

    .Mar

    .MarApr

    .gAu

    .MarApr

                                           .

    .Mar

    .yAprMa.

                                          Oct.

    .vNo

    enJu

    Oct.No

    enJu

    en

                                         yMaJu

    yl

    Juyl

                                         yMaJu

    yMa

    lyJu2000 2001 2002 2003 2004

    Whole milk 2 percent milk 1 percent milk Skim milk

    Source: GAO analysis of data provided by Information Resources, Inc.

    Note: The retail price is the price collected by Information Resources,
    Inc., for the Boston market.

         Appendix III Retail Prices for Four Kinds of Milk in Selected Markets

    Figure 19: Retail Prices in Charlotte, North Carolina, for Whole, 2
    Percent, 1 Percent, and Skim Milk, October 2000 through May 2004

    Dollars per gallon

                                          Feb.

    Oct.No

                                   Oct.No Oct.NoDec.

    Jan.

    .gAu

                                    Dec. Sept. Jan.

    .gAu

                             Sept. Jan.Feb.Feb. Sept. Jan.

    .gAu

                                          Dec.

    ..MarApr.Dec.

                                       Oct. Feb.

    .Mar

    .Apr

    .Mar

    .Apr

    .Mar

                                          . .

    .No

    .Apr

    en

    en

    enJu

                                         yMaJu

                                        yMaJuly

    lyJu

    yMa

    yl

    Ju

                                         yMaJu

    2000 2001 2002 2003 2004

    Whole milk 2 percent milk 1 percent milk Skim milk

    Source: GAO analysis of data provided by Information Resources, Inc.

    Note: The retail price is the price collected by Information Resources,
    Inc., for the Charlotte market.

         Appendix III Retail Prices for Four Kinds of Milk in Selected Markets

    Figure 20: Retail Prices in Cincinnati, Ohio, for Whole, 2 Percent, 1
    Percent, and Skim Milk, October 2000 through May 2004 Dollars per gallon

                                 Feb. Jan. Dec.Feb.Jan.

    .gAu

                                       Sept.Oct.

    Oct.No

    Dec.

    Jan.

    .gAu

                                     Dec. Feb. Dec.

    Oct.No

    .gAu

    .No

    .Apr

                                          Feb.

    .

                                         Sept.

    .Mar

    .Apr

    .No

    .Mar

    .yAprMa

    .Mar

    .Apr

                                          Oct.

    .Mar

                                    . Jan.Sept.yMaJu

    en

    en

                                         yMaJu

    en

                                         yMaJu

    lyJu

    yl

    Ju

    yl

    Ju2000 2001 2002 2003 2004

    Whole milk 2 percent milk 1 percent milk Skim milk

    Source: GAO analysis of data provided by Information Resources, Inc.

    Note: The retail price is the price collected by Information Resources,
    Inc., for the Cincinnati market.

         Appendix III Retail Prices for Four Kinds of Milk in Selected Markets

    Figure 21: Retail Prices in Dallas, Texas, for Whole, 2 Percent, 1 Percent, and
                        Skim Milk, October 2000 through May 2004

    Dollars per gallon

                                       Dec. Sept.

    Oct.No

                                       Jan. Dec.

    Dec.

    .gAu

    .gAu

                                     Oct. Dec.Jan.

    .g

                                         Sept.

    .No

                                          Jan.

    .

    .No

                                          Feb.

    .No

                                          Feb.

    .Apr

    .Apr

    .MarApr

    .yMaJan.

                                          Feb.

    .Mar

                                   Sept. . Oct. Feb.

    .MarApr

    .Mar

                                          Oct.

    en

                                         yMaJu

    en

    yl

    Ju

    yl

    JuAu

                                         yMaJu

    lyJu

                                         yMaJu

    en2000 2001 2002 2003 2004

    Whole milk 2 percent milk 1 percent milk Skim milk

    Source: GAO analysis of data provided by Information Resources, Inc.

    Note: The retail price is the price collected by Information Resources,
    Inc., for the Dallas market.

         Appendix III Retail Prices for Four Kinds of Milk in Selected Markets

     Figure 22: Retail Prices in Denver, Colorado, for Whole, 2 Percent, 1 Percent,
                      and Skim Milk, October 2000 through May 2004

    Dollars per gallon

                                          Feb.

    Oct.

    Jan.

                                       Oct. Jan.

    Dec.

                                          Oct.

    .gAu

                                          Jan.

    .gAu

                                     Feb.Sept. Dec.

    .No

                                          Dec.

    .MarApr

                                     Oct. Jan.Feb..

    .No

                                      Feb. . Sept.

    .gAu

                                       Sept. Dec.

    .Mar

    .MarApr

    .Mar

    .Apr

    .No

    .yAprMa

    .vNo

    en

    en

    lyJu

                                         yMaJu

                                         yMaJu

    en

    yl

    Ju

                                         yMaJu

    lyJu2000 2001 2002 2003 2004

    Whole milk 2 percent milk 1 percent milk Skim milk

    Source: GAO analysis of data provided by Information Resources, Inc.

    Note: The retail price is the price collected by Information Resources,
    Inc., for the Denver market.

         Appendix III Retail Prices for Four Kinds of Milk in Selected Markets

    Figure 23: Retail Prices in Miami, Florida, for Whole, 2 Percent, 1 Percent, and
                        Skim Milk, October 2000 through May 2004

    Dollars per gallon Oct.

                                       Sept. Dec.

    .gAu

                                          Dec.

    Dec.

    Jan.

    .gAu

                         Oct. Feb. Dec.Jan.Feb. Feb.Feb. . Jan.

    .gAu

                                    Oct. Sept. Jan.

    .No

    .MarApr

    .No

    .MarApr

                                        Sept. .

    .Mar

    .yAprMa

    .MarApr

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    .No

                                         Oct..

    en

    lyJu

    en

                                       yMaJuyMaJu

    yl

    Ju

    enJu

                                         yMaJu

    yl2000 2001 2002 2003 2004

    Whole milk 2 percent milk 1 percent milk Skim milk

    Source: GAO analysis of data provided by Information Resources, Inc.

    Note: The retail price is the price collected by Information Resources,
    Inc., for the Miami market.

         Appendix III Retail Prices for Four Kinds of Milk in Selected Markets

    Figure 24: Retail Prices in Milwaukee, Wisconsin, for Whole, 2 Percent, 1
    Percent, and Skim Milk, October 2000 through May 2004

    Dollars per gallon

                                       Dec. Feb.

    Oct.

    .gAu

                               Oct.No Jan.Feb. Sept. Jan.

    Dec.

                                Jan.Feb. Sept.Oct. Oct.

    .Mar

                                       Sept. Dec.

    .Apr

    .gAu

                                          Dec.

    Jan.

    .Apr

                                           .

    .Mar

    .gAu

    .Mar

    .Mar

    .yAprMa

    .Apr

    .No

    .No

    .vNo

                                          Feb.

    enJu

    en

                                         yMaJu

    en

    lyJu

                                         yMaJu

    lyJu

                                         yMaJu

    yl2000 2001 2002 2003 2004

    Whole milk 2 percent milk 1 percent milk Skim milk

    Source: GAO analysis of data provided by Information Resources, Inc.

    Note: The retail price is the price collected by Information Resources,
    Inc., for the Milwaukee market.

         Appendix III Retail Prices for Four Kinds of Milk in Selected Markets

    Figure 25: Retail Prices in Minneapolis, Minnesota, for Whole, 2 Percent,
    1 Percent, and Skim Milk, October 2000 through May 2004

    Dollars per gallon

                                          Jan.

    Jan.

                                Feb. Dec. Feb. Jan. Dec.

    Oct.No

                                  Dec. Sept. Jan.Feb.

    .Dec.

    .gAu

                                         Sept.

    .gAu

    .Mar

    .Apr

    .Apr

                                       Oct. Feb.

    .Mar

    .Mar

    .Mar

    .Apr

                                           .

    .yAprMa

    .gAu

                                         .Sept.

    .No

                                      Oct.NoOct.No

                                         yMaJu

    en

                                         yMaJu

    en

    en

    yl

    Ju

                                         yMaJu

    lyJu

    yl

    Ju2000 2001 2002 2003 2004

    Whole milk 2 percent milk 1 percent milk Skim milk

    Source: GAO analysis of data provided by Information Resources, Inc.

    Note: The retail price is the price collected by Information Resources,
    Inc., for the Minneapolis market.

         Appendix III Retail Prices for Four Kinds of Milk in Selected Markets

    Figure 26: Retail Prices in New Orleans, Louisiana, for Whole, 2 Percent,
    1 Percent, and Skim Milk, October 2000 through May 2004

    Dollars per gallon

                                    Sept. Dec. Feb.

    Oct.

    Dec.

    .gAu

                                  Jan.Feb. Sept. Dec.

    Jan.

                                          Feb.

    .gAu

                                   Oct. Oct. Jan.Feb.

    .Apr

                                          Jan.

    .Mar

                                       Sept. Dec.

    .Mar

    .gAu

    .Mar

    .No

                                          . .

    .No

    .Apr

    .yAprMa

    .No

    .MarApr

                                          Oct.

                                           No

    en

    enJu

    enJu

                                       yMaJuyMaJu

    yl

                                         yMaJu

    yl

    yl

    Ju2000 2001 2002 2003 2004

    Whole milk 2 percent milk 1 percent milk Skim milk

    Source: GAO analysis of data provided by Information Resources, Inc.

    Note: The retail price is the price collected by Information Resources,
    Inc., for the New Orleans market.

         Appendix III Retail Prices for Four Kinds of Milk in Selected Markets

    Figure 27: Retail Prices in Phoenix, Arizona, for Whole, 2 Percent, 1
    Percent, and Skim Milk, October 2000 through May 2004 Dollars per gallon

                                   Jan.Jan. Dec. Feb.

    .gAu

    Dec.

                                       Sept. Dec.

    .Apr

                                    Sept. Feb. Sept.

    Oct.

    .NoJan.

                                          Oct.

                                      No. Jan.Feb.

    .gAu

    .Apr

    .gAu

                                     Oct.Oct. Dec.

    .MarApr

    .yMa

    .Feb.Mar

    .Apr

    .Mar

    .No

    .Mar

    .No

    en

    en

    en

    yl

    Ju

                                         yMaJu

    yl

    Ju

                                         yMaJu

    lyJu

                                         yMaJu

    2000 2001 2002 2003 2004

    Whole milk 2 percent milk 1 percent milk Skim milk

    Source: GAO analysis of data provided by Information Resources, Inc.

    Note: The retail price is the price collected by Information Resources,
    Inc., for the Phoenix market.

         Appendix III Retail Prices for Four Kinds of Milk in Selected Markets

    Figure 28: Retail Prices in Salt Lake City, Utah, for Whole, 2 Percent, 1
                 Percent, and Skim Milk, October 2000 through May 2004

    Dollars per gallon Oct.No

                                     Jan.Feb. Dec.

    .gAu

                                       Sept. Feb.

    .Dec.

                                    Sept. Jan..Dec.

    .AprJan.

                                          Feb.

    .MarApr

                                         Oct.No

    .No

    .Mar

    .Apr

                                    Oct. Dec.. Oct.

    .gAu

                                         Sept.

    .No

    .Mar

    .gAu

                                          Jan.

    .MarApr

                                          Feb.

    en

    .yMa

    yl

    Ju

    enJu

    lyJu

    yl

    en

                                       yMaJuyMaJu

                                         yMaJu

    2000 2001 2002 2003 2004

    Whole milk 2 percent milk 1 percent milk Skim milk

    Source: GAO analysis of data provided by Information Resources, Inc.

    Note: The retail price is the price collected by Information Resources,
    Inc., for the Salt Lake City market.

         Appendix III Retail Prices for Four Kinds of Milk in Selected Markets

    Figure 29: Retail Prices in San Diego, California, for Whole, 2 Percent, 1
    Percent, and Skim Milk, October 2000 through May 2004 Dollars per gallon

                                          Feb.

    Oct.No

    Dec.

                                       Dec. Jan.

    Jan.

    .gAu

    .gAu

                                       Sept. Jan.

    .gAu

                                     Feb.Feb. Sept.

    .MarApr

                                 Oct. Jan. . Oct. Dec.

    .yMa

                                   . Sept. Dec. Oct.

                                         NoFeb.

    .MarApr

                                           .

    .No.

    .v

    .MarApr

    .No

    .MarApr

    en

                                           e

    en

    ynMaJu

    lyJu

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                                         yMaJu

    lyJu

                                         yMaJu

    2000 2001 2002 2003 2004

    Whole milk 2 percent milk 1 percent milk Skim milk

    Source: GAO analysis of data provided by Information Resources, Inc.

    Note: The retail price is the price collected by Information Resources,
    Inc., for the San Diego market.

         Appendix III Retail Prices for Four Kinds of Milk in Selected Markets

        Figure 30: Retail Prices in Seattle, Washington, for Whole, 2 Percent, 1
                 Percent, and Skim Milk, October 2000 through May 2004

    Dollars per gallon Oct. Jan.

                        Feb. Sept.Sept.Oct.No Dec.Jan.Feb. Feb.

    .gAu

                                          Oct.

    Dec.

    .gAu

    .gAu

                                         Oct.No

    .No

                                  Dec.Jan.Feb.Dec.Jan.

    .MarApr

                                        . Sept.

    .No

    .Apr

    .Mar

                                           .

    .Mar

                                           .

    .Apr

    ..MarApr

    enJu

    en

                                         yMaJu

    en

    yl

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                                        ly yMaJu

    lyJu

    yMa

                                         yMaJu

    2000 2001 2002 2003 2004

    Whole milk 2 percent milk 1 percent milk Skim milk

    Source: GAO analysis of data provided by Information Resources, Inc.

    Note: The retail price is the price collected by Information Resources,
    Inc., for the Seattle market.

         Appendix III Retail Prices for Four Kinds of Milk in Selected Markets

     Figure 31: Retail Prices in Washington, D.C., for Whole, 2 Percent, 1 Percent,
                      and Skim Milk, October 2000 through May 2004

    Dollars per gallon

                                        Feb.Mar

    Oct.No

    Jan.

                                        Dec.Jan.

    .gAu

    Oct.No

                                      Dec.Jan.Feb.

    Dec.

                             Sept.Oct. Feb. Oct.No Jan.Feb.

    .

                                           .

    .Apr

    .gAu

                                       Sept. Dec.

    .gAu

                                         Sept.

    .Mar

    .MarApr

    .Apr

                                           .

    .MarApr

                                           .

    .yMa

    .No

                                           .

    en

    en

    enJu

                                         yMaJu

    yl

    Ju

    lyJu

                                         yMaJu

                                         yMaJu

    yl2000 2001 2002 2003 2004

    Whole milk 2 percent milk 1 percent milk Skim milk

    Source: GAO analysis of data provided by Information Resources, Inc.

    Note: The retail price is the price collected by Information Resources,
    Inc., for the Washington, D.C., market.

    Appendix IV

    Average Monthly and Annual Farm, Cooperative, Wholesale and Retail Milk
    Prices in Selected Markets

    This appendix updates information provided in our June 2001 report on
    average monthly and annual farm and cooperative prices of raw milk and on
    the average monthly and annual wholesale and retail prices for a gallon of
    whole, 2 percent, 1 percent, and skim milk. Tables 11 through 25 provide
    these data for 15 selected markets over the period October 2000 through
    May 2004.

    Table 11: Prices for a Gallon of Milk in Atlanta, Georgia, October 2000 through
                               May 2004 Wholesale Retail

      Year Month  Farm Cooperative Whole  2%      1% Skim  Whole    2%    1%  Skim
      2000 Oct.  $1.20       $1.41 $2.16 $2.04 $2.01 $1.99 $2.64 $2.77 $2.87 $2.75
           Nov.   1.20        1.40  2.16 2.04  2.01  1.99   2.48 2.53  2.59   2.51
           Dec.   1.21        1.41  2.16 2.04  2.01  1.99   2.63 2.71  2.76   2.69
           Avg.   1.20        1.41  2.16 2.04  2.01  1.99   2.58 2.67  2.74   2.65
      2001 Jan.   1.37        1.57  2.21 2.42    N/A 2.04   2.66 2.77  2.86   2.74
           Feb.   1.21        1.41  2.17 2.45    N/A 2.07   2.23 2.33  2.37   2.32
           Mar.   1.25        1.45  2.17 2.45    N/A 2.07   2.65 2.73  2.81   2.71
           Apr.   1.32        1.52  2.17 2.45    N/A 2.07   2.53 2.69  2.71   2.65
            May   1.37        1.58  2.17 2.45  2.05  2.07   2.58 2.75  2.76   2.69
           June   1.41        1.61  2.20 2.47  2.05  2.10   2.50 2.62  2.64   2.57
           July   1.45        1.66  2.22 2.52  2.05  2.13   2.55 2.67  2.71   2.64
           Aug.   1.46        1.66  2.22 2.54  2.05  2.13   2.55 2.68  2.68   2.63
           Sept.  1.47        1.68  2.22 2.56  2.05  2.13   2.54 2.70  2.70   2.65
           Oct.   1.50        1.71  2.22 2.56  2.05  2.13   2.64 2.77  2.81   2.71
           Nov.   1.49        1.69  2.22 2.56  2.08  2.13   2.60 2.73  2.74   2.68
           Dec.   1.20        1.41  2.22 2.56  2.08  2.13   2.57 2.68  2.72   2.66
           Avg.   1.38        1.58  2.20 2.50  2.06  2.10   2.55 2.68  2.71   2.64
      2002 Jan.   1.22        1.40  2.22 2.25  2.08  2.13   2.54 2.64  2.68   2.62
           Feb.   1.22        1.40  2.22 2.18  2.08  2.13   2.48 2.62  2.63   2.60
           Mar.   1.22        1.40  2.13 2.06  1.99  1.99   2.51 2.67  2.72   2.64
           Apr.   1.22        1.40  2.04 1.95  1.89  1.84   2.38 2.55  2.55   2.51
            May   1.22        1.40  2.04 1.95  1.89  1.84   2.32 2.51  2.54   2.49
           June   1.20        1.38  2.04 1.95  1.89  1.84   2.30 2.43  2.46   2.42
           July   1.17        1.35  2.04 1.95  1.89  1.84   2.12 2.26  2.22   2.23
           Aug.   1.16        1.34  2.04 1.95  1.89  1.84   2.29 2.51  2.50   2.47
           Sept.  1.15        1.34  2.04 1.95  1.89  1.84   2.21 2.40  2.35   2.37
           Oct.   1.15        1.32  2.04 1.95  1.89  1.84   2.08 2.25  2.21   2.22

     Appendix IV Average Monthly and Annual Farm, Cooperative, Wholesale and Retail
                            Milk Prices in Selected Markets

                             (Continued From Previous Page)

                                    Wholesale Retail

    Year  Month   Farm Cooperative  Whole   2%    1% Skim Whole  2%   1%  Skim
              Nov.   1.17         1.35  2.06  1.97 1.92 1.86 2.13  2.30 2.27 2.26
              Dec.   1.16         1.34  2.08  1.99 1.94 1.88 2.32  2.49 2.51 2.48
              Avg.   1.19         1.37  2.08  2.01 1.94 1.91 2.31  2.47 2.47 2.44
    2003   Jan.   1.16         1.34  2.08  1.99 1.94 1.88 2.21  2.38 2.38 2.35
              Feb.   1.16         1.34  2.08  1.99 1.94 1.88 2.31  2.47 2.50 2.45
              Mar.   1.13         1.31  2.08  1.99 1.94 1.88 2.28  2.47 2.45 2.43
              Apr.   1.11         1.29  2.08  1.99 1.94 1.88 2.23  2.41 2.43 2.38
              May    1.12         1.30  2.08  1.99 1.94 1.88 2.23  2.40 2.38 2.37
              June   1.12         1.30  2.08  1.99 1.94 1.88 2.28  2.47 2.47 2.44
              July   1.12         1.30  2.08  1.99 1.94 1.88 2.23  2.45 2.44 2.40
              Aug.   1.19         1.38  2.08  1.99 1.94 1.88 2.28  2.44 2.42 2.40
             Sept.   1.39         1.57  2.08  1.99 1.94 1.88 2.44  2.67 2.68 2.62
              Oct.   1.41         1.60  2.21  2.11 2.06 2.02 2.44  2.62 2.66 2.60
              Nov.   1.41         1.60  2.21  2.12 2.07 2.02 2.46  2.66 2.67 2.62
              Dec.   1.40         1.58  2.21  2.12 2.07 2.02 2.27  2.49 2.51 2.46

               Avg.   1.23  1.41  2.11  2.02  1.97  1.92  2.31  2.49  2.50   2.46
        2004   Jan.   1.25  1.43  2.21  2.12  2.07  2.02  2.24  2.42  2.38   2.36
               Feb.   1.25  1.43  2.21  2.12  2.07  2.02  2.25  2.39  2.37   2.34
               Mar.   1.26  1.43  2.21  2.12  2.07  2.02  2.28  2.45  2.43   2.40
               Apr.   1.40  1.57  2.22  2.12  2.07  2.03  2.29  2.49  2.38   2.35
               May    1.87  2.05  2.64  2.55  2.50  2.45  2.69  2.93  2.85   2.78
               Avg.   1.41  1.58  2.30  2.21  2.16  2.11  2.35  2.54  2.48   2.45

    Source: GAO's analysis of price data provided by USDA, the Defense
    Commissary Agency, and Information Resources, Inc.

    Note: For the Atlanta market, the farm price is the USDA-estimated farm
    Class I price for 3.5 percent milkfat content; the cooperative price is
    the announced cooperative Class I price for Atlanta for 3.5 percent
    milkfat content; the wholesale price is the average of the prices paid by
    the commissaries at Fort Gillem and Fort McPherson, adjusted for a 5
    percent markup; and the retail price is the price collected by Information
    Resources, Inc., for the Atlanta market. Prices may not average due to
    rounding. "N/A" indicates data not available.

    Appendix IV Average Monthly and Annual Farm, Cooperative, Wholesale and
    Retail Milk Prices in Selected Markets

      Table 12: Prices for a Gallon of Milk in Boston, Massachusetts, October 2000
                           through May 2004 Wholesale Retail

      Year Month  Farm Cooperative Whole  2%      1% Skim  Whole    2%    1%  Skim
      2000 Oct.  $1.41       $1.50 $2.00 $1.96 $1.91 $1.90 $2.19 $2.21 $2.23 $2.02
           Nov.   1.41        1.50  2.00 1.96  1.91  1.90   2.20 2.22  2.24   2.03
           Dec.   1.41        1.50  2.00 1.96  1.91  1.90   2.23 2.26  2.27   2.05
           Avg.   1.41        1.50  2.00 1.96  1.91  1.90   2.21 2.23  2.25   2.03
      2001 Jan.   1.43        1.53  2.00 1.96  1.91  1.90   2.23 2.25  2.25   2.05
           Feb.   1.41        1.50  2.00 1.96  1.91  1.90   2.25 2.29  2.29   2.08
           Mar.   1.41        1.50  2.00 1.96  1.91  1.90   2.26 2.31  2.32   2.12
           Apr.   1.41        1.50  2.00 1.96  1.91  1.90   2.26 2.30  2.31   2.12
            May   1.45        1.55  2.00 1.96  1.91  1.90   2.26 2.31  2.32   2.13
           June   1.55        1.65  2.00 1.96  1.91  1.90   2.26 2.31  2.32   2.14
           July   1.59        1.68  2.00 1.96  1.91  1.90   2.27 2.32  2.33   2.14
           Aug.   1.65        1.75  2.00 1.96  1.91  1.90   2.27 2.32  2.33   2.15
           Sept.  1.66        1.76  2.00 1.96  1.91  1.90   2.28 2.34  2.36   2.18
           Oct.   1.69        1.79  2.00 1.96  1.91  1.90   2.30 2.35  2.37   2.19
           Nov.   1.68        1.78  2.00 1.96  1.93  1.90   2.32 2.38  2.40   2.21
           Dec.   1.36        1.45  2.07 1.85  1.71  1.71   2.27 2.36  2.38   2.20
           Avg.   1.52        1.62  2.01 1.95  1.90  1.88   2.27 2.32  2.33   2.14
      2002 Jan.   1.35        1.45  2.07 1.85  1.71  1.71   2.27 2.33  2.35   2.17
           Feb.   1.35        1.45  2.07 1.85  1.71  1.71   2.28 2.36  2.38   2.20
           Mar.   1.32        1.42  2.04 1.82  1.68  1.68   2.28 2.37  2.38   2.21
           Apr.   1.30        1.41  2.03 1.81  1.67  1.67   2.27 2.34  2.35   2.18
            May   1.29        1.39  2.01 1.81  1.67  1.67   2.27 2.34  2.36   2.19
           June   1.27        1.37  2.00 1.78  1.63  1.63   2.26 2.32  2.34   2.17
           July   1.23        1.33  1.96 1.74  1.60  1.60   2.26 2.31  2.33   2.16
           Aug.   1.20        1.30  1.95 1.73  1.59  1.59   2.24 2.28  2.31   2.14
           Sept.  1.20        1.30  1.95 1.73  1.59  1.59   2.26 2.32  2.33   2.17
           Oct.   1.17        1.28  1.92 1.70  1.56  1.56   2.25 2.32  2.33   2.18
           Nov.   1.21        1.31  1.96 1.74  1.60  1.60   2.26 2.32  2.33   2.18
           Dec.   1.20        1.31  1.95 1.73  1.59  1.59   2.24 2.30  2.29   2.15
           Avg.   1.26        1.36  1.99 1.77  1.63  1.63   2.26 2.33  2.34   2.18
      2003 Jan.   1.20        1.31  1.95 1.73  1.59  1.59   2.27 2.33  2.31   2.16
           Feb.   1.17        1.28  1.90 1.70  1.56  1.55   2.28 2.33  2.33   2.19
           Mar.   1.14        1.25  1.87 1.66  1.52  1.52   2.27 2.33  2.33   2.17
           Apr.   1.12        1.23  1.86 1.65  1.51  1.51   2.25 2.29  2.28   2.15

     Appendix IV Average Monthly and Annual Farm, Cooperative, Wholesale and Retail
                            Milk Prices in Selected Markets

                             (Continued From Previous Page)

                                    Wholesale Retail

    Year  Month   Farm Cooperative  Whole   2%   1%  Skim Whole  2%   1%  Skim
              May    1.13         1.24  1.87  1.66 1.52 1.52 2.26  2.31 2.31 2.16
              June   1.13         1.24  1.87  1.66 1.52 1.52 2.26  2.29 2.30 2.15
              July   1.16         1.27  1.88  1.67 1.53 1.53 2.25  2.29 2.29 2.13
              Aug.   1.26         1.37  1.98  1.76 1.62 1.62 2.25  2.29 2.30 2.14
             Sept.   1.50         1.61  2.15  1.94 1.79 1.79 2.31  2.35 2.37 2.21
              Oct.   1.54         1.66  2.25  2.04 1.89 1.89 2.33  2.38 2.40 2.24
              Nov.   1.55         1.67  2.26  2.05 1.90 1.90 2.33  2.39 2.40 2.24
              Dec.   1.51         1.62  2.21  2.00 1.85 1.85 2.34  2.40 2.42 2.26
              Avg.   1.28         1.40  2.00  1.79 1.65 1.65 2.28  2.33 2.34 2.18
    2004   Jan.   1.34         1.45  2.08  1.87 1.72 1.72 2.35  2.40 2.42 2.26
              Feb.   1.31         1.43  2.03  1.81 1.67 1.67 2.34  2.37 2.39 2.24
              Mar.   1.34         1.46  2.03  1.81 1.67 1.67 2.32  2.37 2.38 2.22
              Apr.   1.49         1.60  2.20  1.98 1.83 1.83 2.32  2.37 2.38 2.26
              May    2.01         2.12  2.26  2.05 1.90 1.90 2.58  2.63 2.66 2.51
              Avg.   1.50         1.61  2.12  1.90 1.76 1.76 2.38  2.43 2.45 2.30

    Source: GAO's analysis of price data provided by USDA, the Defense
    Commissary Agency, and Information Resources, Inc.

    Note: For the Boston market, the farm price is the USDA-estimated farm
    Class I price for 3.5 percent milkfat content; the cooperative price is
    the effective cooperative Class I price for Boston for 3.5 percent milkfat
    content during the period that the Northeast Interstate Dairy Compact was
    effective (July 1997 through September 2001); the cooperative price after
    September 2001 is the announced cooperative Class I price for Boston for
    3.5 percent milkfat content; the wholesale price is the price paid by the
    commissary at Hanscom Air Force Base, adjusted for a 5 percent markup; and
    the retail price is the price collected by Information Resources, Inc.,
    for the Boston market. Prices may not average due to rounding.

    Appendix IV Average Monthly and Annual Farm, Cooperative, Wholesale and
    Retail Milk Prices in Selected Markets

    Table 13: Prices for a Gallon of Milk in Charlotte, North Carolina, October 2000
                           through May 2004 Wholesale Retail

      Year Month  Farm Cooperative Whole  2%      1% Skim  Whole    2%    1%  Skim
      2000 Oct.  $1.25       $1.41 $2.09 $2.05 $2.03 $2.00 $2.59 $2.59 $2.64 $2.55
           Nov.   1.24        1.40  2.08 2.06  2.03  2.00   2.56 2.56  2.59   2.52
           Dec.   1.25        1.41  2.11 2.08  2.03  2.00   2.57 2.59  2.62   2.55
           Avg.   1.25        1.41  2.09 2.06  2.03  2.00   2.57 2.58  2.62   2.54
      2001 Jan.   1.40        1.57  2.25 2.18  2.08  2.00   2.61 2.62  2.64   2.58
           Feb.   1.25        1.41  2.10 2.07  2.03  1.98   2.56 2.57  2.60   2.53
           Mar.   1.29        1.45  2.14 2.11  2.08  2.03   2.61 2.63  2.65   2.57
           Apr.   1.36        1.52  2.21 2.19  2.15  2.10   2.58 2.61  2.63   2.56
            May   1.41        1.58  2.28 2.25  2.21  2.17   2.59 2.62  2.64   2.57
           June   1.44        1.61  2.35 2.32  2.28  2.23   2.58 2.61  2.63   2.57
           July   1.49        1.66  2.38 2.35  2.31  2.26   2.59 2.62  2.64   2.57
           Aug.   1.49        1.66  2.52 2.42  2.36  2.30   2.58 2.61  2.63   2.56
           Sept.  1.51        1.68  2.57 2.45  2.38  2.32   2.57 2.60  2.62   2.55
           Oct.   1.54        1.71  2.57 2.46  2.39  2.33   2.58 2.60  2.63   2.55
           Nov.   1.53        1.69  2.60 2.50  2.46  2.42   2.62 2.64  2.68   2.62
           Dec.   1.24        1.41  2.60 2.55  2.54  2.52   2.62 2.65  2.68   2.63
           Avg.   1.41        1.58  2.38 2.32  2.27  2.22   2.59 2.62  2.64   2.57
      2002 Jan.   1.18        1.40  2.60 2.55  2.54  2.52   2.63 2.65  2.67   2.60
           Feb.   1.18        1.40  2.60 2.55  2.54  2.52   2.59 2.60  2.65   2.58
           Mar.   1.18        1.40  2.60 2.55  2.54  2.52   2.59 2.61  2.65   2.59
           Apr.   1.18        1.40  2.60 2.55  2.54  2.52   2.58 2.60  2.63   2.56
            May   1.19        1.40  2.60 2.55  2.54  2.52   2.57 2.59  2.63   2.57
           June   1.17        1.38  2.60 2.55  2.54  2.52   2.57 2.59  2.60   2.56
           July   1.14        1.35  2.60 2.55  2.54  2.52   2.54 2.56  2.61   2.55
           Aug.   1.12        1.34  2.60 2.55  2.54  2.52   2.56 2.58  2.62   2.56
           Sept.  1.12        1.34  2.60 2.55  2.54  2.52   2.51 2.55  2.59   2.53
           Oct.   1.10        1.31  2.60 2.55  2.54  2.52   2.51 2.53  2.59   2.52
           Nov.   1.14        1.35  2.63 2.57  2.56  2.54   2.59 2.60  2.65   2.58
           Dec.   1.12        1.34  2.65 2.58  2.57  2.56   2.58 2.58  2.63   2.56
           Avg.   1.15        1.37  2.61 2.55  2.54  2.53   2.57 2.59  2.63   2.56
      2003 Jan.   1.13        1.34  2.65 2.58  2.57  2.56   2.52 2.52  2.58   2.50
           Feb.   1.13        1.34  2.64 2.57  2.56  2.54   2.59 2.58  2.64   2.56
           Mar.   1.10        1.31  2.62 2.56  2.55  2.52   2.59 2.59  2.64   2.56
           Apr.   1.08        1.29  2.62 2.56  2.55  2.52   2.58 2.57  2.62   2.54

     Appendix IV Average Monthly and Annual Farm, Cooperative, Wholesale and Retail
                            Milk Prices in Selected Markets

                             (Continued From Previous Page)

                                    Wholesale Retail

    Year  Month   Farm Cooperative  Whole   2%   1%  Skim Whole  2%   1%  Skim
              May    1.09         1.30  2.62  2.56 2.55 2.52 2.56  2.56 2.61 2.53
              June   1.09         1.30  2.62  2.56 2.55 2.52 2.59  2.58 2.62 2.55
              July   1.09         1.30  2.62  2.56 2.55 2.52 2.56  2.56 2.63 2.53
              Aug.   1.16         1.38  2.62  2.56 2.55 2.52 2.59  2.61 2.68 2.58
             Sept.   1.35         1.57  2.77  2.70 2.69 2.66 2.62  2.64 2.71 2.65
              Oct.   1.38         1.60  2.95  2.85 2.87 2.85 2.75  2.76 2.83 2.73
              Nov.   1.38         1.60  2.98  2.85 2.92 2.91 2.78  2.80 2.88 2.80
              Dec.   1.37         1.58  2.98  2.85 2.92 2.91 2.80  2.82 2.90 2.81
              Avg.   1.20         1.41  2.72  2.65 2.65 2.63 2.63  2.63 2.70 2.61
    2004   Jan.   1.21         1.43  2.98  2.90 2.92 2.90 2.78  2.79 2.87 2.78
              Feb.   1.21         1.43  2.88  2.82 2.81 2.80 2.76  2.77 2.84 2.77
              Mar.   1.21         1.43  2.78  2.75 2.69 2.66 2.74  2.75 2.83 2.73
              Apr.   1.35         1.57  2.70  2.69 2.57 2.52 2.83  2.83 2.92 2.81
              May    1.83         2.05  3.10  3.05 2.85 2.84 3.19  3.21 3.24 3.21
              Avg.   1.36         1.58  2.89  2.84 2.77 2.74 2.86  2.87 2.94 2.86

    Source: GAO's analysis of price data provided by USDA, the Defense
    Commissary Agency, and Information Resources, Inc.

    Note: For the Charlotte market, the farm price is the USDA-estimated farm
    Class I price for 3.5 percent milkfat content; the cooperative price is
    the announced cooperative Class I price for Charlotte for 3.5 percent
    milkfat content; the wholesale price is the price paid by the Fort Bragg
    North Post Store, adjusted for a 5 percent markup; and the retail price is
    the price collected by Information Resources, Inc., for the Charlotte
    market. Prices may not average due to rounding.

    Appendix IV Average Monthly and Annual Farm, Cooperative, Wholesale and
    Retail Milk Prices in Selected Markets

    Table 14: Prices for a Gallon of Milk in Cincinnati, Ohio, October 2000 through
                               May 2004 Wholesale Retail

      Year Month  Farm Cooperative Whole  2%     1% Skim  Whole    2%    1%  Skim
      2000 Oct.  $1.20       $1.38  N/A  N/A  $1.96 $1.80 $1.88 $2.28 $2.32 $2.25
           Nov.   1.19        1.37  N/A  N/A  1.96  1.80   1.94 2.18  2.25   2.19
           Dec.   1.22        1.40  N/A  N/A  1.96  1.80   1.93 2.27  2.31   2.25
           Avg.   1.20        1.38  N/A  N/A  1.96  1.80   1.92 2.24  2.29   2.23
      2001 Jan.   1.38        1.55  N/A  N/A  1.96  1.80   2.09 2.37  2.46   2.37
           Feb.   1.20        1.37  N/A  N/A  1.96  1.80   1.86 2.20  2.27   2.22
           Mar.   1.26        1.43 2.29  2.12 1.96  1.80   1.91 2.06  2.08   2.04
           Apr.   1.33        1.50 2.34  2.15 1.99  1.81   1.88 2.21  2.28   2.21
            May   1.39        1.56 2.43  2.22 2.03  1.84   1.80 2.07  1.93   1.88
           June   1.46        1.63 2.49  2.26 2.05  1.84   1.98 2.27  2.31   2.26
           July   1.50        1.67 2.53  2.29 2.07  1.85   1.98 2.28  2.32   2.25
           Aug.   1.51        1.67 2.53  2.29 2.07  1.85   1.94 2.38  2.47   2.41
           Sept.  1.52        1.69 2.54  2.30 2.08  1.86   2.00 2.42  2.46   2.40
           Oct.   1.55        1.72 2.56  2.30 2.06  1.82   1.95 2.23  2.29   2.15
           Nov.   1.52        1.70 2.39  2.36 2.15  1.96   2.02 2.56  2.67   2.55
           Dec.   1.21        1.37 2.28  2.09 2.19  2.00   1.87 2.29  2.36   2.27
           Avg.   1.40        1.57 2.44  2.24 2.05  1.85   1.94 2.28  2.33   2.25
      2002 Jan.   1.19        1.36 2.26  2.06 2.19  2.00   1.96 2.38  2.44   2.34
           Feb.   1.19        1.36 2.26  2.06 2.19  2.00   1.91 2.37  2.46   2.38
           Mar.   1.17        1.33 2.23  2.03 2.19  2.00   1.93 2.36  2.50   2.36
           Apr.   1.15        1.32 2.23  2.03  N/A   N/A   1.95 2.28  2.29   2.22
            May   1.13        1.30 2.20  2.00  N/A   N/A   1.88 2.44  2.48   2.38
           June   1.11        1.28 2.19  1.99  N/A   N/A   1.81 2.21  2.27   2.18
           July   1.08        1.24 2.16  1.96  N/A   N/A   1.81 2.30  2.33   2.24
           Aug.   1.07        1.23 2.14  1.94  N/A   N/A   1.82 2.33  2.36   2.27
           Sept.  1.07        1.23 2.14  1.94  N/A   N/A   1.81 2.34  2.38   2.28
           Oct.   1.03        1.20 2.11  1.91  N/A   N/A   1.79 2.28  2.32   2.23
           Nov.   1.07        1.24 2.15  1.95  N/A   N/A   1.83 2.43  2.48   2.37
           Dec.   1.07        1.23 2.14  1.94 1.75  1.56   1.85 2.37  2.40   2.32
           Avg.   1.11        1.28 2.18  1.98 2.08  1.89   1.86 2.34  2.39   2.30
      2003 Jan.   1.07        1.24 2.14  1.94 1.75  1.56   1.72 2.35  2.39   2.30
           Feb.   1.06        1.24 2.11  1.90 1.75  1.56   1.82 2.29  2.33   2.24
           Mar.   1.02        1.20 2.07  1.86 1.71  1.52   1.84 2.30  2.34   2.24
           Apr.   1.01        1.19 2.06  1.85 1.71  1.52   1.74 2.21  2.24   2.17

     Appendix IV Average Monthly and Annual Farm, Cooperative, Wholesale and Retail
                            Milk Prices in Selected Markets

                             (Continued From Previous Page)

                                    Wholesale Retail

    Year  Month   Farm Cooperative  Whole   2%   1%  Skim Whole  2%   1%  Skim
              May    1.02         1.19  2.07  1.86 1.68 1.49 1.84  2.38 2.42 2.32
              June   1.02         1.20  2.07  1.86 1.68 1.49 1.80  2.47 2.54 2.42
              July   1.02         1.20  2.08  1.87 1.69 1.50 1.82  2.30 2.33 2.25
              Aug.   1.09         1.27  2.17  1.97 1.78 1.59 1.86  2.43 2.48 2.37
             Sept.   1.33         1.51  2.39  2.19 2.01 1.81 1.83  2.38 2.42 2.32
              Oct.   1.38         1.56  2.44  2.24 2.06 1.86 1.86  2.36 2.42 2.31
              Nov.   1.38         1.56  2.45  2.25 2.07 1.87 1.88  2.40 2.46 2.34
              Dec.   1.34         1.52  2.39  2.20 2.06 1.86 1.87  2.15 2.18 2.08
              Avg.   1.15         1.32  2.20  2.00 1.83 1.64 1.82  2.34 2.38 2.28
    2004   Jan.   1.18         1.36  2.27  2.07 1.89 1.70 1.71  2.08 2.07 2.00
              Feb.   1.15         1.33  2.22  2.02 1.83 1.64 1.63  1.89 1.88 1.82
              Mar.   1.18         1.36  2.25  2.05 1.86 1.67 1.63  1.87 1.85 1.80
              Apr.   1.33         1.51  2.41  2.21 2.03 1.83 1.46  1.70 1.60 1.56
              May    1.85         2.03  2.88  2.68 2.50 2.31 1.87  2.19 2.14 2.05
              Avg.   1.34         1.52  2.41  2.21 2.02 1.83 1.66  1.95 1.91 1.85

    Source: GAO's analysis of price data provided by USDA, the Defense
    Commissary Agency, and Information Resources, Inc.

    Note: For the Cincinnati market, the farm price is the USDA-estimated farm
    Class I price for 3.5 percent milkfat content; the cooperative price is
    the announced cooperative Class I price for Cincinnati for 3.5 percent
    milkfat content; the wholesale price is the price paid by the commissary
    at Wright-Patterson Air Force Base, adjusted for a 5 percent markup; and
    the retail price is the price collected by Information Resources, Inc.,
    for the Cincinnati market. Prices may not average due to rounding. "N/A"
    indicates data not available.

    Appendix IV Average Monthly and Annual Farm, Cooperative, Wholesale and
    Retail Milk Prices in Selected Markets

    Table 15: Prices for a Gallon of Milk in Dallas, Texas, October 2000 through May
                                 2004 Wholesale Retail

      Year Month  Farm Cooperative Whole  2%      1% Skim  Whole    2%    1%  Skim
      2000 Oct.  $1.24       $1.35 $2.06 $2.06 $2.02 $1.95 $1.79 $1.64 $1.75 $1.67
           Nov.   1.23        1.35  2.06 2.06  2.02  1.95   1.87 1.77  2.01   1.80
           Dec.   1.24        1.35  2.06 2.03  2.02  1.95   2.00 1.82  2.02   1.81
           Avg.   1.24        1.35  2.06 2.05  2.02  1.95   1.89 1.74  1.93   1.76
      2001 Jan.   1.35        1.46  2.06 2.03  2.02  1.95   2.01 1.89  2.12   1.87
           Feb.   1.25        1.36  2.15 2.12  2.11  2.04   2.02 1.91  2.07   1.91
           Mar.   1.29        1.40  2.16 2.13  2.12  2.04   1.96 1.85  2.03   1.84
           Apr.   1.35        1.46  2.16 2.13  2.12  2.04   2.00 1.92  2.06   1.92
            May   1.40        1.51  2.16 2.13  2.12  2.04   2.05 1.94  2.07   1.94
           June   1.43        1.55  2.16 2.13  2.12  2.04   2.07 2.00  2.05   1.98
           July   1.50        1.61  2.16 2.13  2.12  2.04   2.08 2.00  2.09   1.96
           Aug.   1.50        1.62  2.21 2.18  2.15  2.10   2.08 2.06  2.18   2.05
           Sept.  1.50        1.61  2.21 2.19  2.18  2.10   2.06 2.02  2.09   1.99
           Oct.   1.54        1.64  2.21 2.19  2.18  2.10   2.10 2.04  2.12   2.05
           Nov.   1.53        1.63  2.21 2.19  2.18  2.10   2.08 2.05  2.19   2.06
           Dec.   1.25        1.36  2.21 2.19  2.18  2.10   2.16 2.10  2.14   2.10
           Avg.   1.41        1.52  2.17 2.15  2.13  2.06   2.06 1.98  2.10   1.97
      2002 Jan.   1.25        1.36  2.21 2.19  2.18  2.10   2.03 2.03  2.20   2.01
           Feb.   1.26        1.36  2.21 2.19  2.18  2.10   2.09 2.03  2.15   2.02
           Mar.   1.27        1.37  2.21 2.19  2.18  2.10   2.02 2.00  2.11   1.97
           Apr.   1.27        1.37  2.21 2.19  2.18  2.10   2.05 2.01  2.14   2.00
            May   1.27        1.37  2.21 2.19  2.18  2.10   2.08 2.02  2.17   2.00
           June   1.27        1.37  2.21 2.19  2.18  2.10   2.10 2.06  2.21   2.07
           July   1.20        1.29  2.21 2.19  2.18  2.10   2.07 2.06  2.23   2.06
           Aug.   1.18        1.28  2.21 2.19  2.18  2.10   2.08 2.06  2.23   2.06
           Sept.  1.18        1.28  2.21 2.19  2.18  2.10   2.07 2.05  2.18   2.05
           Oct.   1.15        1.25  2.21 2.19  2.18  2.10   2.06 2.06  2.18   2.06
           Nov.   1.20        1.28  2.21 2.19  2.18  2.10   2.05 1.99  2.08   1.99
           Dec.   1.18        1.28  2.21 2.19  2.18  2.10   2.02 1.97  2.05   1.97
           Avg.   1.22        1.32  2.21 2.19  2.18  2.10   2.06 2.03  2.16   2.02
      2003 Jan.   1.19        1.29  2.21 2.19  2.18  2.10   2.02 1.98  2.07   1.96
           Feb.   1.16        1.26  2.21 2.19  2.18  2.10   2.01 1.95  2.03   1.93
           Mar.   1.12        1.22  2.21 2.19  2.18  2.10   2.05 1.97  2.04   1.96
           Apr.   1.11        1.21  2.21 2.19  2.18  2.10   2.07 2.00  2.07   2.00

     Appendix IV Average Monthly and Annual Farm, Cooperative, Wholesale and Retail
                            Milk Prices in Selected Markets

                             (Continued From Previous Page)

                                    Wholesale Retail

    Year  Month   Farm Cooperative  Whole   2%   1%  Skim Whole  2%   1%  Skim
              May    1.11         1.22  2.21  2.19 2.18 2.10 2.06  1.96 2.05 1.96
              June   1.11         1.22  2.21  2.19 2.18 2.10 2.07  2.01 2.08 1.99
              July   1.11         1.22  2.21  2.19 2.18 2.10 2.06  1.98 2.07 1.96
              Aug.   1.19         1.30  2.21  2.19 2.18 2.10 2.14  2.01 2.12 1.99
             Sept.   1.41         1.52  2.39  2.37 2.26 2.27 2.18  2.05 2.14 2.02
              Oct.   1.43         1.54  2.39  2.37 2.43 2.27 2.27  2.17 2.27 2.16
              Nov.   1.43         1.54  2.39  2.37 2.45 2.27 2.24  2.11 2.21 2.10
              Dec.   1.42         1.53  2.49  2.46 2.44 2.37 2.19  2.05 2.06 2.02
              Avg.   1.23         1.34  2.28  2.26 2.25 2.17 2.11  2.02 2.10 2.00
    2004   Jan.   1.27         1.38  2.41  2.38 2.37 2.28 2.16  2.01 2.01 1.95
              Feb.   1.27         1.38  2.39  2.37 2.35 2.26 2.15  1.96 1.98 1.92
              Mar.   1.28         1.38  2.39  2.37 2.35 2.26 2.14  1.97 1.96 1.94
              Apr.   1.42         1.52  2.43  2.40 2.38 2.29 2.24  2.03 2.03 1.95
              May    1.89         2.00  2.87  2.84 2.82 2.74 2.79  2.67 2.77 2.52
              Avg.   1.43         1.53  2.50  2.47 2.45 2.37 2.30  2.13 2.15 2.06

    Source: GAO's analysis of price data provided by USDA, the Defense
    Commissary Agency, and Information Resources, Inc.

    Note: For the Dallas market, the farm price is the USDA-estimated farm
    Class I price for 3.5 percent milkfat content; the cooperative price is
    the announced cooperative Class I price for Dallas for 3.5 percent milkfat
    content; the wholesale price is the average of the prices paid by the two
    commissaries at Fort Hood, adjusted for a 5 percent markup; and the retail
    price is the price collected by Information Resources, Inc., for the
    Dallas market. Prices may not average due to rounding.

    Appendix IV Average Monthly and Annual Farm, Cooperative, Wholesale and
    Retail Milk Prices in Selected Markets

    Table 16: Prices for a Gallon of Milk in Denver, Colorado, October 2000 through
                               May 2004 Wholesale Retail

      Year Month  Farm Cooperative Whole    2%    1% Skim  Whole    2%    1%  Skim
      2000 Oct.  $1.18       $1.31 $1.94 $1.71 $1.62 $1.52 $2.55 $2.43 $2.45 $2.23
           Nov.   1.19        1.30  1.94 1.72  1.63  1.53   2.55 2.44  2.46   2.25
           Dec.   1.21        1.33  1.97 1.75  1.65  1.56   2.58 2.49  2.45   2.27
           Avg.   1.19        1.31  1.95 1.73  1.63  1.54   2.56 2.45  2.45   2.25
      2001 Jan.   1.38        1.49  2.10 1.88  1.79  1.70   2.62 2.50  2.56   2.28
           Feb.   1.21        1.31  1.97 1.75  1.54  1.57   2.57 2.48  2.54   2.27
           Mar.   1.27        1.37  1.99 1.77  1.55  1.59   2.49 2.45  2.48   2.15
           Apr.   1.33        1.44  2.07 1.85  1.63  1.67   2.59 2.50  2.50   2.30
            May   1.40        1.51  2.14 1.93  1.70  1.74   2.59 2.51  2.61   2.28
           June   1.46        1.57  2.20 2.00  1.76  1.81   2.65 2.56  2.58   2.34
           July   1.49        1.60  2.23 2.02  1.79  1.83   2.65 2.55  2.48   2.31
           Aug.   1.49        1.61  2.24 2.03  1.80  1.84   2.65 2.55  2.52   2.31
           Sept.  1.51        1.62  2.25 2.04  1.81  1.85   2.60 2.53  2.49   2.31
           Oct.   1.55        1.65  2.28 2.07  1.82  1.88   2.64 2.60  2.62   2.35
           Nov.   1.53        1.64  2.27 2.06  1.83  1.87   2.65 2.63  2.72   2.39
           Dec.   1.22        1.33  1.96 1.74  1.64  1.56   2.64 2.65  2.64   2.40
           Avg.   1.40        1.51  2.14 1.93  1.72  1.74   2.61 2.54  2.56   2.31
      2002 Jan.   1.21        1.32  1.96 1.74  1.64  1.56   2.67 2.65  2.73   2.39
           Feb.   1.21        1.32  1.95 1.74  1.64  1.56   2.66 2.64  2.72   2.39
           Mar.   1.18        1.29  1.92 1.71  1.62  1.53   2.64 2.63  2.72   2.34
           Apr.   1.17        1.28  1.91 1.70  1.61  1.52   2.69 2.71  2.73   2.39
            May   1.15        1.26  1.89 1.68  1.59  1.50   2.60 2.61  2.71   2.40
           June   1.13        1.24  1.87 1.66  1.57  1.48   2.59 2.54  2.71   2.34
           July   1.09        1.21  1.83 1.62  1.53  1.44   2.50 2.43  2.64   2.30
           Aug.   1.08        1.20  1.82 1.62  1.52  1.43   2.50 2.43  2.63   2.33
           Sept.  1.08        1.19  1.82 1.62  1.52  1.43   2.52 2.51  2.70   2.30
           Oct.   1.05        1.17  1.80 1.59  1.49  1.41   2.55 2.52  2.70   2.34
           Nov.   1.09        1.21  1.83 1.62  1.53  1.44   2.43 2.50  2.68   2.32
           Dec.   1.09        1.20  1.82 1.62  1.52  1.43   2.49 2.49  2.64   2.30
           Avg.   1.13        1.24  1.87 1.66  1.57  1.48   2.57 2.56  2.69   2.35
      2003 Jan.   1.09        1.20  1.82 1.61  1.52  1.43   2.57 2.52  2.71   2.32
           Feb.   1.06        1.17  1.79 1.58  1.49  1.40   2.61 2.56  2.70   2.35
           Mar.   1.03        1.14  1.77 1.55  1.46  1.38   2.56 2.50  2.65   2.34
           Apr.   1.01        1.12  1.75 1.54  1.44  1.36   2.51 2.44  2.61   2.31

     Appendix IV Average Monthly and Annual Farm, Cooperative, Wholesale and Retail
                            Milk Prices in Selected Markets

                             (Continued From Previous Page)

                                    Wholesale Retail

    Year  Month  Farm  Cooperative  Whole   2%   1%  Skim Whole  2%   1%  Skim
              May    1.02         1.13  1.76  1.55 1.45 1.37 2.55  2.47 2.66 2.34
              June   1.02         1.13  1.76  1.55 1.45 1.37 2.54  2.45 2.64 2.31
              July   1.02         1.14  1.77  1.56 1.46 1.38 2.56  2.47 2.68 2.35
              Aug.   1.12         1.24  1.85  1.64 1.55 1.46 2.58  2.50 2.71 2.35
             Sept.   1.36         1.47  2.03  1.81 1.72 1.63 2.80  2.69 2.97 2.53
              Oct.   1.41         1.52  2.13  1.92 1.82 1.73 2.87  2.73 2.99 2.55
              Nov.   1.42         1.53  2.15  1.94 1.84 1.75 2.81  2.70 2.93 2.45
              Dec.   1.37         1.49  2.14  1.96 1.82 1.72 2.73  2.62 2.72 2.36
              Avg.   1.16         1.27  1.89  1.68 1.59 1.50 2.64  2.55 2.75 2.38
    2004   Jan.   1.17         1.31  2.10  1.91 1.78 1.68 2.72  2.65 2.70 2.34
              Feb.   1.15         1.29  2.07  1.89 1.75 1.65 2.69  2.55 2.58 2.20
              Mar.   1.18         1.32  2.07  1.89 1.75 1.64 2.80  2.69 2.56 2.42
              Apr.   1.33         1.47  2.21  2.04 1.89 1.78 2.88  2.79 2.59 2.49
              May    1.85         1.99  2.66  2.48 2.34 2.23 3.00  2.90 2.87 2.64
              Avg.   1.34         1.48  2.22  2.04 1.90 1.80 2.82  2.72 2.66 2.42

    Source: GAO's analysis of price data provided by USDA, the Defense
    Commissary Agency, and Information Resources, Inc.

    Note: For the Denver market, the farm price is the USDA-estimated farm
    Class I price for 3.5 percent milkfat content; the cooperative price is
    the announced cooperative Class I price for Denver for 3.5 percent milkfat
    content; the wholesale price is the average of the prices paid by the
    commissaries at Fort Carson, Peterson Air Force Base, Buckley Air Force
    Base, and the U.S. Air Force Academy, adjusted for a 5 percent markup; and
    the retail price is the price collected by Information Resources, Inc.,
    for the Denver market. Prices may not average due to rounding.

    Appendix IV Average Monthly and Annual Farm, Cooperative, Wholesale and
    Retail Milk Prices in Selected Markets

     Table 17: Prices for a Gallon of Milk in Miami, Florida, October 2000 through
                               May 2004 Wholesale Retail

      Year Month Farm  Cooperative Whole  2%    1%  Skim  Whole    2%    1%  Skim
      2000 Oct.  $1.40       $1.62 $2.46 $2.46 N/A  $2.46 $2.47 $2.36 $2.38 $2.25
           Nov.   1.39        1.62  2.47 2.47  N/A  2.47   2.47 2.31  2.34   2.25
           Dec.   1.40        1.62  2.56 2.56  N/A  2.56   2.47 2.33  2.35   2.24
           Avg.   1.40        1.62  2.50 2.50  N/A  2.50   2.47 2.33  2.36   2.25
      2001 Jan.   1.56        1.78  2.56 2.56  N/A  2.56   2.48 2.34  2.35   2.24
           Feb.   1.40        1.63  2.56 2.56  N/A  2.56   2.47 2.32  2.32   2.25
           Mar.   1.43        1.66  2.56 2.56  N/A  2.56   2.49 2.34  2.35   2.26
           Apr.   1.51        1.74  2.56 2.56  N/A  2.56   2.49 2.37  2.36   2.27
            May   1.57        1.79  2.56 2.56  N/A  2.56   2.48 2.37  2.39   2.28
           June   1.60        1.83  2.56 2.56  N/A  2.56   2.57 2.45  2.47   2.34
           July   1.65        1.87  2.56 2.56  N/A  2.56   2.56 2.44  2.45   2.32
           Aug.   1.65        1.88  2.56 2.56  N/A  2.56   2.58 2.45  2.47   2.34
           Sept.  1.67        1.89  2.56 2.56  N/A  2.56   2.58 2.45  2.47   2.35
           Oct.   1.70        1.92  2.56 2.56  N/A  2.56   2.56 2.44  2.45   2.33
           Nov.   1.68        1.91  2.56 2.56  N/A  2.56   2.56 2.44  2.45   2.34
           Dec.   1.40        1.62  2.56 2.56  N/A  2.56   2.56 2.43  2.44   2.33
           Avg.   1.57        1.79  2.56 2.56  N/A  2.56   2.53 2.40  2.41   2.30
      2002 Jan.   1.38        1.62  2.56 2.56  N/A  2.56   2.53 2.40  2.40   2.31
           Feb.   1.38        1.62  2.56 2.56  N/A  2.56   2.49 2.38  2.38   2.30
           Mar.   1.38        1.62  2.56 2.56  N/A  2.56   2.49 2.38  2.39   2.30
           Apr.   1.39        1.62  2.56 2.56  N/A  2.56   2.52 2.39  2.40   2.30
            May   1.39        1.62  2.56 2.56  N/A  2.56   2.47 2.36  2.36   2.27
           June   1.37        1.60  2.56 2.56  N/A  2.56   2.48 2.36  2.39   2.28
           July   1.33        1.57  2.56 2.56  N/A  2.56   2.46 2.37  2.35   2.27
           Aug.   1.32        1.55  2.56 2.56  N/A  2.56   2.34 2.33  2.31   2.24
           Sept.  1.32        1.55  2.56 2.56  N/A  2.56   2.37 2.29  2.27   2.22
           Oct.   1.29        1.52  2.56 2.56  1.86 2.56   2.38 2.28  2.26   2.19
           Nov.   1.32        1.56  2.56 2.56  1.88 2.56   2.45 2.35  2.36   2.28
           Dec.   1.31        1.55  2.56 2.56  1.88 2.56   2.49 2.38  2.39   2.30
           Avg.   1.35        1.58  2.56 2.56  1.87 2.56   2.46 2.36  2.36   2.27
      2003 Jan.   1.31        1.55  2.56 2.56  1.90 2.56   2.50 2.38  2.39   2.30
           Feb.   1.29        1.52  2.56 2.56  1.90 2.56   2.50 2.36  2.37   2.28
           Mar.   1.26        1.49  2.56 2.56  1.90 2.56   2.51 2.38  2.39   2.29
           Apr.   1.25        1.48  2.56 2.56  1.90 2.56   2.49 2.38  2.40   2.30

     Appendix IV Average Monthly and Annual Farm, Cooperative, Wholesale and Retail
                            Milk Prices in Selected Markets

                             (Continued From Previous Page)

                                    Wholesale Retail

    Year  Month  Farm  Cooperative  Whole   2%   1%  Skim Whole  2%   1%  Skim
              May    1.26         1.49  2.56  2.56 1.90 2.56 2.54  2.42 2.43 2.32
              June   1.26         1.49  2.56  2.56 1.90 2.56 2.54  2.42 2.43 2.32
              July   1.25         1.49  2.56  2.56 1.91 2.56 2.51  2.40 2.41 2.31
              Aug.   1.34         1.57  2.56  2.56 2.08 2.56 2.58  2.48 2.50 2.39
             Sept.   1.53         1.77  2.56  2.56 2.27 2.56 2.69  2.59 2.62 2.50
              Oct.   1.56         1.79  2.56  2.56 2.27 2.56 2.71  2.61 2.62 2.51
              Nov.   1.56         1.79  2.56  2.56 2.27 2.56 2.69  2.59 2.57 2.49
              Dec.   1.55         1.78  2.56  2.56 2.27 2.56 2.71  2.61 2.56 2.51
              Avg.   1.37         1.60  2.56  2.56 2.04 2.56 2.58  2.47 2.47 2.38
    2004   Jan.   1.41         1.63  2.56  2.56 2.18 2.56 2.67  2.54 2.50 2.44
              Feb.   1.41         1.63  2.56  2.56 2.08 2.56 2.63  2.49 2.46 2.41
              Mar.   1.41         1.63  2.56  2.56 2.08 2.56 2.64  2.51 2.47 2.42
              Apr.   1.55         1.77  2.56  2.56 2.09 2.56 2.74  2.62 2.58 2.53
              May    2.02         2.25  2.56  2.56 2.66 2.56 3.07  2.97 2.92 2.86
              Avg.   1.56         1.78  2.56  2.56 2.22 2.56 2.75  2.63 2.59 2.53

    Source: GAO's analysis of price data provided by USDA, the Defense
    Commissary Agency, and Information Resources, Inc.

    Note: For the Miami market, the farm price is the USDA-estimated farm
    Class I price for 3.5 percent milkfat content; the cooperative price is
    the announced cooperative Class I price for Miami for 3.5 percent milkfat
    content; the wholesale price is the price paid by the commissary at the
    Naval Air Station, Key West, adjusted for a 5 percent markup; and the
    retail price is the price collected by Information Resources, Inc., for
    the Miami market. Prices may not average due to rounding. "N/A" indicates
    data not available.

    Appendix IV Average Monthly and Annual Farm, Cooperative, Wholesale and
    Retail Milk Prices in Selected Markets

      Table 18: Prices for a Gallon of Milk in Milwaukee, Wisconsin, October 2000
                           through May 2004 Wholesale Retail

      Year Month  Farm Cooperative Whole    2%    1% Skim  Whole    2%    1%  Skim
      2000 Oct.  $1.20       $1.34 $1.87 $1.79 $1.76 $1.72 $1.97 $1.93 $2.01 $1.87
           Nov.   1.20        1.33  1.87 1.79  1.76  1.72   1.98 1.95  2.03   1.89
           Dec.   1.21        1.34  1.87 1.79  1.76  1.72   1.99 1.95  2.00   1.89
           Avg.   1.20        1.34  1.87 1.79  1.76  1.72   1.98 1.94  2.01   1.88
      2001 Jan.   1.39        1.54  2.24 2.15  2.10  2.04   2.12 2.09  2.15   1.99
           Feb.   1.17        1.32  2.09 2.06  2.05  2.04   2.05 2.03  2.07   1.94
           Mar.   1.24        1.39  2.07 2.05  2.05  2.04   2.08 2.03  2.10   1.96
           Apr.   1.31        1.46  2.14 2.09  2.07  2.04   2.10 2.05  2.10   1.96
            May   1.38        1.53  2.23 2.15  2.12  2.07   2.11 2.07  2.12   1.96
           June   1.46        1.61  2.29 2.19  2.15  2.09   2.10 2.06  2.08   1.94
           July   1.49        1.64  2.32 2.21  2.16  2.09   2.14 2.07  2.12   1.96
           Aug.   1.50        1.65  2.34 2.23  2.17  2.11   2.15 2.09  2.13   1.97
           Sept.  1.53        1.67  2.42 2.31  2.25  2.18   2.16 2.09  2.13   1.97
           Oct.   1.55        1.70  2.44 2.30  2.23  2.15   2.18 2.12  2.16   1.99
           Nov.   1.55        1.69  2.40 2.30  2.26  2.21   2.20 2.13  2.18   2.01
           Dec.   1.22        1.36  2.19 2.05  2.00  1.98   2.11 2.04  2.08   1.94
           Avg.   1.40        1.55  2.26 2.17  2.13  2.09   2.13 2.07  2.12   1.97
      2002 Jan.   1.20        1.36  1.97 1.86  1.84  1.84   2.07 2.04  2.04   1.91
           Feb.   1.18        1.35  1.92 1.81  1.81  1.81   2.08 2.03  2.03   1.90
           Mar.   1.16        1.32  1.92 1.81  1.81  1.81   2.08 2.02  2.02   1.90
           Apr.   1.16        1.32  1.92 1.81  1.81  1.81   2.08 2.05  2.06   1.92
            May   1.13        1.30  1.92 1.81  1.81  1.81   2.06 2.00  2.03   1.89
           June   1.13        1.29  1.92 1.81  1.81  1.81   2.08 2.02  2.05   1.92
           July   1.09        1.25  1.92 1.81  1.81  1.81   2.08 2.00  2.04   1.90
           Aug.   1.08        1.25  1.92 1.81  1.81  1.81   2.05 2.00  2.02   1.89
           Sept.  1.08        1.25  1.92 1.81  1.81  1.81   2.05 1.99  2.03   1.89
           Oct.   1.05        1.22  1.92 1.81  1.81  1.81   2.04 1.98  2.02   1.88
           Nov.   1.09        1.26  1.92 1.81  1.81  1.81   2.06 1.99  2.03   1.88
           Dec.   1.08        1.25  1.92 1.81  1.81  1.81   2.06 1.99  2.02   1.88
           Avg.   1.12        1.29  1.92 1.81  1.81  1.81   2.07 2.01  2.03   1.90
      2003 Jan.   1.09        1.27  1.92 1.81  1.81  1.81   2.06 1.98  2.01   1.87
           Feb.   1.05        1.22  1.92 1.81  1.81  1.81   2.06 1.98  1.99   1.86
           Mar.   1.01        1.18  1.92 1.81  1.81  1.81   2.06 1.98  2.01   1.87
           Apr.   1.00        1.18  1.92 1.81  1.81  1.81   2.06 1.98  2.00   1.87

     Appendix IV Average Monthly and Annual Farm, Cooperative, Wholesale and Retail
                            Milk Prices in Selected Markets

                             (Continued From Previous Page)

                                    Wholesale Retail

    Year  Month   Farm Cooperative  Whole   2%   1%  Skim Whole  2%   1%  Skim
              May    1.01         1.18  1.92  1.81 1.81 1.81 2.05  1.95 1.97 1.85
              June   1.01         1.18  1.92  1.81 1.81 1.81 2.03  1.93 1.96 1.83
              July   1.01         1.18  1.92  1.81 1.81 1.81 2.04  1.94 1.98 1.84
              Aug.   1.13         1.31  1.92  1.81 1.81 1.81 2.06  2.01 2.03 1.90
             Sept.   1.37         1.54  1.92  1.81 1.81 1.81 2.14  2.06 2.09 1.94
              Oct.   1.39         1.57  2.16  2.05 2.04 2.04 2.15  2.07 2.11 1.96
              Nov.   1.40         1.58  2.17  2.06 2.05 2.05 2.16  2.10 2.12 1.98
              Dec.   1.36         1.53  2.17  2.06 2.05 2.05 2.17  2.05 2.11 1.92
              Avg.   1.15         1.33  1.98  1.87 1.87 1.87 2.09  2.00 2.03 1.89
    2004   Jan.   1.18         1.33  2.17  2.06 2.05 2.05 2.16  2.07 2.04 1.91
              Feb.   1.16         1.32  2.17  2.06 2.05 2.05 2.14  2.06 2.01 1.89
              Mar.   1.18         1.34  2.17  2.06 2.05 2.05 2.12  2.01 1.99 1.85
              Apr.   1.37         1.52  2.17  2.06 2.05 2.05 2.17  2.08 2.03 1.88
              May    2.01         2.17  2.53  2.42 2.28 2.19 2.52  2.45 2.41 2.18
              Avg.   1.38         1.54  2.24  2.13 2.10 2.08 2.22  2.13 2.10 1.94

    Source: GAO's analysis of price data provided by USDA, the Defense
    Commissary Agency, and Information Resources, Inc.

    Note: For the Milwaukee market, the farm price is the USDA-estimated farm
    Class I price for 3.5 percent milkfat content; the cooperative price is
    the announced cooperative Class I price for Milwaukee for 3.5 percent
    milkfat content; the wholesale price is the price paid by the commissary
    at the Naval Station Great Lakes, adjusted for a 5 percent markup; and the
    retail price is the price collected by Information Resources, Inc., for
    the Milwaukee market. Prices may not average due to rounding.

    Appendix IV Average Monthly and Annual Farm, Cooperative, Wholesale and
    Retail Milk Prices in Selected Markets

     Table 19: Prices for a Gallon of Milk in Minneapolis, Minnesota, October 2000
                           through May 2004 Wholesale Retail

      Year Month  Farm Cooperative Whole  2%      1% Skim  Whole    2%    1%  Skim
      2000 Oct.  $1.16       $1.27 $2.07 $2.05 $2.03 $2.01 $1.84 $1.74 $1.86 $1.68
           Nov.   1.15        1.26 2.07  2.05  2.03  2.01   1.82 1.79  1.89   1.71
           Dec.   1.16        1.27 2.07  2.05  2.03  2.01   1.79 1.79  1.92   1.74
           Avg.   1.16        1.27 2.07  2.05  2.03  2.01   1.82 1.77  1.89   1.71
      2001 Jan.   1.35        1.47 2.24  2.16  2.10  2.04   1.78 1.73  1.85   1.68
           Feb.   1.14        1.27 2.08  2.06  2.06  2.04   1.68 1.67  1.80   1.64
           Mar.   1.21        1.33 2.07  2.05  2.05  2.04   1.66 1.69  1.85   1.70
           Apr.   1.28        1.41 2.14  2.09  2.07  2.04   1.67 1.72  1.86   1.76
            May   1.35        1.48 2.23  2.15  2.12  2.07   1.65 1.70  1.88   1.75
           June   1.43        1.56 2.29  2.19  2.15  2.09   1.68 1.71  1.91   1.78
           July   1.46        1.58 2.32  2.21  2.16  2.09   1.68 1.73  1.94   1.80
           Aug.   1.47        1.59 2.34  2.23  2.18  2.11   1.69 1.75  1.96   1.82
           Sept.  1.50        1.62 2.42  2.30  2.25  2.18   1.69 1.76  1.99   1.83
           Oct.   1.53        1.64 2.44  2.30  2.23  2.15   1.69 1.74  1.99   1.82
           Nov.   1.51        1.64 2.43  2.37  2.34  2.30   1.74 1.80  2.05   1.88
           Dec.   1.19        1.31 2.40  2.37  2.34  2.29   1.66 1.76  2.00   1.83
           Avg.   1.37        1.49 2.28  2.21  2.17  2.12   1.69 1.73  1.92   1.77
      2002 Jan.   1.17        1.32 2.40  2.37  2.34  2.29   1.68 1.74  1.99   1.81
           Feb.   1.16        1.31 2.40  2.37  2.34  2.29   1.76 1.87  2.10   1.86
           Mar.   1.13        1.28 2.40  2.38  2.35  2.30   1.86 2.01  2.20   1.95
           Apr.   1.13        1.28 2.40  2.38  2.35  2.30   1.85 2.00  2.19   1.94
            May   1.11        1.26 2.40  2.38  2.35  2.30   1.84 1.97  2.23   1.92
           June   1.09        1.24 2.40  2.38  2.35  2.30   2.04 2.09  2.33   2.02
           July   1.05        1.20 2.40  2.38  2.35  2.30   2.06 2.10  2.33   2.02
           Aug.   1.04        1.19 2.40  2.38  2.35  2.30   2.04 2.05  2.31   1.97
           Sept.  1.04        1.19 2.40  2.38  2.35  2.30   1.97 1.98  2.27   1.92
           Oct.   1.02        1.16 2.40  2.38  2.35  2.30   1.78 1.85  2.14   1.83
           Nov.   1.05        1.20 2.40  2.38  2.35  2.30   1.72 1.76  2.00   1.78
           Dec.   1.05        1.19 2.40  2.38  2.35  2.30   1.83 1.95  2.17   1.90
           Avg.   1.09        1.24 2.40  2.38  2.35  2.30   1.87 1.95  2.19   1.91
      2003 Jan.   1.07        1.21 2.40  2.38  2.35  2.30   1.87 1.96  2.18   1.92
           Feb.   1.02        1.16 2.40  2.38  2.35  2.30   1.75 1.79  2.00   1.78
           Mar.   0.98        1.13 2.38  2.35  2.32  2.27   1.57 1.59  2.24   1.54
           Apr.   0.97        1.12 2.35  2.32  2.29  2.24   1.52 1.53  2.50   1.46

     Appendix IV Average Monthly and Annual Farm, Cooperative, Wholesale and Retail
                            Milk Prices in Selected Markets

                             (Continued From Previous Page)

                                    Wholesale Retail

    Year  Month   Farm Cooperative  Whole   2%   1%  Skim Whole  2%   1%  Skim
              May    0.98         1.12  2.35  2.32 2.29 2.24 1.44  1.44 2.75 1.34
              June   0.98         1.13  2.35  2.32 2.29 2.24 1.43  1.45 2.82 1.31
              July   0.98         1.13  2.35  2.32 2.29 2.24 1.45  1.43 2.72 1.32
              Aug.   1.10         1.25  2.35  2.32 2.29 2.24 1.52  1.46 2.84 1.35
             Sept.   1.34         1.49  2.35  2.32 2.29 2.24 1.51  1.49 2.98 1.39
              Oct.   1.37         1.51  2.41  2.37 2.34 2.27 1.53  1.55 2.81 1.48
              Nov.   1.38         1.53  2.49  2.43 2.38 2.31 1.66  1.88 2.55 1.86
              Dec.   1.33         1.48  2.49  2.43 2.38 2.31 1.57  1.88 2.57 1.91
              Avg.   1.13         1.27  2.39  2.36 2.32 2.27 1.57  1.62 2.58 1.56
    2004   Jan.   1.15         1.30  2.49  2.43 2.38 2.31 1.65  1.94 2.57 1.94
              Feb.   1.14         1.29  2.49  2.43 2.38 2.31 1.64  1.91 2.55 1.93
              Mar.   1.16         1.31  2.49  2.43 2.38 2.31 1.60  1.80 2.54 1.81
              Apr.   1.35         1.49  2.49  2.43 2.38 2.31 1.52  1.78 2.52 1.63
              May    1.99         2.14  2.49  2.43 2.38 2.31 2.09  2.21 2.56 2.06
              Avg.   1.36         1.51  2.49  2.43 2.38 2.31 1.70  1.93 2.55 1.87

    Source: GAO's analysis of price data provided by USDA, the Defense
    Commissary Agency, and Information Resources, Inc.

    Note: For the Minneapolis market, the farm price is the USDA-estimated
    farm Class I price for 3.5 percent milkfat content; the cooperative price
    is the announced cooperative Class I price for Minneapolis for 3.5 percent
    milkfat content; the wholesale price is the price paid by the commissary
    at Fort McCoy, adjusted for a 5 percent markup; and the retail price is
    the price collected by Information Resources, Inc., for the Minneapolis
    market. Prices may not average due to rounding.

    Appendix IV Average Monthly and Annual Farm, Cooperative, Wholesale and
    Retail Milk Prices in Selected Markets

     Table 20: Prices for a Gallon of Milk in New Orleans, Louisiana, October 2000
                           through May 2004 Wholesale Retail

      Year Month  Farm Cooperative Whole    2%    1% Skim  Whole    2%    1%  Skim
      2000 Oct.  $1.22       $1.42 $2.36 $2.25 $2.25 $2.25 $2.64 $2.62 $2.62 $2.60
           Nov.   1.22        1.41  2.32 2.25  2.25  2.25   2.59 2.60  2.54   2.56
           Dec.   1.22        1.42  2.32 2.25  2.25  2.19   2.63 2.60  2.56   2.56
           Avg.   1.22        1.42  2.33 2.25  2.25  2.23   2.62 2.61  2.57   2.57
      2001 Jan.   1.38        1.58  2.40 2.32  2.32  2.25   2.68 2.67  2.63   2.62
           Feb.   1.23        1.42  2.34 2.29  2.29  2.19   2.59 2.58  2.56   2.58
           Mar.   1.27        1.46  2.34 2.29  2.29  2.19   2.57 2.59  2.60   2.60
           Apr.   1.34        1.53  2.38 2.32  2.32  2.19   2.59 2.63  2.61   2.62
            May   1.38        1.58  2.42 2.35  2.35  2.25   2.57 2.62  2.58   2.58
           June   1.41        1.62  2.38 2.32  2.32  2.19   2.64 2.68  2.65   2.64
           July   1.46        1.67  2.41 2.35  2.35  2.22   2.67 2.71  2.70   2.67
           Aug.   1.47        1.67  2.44 2.38  2.38  2.25   2.70 2.74  2.70   2.68
           Sept.  1.48        1.69  2.38 2.32  2.32  2.19   2.68 2.72  2.71   2.69
           Oct.   1.51        1.72  2.38 2.32  2.32  2.19   2.70 2.73  2.74   2.71
           Nov.   1.50        1.71  2.38 2.31  2.31  2.19   2.75 2.78  2.79   2.74
           Dec.   1.21        1.42  2.29 2.23  2.23  2.19   2.73 2.75  2.80   2.74
           Avg.   1.39        1.59  2.38 2.32  2.32  2.21   2.66 2.68  2.67   2.66
      2002 Jan.   1.15        1.41  2.29 2.23  2.23  2.18   2.73 2.74  2.79   2.73
           Feb.   1.15        1.41  2.27 2.21  2.21  2.15   2.74 2.74  2.77   2.71
           Mar.   1.14        1.41  2.27 2.21  2.21  2.15   2.73 2.76  2.76   2.71
           Apr.   1.15        1.41  2.27 2.21  2.21  2.15   2.72 2.74  2.74   2.71
            May   1.15        1.42  2.25 2.21  2.21  2.17   2.71 2.72  2.73   2.69
           June   1.13        1.40  2.30 2.23  2.23  2.19   2.70 2.71  2.72   2.68
           July   1.09        1.36  2.31 2.23  2.24  2.19   2.70 2.71  2.72   2.69
           Aug.   1.08        1.35  2.31 2.23  2.24  2.19   2.71 2.70  2.73   2.69
           Sept.  1.08        1.35  2.31 2.23  2.24  2.19   2.64 2.64  2.67   2.64
           Oct.   1.07        1.34  2.30 2.23  2.24  2.18   2.63 2.65  2.64   2.63
           Nov.   1.10        1.36  2.27 2.19  2.22  2.16   2.61 2.65  2.60   2.62
           Dec.   1.09        1.35  2.27 2.19  2.22  2.16   2.61 2.63  2.63   2.64
           Avg.   1.12        1.38  2.29 2.22  2.23  2.17   2.69 2.70  2.71   2.68
      2003 Jan.   1.06        1.36  2.27 2.19  2.22  2.16   2.60 2.62  2.61   2.60
           Feb.   1.06        1.36  2.27 2.19  2.22  2.16   2.56 2.60  2.61   2.60
           Mar.   1.02        1.32  2.27 2.19  2.22  2.16   2.56 2.58  2.60   2.60
           Apr.   1.01        1.31  2.27 2.19  2.22  2.16   2.56 2.59  2.62   2.60

     Appendix IV Average Monthly and Annual Farm, Cooperative, Wholesale and Retail
                            Milk Prices in Selected Markets

                             (Continued From Previous Page)

                                    Wholesale Retail

    Year  Month   Farm Cooperative  Whole   2%   1%  Skim Whole  2%   1%  Skim
              May    1.01         1.31  2.27  2.19 2.22 2.16 2.57  2.61 2.64 2.61
              June   1.02         1.31  2.27  2.19 2.22 2.16 2.64  2.67 2.70 2.64
              July   1.01         1.32  2.28  2.19 2.22 2.16 2.58  2.62 2.66 2.62
              Aug.   1.09         1.39  2.32  2.25 2.24 2.19 2.62  2.68 2.74 2.67
             Sept.   1.28         1.59  2.38  2.32 2.31 2.22 2.72  2.80 2.89 2.80
              Oct.   1.31         1.61  2.44  2.38 2.37 2.25 2.75  2.81 2.86 2.80
              Nov.   1.31         1.61  2.34  2.25 2.24 2.10 2.74  2.79 2.83 2.79
              Dec.   1.29         1.60  2.25  2.16 2.14 1.97 2.76  2.81 2.82 2.78
              Avg.   1.12         1.42  2.30  2.22 2.24 2.15 2.64  2.68 2.72 2.68
    2004   Jan.   1.15         1.45  2.20  2.13 2.11 1.91 2.75  2.78 2.79 2.75
              Feb.   1.15         1.45  2.14  2.08 2.05 1.85 2.71  2.74 2.74 2.70
              Mar.   1.15         1.45  2.14  2.08 2.05 1.85 2.70  2.74 2.75 2.70
              Apr.   1.31         1.60  2.18  2.11 2.07 1.86 2.80  2.85 2.88 2.80
              May    1.78         2.08  2.44  2.33 2.27 2.04 3.18  3.25 3.28 3.18
              Avg.   1.31         1.61  2.22  2.15 2.11 1.90 2.83  2.87 2.89 2.83

    Source: GAO's analysis of price data provided by USDA, the Defense
    Commissary Agency, and Information Resources, Inc.

    Note: For the New Orleans market, the farm price is the USDA-estimated
    farm Class I price for 3.5 percent milkfat content; the cooperative price
    is the announced cooperative Class I price for New Orleans for 3.5 percent
    milkfat content; the wholesale price is the average of the prices paid by
    the Naval Support Activities, New Orleans; the Naval Construction
    Battalion Center, Gulfport; and Keesler Air Force Base commissaries,
    adjusted for a 5 percent markup; and the retail price is the price
    collected by Information Resources, Inc., for the New Orleans market.
    Prices may not average due to rounding.

    Appendix IV Average Monthly and Annual Farm, Cooperative, Wholesale and
    Retail Milk Prices in Selected Markets

    Table 21: Prices for a Gallon of Milk in Phoenix, Arizona, October 2000 through
                               May 2004 Wholesale Retail

      Year Month  Farm Cooperative Whole  2%      1% Skim  Whole    2%    1%  Skim
      2000 Oct.  $1.17       $1.24 $1.97 $1.83 $1.73 $1.63 $2.25 $2.27 $2.44 $2.16
           Nov.   1.16        1.23  1.98 1.83  1.74  1.63   2.20 2.17  2.39   2.10
           Dec.   1.19        1.26  1.98 1.83  1.74  1.63   2.16 1.82  2.29   1.91
           Avg.   1.17        1.24  1.98 1.83  1.74  1.63   2.20 2.09  2.37   2.06
      2001 Jan.   1.35        1.42  1.99 1.84  1.74  1.62   2.60 2.58  2.60   2.49
           Feb.   1.17        1.24  2.04 1.89  1.76  1.64   2.70 2.59  2.59   2.50
           Mar.   1.23        1.31  2.15 1.97  1.81  1.66   2.48 2.44  2.47   2.37
           Apr.   1.30        1.37  2.18 1.99  1.81  1.66   2.62 2.56  2.57   2.46
            May   1.37        1.44  2.08 1.96  1.80  1.64   2.46 2.38  2.43   2.27
           June   1.43        1.51  2.04 1.85  1.72  1.60   2.28 2.35  2.46   2.26
           July   1.46        1.54  2.04 1.85  1.72  1.60   2.38 2.44  2.49   2.34
           Aug.   1.47        1.54  2.05 1.86  1.72  1.60   2.20 2.23  2.31   2.20
           Sept.  1.48        1.56  2.07 1.89  1.74  1.62   2.27 2.31  2.38   2.27
           Oct.   1.52        1.59  2.10 1.92  1.74  1.61   2.41 2.47  2.53   2.39
           Nov.   1.50        1.57  2.11 1.92  1.74  1.60   2.08 2.08  2.20   2.06
           Dec.   1.18        1.25  2.11 1.97  1.85  1.76   2.47 2.56  2.54   2.40
           Avg.   1.37        1.45  2.08 1.91  1.76  1.63   2.41 2.42  2.46   2.33
      2002 Jan.   1.18        1.25  2.07 1.91  1.79  1.70   2.60 2.66  2.66   2.51
           Feb.   1.17        1.25  2.09 1.88  1.78  1.69   2.52 2.52  2.58   2.51
           Mar.   1.14        1.22  2.09 1.88  1.78  1.69   2.73 2.73  2.70   2.65
           Apr.   1.13        1.20  2.06 1.88  1.78  1.69   2.53 2.64  2.64   2.50
            May   1.11        1.19  1.97 1.88  1.78  1.69   2.71 2.73  2.72   2.69
           June   1.09        1.17  1.97 1.88  1.78  1.69   2.58 2.58  2.66   2.55
           July   1.06        1.13  1.97 1.88  1.78  1.69   2.68 2.73  2.78   2.65
           Aug.   1.04        1.12  1.97 1.88  1.78  1.69   2.46 2.51  2.75   2.38
           Sept.  1.03        1.12  1.97 1.88  1.78  1.69   2.36 2.25  2.37   2.28
           Oct.   1.00        1.09  1.97 1.88  1.78  1.69   2.63 2.58  2.63   2.60
           Nov.   1.05        1.13  1.97 1.88  1.78  1.69   2.48 2.57  2.60   2.51
           Dec.   1.04        1.12  1.98 1.90  1.80  1.71   2.52 2.59  2.62   2.60
           Avg.   1.09        1.17  2.01 1.88  1.78  1.69   2.57 2.59  2.64   2.54
      2003 Jan.   1.04        1.13  1.99 1.92  1.81  1.73   2.49 2.58  2.61   2.55
           Feb.   1.01        1.10  1.99 1.92  1.81  1.73   2.46 2.53  2.59   2.56
           Mar.   0.98        1.06  1.99 1.92  1.81  1.73   2.43 2.43  2.52   2.48
           Apr.   0.97        1.05  1.99 1.92  1.81  1.73   2.44 2.49  2.54   2.42

     Appendix IV Average Monthly and Annual Farm, Cooperative, Wholesale and Retail
                            Milk Prices in Selected Markets

                             (Continued From Previous Page)

                                    Wholesale Retail

    Year  Month   Farm Cooperative  Whole   2%   1%  Skim Whole  2%   1%  Skim
              May    0.97         1.05  1.94  1.88 1.81 1.73 2.43  2.43 2.51 2.44
              June   0.98         1.06  1.89  1.84 1.80 1.73 2.51  2.55 2.59 2.52
              July   0.97         1.06  1.89  1.84 1.80 1.73 2.30  2.32 2.45 2.27
              Aug.   1.08         1.16  1.89  1.84 1.80 1.73 2.09  2.34 2.59 2.06
             Sept.   1.31         1.40  2.08  1.99 1.88 1.79 2.44  2.45 2.63 2.45
              Oct.   1.36         1.45  2.26  2.17 2.06 1.97 2.67  2.70 2.85 2.67
              Nov.   1.37         1.45  2.27  2.18 2.07 1.98 2.33  2.36 2.59 2.38
              Dec.   1.33         1.41  2.27  2.18 2.07 1.98 2.13  2.16 2.33 2.14
              Avg.   1.11         1.20  2.04  1.97 1.88 1.80 2.39  2.45 2.57 2.41
    2004   Jan.   1.15         1.24  2.27  2.18 2.07 1.98 1.97  2.11 2.27 2.02
              Feb.   1.13         1.21  2.27  2.18 2.07 1.98 2.07  2.10 2.22 2.05
              Mar.   1.16         1.24  2.27  2.18 2.07 1.98 2.14  2.25 2.24 2.16
              Apr.   1.31         1.39  2.23  1.94 1.91 1.76 2.00  2.10 2.18 2.03
              May    1.83         1.91  2.77  2.35 2.33 2.14 2.62  2.67 2.65 2.55
              Avg.   1.32         1.40  2.36  2.17 2.09 1.97 2.16  2.25 2.31 2.16

    Source: GAO's analysis of price data provided by USDA, the Defense
    Commissary Agency, and Information Resources, Inc.

    Note: For the Phoenix market, the farm price is the USDA-estimated farm
    Class I price for 3.5 percent milkfat content; the cooperative price is
    the announced cooperative Class I price for Phoenix for 3.5 percent
    milkfat content; the wholesale price is the average of the prices paid by
    the commissaries at Luke Air Force Base and Davis-Monthan Air Force Base,
    adjusted for a 5 percent markup; and the retail price is the price
    collected by Information Resources, Inc., for the Phoenix market. Prices
    may not average due to rounding.

    Appendix IV Average Monthly and Annual Farm, Cooperative, Wholesale and
    Retail Milk Prices in Selected Markets

      Table 22: Prices for a Gallon of Milk in Salt Lake City, Utah, October 2000
                           through May 2004 Wholesale Retail

      Year Month  Farm Cooperative Whole  2%      1% Skim  Whole    2%    1%  Skim
      2000 Oct.  $1.13       $1.21 $2.03 $1.96 $1.84 $1.80 $2.60 $2.18 $2.17 $2.44
           Nov.   1.13        1.20  2.04 1.97  1.85  1.81   2.59 2.38  2.39   2.44
           Dec.   1.15        1.23  2.06 1.98  1.86  1.81   2.58 2.18  2.24   2.44
           Avg.   1.14        1.21  2.04 1.97  1.85  1.81   2.59 2.25  2.27   2.44
      2001 Jan.   1.31        1.39  2.14 2.03  1.89  1.81   2.68 2.27  2.17   2.42
           Feb.   1.13        1.21  2.15 2.04  1.89  1.82   2.58 2.21  2.19   2.31
           Mar.   1.19        1.28  2.09 2.00  1.87  1.82   2.50 2.23  2.21   2.21
           Apr.   1.26        1.34  2.15 2.04  1.89  1.82   2.34 2.28  2.27   2.09
            May   1.33        1.41  2.22 2.08  1.91  1.82   2.13 2.09  2.03   2.18
           June   1.39        1.48  2.28 2.12  1.93  1.83   2.38 2.18  2.16   2.21
           July   1.42        1.51  2.34 2.15  1.96  1.84   2.39 2.19  2.12   2.00
           Aug.   1.43        1.51  2.36 2.17  1.97  1.84   2.39 2.13  2.13   2.00
           Sept.  1.44        1.53  2.37 2.18  1.97  1.85   2.46 2.20  2.20   2.06
           Oct.   1.48        1.56  2.39 2.19  1.97  1.83   2.39 2.35  2.37   2.21
           Nov.   1.47        1.55  2.41 2.22  2.02  1.91   2.41 2.36  2.33   2.22
           Dec.   1.14        1.22  2.28 2.14  1.98  1.90   2.37 2.35  2.34   2.15
           Avg.   1.33        1.42  2.27 2.11  1.94  1.84   2.42 2.24  2.21   2.17
      2002 Jan.   1.14        1.22  2.16 2.04  1.89  1.83   2.25 2.24  2.24   2.06
           Feb.   1.14        1.22  2.16 2.04  1.89  1.83   2.46 2.41  2.42   2.18
           Mar.   1.11        1.19  2.15 2.04  1.89  1.83   2.41 2.33  2.34   2.17
           Apr.   1.10        1.18  2.02 1.96  1.88  1.75   2.37 2.33  2.29   2.13
            May   1.08        1.16  1.89 1.88  1.86  1.67   2.34 2.31  2.30   2.13
           June   1.06        1.14  1.88 1.88  1.85  1.66   2.39 2.38  2.42   2.17
           July   1.03        1.11  1.85 1.87  1.86  1.68   2.38 2.30  2.26   2.17
           Aug.   1.01        1.09  1.84 1.86  1.85  1.67   2.37 2.33  2.37   2.10
           Sept.  1.01        1.09  1.84 1.85  1.85  1.68   2.16 2.01  1.94   1.91
           Oct.   0.99        1.06  1.84 1.84  1.84  1.68   2.46 2.42  2.40   2.17
           Nov.   1.02        1.10  1.85 1.85  1.85  1.70   2.38 2.44  2.41   2.17
           Dec.   1.02        1.10  1.87 1.87  1.86  1.71   2.10 1.97  1.99   1.84
           Avg.   1.06        1.14  1.95 1.92  1.86  1.72   2.34 2.29  2.28   2.10
      2003 Jan.   1.02        1.10  1.87 1.86  1.85  1.70   2.10 2.06  2.01   1.83
           Feb.   0.99        1.07  1.86 1.85  1.84  1.68   2.09 2.10  2.08   1.88
           Mar.   0.96        1.04  1.85 1.84  1.82  1.66   2.07 2.05  2.03   1.83
           Apr.   0.94        1.02  1.88 1.87  1.85  1.69   2.10 2.09  2.07   1.85

     Appendix IV Average Monthly and Annual Farm, Cooperative, Wholesale and Retail
                            Milk Prices in Selected Markets

                             (Continued From Previous Page)

                                    Wholesale Retail

    Year  Month   Farm Cooperative  Whole   2%    1% Skim Whole  2%   1%  Skim
              May    0.95         1.03  1.90  1.89 1.87 1.71 2.12  2.11 2.09 1.89
              June   0.95         1.03  1.90  1.89 1.87 1.71 1.96  2.00 2.01 1.83
              July   0.95         1.03  1.90  1.89 1.87 1.71 2.04  2.03 2.01 1.86
              Aug.   1.05         1.14  1.96  1.95 1.94 1.77 2.32  2.33 2.23 2.11
             Sept.   1.29         1.37  2.13  2.10 2.09 1.92 2.37  2.51 2.28 2.32
              Oct.   1.34         1.42  2.27  2.24 2.23 2.07 2.22  2.29 2.28 2.18
              Nov.   1.35         1.43  2.29  2.28 2.26 2.09 2.00  2.05 2.06 1.88
              Dec.   1.30         1.38  2.28  2.26 2.24 2.07 2.03  2.10 2.10 1.95
              Avg.   1.09         1.17  2.01  1.99 1.98 1.82 2.12  2.14 2.10 1.95
    2004   Jan.   1.14         1.21  2.21  2.18 2.16 1.99 2.00  2.06 2.08 1.93
              Feb.   1.12         1.19  2.12  2.08 2.04 1.86 1.96  2.03 2.09 1.90
              Mar.   1.14         1.22  2.13  2.06 2.00 1.80 1.99  2.06 2.13 1.95
              Apr.   1.29         1.37  2.20  2.10 2.01 1.78 2.19  2.22 2.21 2.02
              May    1.81         1.88  2.52  2.38 2.28 2.03 2.50  2.58 2.63 2.38
              Avg.   1.30         1.37  2.24  2.16 2.10 1.89 2.13  2.19 2.23 2.04

    Source: GAO's analysis of price data provided by USDA, the Defense
    Commissary Agency, and Information Resources, Inc.

    Note: For the Salt Lake City market, the farm price is the USDA-estimated
    farm Class I price for 3.5 percent milkfat content; the cooperative price
    is the announced cooperative Class I price for Salt Lake City for 3.5
    percent milkfat content; the wholesale price is the price paid by the
    commissary at Hill Air Force Base, adjusted for a 5 percent markup; and
    the retail price is the price collected by Information Resources, Inc.,
    for the Salt Lake City market. Prices may not average due to rounding.

    Appendix IV Average Monthly and Annual Farm, Cooperative, Wholesale and
    Retail Milk Prices in Selected Markets

      Table 23: Prices for a Gallon of Milk in San Diego, California, October 2000
                           through May 2004 Wholesale Retail

      Year Month  Farm Cooperative Whole    2%    1% Skim  Whole    2%    1%  Skim
      2000 Oct.  $0.99       $1.21 $1.90 $1.90 $1.87 $1.69 $2.55 $2.45 $2.66 $2.29
           Nov.   1.04        1.21  1.88 1.88  1.85  1.66   2.51 2.54  2.54   2.23
           Dec.   1.06        1.28  1.95 1.91  1.88  1.67   2.72 2.63  2.79   2.40
           Avg.   1.03        1.23  1.91 1.90  1.87  1.67   2.59 2.54  2.66   2.31
      2001 Jan.   1.03        1.43  2.03 1.98  1.95  1.68   2.81 2.72  2.93   2.52
           Feb.   1.05        1.21  1.92 1.91  1.91  1.66   2.69 2.75  2.71   2.36
           Mar.   1.11        1.26  1.98 1.97  1.94  1.67   2.68 2.57  2.77   2.40
           Apr.   1.18        1.33  2.05 2.01  1.96  1.67   2.81 2.74  2.84   2.39
            May   1.25        1.39  2.11 2.06  1.98  1.67   2.85 2.71  2.81   2.30
           June   1.31        1.46  2.13 2.07  1.98  1.67   2.91 2.85  2.80   2.34
           July   1.30        1.49  2.15 2.08  1.99  1.67   3.00 2.94  2.99   2.50
           Aug.   1.34        1.49  2.19 2.11  2.00  1.67   3.10 2.99  3.04   2.55
           Sept.  1.37        1.49  2.19 2.11  2.00  1.67   3.22 2.95  3.24   2.62
           Oct.   1.21        1.55  2.23 2.13  2.00  1.65   3.27 2.95  3.24   2.61
           Nov.   1.11        1.41  2.11 2.09  2.02  1.71   3.18 2.93  2.81   2.52
           Dec.   1.06        1.19  2.01 2.00  2.00  1.64   3.06 2.94  3.08   2.52
           Avg.   1.19        1.39  2.09 2.04  1.98  1.67   2.97 2.84  2.94   2.47
      2002 Jan.   1.07        1.18  1.99 1.98  1.99  1.64   3.05 2.91  2.94   2.46
           Feb.   1.01        1.20  1.97 1.97  1.97  1.64   2.95 2.76  2.72   2.40
           Mar.   0.99        1.16  1.92 1.93  1.96  1.63   2.85 2.71  2.50   2.32
           Apr.   0.98        1.16  1.88 1.89  1.88  1.61   2.76 2.47  2.63   2.40
            May   0.94        1.14  1.82 1.81  1.79  1.58   2.88 2.67  2.73   2.35
           June   0.90        1.10  1.79 1.80  1.78  1.58   2.87 2.62  2.85   2.40
           July   0.87        1.10  1.77 1.78  1.77  1.57   2.85 2.49  2.77   2.37
           Aug.   0.89        1.08  1.75 1.75  1.76  1.57   2.69 2.58  2.63   2.28
           Sept.  0.91        1.08  1.75 1.75  1.76  1.57   2.72 2.64  2.72   2.29
           Oct.   0.94        1.05  1.75 1.76  1.77  1.58   2.75 2.71  2.74   2.30
           Nov.   0.92        1.16  1.83 1.85  1.86  1.65   2.80 2.70  2.80   2.30
           Dec.   0.92        1.08  1.77 1.78  1.78  1.58   2.73 2.71  2.74   2.23
           Avg.   0.95        1.12  1.83 1.84  1.84  1.60   2.83 2.66  2.73   2.34
      2003 Jan.   0.92        1.11  1.77 1.77  1.77  1.57   2.68 2.59  2.84   2.28
           Feb.   0.89        1.06  1.74 1.71  1.71  1.50   2.74 2.63  2.94   2.29
           Mar.   0.87        1.05  1.72 1.71  1.69  1.44   2.70 2.58  2.78   2.27
           Apr.   0.88        1.02  1.70 1.70  1.67  1.43   2.72 2.60  2.80   2.27

     Appendix IV Average Monthly and Annual Farm, Cooperative, Wholesale and Retail
                            Milk Prices in Selected Markets

                             (Continued From Previous Page)

                                    Wholesale Retail

    Year  Month   Farm Cooperative  Whole   2%   1%  Skim Whole  2%   1%  Skim
              May    0.87         1.03  1.68  1.69 1.65 1.42 2.81  2.67 2.80 2.29
              June   0.87         1.04  1.68  1.69 1.65 1.42 2.80  2.68 2.78 2.30
              July   0.99         1.03  1.70  1.71 1.68 1.44 2.82  2.70 2.84 2.32
              Aug.   1.10         1.27  1.86  1.89 1.87 1.60 3.00  2.78 2.98 2.36
             Sept.   1.14         1.41  2.03  2.06 2.04 1.73 3.13  2.93 3.07 2.50
              Oct.   1.16         1.42  2.03  2.08 2.07 1.76 3.19  2.86 3.23 2.43
              Nov.   1.10         1.42  2.03  2.07 2.06 1.75 3.12  2.80 3.29 2.44
              Dec.   1.08         1.32  1.94  1.98 1.97 1.65 2.72  2.49 2.93 2.23
              Avg.   0.99         1.18  1.82  1.84 1.82 1.56 2.87  2.69 2.94 2.33
    2004   Jan.   1.04         1.22  1.85  1.87 1.85 1.55 2.64  2.45 2.82 2.19
              Feb.   1.09         1.17  1.77  1.77 1.74 1.44 2.62  2.43 2.72 2.17
              Mar.   1.26         1.21  1.80  1.77 1.71 1.40 2.55  2.34 2.76 2.13
              Apr.   1.48         1.38  1.99  1.87 1.76 1.43 2.76  2.49 2.63 2.15
              May    1.52         1.85  2.41  2.34 2.25 1.83 3.03  2.78 2.93 2.40
              Avg.   1.28         1.37  1.96  1.92 1.86 1.53 2.72  2.50 2.77 2.21

    Source: GAO's analysis of price data provided by the California Department
    of Food and Agriculture, the Defense Commissary Agency, and Information
    Resources, Inc.

    Note: For the San Diego market, the farm price is the California mailbox
    price for 3.5 percent milkfat content; the cooperative price is the
    Southern California Class I price for 3.5 percent milkfat content; the
    wholesale price is the average of the prices paid by the commissaries at
    the Naval Base, San Diego; Marine Corps Base, Camp Pendleton; Naval
    Outlying Landing Field, Imperial Beach; Marine Corps Air Station, Miramar;
    Naval Air Station, North Island; and by the San Onofre Commissary, Camp
    Pendleton, adjusted for a 5 percent markup; and the retail price is the
    price collected by Information Resources, Inc., for the San Diego market.
    Prices may not average due to rounding.

    Appendix IV Average Monthly and Annual Farm, Cooperative, Wholesale and
    Retail Milk Prices in Selected Markets

    Table 24: Prices for a Gallon of Milk in Seattle, Washington, October 2000
                           through May 2004 Wholesale Retail

      Year Month  Farm Cooperative Whole  2%      1% Skim  Whole    2%    1%  Skim
      2000 Oct.  $1.20       $1.28 $1.59 $1.46 $1.38 $1.31 $2.71 $2.50 $2.50 $2.37
           Nov.   1.14        1.22  1.58 1.46  1.37  1.30   2.83 2.62  2.58   2.49
           Dec.   1.18        1.27  1.61 1.48  1.40  1.33   2.73 2.57  2.57   2.45
           Avg.   1.17        1.26  1.59 1.47  1.38  1.31   2.76 2.56  2.55   2.44
      2001 Jan.   1.32        1.41  1.76 1.63  1.55  1.48   2.62 2.39  2.40   2.25
           Feb.   1.17        1.25  1.60 1.48  1.39  1.33   2.98 2.77  2.71   2.62
           Mar.   1.21        1.29  1.64 1.51  1.43  1.36   2.77 2.52  2.52   2.29
           Apr.   1.27        1.36  1.71 1.59  1.50  1.43   2.95 2.72  2.67   2.54
            May   1.34        1.42  1.78 1.66  1.57  1.51   2.95 2.65  2.67   2.44
           June   1.41        1.49  1.84 1.72  1.63  1.57   2.80 2.77  2.70   2.49
           July   1.44        1.52  1.87 1.75  1.66  1.60   3.14 3.01  2.85   2.71
           Aug.   1.44        1.53  1.88 1.76  1.67  1.61   3.15 2.99  2.85   2.71
           Sept.  1.46        1.54  1.89 1.77  1.68  1.62   2.84 2.65  2.62   2.43
           Oct.   1.49        1.57  1.92 1.80  1.71  1.64   2.92 2.72  2.69   2.46
           Nov.   1.47        1.56  1.91 1.78  1.70  1.63   3.01 2.76  2.73   2.50
           Dec.   1.15        1.23  1.60 1.48  1.39  1.32   2.93 2.75  2.68   2.47
           Avg.   1.35        1.43  1.78 1.66  1.57  1.51   2.92 2.73  2.67   2.49
      2002 Jan.   1.15        1.23  1.60 1.47  1.39  1.32   3.18 2.93  2.82   2.67
           Feb.   1.25        1.33  1.60 1.47  1.39  1.32   3.13 2.86  2.74   2.62
           Mar.   1.12        1.20  1.57 1.44  1.36  1.29   3.16 2.91  2.78   2.68
           Apr.   1.11        1.19  1.56 1.43  1.35  1.28   2.99 2.66  2.59   2.42
            May   1.09        1.17  1.54 1.41  1.33  1.26   3.08 2.70  2.68   2.48
           June   1.07        1.15  1.52 1.40  1.31  1.24   3.08 2.56  2.54   2.32
           July   1.03        1.12  1.48 1.36  1.27  1.21   3.07 2.67  2.69   2.49
           Aug.   1.02        1.10  1.47 1.35  1.26  1.20   2.81 2.62  2.42   2.43
           Sept.  1.02        1.10  1.47 1.35  1.26  1.20   3.01 2.70  2.71   2.47
           Oct.   0.99        1.07  1.45 1.32  1.24  1.17   3.10 2.77  2.73   2.56
           Nov.   1.03        1.11  1.47 1.34  1.26  1.19   2.98 2.73  2.69   2.41
           Dec.   1.02        1.11  1.47 1.35  1.26  1.20   2.98 2.76  2.75   2.50
           Avg.   1.08        1.16  1.52 1.39  1.31  1.24   3.05 2.74  2.68   2.50
      2003 Jan.   1.03        1.11  1.47 1.35  1.26  1.19   3.12 3.04  2.91   2.78
           Feb.   1.00        1.08  1.44 1.32  1.23  1.17   3.07 2.92  2.73   2.53
           Mar.   0.96        1.05  1.42 1.29  1.21  1.14   2.97 2.75  2.66   2.42
           Apr.   0.95        1.03  1.40 1.27  1.19  1.12   3.00 2.93  2.72   2.49

     Appendix IV Average Monthly and Annual Farm, Cooperative, Wholesale and Retail
                            Milk Prices in Selected Markets

                             (Continued From Previous Page)

                                    Wholesale Retail

    Year  Month   Farm Cooperative  Whole   2%   1%  Skim Whole  2%   1%  Skim
              May    0.95         1.04  1.44  1.32 1.23 1.16 2.94  2.81 2.66 2.45
              June   0.96         1.04  1.44  1.32 1.24 1.17 3.00  2.82 2.76 2.54
              July   0.95         1.04  1.45  1.33 1.24 1.18 3.07  2.86 2.82 2.55
              Aug.   1.05         1.15  1.55  1.43 1.36 1.28 3.11  2.93 2.90 2.65
             Sept.   1.29         1.38  1.81  1.69 1.63 1.54 3.22  3.00 3.01 2.72
              Oct.   1.34         1.43  1.85  1.72 1.88 1.58 3.06  2.98 2.97 2.69
              Nov.   1.35         1.44  1.86  1.73 1.82 1.59 3.10  2.89 2.93 2.63
              Dec.   1.30         1.39  1.82  1.69 1.99 1.55 2.75  2.62 2.49 2.39
              Avg.   1.09         1.18  1.58  1.46 1.44 1.31 3.03  2.88 2.80 2.57
    2004   Jan.   1.13         1.22  1.69  1.56 1.92 1.42 2.59  2.56 2.47 2.37
              Feb.   1.10         1.20  1.65  1.53 1.72 1.38 2.81  2.50 2.45 2.33
              Mar.   1.13         1.23  1.73  1.60 1.67 1.44 2.44  2.46 2.32 2.16
              Apr.   1.28         1.38  1.90  1.76 1.68 1.64 2.56  2.53 2.46 2.32
              May    1.80         1.89  2.38  2.24 1.96 2.13 3.06  2.88 2.82 2.61
              Avg.   1.29         1.38  1.87  1.74 1.79 1.60 2.69  2.59 2.50 2.36

    Source: GAO's analysis of price data provided by USDA, the Defense
    Commissary Agency, and Information Resources, Inc.

    Note: For the Seattle market, the farm price is the USDA-estimated farm
    Class I price for 3.5 percent milkfat content; the cooperative price is
    the announced cooperative Class I price for Seattle for 3.5 percent
    milkfat content; the wholesale price is the average of the prices paid by
    the commissaries at the Naval Station Everett, Smokey Point Support
    Center; Fort Lewis; and McChord Air Force Base, adjusted for a 5 percent
    markup; and the retail price is the price collected by Information
    Resources, Inc., for the Seattle market. Prices may not average due to
    rounding.

    Appendix IV Average Monthly and Annual Farm, Cooperative, Wholesale and
    Retail Milk Prices in Selected Markets

    Table 25: Prices for a Gallon of Milk in Washington, D.C., October 2000 through
                               May 2004 Wholesale Retail

      Year Month  Farm Cooperative Whole    2%    1% Skim  Whole    2%    1%  Skim
      2000 Oct.  $1.32       $1.40 $1.66 $1.51 $1.49 $1.42 $2.10 $2.10 $2.09 $1.94
           Nov.   1.33        1.41  1.66 1.50  1.49  1.42   2.09 2.10  2.09   1.94
           Dec.   1.36        1.44  1.68 1.53  1.51  1.43   2.11 2.12  2.11   1.97
           Avg.   1.34        1.42  1.67 1.51  1.50  1.42   2.10 2.11  2.10   1.95
      2001 Jan.   1.54        1.62  1.83 1.67  1.62  1.54   2.21 2.24  2.22   2.05
           Feb.   1.36        1.44  1.67 1.52  1.53  1.44   2.22 2.25  2.23   2.04
           Mar.   1.43        1.50  1.73 1.57  1.57  1.48   2.21 2.23  2.22   2.05
           Apr.   1.49        1.57  1.79 1.64  1.61  1.52   2.25 2.27  2.27   2.10
            May   1.56        1.63  1.86 1.70  1.66  1.58   2.29 2.31  2.32   2.15
           June   1.63        1.70  1.93 1.77  1.72  1.65   2.32 2.31  2.30   2.13
           July   1.63        1.71  1.96 1.80  1.74  1.68   2.29 2.27  2.25   2.10
           Aug.   1.64        1.71  1.96 1.80  1.74  1.68   2.29 2.28  2.26   2.10
           Sept.  1.65        1.72  1.97 1.80  1.75  1.69   2.31 2.31  2.30   2.13
           Oct.   1.68        1.76  1.99 1.83  1.78  1.71   2.37 2.35  2.34   2.17
           Nov.   1.69        1.77  1.99 1.83  1.79  1.74   2.38 2.39  2.40   2.25
           Dec.   1.37        1.44  1.73 1.57  1.60  1.60   2.35 2.36  2.35   2.19
           Avg.   1.56        1.63  1.87 1.71  1.68  1.61   2.29 2.30  2.29   2.12
      2002 Jan.   1.37        1.44  1.71 1.54  1.53  1.55   2.36 2.36  2.35   2.18
           Feb.   1.37        1.44  1.68 1.52  1.52  1.52   2.33 2.33  2.32   2.15
           Mar.   1.34        1.41  1.65 1.49  1.50  1.50   2.30 2.31  2.30   2.15
           Apr.   1.33        1.40  1.64 1.48  1.43  1.49   2.30 2.30  2.30   2.14
            May   1.31        1.38  1.63 1.46  1.42  1.48   2.32 2.31  2.32   2.16
           June   1.29        1.36  1.61 1.44  1.40  1.46   2.29 2.27  2.27   2.12
           July   1.25        1.32  1.57 1.41  1.37  1.44   2.31 2.29  2.29   2.13
           Aug.   1.24        1.31  1.56 1.40  1.36  1.43   2.29 2.27  2.28   2.13
           Sept.  1.24        1.31  1.56 1.40  1.36  1.43   2.27 2.27  2.29   2.13
           Oct.   1.21        1.28  1.54 1.37  1.34  1.41   2.25 2.25  2.27   2.12
           Nov.   1.25        1.32  1.57 1.41  1.37  1.44   2.19 2.20  2.22   2.08
           Dec.   1.24        1.32  1.56 1.40  1.36  1.43   2.24 2.25  2.24   2.09
           Avg.   1.29        1.36  1.61 1.44  1.41  1.47   2.29 2.28  2.29   2.13
      2003 Jan.   1.24        1.32  1.56 1.40  1.36  1.43   2.20 2.22  2.20   2.06
           Feb.   1.20        1.28  1.53 1.37  1.33  1.41   2.19 2.23  2.22   2.08
           Mar.   1.17        1.24  1.50 1.33  1.30  1.38   2.18 2.19  2.20   2.06
           Apr.   1.17        1.24  1.48 1.32  1.29  1.38   2.22 2.22  2.21   2.07

     Appendix IV Average Monthly and Annual Farm, Cooperative, Wholesale and Retail
                            Milk Prices in Selected Markets

                             (Continued From Previous Page)

                                    Wholesale Retail

    Year  Month   Farm Cooperative  Whole   2%   1%  Skim Whole  2%   1%  Skim
              May    1.17         1.25  1.49  1.33 1.30 1.38 2.23  2.22 2.22 2.07
              June   1.18         1.25  1.49  1.33 1.30 1.38 2.25  2.22 2.20 2.06
              July   1.19         1.26  1.50  1.34 1.30 1.39 2.28  2.23 2.20 2.07
              Aug.   1.29         1.36  1.58  1.43 1.38 1.45 2.34  2.29 2.27 2.14
             Sept.   1.52         1.60  1.74  1.61 1.55 1.59 2.50  2.47 2.42 2.28
              Oct.   1.57         1.65  1.86  1.70 1.65 1.71 2.58  2.53 2.51 2.35
              Nov.   1.58         1.66  1.87  1.71 1.66 1.72 2.59  2.53 2.50 2.34
              Dec.   1.53         1.61  1.83  1.67 1.63 1.70 2.59  2.55 2.52 2.37
              Avg.   1.32         1.39  1.62  1.46 1.42 1.49 2.35  2.33 2.31 2.16
    2004   Jan.   1.36         1.44  1.69  1.53 1.49 1.58 2.59  2.54 2.51 2.36
              Feb.   1.34         1.42  1.66  1.50 1.46 1.55 2.56  2.50 2.48 2.33
              Mar.   1.37         1.45  1.66  1.50 1.45 1.54 2.53  2.48 2.45 2.31
              Apr.   1.51         1.59  1.82  1.66 1.61 1.66 2.58  2.49 2.43 2.25
              May    2.03         2.11  2.28  2.12 2.05 2.04 2.90  2.78 2.72 2.51
              Avg.   1.52         1.60  1.82  1.66 1.61 1.67 2.63  2.56 2.52 2.35

    Source: GAO's analysis of price data provided by USDA, the Defense
    Commissary Agency, and Information Resources, Inc.

    Note: For the Washington, D.C., market, the farm price is the
    USDA-estimated farm Class I price for 3.5 percent milkfat content; the
    cooperative price is the announced cooperative Class I price for
    Washington, D.C., for 3.5 percent milkfat content; the wholesale price is
    the average of the prices paid by the commissaries at Bolling Air Force
    Base; Walter Reed Army Medical Center; Fort Myer; Fort Belvoir; the Marine
    Corps Base, Quantico; Andrews Air Force Base; Aberdeen Proving Ground; the
    Naval Station, Annapolis; Fort Meade; and Fort Detrick, adjusted for a 5
    percent markup; and the retail price is the price collected by Information
    Resources, Inc., for the Washington, D.C., market. Prices may not average
    due to rounding.

    Appendix V

    Factors That Influence the Price of Milk as It Moves from the Farm to the
    Consumer

    The prices that farmers, cooperatives, wholesale processors, and retailers
    receive are determined by the interaction of many factors, such as forces
    affecting the supply of raw milk and manufactured and fluid milk products,
    consumer demand for manufactured and fluid milk products, federal and
    state dairy programs, the level of services provided by dairy
    cooperatives, market structure at various levels of the marketing chain,
    and other input costs of processing and retailing. Dairy farmers receive a
    price for raw milk, and each entity involved in the processing and
    marketing of fluid milk adds value to the product and retains a portion of
    the difference between the farm and retail prices. (This difference is
    known as the price spread.) This appendix examines the key factors that
    influence milk prices at the different levels of the marketing chain.

    Market Forces, in Addition to Federal and State Policies, Influence Milk
    Prices at the Farm Level

    Supply and demand forces, which in turn are influenced by federal and
    state dairy programs, determine farm prices for the raw milk that is sold
    for use in fluid milk and other dairy products.1 For example, in recent
    months, a variety of supply and demand forces have come together to
    significantly increase farm milk prices. On the supply side, the available
    supply of raw milk has been reduced by farmers cutting back production due
    to a previous period of low prices and by the closing of the Canadian
    border to replacement cows as a result of concerns about mad cow disease.2
    On the demand side, consumer demand for nonfluid dairy products has
    increased as consumers resumed eating out following the attacks of
    September 11, 2001, and as dietary trends, such as the rising popularity
    of lowcarbohydrate diets, have changed. While these forces have been
    driving recent price trends, federal and state dairy programs continue to
    influence milk prices. For example, major domestic programs such as
    federal milk marketing orders (FMMOs) and price supports help individual
    farmers who lack market power compared to other entities such as wholesale
    processors and retailers and help to ensure that farm prices do not fall
    below a minimum level. At the same time, U.S. import restrictions maintain
    domestic dairy prices at levels higher than average international market

    1Each year the United States processes about 7 billion gallons of the
    approximately 20 billion gallons of raw milk into fluid milk products,
    such as flavored milks, buttermilk, whole, 2 percent, 1 percent, and skim
    milk. The rest of the raw milk supply is used to produce manufactured
    products, such as butter, ice cream, yogurt, powdered milk, and cheese.

    2Bovine spongiform encephalopathy (BSE), commonly referred to as mad cow
    disease, is a degenerative neurological disease affecting the central
    nervous system in cattle.

                                       Appendix V
                     Factors That Influence the Price of Milk as It
                          Moves from the Farm to the Consumer

    prices by limiting the quantities of milk products that are imported into
    the country.

    Supply and Demand Forces Affect Farm Milk Prices

    The quantity of raw milk that dairy farmers supply (production) is
    determined by the operating costs of producing that milk, such as feed and
    fuel,3 ownership costs for dairying equipment,4 land costs, and labor
    costs, as well as the price that farmers expect to receive for milk (as
    based on demand). Of these costs, the 2002 annual report on the costs of
    milk production in California, the largest milk producing state, showed
    that the highest cost is feed, at 44 percent of milk production costs.
    Other major costs include replacement cows (14 percent), other operating
    expenses (13 percent), and labor (11 percent).5 Milk production can also
    vary seasonally, according to weather, and is affected by farmers'
    management practices.

    In February 2004, the U.S. Department of Agriculture (USDA) published a
    report on the characteristics and costs of milk production in the United
    States, which found that dairy farmers in the West had a cost advantage
    over farmers in other regions because western operations were appreciably
    larger.6 Farms with 500 or more milk cows had substantially lower total
    operating and ownership costs, averaging $11.60 per hundredweight of milk
    sold. This cost advantage arises because as herd size increases,
    associated increases in fixed costs, such as capital investments, are
    spread proportionally over a larger amount of production, thereby lowering
    the fixed costs per hundredweight of milk produced. USDA found that the
    average herd size of low-cost operations was more than three times the
    size

    3Operating costs include major inputs such as feed, veterinary services
    and medicine, bedding and litter, marketing, fuel, lubricant, electricity,
    repairs, and interest on operating expenses.

    4Ownership costs include the annualized cost of maintaining the capital
    investment (depreciation and interest) in dairy facilities and equipment,
    and costs for non-real estate property taxes and insurance.

    5This labor estimate includes salary, benefits, and all employer taxes for
    hired labor. If family labor were also included, labor would represent
    over 12 percent of total production costs.

    6S.D. Short, U.S. Department of Agriculture, Characteristics and
    Production Costs of U.S. Dairy Operations. Resource Economics Division,
    Economic Research Service, Statistical Bulletin Number 974-6, February
    2004.

    Appendix V
    Factors That Influence the Price of Milk as It
    Moves from the Farm to the Consumer

    of high-cost operations.7 Table 26 shows the average ownership and
    operating costs by region and herd size in 2000.

    Table 26: Average Ownership and Operating Costs by Region and Herd Size,
    2000

    Ownership and operating costs per Region hundredweight

    Arizona/Las Vegas, Pacific Northwest,
    Californiaa $11.58

                                 Upper Midwestb $14.40

                                   Northeastc $14.44

                                    Centrald $18.09

                               Mideast/Southeaste $18.23

    Herd size

                                   Small (<50) $17.98

                                 Medium (50-199) $15.16

                                 Large (200-499) $13.32

                                Industrial (>500) $11.60

    Source: USDA.

    aStates in this survey region included parts of Arizona, California,
    Idaho, Oregon, and Washington.

    bStates in this survey region included Michigan and Wisconsin and part of
    Minnesota.

    cStates in this survey region included Connecticut, Maine, Massachusetts,
    New Hampshire, New Jersey, New York, Rhode Island, and Vermont and parts
    of Maryland, Ohio, and Pennsylvania.

    dStates in this survey region included Illinois, Indiana, and Iowa and
    parts of Kentucky, Minnesota, Missouri, Nebraska, Ohio, and South Dakota.

    eStates in this survey region included West Virginia and parts of Alabama,
    Arkansas, Georgia, Kentucky, Missouri, North Carolina, Ohio, Oklahoma,
    Pennsylvania, Tennessee, and Virginia.

    The USDA study also reported that while milk is produced in all 50 states,
    the top 5 milk-producing states in 2000-California, Wisconsin, New York,
    Pennsylvania, and Minnesota-accounted for 53 percent of total milk
    produced. Growth in the importance of western regions as major sources of
    milk over the past 25 years is a significant feature of the United States
    dairy industry. For example, in 1975, midwestern states such as Iowa,
    Ohio, and Missouri were prominent among the top 10 dairy producing states.
    By 2000, production in Idaho, New Mexico, and Washington State surpassed

    7The USDA study defined low-cost producers as the 25 percent of milk
    producers with costs of $12.17 or less per hundredweight of milk sold.
    High-cost producers were defined as the 25 percent of milk producers with
    costs of $18.79 or more per hundredweight of milk sold.

    Appendix V
    Factors That Influence the Price of Milk as It
    Moves from the Farm to the Consumer

    production in these traditional dairy states. Milk production is
    consolidating so that farms with larger numbers of cows account for a
    growing share of production. In 1993, farms with 100 or more cows
    accounted for 14 percent of all U.S. dairy farms, over half of all cows,
    and over 55 percent of the milk produced. As of 2000, these numbers had
    grown to 20 percent of all dairy farms, 66 percent of all cows, and more
    than 70 percent of milk produced. Significantly, farms with 500 or more
    cows accounted for 3 percent of all dairy farms, but 35 percent of cows
    and 31 percent of milk produced in 2000.

    The production of milk has unique characteristics that distinguish it from
    other agricultural products and that cause relatively small changes in
    supply or demand to result in relatively large changes in price,
    particularly at the farm level. Farmers employ specialized assets or
    equipment to produce milk, and they have limited ability to use their
    farms, cows, and equipment for other purposes during periods of low
    prices. This limited flexibility creates a relatively inelastic supply of
    milk with respect to price.8

    Demand for raw milk is mainly derived from consumer demand for fluid milk
    and manufactured milk products.9 Consumer demand for different fluid or
    manufactured milk products affects the price of raw milk used for other
    products because increased consumer demand for one particular
    product-causing more of that product to be produced--reduces the supply of
    raw milk available for other products, thus increasing the price that
    manufacturers of other products must pay to acquire raw milk. Over the
    long term, per capita demand for fluid milk products has been steadily
    declining, in large part because consumers have substituted carbonated
    soft drinks and other beverages for fluid milk. On the other hand,
    consumer demand for milk products has varied based on dietary
    considerations, such as the rising popularity of low-carbohydrate diets
    and changes in food consumption patterns, such as an increase in the
    amount of food consumed away from the home. Despite some evidence that
    consumer demand for

    8Price elasticity of supply refers to the percentage change in the
    quantity supplied relative to a percentage change in the price received
    for a product, in this case raw milk. Supply is price elastic when a
    proportional change in the quantity supplied of a product exceeds the
    proportional change in its price; supply is price inelastic when a
    proportional change in the quantity supplied of a product is less than a
    proportional change in its price.

    9Demand for raw milk is also influenced by the costs of transporting,
    processing, and marketing raw milk to produce dairy products for retail
    sale.

    Appendix V
    Factors That Influence the Price of Milk as It
    Moves from the Farm to the Consumer

    fluid milk has become more price elastic, it remains relatively price
    inelastic compared to the demand for many other products.10

    Given the relative inelasticities of milk supply and demand with respect
    to price, a number of sources indicated that recent changes in the amount
    of raw milk produced, when combined with changes in demand, have affected
    farm prices. After late 1999, farm prices began falling in response to the
    production surplus that existed at that time. In addition, a number of
    dairy experts indicated that following the terrorist attacks of September
    11, 2001, prices began to fall even further as people stopped eating out
    as much, thereby reducing the demand for manufactured milk products such
    as cheese.11 This reduced consumption compounded the long-term decline in
    demand for fluid milk products. USDA reported that the combination of
    these supply and demand factors was responsible for the low farm prices
    that occurred during 2002 and 2003.

    More recently, however, supply and demand conditions have changed to
    produce record high farm prices in 2004. For example, in response to low
    prices during 2002 and 2003, some farmers began to cut back on production
    by reducing the sizes of their herds. However, with the relative price
    inelasticity of milk supplies, one academic expert noted that it can take
    12 to 18 months to achieve a supply response to low prices. During this
    time, the identification of a cow infected with mad cow disease in
    Alberta, Canada, in May 2003, led to a temporary U.S. ban on imports of
    Canadian beef and cattle. This ban included live animals, some of which
    would have been used as replacement cows in U.S. dairy herds. While some
    beef imports have resumed, USDA has not lifted restrictions on imports of
    live cattle.12 Consequently, in June 2004, a report by USDA's Economic
    Research Service noted that with relatively few expansions in late 2003
    and the tight supplies of replacement cows, few dairy farmers could
    increase production

    10Price elasticity of demand refers to the percentage change in the
    quantity demanded relative to a percentage change in the price of a
    product, in this case fluid milk products. Demand is price elastic when a
    proportional change in the quantity demanded of a product exceeds the
    proportional change in its price; demand is price inelastic when a
    proportional change in the quantity demanded of a product is less than a
    proportional change in its price.

    11According to USDA officials, a decline in the restaurant business began
    in mid-2001 and may have been related to other economic factors, such as
    falling stock market values and corporate scandals.

    12Canadian feedlot operators have filed a class-action lawsuit against the
    United States under the North American Free Trade Agreement.

    Appendix V
    Factors That Influence the Price of Milk as It
    Moves from the Farm to the Consumer

    in response to rising milk prices, a response that usually limits price
    increases.13

    Another factor in reducing milk production has been the lower amount of
    bST-a hormone used in milk production-available to U.S. farmers.14 USDA
    reported that about 2 percent of the U.S. milk supply can be attributed to
    the use of bST.15 However, in January 2004, Monsanto, the maker of the
    hormone, announced that its customers would receive only half their normal
    supply. This reduced availability began March 1 and is expected to
    continue through the end of 2004. Additionally, drought conditions in
    recent years have led to higher feed costs and have negatively affected
    the quality of the feed.16 Finally, some sources identified the National
    Milk Producers Federation's Cooperatives Working Together program as
    another factor leading to reduced raw milk supplies.17 Since the program
    began in July 2003, cooperatives have tried to reduce raw milk supplies by
    eliminating some dairy herds, decreasing production, and increasing
    exports. USDA estimates indicate that from January through June 2004, milk
    production in the top 20 dairy producing states averaged about 1 percent
    below production levels during the same period in 2003.

    While these factors combined to reduce the available supply of raw milk,
    dairy experts indicated that demand for manufactured milk products has
    recovered during 2004. In part, they cited a general economic recovery as
    contributing to this increased demand. They also indicated that people
    have returned to consuming more food away from home, as they did prior

    13"Dairy Markets Adjust, But Are Expected to Remain Tight," Livestock,
    Dairy, and Poultry Outlook, ERS, LDP-M-120, June 2004.

    14USDA's Animal and Plant Health Inspection Service indicated that use of
    bovine somatotropin (bST) typically increases average milk yield by 10
    pounds per cow per day over the course of the cow's entire lactation, or
    as long as bST continues to be used.

    15"Meat Markets Roiled by Disease Outbreaks," Livestock, Dairy, and
    Poultry Outlook, ERS, LDP-M-116, February 2004.

    16Poor quality feed can reduce milk production and may require farmers to
    supplement their feed, thereby raising overall feed costs.

    17This initiative is funded by an assessment of $0.05 per hundredweight of
    milk that participating farmers market. The National Milk Producers
    Federation estimates a $0.59 per hundredweight increase in farm income
    from the program through September 2004. However, while some dairy experts
    indicated that the program has reduced raw milk supplies and thus
    benefited farmers' income, they also indicated that this estimate could be
    overstated.

                                       Appendix V
                     Factors That Influence the Price of Milk as It
                          Moves from the Farm to the Consumer

    to September 11, 2001. This recovery in demand, coming at a time of
    reduced milk supplies, pushed farm prices to record high levels in April
    and May of 2004. For example, USDA's market-based announced minimum price
    for milk to be used in manufactured products, such as cheese, was $19.66
    and $20.58 per hundredweight in April and May of 2004, respectively. These
    prices compare with $9.41 and $9.71 per hundredweight for April and May of
    2003. More recently, these high prices have started to moderate; the
    comparable announced minimum price for June 2004 was $17.68. However, USDA
    has estimated that average 2004 farm-level prices will be more than $3 per
    hundredweight higher than they were in 2003.

    Federal and State Dairy Programs and Policies Influence Farm Prices

    Federal and State Milk Marketing Orders

    A complex system of programs and policies influences the price of raw milk
    used to produce fluid milk and manufactured products. USDA's milk
    marketing orders, as well as some states' dairy programs, attempt to
    stabilize milk marketing conditions by establishing minimum raw milk
    prices and other marketing rules, thus, these programs assist individual
    farmers and dairy cooperatives, which lack the market power of other
    entities such as wholesale milk processors.18 USDA's price support program
    attempts to ensure that farm prices do not fall below a minimum level,
    and, together with the Milk Income Loss Contract (MILC) program, provides
    a safety net for individual farmers during periods of low prices. These
    programs and other federal dairy policies operate in a broader context of
    trade restrictions, which can limit competition from imported dairy
    products and maintain U.S. prices above average international market
    prices.

    In 2003, the price of about 67 percent of the fluid grade milk marketed by
    dairy farmers in the United States was regulated under the FMMO program,
    created in 1933 and administered by USDA.19 Under this program, USDA uses
    national dairy market price information to set the minimum prices that
    must be paid by processors for raw fluid grade milk in specified

    18According to USDA, the objectives of FMMOs are to promote orderly
    marketing conditions in fluid milk markets, to improve the income
    situation of dairy farmers by establishing minimum milk prices, to
    supervise the terms of trade in milk markets in such manner as to achieve
    more equality of bargaining between farmers and processors, and to assure
    consumers adequate supplies of good quality milk at reasonable prices.

    19The 1933 Agricultural Adjustment Act, as amended and reenacted in the
    Agricultural Marketing Agreement Act of 1937, established the federal
    marketing order agreements.

                                       Appendix V
                     Factors That Influence the Price of Milk as It
                          Moves from the Farm to the Consumer

    marketing areas, or orders.20 Figure 32 shows a map of the current 10
    FMMOs.

    Figure 32: Map of Federal Milk Marketing Orders

    Source: GAO, based on USDA Agricultural Marketing Service Dairy Programs.

    20Dairy farmers sell two grades of milk. Grade A may be used for fluid
    consumption or in manufactured products. Grade B may be used only for
    manufactured products. Farmers producing Grade A milk must adhere to
    higher sanitation requirements than for Grade B milk. Prior to World War
    I, much of the milk marketed by farmers did not meet Grade A standards.
    However, by 1999, only about 3 percent of all milk marketed in the United
    States did not meet Grade A standards.

    Appendix V
    Factors That Influence the Price of Milk as It
    Moves from the Farm to the Consumer

    Under the FMMO program, USDA has a classified pricing system for setting
    minimum prices for milk on a monthly basis, based upon the intended use of
    the milk, as shown in table 27. While there is some variation among the
    methods used for setting prices in different orders, in general, FMMO
    class prices are determined by formulas with milk component values derived
    from wholesale dairy product prices. For example, Class III formulas use
    weekly average butter, cheese, and dry whey prices to determine values on
    a monthly basis for butterfat, protein, and nonfat solids. The Class IV
    formulas use weekly average butter and nonfat dry milk prices to determine
    values on a monthly basis for butterfat and nonfat solids, respectively.
    The Class II price is determined by adding a fixed amount-a Class II
    differential of $0.70 per hundredweight-to the advanced Class IV skim milk
    value, while the Class I price is determined by adding a Class I
    differential to the higher of the advanced Class III or IV skim milk
    values.21 The Class I differentials vary by order. These differentials
    were, and to some extent remain, designed to represent the cost of
    transporting milk from areas with a surplus-traditionally the Upper
    Midwest region-to areas with a deficit, when necessary to meet the demands
    for fluid milk products. Because these differentials vary among orders,
    Class I prices differ from one marketing order to another.

    Table 27: USDA's Milk Classes Used for Setting Milk Prices

    Class Usage (examples)

    Fluid milk for drinking purposes

    Soft manufactured products, such as cream products, cottage cheese, ice
    cream, and yogurt

    Cream cheese, other spreadable cheeses, and hard cheese

    Butter and dried milk products, such as nonfat dry milk

    Source: GAO presentation of USDA data.

    Dairy farmers selling raw milk to manufactured or fluid milk processors
    regulated by an FMMO receive an average, or "blend," price that is the
    weighted average of the prices of Class I through IV milk. The weights are
    determined by the amount of milk sold in each class in the marketing
    order.

    21Basing Class I and II prices on the advanced Class III and IV skim milk
    values ensures that minimum prices of raw milk used in these products will
    be known in the month preceding the month to which they apply.

    Appendix V
    Factors That Influence the Price of Milk as It
    Moves from the Farm to the Consumer

    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 a milk marketing order sometimes ship their milk
    to another order to obtain a higher price.22 If the farmer meets the
    receiving milk marketing order's shipping requirements, all of that
    farmer's milk, not only the shipped milk, can qualify for that order's
    blend price.23 However, farmers must consider whether the benefit of
    receiving a higher blend price outweighs the cost of transporting a
    sufficient amount of milk to qualify for the receiving order's blend
    price.

    To generate the money paid to farmers, processors pay into, or draw from,
    a federal order "pool" based on the value of the use for which they are
    buying the raw milk.24 Fluid milk processors are required to participate
    in the federal order pool if they are covered by one of the federal milk
    marketing orders. Processors of manufactured products are not required to
    participate in the pool. Under the classified pricing system, raw milk
    used in fluid products is valued more highly. Therefore, the fluid milk
    processors typically pay money to the pool, while those producing other
    products typically draw money from the pool. This draw represents a
    benefit to processors of manufactured milk products for serving as a
    reserve supply plant for that order's Class I market. In part, a
    processor's payment or draw depends on the producer price differential, a
    measure of the difference between the value of that processor's use of raw
    milk as determined by the market and the value if all of that processor's
    raw milk were used in Class III products. In times of significant price
    volatility, it is possible for the producer price differential to be
    negative, so that some processors of manufactured products would have to
    pay into the pool. In such cases,

    22Farmers not located in a federal order can also ship their milk into a
    federal order. While farmers can ship milk independently, generally it is
    dairy cooperatives acting on behalf of their farmer members that assemble
    and ship milk to processors.

    23Each order has its own requirements, such as the minimum amount of raw
    milk required to be shipped to processing plants participating in that
    order to qualify for its blend price. Entities regulated by the FMMO
    program have the ability to petition USDA for a hearing to amend order
    regulations, including the requirements that outside farmers must meet
    when shipping their milk to another order.

    24The term "pool" is used interchangeably to refer to both the amount of
    money generated by applying the minimum federal order class prices to the
    amount of milk used in each class within an order and the raw milk
    associated with the order for which farmers and processors are able to
    share payments from the amount of money generated by the order system.

                                       Appendix V
                     Factors That Influence the Price of Milk as It
                          Moves from the Farm to the Consumer

    some of these processors choose not to participate in the pool, or de-pool
    their milk, because they would be required to pay into the pool instead of
    receiving a draw.

    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 farm 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.

    Dairy Price Support Program	The dairy price support program, established
    in 1949, supports farm prices by providing a standing offer from USDA's
    Commodity Credit Corporation (CCC) to purchase butter, cheese, and nonfat
    dry milk at specified prices.25 The prices offered for these dairy
    products are intended to provide sufficient revenue so that processors of
    these products can pay farmers, on average, a legislatively set support
    price for raw milk. Since 1999, the support price has been set at $9.90
    per hundredweight.26

    By offering to purchase as much butter, cheese, and nonfat dry milk as
    processors offer to sell at specified prices, the price support program
    sets a floor on the price of these commodities and, thus, indirectly on
    the raw milk used to produce them. Because processors are not required to
    sell to the CCC and milk processing costs vary, farmers may receive prices
    that are either above or below the support price. However, manufactured
    product prices generally will not fall below the floor for very long.
    Also, because the price for raw milk used for fluid purposes under the
    FMMO program is based in part on the price of raw milk used for
    manufacturing purposes, the price support program indirectly influences
    the price that farmers receive for raw milk used for fluid purposes as
    well.

    25The dairy price support program was established by the Agricultural Act
    of 1949, legislation that also expanded the CCC's role as a
    government-owned entity to carry out price support activities for a
    variety of agricultural commodities.

    26The Federal Agriculture Improvement and Reform Act of 1996 required that
    the support price be reduced $0.15 per year from $10.35 in 1996 to $9.90
    per hundredweight in 1999.

                                       Appendix V
                     Factors That Influence the Price of Milk as It
                          Moves from the Farm to the Consumer

    The Secretary of Agriculture can adjust-or tilt-the related CCC purchase
    prices for butter and nonfat dry milk and still achieve the target support
    price for raw milk used in manufactured products. These products are
    considered joint products manufactured from the same 100 pounds of milk.27
    Therefore, by increasing the support price of butter while lowering the
    support price of nonfat dry milk, or vice versa, USDA is able to adjust
    the CCC purchase prices, while maintaining the overall support price. The
    ability to adjust the relative purchase prices of these products is
    important for correcting imbalances in the CCC's purchases of milkfat
    (butter) and nonfat solids (nonfat dry milk). Failure to correct for such
    imbalances can create an incentive for farmers to expand production and
    may alter the flow of milk to alternative uses. The 1990 Farm Bill
    authorized the Secretary of Agriculture to adjust the tilt twice annually
    to limit the accumulation of significant government stocks of certain
    commodities.28

    As market prices rise, the support program allows the CCC to release its
    commodity stocks if the market price for a particular commodity exceeds
    that commodity's purchase price. In this respect, the program helps to
    decrease volatility in milk prices with regard to high-price periods as
    well as low-price periods.

    Milk Income Loss Contract In 2002, the MILC program began to provide
    countercyclical payments

    Program	directly to farmers during periods of low prices.29 The MILC
    program provides support to farmers when the price of Class I milk in
    Boston falls

    27In fact, most of the butter manufactured in the United States is
    produced independent of nonfat dry milk; however, the assumption correctly
    implies that the relative price relationship between butter and nonfat dry
    milk must conform to relative yields from raw milk.

    28Food, Agriculture, Conservation and Trade Act of 1990, Pub. L. No.
    101-624 (codified at 7 U.S.C. S:7251(d)). Butter/nonfat dry milk tilts
    were common in the early 1990s-several tilts were made between April 1990
    and July 1993-to account for market conditions in which butter was in
    surplus relative to nonfat dry milk.

    29The MILC program, also known as the National Dairy Market Loss
    Assistance Payment program, was authorized in the Farm Security and Rural
    Investment Act of 2002. USDA began accepting applications for the MILC
    program in August 2002 (payments were made retroactively to December 1,
    2001) and will continue to do so until September 30, 2005.

                                       Appendix V
                     Factors That Influence the Price of Milk as It
                          Moves from the Farm to the Consumer

    below $16.94.30 MILC payments are equal to 45 percent of the difference
    between $16.94 and the lower Boston Class I price. Farmers in all regions
    of the country have access to payments under this program, but only 2.4
    million pounds of milk per farm are eligible for payments during each
    federal fiscal year. Farmers may choose the month that they begin
    accepting their payments.31 This discretion may enable farmers producing
    more than 2.4 million pounds of milk per year to target their MILC
    payments during the lowest-price periods of the year to maximize the MILC
    payments they receive before reaching the cap on eligible production.

    Trade Restrictions and Export According to some government and academic
    experts, trade restrictions

    Incentives for Dairy Products	have the greatest effect of any federal
    policy on farm milk prices. Trade restrictions maintain U.S. prices above
    average international market prices by restricting the amount of imports,
    particularly of manufactured dairy products, that enter the country.32 In
    other countries, costs of production may be lower, or exports may be more
    heavily subsidized, possibly allowing these countries to export products
    to the United States at competitive prices. Thus, without trade
    restrictions, manufactured products from these other countries might enter
    the United States in greater quantities. This increased supply of
    manufactured products would be expected to decrease the demand for
    domestic raw milk and lead to lower farm prices. Without these trade
    restrictions, other dairy programs, such as the price support program,
    might not be feasible because lower manufactured product prices resulting
    from international competition

    30This price is the same price that was in place when the Northeast
    Interstate Dairy Compact was effective. The compact included the six New
    England states-Connecticut, Maine, Massachusetts, New Hampshire, Rhode
    Island, and Vermont. Legislative authority for the compact expired at the
    end of September 2001. MILC serves as an alternative to regional dairy
    compacts and ad hoc emergency payments to farmers.

    31However, this discretion is limited. USDA regulations prohibit a farmer
    from selecting a month to receive payments if the month has already begun,
    if the month has already passed, or during which no milk was produced. A
    farmer also cannot change a previously selected start month after the 15th
    of the month before the month selected. Furthermore, once monthly payments
    begin, the farmer has no discretion in determining which month or months
    to receive payments.

    32Between January 1998 and June 2004, U.S. prices remained above average
    international market prices reported by USDA's Foreign Agricultural
    Service for four dairy commodities whose prices are tracked
    internationally: butter, cheese, nonfat dry milk, and whole milk powder.
    During this time, U.S. prices averaged between 103 to 125 percent higher
    for butter, 44 to 58 percent higher for cheese, 24 to 35 percent higher
    for nonfat dry milk, and 62 to 74 percent higher for whole milk powder.

    Appendix V
    Factors That Influence the Price of Milk as It
    Moves from the Farm to the Consumer

    could trigger an increase in purchases by the CCC, which could render the
    program prohibitively expensive.

    The primary U.S. international trade restriction is the tariff-rate quota,
    which is the primary international trade restriction allowed under current
    international agreements. USDA's Foreign Agricultural Service uses
    licensing to administer a tariff-rate quota system for most dairy
    products. Under tariff-rate quotas, a low tariff rate applies to imports
    up to a specified quantity, and a higher tariff rate applies to any
    imports exceeding that amount. These higher over-quota tariff rates
    generally limit trade to within quota levels. Quota rates and quantities
    vary by product.

    Another aspect of U.S. trade policy that affects farm prices is the Dairy
    Export Incentive Program (DEIP), an initiative that aims to help exporters
    of certain U.S. dairy products-specifically, nonfat dry milk, butterfat,
    and various cheeses-meet prevailing world prices for targeted dairy
    products and destinations.33 A major objective of the program is to
    develop export markets for dairy products where U.S. products are not
    currently competitive. Under the program, the Foreign Agricultural Service
    pays cash to exporters as bonuses, allowing them to buy dairy products at
    U.S. prices and then sell them abroad at lower international prices. DEIP
    could affect farm prices primarily by increasing demand for dairy products
    through export subsidies.34 According to a 2002 report by the
    Congressional Research Service, past studies have indicated that DEIP
    subsidies have at times enhanced farm prices; for example, these studies
    indicated that DEIP subsidies enhanced farm prices by $0.30 to $0.50 per
    hundredweight in 1992.35 Additionally, in May 2003, the National Milk
    Producers Federation

    33The Dairy Export Incentive Program was introduced in the Food Security
    Act of 1985, Pub.

    L. No. 99-198, Title I, S:153 (1985) (codified at 15 U.S.C. S:713a-14) and
    has been reauthorized since then in successive farm bills. Most recently,
    the Farm Security and Rural Investment Act of 2002 extended the program to
    2007.

    34As is the case with other export subsidy programs, the degree to which
    demand is increased under a program such as DEIP depends on the degree to
    which the exports under the program are additional to those that would
    have occurred in the absence of the program.

    35However, the Congressional Research Service study also noted that while
    DEIP may help to raise farm prices when milk markets are relatively
    balanced, the program would not be likely to have such impacts when
    supplies are relatively tight because the industry would not be willing to
    give up products for export that were needed to supply the domestic
    market. Geoffrey S. Becker, "Agricultural Export Programs: The Dairy
    Export Incentive Program (DEIP)," Congressional Research Service Report
    for Congress, September 18, 2002.

                                       Appendix V
                     Factors That Influence the Price of Milk as It
                          Moves from the Farm to the Consumer

    testified that the subsidies for 5,000 metric tons of butterfat provided
    by DEIP in March 2003 increased wholesale butter prices by an estimated
    $0.06 per pound.36 This price increase boosted farm income by between $20
    million and $30 million. DEIP can also help lower government costs by
    reducing the amount of product purchased under the price support program
    to the extent that savings in the price support program exceed the costs
    of subsidies. Given recent market conditions, DEIP has primarily been used
    to encourage exports of nonfat dry milk and cheese,37 and for the most
    part, from 1998 through 2002 the program supported exports of these
    products to the maximum extent allowable under international trade
    commitment limits.38

    Services Provided by Cooperatives, Market Structure, and Collective Action
    Can Influence the Price of Milk at the Cooperative Level

    Milk reaches the consumer through a variety of pathways; however, most
    milk produced by dairy farmers in the United States is marketed through
    dairy cooperatives.39 Dairy cooperatives can either sell, or arrange the
    sale of, raw milk purchased from farmers to wholesale milk processors, or
    they can process it into fluid and manufactured milk products and
    distribute them to retail outlets.40 As part of sales to wholesale milk
    processors, cooperatives negotiate with the processors for over-order
    premiums, which represent the difference between the prices charged to the
    wholesalers and regulated minimum prices, in areas with federal or state
    marketing orders or regulations. The difference between the price at which
    cooperatives sell raw milk to wholesale fluid milk processors and the farm
    price for fluid

    36This testimony was for the U.S. House of Representatives, Committee on
    Agriculture, Subcommittee on Department Operations, Oversight, Nutrition,
    and Forestry.

    37DEIP assisted exports of butterfat have varied depending on market
    conditions.

    38In some years, such as 1998 and 1999, actual shipments appeared to
    exceed the World Trade Organization (WTO) maximum. This excess occured
    because of provisions that enabled unused quantities from previous years
    to be rolled over into future years. Limits established by U.S. trade
    agreements are explained in greater detail in appendix VII.

    39Dairy farmers who produce the raw milk used in fluid and manufactured
    products can (1) market it through dairy cooperatives, (2) sell it
    directly to wholesale milk processors, or (3) process it for direct sale
    to consumers.

    40See GAO, Dairy Industry: Information on Prices for Fluid Milk and the
    Factors That Influence Them, GAO/RCED-99-4 (Washington, D.C.: Oct. 8,
    1998) and GAO, Dairy Industry: Information on Marketing Channels and
    Prices for Fluid Milk, GAO/RCED-9870 (Washington, D.C.: Mar. 16, 1998) for
    more information on the role of cooperatives and other entities in the
    marketing of fluid milk.

                                       Appendix V
                     Factors That Influence the Price of Milk as It
                          Moves from the Farm to the Consumer

    milk is influenced by the costs of services that cooperatives provide to
    their members and to their buyers, the relative market power of
    cooperatives and fluid milk processors, and the effects of collective
    action taken by dairy cooperatives in marketing their members' milk.

    Costs of Services Provided by Cooperatives Influence Milk Prices

    Over-order premiums, in part, compensate cooperatives for the services
    they provide to their members and on behalf of their members to
    wholesalers. Some distinctive features of cooperatives include member
    ownership and control, at-cost services for members, and distribution of
    income to members on the basis of patronage. Farmers join dairy
    cooperatives to guarantee a market outlet for their milk, to gain
    bargaining power to obtain the best price in the market, to have their
    milk marketed efficiently, with the assurance that their milk will be
    accurately weighed and tested, and to be effectively represented in
    legislative, regulatory, and public relations matters. Most dairy
    cooperatives require farmers to sign a 1-year membership agreement that
    commits them to market all their milk through the cooperative.41

    Cooperatives operate like corporate businesses to perform services for
    their members. For example, Dairy Farmers of America, the largest dairy
    cooperative in the country, serves almost 23,000 members, producing about
    21 percent and marketing about 33 percent of the milk in the United
    States. According to the cooperative's Web site, the cooperative provides
    a variety of services to its members, including the following:

    o 	insurance-medical programs, dental/vision plans, and life insurance
    available to members via a milk check deduction;

    o 	direct deposit-direct deposit of members' milk checks, ensuring that
    farmers' pay checks will be available within 24 hours of the pay date;

    o 	forward contracting-a marketing service that allows members to protect
    themselves against price volatility by locking in the future sale price of
    their milk several months before it is produced; and

    o 	financing services-loan packages for cattle, equipment, and operating
    expenses.

    41Typically, these agreements are self-renewing.

                                       Appendix V
                     Factors That Influence the Price of Milk as It
                          Moves from the Farm to the Consumer

    In some cases, dairy farmers pay on a per-use basis for the services they
    receive. However, cooperatives may also try to offset the costs of their
    services through negotiations with wholesale milk processors for overorder
    premiums.

    Over-order premiums also compensate dairy cooperatives for a number of
    services that they provide to fluid milk processors on behalf of their
    members. Generally, these services include (1) transporting milk from
    different milk-producing areas, (2) scheduling-or balancing-milk
    deliveries to coincide with demand, and (3) standardizing the component
    content of milk deliveries. Different cooperatives also provide additional
    services for fluid milk processors. For example, one cooperative we
    contacted noted the rigorous quality control procedures it performs on its
    members' milk. According to the cooperative official, these efforts allow
    the cooperative to market its members' milk as better quality, potentially
    helping the cooperative negotiate higher over-order premiums. Officials
    from another cooperative said that a major component of the costs of
    services provided by cooperatives is balancing the delivery of raw milk
    supplies to processors' plants. At certain times processors' plants have
    surging demand for raw milk, while at other times the plants are empty. In
    addition, supply disruptions, such as labor strikes, create significant
    balancing disruptions. In this environment, few, if any, fluid milk
    processing firms have the capital (plants to make cheese and other
    products during periods of low fluid demand) to assume the risks inherent
    in balancing, and so in most cases this responsibility is met by the
    cooperatives.

    Relative Market Power of Cooperatives and Processors Influences Milk
    Prices

    Historically, farmers produced and distributed fluid milk as well as some
    manufactured products. Milk is a highly perishable product that is bulky
    to transport. Traditionally, this left farmers dependent on local markets
    for the sale of their milk. The role of dairy cooperatives developed as
    farmers faced greater demand for fluid milk and dairy products and the
    number of farmers who processed and distributed their own milk products
    declined. Instead, specialized firms began taking on the role of
    processing fluid and manufactured milk products and marketing them for
    sale to consumers. However, in this environment, there were many more
    farmers than processors, so processors had the opportunity to bargain with
    different farmers to obtain a lower price for their raw milk supplies. In
    this situation, farmers were at a disadvantage. Consequently, cooperatives
    took on the role of collecting raw milk from farmers and distributing it
    to processors. By doing so, cooperatives helped to balance the bargaining
    power between

    Appendix V
    Factors That Influence the Price of Milk as It
    Moves from the Farm to the Consumer

    farmers and processors. The 1922 Capper-Volstead Act provides limited
    antitrust immunity to cooperatives that meet certain requirements under
    certain conditions and gives farmers an opportunity to work together in
    setting raw milk prices, including bargaining for market premiums. Thus,
    over-order premiums, in part, reflect market power acquired by
    cooperatives relative to processors.

    Since our June 2001 report, the concentration of dairy cooperatives has
    increased, with the potential effect of enhancing their market power in
    negotiations with processors. In 2001, we reported that 83 percent of the
    milk produced in the United States was marketed by cooperatives. However,
    USDA recently reported that in 2002, the share of milk sold to processors
    and other distributors by cooperatives reached 86 percent of all the milk
    produced in the United States.42 Cooperatives attained this market share
    despite a 13 percent decrease in the number of dairy cooperatives between
    1997 and 2002. During this time the amount of member-produced milk
    marketed by the eight largest dairy cooperatives grew from 52 to 63
    percent of the total volume of milk marketed by cooperatives. This
    translated into an increase from 42 to 52 percent of the total volume of
    milk produced in the United States.

    A number of dairy experts cited the need to offset gains in market power
    made by increasingly concentrated firms at the wholesale processor and
    retail levels of the milk marketing chain as a key factor in the continued
    concentration of cooperatives. The greater the percentage of the milk
    supply that a cooperative markets, the greater its ability might be to
    obtain higher over-order premiums in negotiations with wholesale
    processors. On the other hand, one academic source questioned the extent
    to which increased concentration is enhancing the market power of dairy
    cooperatives, particularly over the long term. He noted that although
    Dairy Farmers of America has been consolidating its control over milk
    supplies in some regions, farmers and cooperatives have been able to
    command larger over-order premiums in the East and Upper Midwest
    regions-where the cooperative's presence is not as strong-than in the
    West, where milk supplies have been increasing. Other sources noted that
    competition still exists among cooperatives and independent dairy farmers
    and that this competition prevents even larger cooperatives from obtaining
    excessively high over-order premiums.

    42K. Charles Ling, Marketing Operations of Dairy Cooperatives, 2002,
    USDA/Rural Business-Cooperative Service, Research Report 201, February
    2004.

                                       Appendix V
                     Factors That Influence the Price of Milk as It
                          Moves from the Farm to the Consumer

    Collective Action by Cooperatives Influences Milk Prices

    Another factor in determining the over-order premiums received by
    cooperatives for raw milk is collective action taken by cooperatives.
    Cooperatives work together to try to set prices by coordination allowed
    under the protection afforded by the Capper-Volstead Act. For example,
    officials with Dairy Farmers of America said that a major factor in the
    price of milk at the cooperative level is the action of marketing agencies
    composed of cooperatives. Marketing agencies behave like cartels and
    announce prices for their cooperative members. In most cases these
    agencies set prices for raw milk used in fluid milk and other products.
    Most of the prices announced by the marketing agencies represent the
    minimum federal order prices; additional charges may be added representing
    the costs of services provided by the cooperatives to the processors.

    Representatives of Dairy Farmers of America said that there are marketing
    agency agreements in most major markets except in the Pacific Northwest
    and that for the most part, cooperatives participate in marketing
    agencies. They further stated that the use of marketing agencies has
    become more common in recent years. The marketing agencies may also market
    milk for independent farmers. The officials noted that while cooperatives
    and independent farmers can choose not to participate in the marketing
    agencies, experience has shown that as more producers choose to market
    milk outside the system, the marketing agencies face significant
    competition and prices fall. Eventually, if the prices get low enough, the
    producers have an incentive to work together again.

    In an alternative type of collective action, three cooperatives-the
    Dairylea Cooperative, Dairy Farmers of America, and St. Albans Cooperative
    Creamery-established a milk marketing organization called Dairy Marketing
    Services. According to a Dairy Marketing Services official, the
    organization was formed because the cooperatives realized that they needed
    more market power to compete with increasingly concentrated processors and
    retailers. Cooperatives such as Dairylea, or individual farmers, establish
    contracts with Dairy Marketing Services to market their milk. Dairy
    Marketing Services markets about 16 billion pounds of milk annually for
    farmers in the Northeast area that extends from Maine to Maryland, and
    includes a small area in Ohio. The official estimated that this quantity
    represents about 45 percent of the milk marketed in the Northeast and is
    produced by some 10,000 to 11,000 farmers.

    The Dairy Marketing Services official stated that the organization has
    been able to carve a niche for itself in the milk marketing chain by
    convincing processors that it is more efficient for them to have Dairy
    Marketing

                                       Appendix V
                     Factors That Influence the Price of Milk as It
                          Moves from the Farm to the Consumer

    Services arrange to have raw milk transported from the farm to the plant
    and allow the processors to focus on processing milk. As a result, Dairy
    Marketing Services has been able to obtain contracts from a number of
    major processors in the Northeast, including Dean Foods, Crowley Foods,
    and Kraft, to ensure an adequate supply of milk for their plants.
    Additionally, Dairy Marketing Services provides specialized services for
    farmers such as health insurance and workmen's compensation, a livestock
    purchasing service, and risk management operations for farmers engaged in
    forward contracting. Although we were unable to confirm the effects that
    Dairy Marketing Services' efforts have had, the official stated that the
    organization has provided higher over-order premiums and lower
    transportation charges for its participating cooperatives and farmers than
    would have otherwise been the case.

    Input Costs, Service Levels, Innovations, and Market Structure Influence
    Wholesale Fluid Milk Prices

    The difference between the price at which wholesale fluid milk processors
    sell fluid milk products to retail firms and the price they pay for raw
    milk is influenced by changes in input costs, such as fuel, labor,
    packaging, transportation, and capital expenses. These costs, in turn, are
    affected by recent innovations that have increased efficiency and lowered
    costs of fluid milk processing, as well as by the level of service that
    fluid milk processors provide to retailers. For example, in addition to
    shipping the products to retailers, some wholesalers provide in-store
    services, including unloading the milk on the store dock, restocking the
    dairy case, and removing outdated or leaking containers. The difference
    between what fluid milk processors pay for raw milk and the wholesale
    price they charge their retail customers is also influenced by continued
    structural change in the fluid milk processing industry, including a
    steady increase in firm consolidation and the market share of some firms.
    While there have been many reasons for these trends, the effects on the
    market and fluid milk prices at this level are unclear.

    Input Costs, Service Levels, Several fluid milk processors stated that the
    cost of raw milk, and, in

    and Innovations Influence particular, the federal order minimum price, was
    the single most important

    Wholesale Fluid Milk Prices	influence on wholesale milk prices. We
    estimate that the price of raw milk ranges from about 60 to 70 percent of
    the wholesale price of 2 percent milk. As such, the wholesale price that
    processors charge would be directly linked to the Class I federal order
    price on a year-to-year basis, with adjustments for over-order premiums
    and other inputs. However, a variety of other input costs can also affect
    the price at which fluid milk processors

    Appendix V
    Factors That Influence the Price of Milk as It
    Moves from the Farm to the Consumer

    sell fluid milk products to retailers. Some sources indicated that costs
    of inputs other than raw milk have been increasing in recent years.43 As
    one executive of a milk-processing firm explained, the primary input
    costs, apart from raw milk, include labor and energy. A 2002 study
    examining changes in fluid milk processing plants located in the state of
    Maine found that total processing costs rose at an annual rate of about
    2.4 percent (adjusted for inflation) from 1993 through 2000.44 The study
    indicated that economywide wage inflation plus a dramatic increase in
    health care premiums paid by employers drove labor costs above the costs
    of other inputs, such as land and building expenses and plant supplies.
    Equipment costs increased 10.9 percent per year with investments in plant
    automation and greater reliance on information technologies. Also, fuel
    costs increased by 4.6 percent per year, reflecting economywide trends in
    energy costs. Moreover, while the cost of operating capital constituted
    only 1.0 percent of processing costs, it increased substantially during
    this period due to an increase in the short-term lending rate. Table 28
    displays the percentage change in fluid milk processing costs in Maine
    reported in this study for each cost category from 1993 through 2000.

    43We could not identify any recent studies that have examined milk
    processing and distribution costs on a national level.

    44T.J. Dalton, G.K. Criner, and J. Halloran, "Fluid Milk Processing Costs:
    Current State and Comparisons," Journal of Dairy Science, Vol. 85, No. 4
    (2002): 984-991. The study used costengineering methods to look at four
    state-of-the-art fluid milk processing plants in Maine ranging from
    335,000 gallons per week to 600,000 gallons per week.

    Appendix V
    Factors That Influence the Price of Milk as It
    Moves from the Farm to the Consumer

    Table 28: Change in Costs for Fluid Milk Processing Plants in Maine, 1993
    through 2000

                                                                Total change from
                                Percent of total Annual rate of      1993 through
                 Cost category  cost in 2000 (%)   change (%)            2000 (%)
                   Electricity               5.0            1.6              12.0
                     Equipment              20.0           10.9             106.0
                      Fuel oil               1.0            4.6              37.0
                         Labor              31.0            3.7              29.0
             Land and building              13.0            3.8              30.0
             Operating capital               1.0           15.5             175.0
                  Product loss               1.0            0.4
                      Supplies              27.0          (3.0)            (19.0)
               Water and sewer               1.0          (0.3)             (2.0)
                         Total               100            2.4              18.0

    Source: GAO analysis of data from Dalton et al. (2002).

    Note: Percentages calculated based on 2000 dollars. Percent of total cost
    in 2000 was calculated by GAO and is rounded to the nearest percent.
    Annual rates of change and total change from 1993 through 2000 are from
    Dalton et al. (2002).

    Changes in the level of service that some fluid milk processors provide
    their retail customers have increased the efficiency of the dairy supply
    chain, thus potentially influencing wholesale milk prices. For example,
    some fluid milk processors have begun to undertake supply-chain management
    for their retail customers.45 According to a number of retailers and
    processors, supply-chain management commonly involves shared computer
    systems, which, in the vertical marketing chain, allow processors to more
    efficiently manage the processing and transporting of fluid milk products.
    One processor indicated that it uses an electronic data transfer system to
    manage supplies for certain retailers. In particular, this system allows
    the processor to contract for a certain number of loads of milk per day.
    Further, according to a recent presentation given by company officials,
    Dean Foods' national, refrigerated, direct-store-delivery system allows it
    to deliver fluid milk to its customers with increased route network
    efficiency

    45Supply-chain management is an attempt to coordinate processes involving
    producing, shipping, and distributing products, generally performed only
    by large corporations with large suppliers.

    Appendix V
    Factors That Influence the Price of Milk as It
    Moves from the Farm to the Consumer

    and without customer disruption.46 Dean Foods operates 129 fluid
    processing plants in 39 states, servicing more than 150,000 customers
    coast to coast via its direct-store-delivery system of more than 6,000
    routes.47

    By allowing fluid milk products to move more efficiently from the
    processor to the retailer, these kinds of services help to ensure quality
    and reduce waste and costs along the supply chain. To the extent that
    processors benefit from the reduced costs of supplying retailers with
    fluid milk products, the provision of these services could have a downward
    effect on wholesale prices. On the other hand, these services could
    provide value to retailers for which they might be willing to pay a higher
    price when acquiring fluid milk products. Therefore, the net effect on
    wholesale prices of the level of service that processors provide to
    retailers is uncertain.

    Additionally, innovations in technology can affect prices at the wholesale
    milk processing level. For example, changes in processing technology, such
    as more automated equipment, can improve the efficiency of processing
    operations and, to the extent that processing firms are successful at
    reducing their costs through innovative practices, they may be able to
    reduce their prices. A representative of one fluid milk processor
    explained that improvements in processing and packaging technology have
    doubled and tripled output. Also, a representative of one firm that
    processes milk for sale in its own retail stores stated that the firm has
    dedicated a large contingent of people toward the goal of reducing milk
    losses at its processing plants and has been successful at cutting these
    losses in half. He noted that a driving force behind these efforts is to
    try to alleviate increases in other input costs, such as labor.

    With innovations in technology, the fluid milk processing industry has
    also invested in innovative new products. By developing products with
    extended shelf lives, processors can potentially save shipping costs,
    leading to lower wholesale prices. For instance, the dairy processing
    industry's collective investment in extended shelf life, ultra high
    temperature, and aseptic packaging technology allows fluid milk products

    46Dean Foods Company, Presentation at the Consumer Analyst Group of New
    York Conference, Scottsdale, Arizona, February 17, 2004. Available online
    at http://www.deanfoods.com/investors.

    47Dean Foods Annual Report (2001), 18.

                                       Appendix V
                     Factors That Influence the Price of Milk as It
                          Moves from the Farm to the Consumer

    to reach the end user more efficiently while maintaining quality.48 The
    benefits to processors and their retailers include the ability to ship
    these products longer distances because they are able to endure more
    stress than traditionally processed milk.

    Market Structure in the Fluid Milk Processing Industry Can Influence
    Wholesale Prices

    Since the 1960s, there has been long-term structural change in the
    wholesale fluid milk processing industry as a continuously declining
    number of firms have processed an increasing average volume of milk.49
    Structural change in the processing industry has been driven by economies
    of size, technological changes, high concentration at other levels of the
    milk marketing chain, and rapid consolidation into fewer and fewer
    firms.50 While structural change can lead to lower prices due to cost
    reduction from greater efficiency in production, it can also lead to
    higher market concentration, particularly in individual markets. In
    general, high and increasing market concentration can result in greater
    market power, potentially allowing firms to increase prices above
    competitive levels. Accordingly, the net impact of increased market
    concentration on wholesale prices can be either positive or negative.

    In recent years, through aggressive acquisitions of independent dairy
    processing plants, a handful of fluid milk processing firms have changed
    the market structure of the dairy industry at the wholesale level. These
    companies have generally pursued the business strategy of acquiring strong
    regional dairy processing plants so that they can strengthen their
    presence in existing markets, while expanding their geographic coverage to
    a national level. The acquisition and consolidation trend at the wholesale
    level has affected market structure by leading to higher market

    48Aseptic packaging, commonly called "drink boxes," is the result of a
    beverage and liquid food system that allows perishable food products to be
    distributed and stored without refrigeration for periods up to six months
    or more. It is used to preserve and package everything from milk, juice,
    and drinks of all kinds to scrambled egg mix, tomato sauce, soups, and
    other liquid foods.

    49Structural change is characterized by broad and long-term changes in key
    industry characteristics, frequently including consolidation and changes
    in concentration, methods of vertical coordination, and the mix of
    products and services offered by firms in an industry.

    50Don P. Blayney and James J. Miller, "Concentration and Structural Change
    in Dairy Processing and Manufacturing," Paper presented at the 10th Annual
    Workshop for Dairy Economists and Policy Analysts, Memphis, Tennessee,
    April 2003.

    Appendix V
    Factors That Influence the Price of Milk as It
    Moves from the Farm to the Consumer

    concentration for fluid milk processors in some markets. One common
    measure of market concentration is the four-firm concentration ratio-the
    percentage of sales by the top four firms in a market. According to the
    1997 Census of Manufacturers, the market share for the top four fluid milk
    processors in the nation was about 21 percent. However, the market share
    for top fluid milk processors at the local level was significantly higher.
    For example, in our June 2001 report, we found that in Boston,
    Massachusetts, the market share of the top four fluid milk processors
    increased from 66 percent in December 1997 to 88 percent in December
    1999.51

    Since our last report in 2001 on fluid milk prices, this trend has
    continued, and there have been several significant mergers, acquisitions,
    and joint ventures that have further consolidated the industry. For
    example, in late 2001, Dean Foods merged with Suiza, Inc., bringing
    together the number one and two firms in terms of market share in the
    processing industry. Then, in July 2002, the Land O' Lakes dairy
    cooperative sold its fluid milk operations to Dean Foods. We estimate that
    these acquisitions and mergers gave Dean Foods about a 27 percent market
    share nationally in fluid milk products in 2002. Others have estimated
    that Dean Foods' market share is about 35 percent nationally and
    approximately 70 percent in New England.52 As of 2002, we estimate that
    the market share of the top four fluid milk processors has increased to
    approximately 47 percent.53 As seen in figure 33, with increased
    concentration, the number of fluid milk processing plants has gone from
    1,066 plants producing an average of 50.1 million pounds of milk per year
    in 1980 to 385 plants producing an average of 154.2 million pounds per
    year in 2002.

    51See GAO-01-561, appendix VI, for more information on consolidation at
    the wholesale milk processor level.

    52As a result of a divestiture plan stemming from the Dean-Suiza merger,
    the second largest fluid milk processor, the National Dairy Holdings
    Group, was created.

    53We estimated the four-firm concentration ratio using expert opinion from
    conversations with dairy experts at USDA on the leading four fluid milk
    processing firms, estimates of company sales from the August 2003 Dairy
    Foods Magazine, "The Dairy 100: The List," and the total value of
    shipments from the 2002 Economic Census, Industry Series (September 2004)
    for fluid milk manufacturing. We also adjusted company sales listed in
    Dairy Foods, per company annual statements and expert opinion, for the
    percent of sales that would account for products such as ice cream and
    cheese. To make our estimate consistent with the 1997 Economic Census
    four-firm concentration ratio, we also included the same categories for
    fluid milk manufacturing, such as cottage cheese and yogurt, along with
    fluid milk processing, that went into this calculation. This figure does
    not include the sales that firms may have from various joint ventures.

                                       Appendix V
                     Factors That Influence the Price of Milk as It
                          Moves from the Farm to the Consumer

    Figure 33: Number of Fluid Milk Processing Plants and Volume of Milk
    Processed per Plant, 1980 through 2002 Average volume (million lbs.)

    Number of plants 1,200

    160 1,000

    140

    120 800

    100 600

    80

    60 400 40 20

                                          200

                                           00

    1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
    1995 1996 1997 1998 1999 2000

                                       2001 2002

    Year

    Average volume (in millions of pounds) Number of plants

    Source: GAO presentation of USDA data.

    Such increased concentration of fluid milk processing firms, particularly
    in individual markets, can increase the price at which fluid milk is sold
    to retailers because market concentration can provide these firms greater
    market power. Thus, some analysts viewed the trend toward greater
    concentration in the wholesale market as a means toward greater dominance
    and market power in selling fluid milk to retailers. Further, they noted
    that increased market power can also benefit processors in their
    negotiations for raw milk supplies from cooperatives and independent
    farmers. For example, the exercise of market power could allow processors
    to negotiate more favorable supply contracts, which could drive down input
    prices and increase the spread between wholesale and retail prices. Other
    economists who study the causes of market concentration described a
    phenomenon called the "replication hypothesis"-as concentration grows at
    one marketing level, it is likely to be replicated at other marketing
    levels. For instance, high market concentration at the retail level can
    lead to greater concentration at the fluid milk processor level, and
    higher concentration in fluid milk processing can, in turn, lead to higher
    concentration at the cooperative level. One fluid milk processor that

                                       Appendix V
                     Factors That Influence the Price of Milk as It
                          Moves from the Farm to the Consumer

    we spoke with stated that retail concentration has resulted in retailers
    preferring only one supplier, requiring a processor to have multiple
    plants in order to supply a retailer who serves many markets.

    On the other hand, increasing concentration can lead to cost savings
    through efficiency gains, which may be passed on to retailers in the form
    of lower wholesale prices. For example, some economists viewed
    consolidation of processing firms as a result of increasing economies of
    scale and excess plant capacity. That is, processors decrease their costs
    per gallon for items like packaging or processing costs, as they increase
    the amount of milk they process.54 One dairy analyst reported that in
    plants ranging from a monthly volume of 90,000 pounds per month to 30
    million pounds per month processing costs decreased from about $1 per
    gallon to about $0.50 per gallon. In the end, the impact of market
    concentration on wholesale prices, either positive or negative, depends on
    whether market power or efficiency dominates.55

    Retailing Costs, Consumer Demand, and Market Structure Changes Affect
    Retail Prices for Fluid Milk

    Three key factors that influence fluid milk prices at the retail level are
    retailing costs, consumer demand, and market structure. Recent increases
    in input costs such as labor and energy have been substantial. In an
    effort to hold down their retailing costs and remain competitive, some
    retailers are implementing supply-chain management and other innovations
    that increase efficiency. At the same time, consumers are purchasing a
    declining amount of traditional fluid milk and are increasing consumption
    of other beverages, such as soft drinks and bottled water. Market
    structure changes include continued consolidation in recent years through
    mergers and acquisitions among large food retailers at the national level
    and in many local markets, along with an increasing number of outlets that
    are competing with traditional supermarkets to sell fluid milk.

    54See T.J. Dalton, G.K. Criner, and J. Halloran, "Fluid Milk Processing
    Costs: Current State and Comparisons," Journal of Dairy Science, Vol. 85,
    No. 4, 2002, 984-991. Also, Day 3 of the Hearing on Pacific Northwest and
    Arizona/Las Vegas Producer-Handlers, September 25, 2003, including the
    exhibit on "Cost Structure of Fluid Milk Plants of Various Sizes."

    55One study that we identified, however, that separated market power and
    cost-efficiency effects on the prices in 33 food processing industries
    from 1972 to 1992, found that the market power effect dominated in fluid
    milk manufacturing. Rigoberto A. Lopez, Azzedine M. Azzam, and Carmen
    Liron-Espana, "Market Power and/or Efficiency: A Structural Approach"
    Review of Industrial Organization, Vol. 20, March 2002: 115-126.

                                       Appendix V
                     Factors That Influence the Price of Milk as It
                          Moves from the Farm to the Consumer

    Costs of Retailing Influence the Price of Fluid Milk

    Representatives of the Food Marketing Institute stated that after the
    wholesale costs of the milk, the primary costs that influence the retail
    price of fluid milk are related to labor and energy.56 They added that all
    of these costs have been rising recently. According to the Bureau of Labor
    Statistics, the average hourly earnings for nonsupervisory food store
    employees went from $7.56 per hour in 1992 to $10.20 per hour in 2002.
    These payroll costs are the largest percentage of retail operating costs,
    followed by the second largest single category, employee benefits such as
    health insurance.57 Table 29 shows the breakdown of supermarket operating
    costs in 2003 as a percentage of total sales and gross margin.58

    Table 29: Supermarket Operating Costs as a Percentage of Sales and Gross
    Margin, 2003

                           Expenses Percentage of sales       Percentage of gross
                                                                           margin
                   Depreciation and
                       amortization                 1.3
                  Employee benefits                 3.5
                          Insurance                 0.3
            Maintenance and repairs                 0.7
              Other operating costs                 3.8
                            Payroll                11.4
                   Property rentals                 1.8
                           Supplies                 1.1
                 Taxes and licenses                 0.4
                          Utilities                 1.3
                     Total expenses                25.7

    Source: GAO analysis of Food Marketing Institute data.

    56The Food Marketing Institute is a trade association that represents
    segments of the retail food industry such as supermarkets. The Food
    Marketing Institute does not represent convenience stores.

    57As table 29 shows, the category "other operating costs" is somewhat
    larger than "employee benefits," but according to the Food Marketing
    Institute, it is a catch-all category including items such as travel,
    equipment rentals, communication, and services purchased.

    58The gross margin is a firm's sales revenue minus the costs of acquiring
    products, expressed as a percentage of sales.

    Appendix V
    Factors That Influence the Price of Milk as It
    Moves from the Farm to the Consumer

    Table 30 displays the sales and expense growth as a percentage of sales
    for the supermarket industry during the last decade, from 1993 through
    2003. During this time, total employment costs increased by 12.0 percent,
    including a 10.7 percent increase in payroll expenses; the cost of
    supplies also increased by 10.0 percent.

    Table 30: Growth of Supermarket Sales and Expenses during the Last Decade,
    1993 through 2003

    Percent change 1993 2003 1993 through 2003

                        Supermarket sales (dollars in billions)

    Sales from supermarkets with more than
    $2 million in annual sales $292.0 $432.8 48.2

                        Retailing costs as a percentage of sales

                          Payroll expenses         10.3         11.4         10.7
                     Total employment cost         13.3         14.9         12.0
                                  Supplies          1.0     1.1              10.0
                                 Utilities          1.2     1.3

    Source: GAO analysis of Food Marketing Institute data.

    A 2003 study that was more specific to retailer costs related to fluid
    milk sales noted that these costs include both direct and indirect
    costs.59 Direct costs are those for electricity, labor, store equipment,
    and fluid milk. Indirect costs include corporate, division, and store
    overhead. While the study found variation in the indirect costs, such as
    store overhead, there was less variation across retail stores in direct
    costs.

    Increasing per unit costs have led some retailers to try to improve
    efficiency and reduce total costs. As mentioned in the discussion of
    factors influencing fluid milk prices at the wholesale level, some
    retailers are reducing costs by working with their wholesale suppliers to
    achieve supply-chain management. For example, officials with Wal-Mart
    noted that the firm has tried to reduce its costs and maintain its
    everyday-low-pricing strategy for consumers through

    59George Criner, "Milk Retail Costs and Margins." Paper presented at the
    Northeast Dairy Policy Summit Meeting, November 17-18, 2003, University of
    Connecticut, Storrs.

                                       Appendix V
                     Factors That Influence the Price of Milk as It
                          Moves from the Farm to the Consumer

    o 	a computerized system called Collaborative Planning Forecast
    Replenishment that allows processors to track stock levels at Wal-Mart
    locations and schedule deliveries to specific locations;

    o 	direct-store-delivery of the majority of its fluid milk products to
    increase the efficiency of its supply chain;60 and

    o 	changes to its shipping practices, such as not putting labels on its
    cases, that have allowed Wal-Mart to save time and money.

    Another retailer indicated that it is trying to improve the way it stocks
    its shelves to cut costs. A representative indicated that the retailer has
    invested in retrofitting its stores to use a device called a "bossy cart,"
    which allows store employees to move 80 gallons of milk into the milk case
    in one shelf-stocking.

    Consumer Demand Influences Retail Fluid Milk Pricing

    Consumer demand, driven by factors such as taste, convenience, and health,
    influences the retail price of milk. Moreover, since fluid milk represents
    approximately 3 percent of total supermarket sales, it is an important
    category for store performance, and retailers have an incentive to price
    their products competitively. However, over time, fluid milk consumption
    has gradually declined, with per capita demand for milk trending downward
    at a rate of 2 to 3 percent per year. This downward trend stems from
    several key factors including increasing consumption of substitute drinks
    such as carbonated soft drinks, juice drinks, coffee, teas, soy products,
    and bottled water. Also, there has been an increasing trend toward more
    eating outside the home, reducing the demand for fluid milk sold in food
    stores. Within the fluid milk category, whole milk has gone from being 92
    percent of fluid milk consumed in 1960 to about 35 percent in 2001.
    Private labels represent the largest portion of the market, about 60
    percent.61 More recently, however, there has been growth in the
    development of innovative value-added dairy products. These new
    innovations include dairy products for medicine/health (such as low

    60For most other products, Wal-Mart officials said that the retailer
    maintains a network of approximately 30 food distribution centers.

    61Private label refers to products that are "store brands" and have labels
    that represent the retailer. These products may be produced by
    manufacturers that also produce national brands or by retailers who own
    their own manufacturing operations.

    Appendix V
    Factors That Influence the Price of Milk as It
    Moves from the Farm to the Consumer

    carbohydrate products), multipack drinks such as single-serve and vending
    drinks, and organic dairy products.

    In response to trends in consumer demand for fluid milk products,
    retailers from high-end supermarkets to mass merchandisers use diverse
    pricing strategies, and no single approach applies to any group. However,
    according to some retail executives, one method that retailers are
    currently using is category management. Using this strategy, a retailer
    would not focus on how much 1 percent, 2 percent, or whole milk it sells,
    but rather on how much is sold from the entire dairy case.62 Accordingly,
    category managers would view product assortment strategically, evaluating
    the performance of entire groups of related dairy products. The goal is to
    maximize the sales for the entire category, which requires continual
    adjustment to match consumer demand. To accomplish this goal, managers may
    feed scanner data and other market information into computer models that
    make product assortment decisions.

    A related issue influencing the retail price of fluid milk is the price
    elasticity of demand, that is, the sensitivity of fluid milk consumption
    to changes in price. For many years, empirical studies have indicated that
    milk prices were very price inelastic, meaning that there was little
    change in demand in response to a change in price. Most studies suggest
    that overall, the demand for milk is still price inelastic. However, some
    recent studies suggest that the demand for milk is not as price inelastic
    as it was previously.

    Moreover, some researchers have found that for many fluid milk products,
    demand is elastic, or that there is a greater change in demand relative to
    a change in price for certain types of milk. One study reported that price
    elasticities varied considerably by container size, type (such as white or
    flavored), and fat content of the milk.63 For instance, the study found
    that the demand for whole milk, skim milk, and low fat milk in half-gallon
    containers was price elastic. This research also suggested that carbonated

    62Different retailers may define the dairy case differently depending on
    the market that they serve. The dairy case may include products such as
    fluid milk, cottage cheese, creamers, yogurt, butter, and eggs as well as
    a variety of new "value added" dairy products. A recent study by Cornell
    University on dairy case management found that, on average, stores used
    approximately 37 different milk products in their dairy cases.

    63Oral Capps, Jr., "Demand and Marketing Analyses for Fluid Milk Products
    by Type and by Package Size." Presentation at the 2004 Dairy Forum, Boca
    Raton, Florida, January 2004.

                                       Appendix V
                     Factors That Influence the Price of Milk as It
                          Moves from the Farm to the Consumer

    soft drinks are the chief substitute or competitor for fluid milk
    products, while water is a complement in consumption.64 In another study,
    researchers found that the elasticities of demand for skim/low fat and
    whole milk brands are different.65 Demand for skim/low fat milk was found
    to be more price elastic than demand for whole milk, suggesting that
    retailers could increase overall fluid milk sales by lowering the prices
    of skim/low fat milk relative to prices for whole milk.

                Retail Market Structure Can Influence Fluid Milk Prices

    As with the fluid milk processing industry, there have been trends of
    increasing consolidation and concentration at the retail level during
    recent years, especially among retail firms in some individual markets.
    Structural change and increased consolidation at the retail level of the
    milk marketing chain could lead to lower retail prices as individual
    retailers experience increased efficiencies in their operations. On the
    other hand, high levels of concentration can result in greater market
    power, potentially allowing firms to increase market prices above
    competitive levels.66 Also, greater market concentration at this level
    could increase a retailer's buying power with fluid milk processors,
    potentially lowering costs. Depending upon whether these lower costs are
    passed on to consumers, this can either lower retail milk prices or
    increase the spread between wholesale and retail prices.

    According to USDA, since 1996, almost 4,700 supermarkets, representing
    $75.5 billion in sales, were acquired by other firms. Major mergers and
    acquisitions that have occurred in the retail food market in recent years
    include the following:

    64If products are substitutes, an increase in the price of one would
    increase the demand for the other. A complement in consumption means that
    the products are consumed in conjunction with one another. An increase in
    price for one product would decrease the demand for the complementary
    product.

    65Tirtha Dhar and Tom Cox, "Strategic Implications of Retail Pricing in
    the U.S. Fluid Milk Market." Paper prepared for presentation at the
    American Agricultural Economics Association Annual Meeting, Montreal,
    Canada, July 27-30, 2003.

    66Economic studies of the relationship between price and market
    concentration in food retailing have found mixed results. Carolyn Dimitri,
    Abebayehu Tegene, and Phil R. Kaufman, U.S. Fresh Produce Markets:
    Marketing Channels, Trade Practices, and Retail Price Behavior,
    Agricultural Economic Report Number 825, Economic Research Service, USDA,
    September 2003.

    Appendix V
    Factors That Influence the Price of Milk as It
    Moves from the Farm to the Consumer

    o 	In 1998, Kroger, the nation's largest supermarket chain, acquired Fred
    Meyer, and Albertsons acquired American Stores, the second-largest at that
    time.

    o 	In 2000, Delhaize America, operator of the Food Lion chain of stores,
    purchased Hannaford Brother's Shop 'n Save supermarkets in New England to
    become the eighth-largest food retailer at that time.

    o 	In 2001, Kroger purchased supermarkets in Oklahoma and Texas from
    Winn-Dixie.

    o 	In 2001, Safeway made several acquisitions including Genuardi's Family
    Market stores (Pennsylvania, New Jersey, and Delaware), Randall's food
    markets (Houston, Texas), and Dominick's supermarkets (Chicago
    metropolitan area).

    o 	In 2004, Albertsons, the third-largest U.S. food retailer, purchased
    Shaw's, the eleventh-largest at the time.

    In June 2001, we reported that, for the 100 largest U.S. cities, the
    combined average market share of the top four firms increased from 69
    percent in 1992 to 72 percent in 1998, with some variation depending upon
    the particular market area.67 An official of one large supermarket chain
    noted that because of Wal-Mart's large presence in the market, other
    companies' slices of the "demand pie" got thinner, providing an incentive
    to expand and buy out other companies. According to USDA data, the top
    four firms among all food retailers in 2003 were Kroger, Wal-Mart,
    Albertsons, and Safeway.68

    Consolidation in food retail chains has led to high levels of
    concentration in individual metropolitan markets. Table 31 displays market
    concentration, as measured by the four-firm concentration ratio, in the 15
    markets that we used in this report to analyze the spread between retail
    and farm milk

    67These were defined by the U.S. Census Bureau as Metropolitan Statistical
    Areas. See GAO01-561, appendix VI, for more information on concentration
    among retail firms.

    68Sales by Wal-Mart and other super centers and mass merchandisers are not
    included in the supermarket category. Super centers are defined as a large
    combination supermarket and discount general merchandise store, with
    grocery products accounting for up to 40 percent of selling area.

    Appendix V
    Factors That Influence the Price of Milk as It
    Moves from the Farm to the Consumer

    prices.69 While this threshold varies, some economists have characterized
    a market with a four-firm concentration ratio of 60 percent or greater as
    a "tight oligopoly" or highly concentrated.70 In 2003, the levels of
    concentration varied by metropolitan market, with the percentage of the
    market held by the four largest firms ranging from 62.8 percent in the
    Minneapolis/St. Paul area to 84.9 percent in Denver, with an overall
    unweighted average of 73.9 percent. Moreover, for the 15 markets that we
    analyzed, the overall average four-firm concentration ratio for 1998 that
    we reported in 2001-74 percent-is comparable to the 2003 average.71

    Table 31: Market Share of the Top Four Food Retailers in Selected Markets,
    2003

                 Retail markets Four-firm market share, 2003 (percent)

                                   Atlanta, Ga. 78.2

                                   Boston, Mass. 70.1

                                  Charlotte, N.C. 82.0

                                 Cincinnati, Ohio 79.4

                                   Dallas, Tex. 67.3

                                   Denver, Colo. 84.9

                                    Miami, Fla. 81.6

                                 Milwaukee, Wisc. 63.2

                                Minneapolis, Minn. 62.8

                                 New Orleans, La. 74.7

                                  Phoenix, Ariz. 80.2

    69The four-firm concentration ratio in a market is the share of sales made
    by the four largest sellers.

    70William G. Shepherd, The Economics of Industrial Organization, 3rd ed.
    Prentice Hall, 1990. While a useful tool for categorizing the degree of
    competition in a market, a numerical cut-off of a concentration index,
    such as the four-firm concentration ratio, is not generally considered a
    precise demarcation between various categories of the degree of
    competition in a market. The Federal Trade Commission and Department of
    Justice use an index of market concentration, the Herfindahl-Hirschman
    Index, in combination with a number of other market factors, in
    determining the potential anticompetitive effects of a proposed merger.
    Economic studies of various markets, however, have found that the
    four-firm concentration ratio and the Herfindahl-Hirschman Index are
    highly correlated.

    71While very similar, some of the 15 market areas for our 2001 report for
    retail concentration in 1998 did not exactly match those in our present
    data for 2003 due to a realignment of MarketScope's metropolitan market
    area definitions.

    Appendix V
    Factors That Influence the Price of Milk as It
    Moves from the Farm to the Consumer

    (Continued From Previous Page)

                 Retail markets Four-firm market share, 2003 (percent)

                               Salt Lake City, Utah 67.6

                                 San Diego, Calif. 68.8

                                  Seattle, Wash. 71.8

                                 Washington, D.C. 76.5

                                      Average 73.9

    Source: GAO presentation of USDA/ERS data.

    Note: Four-firm market shares are for supermarkets and super centers only.
    Smaller grocery stores and convenience stores are excluded.

    At the same time, the traditional dominance of supermarkets in food sales
    has been challenged by competition from new mass merchandisers and super
    centers such as Wal-Mart, K-Mart, and Target. These retailers tend to
    offer lower prices and often purchase their inventories in large
    quantities to pass on low prices to consumers. According to a recent USDA
    report, even the larger conventional food stores do not have the same
    buying power as these large general merchandisers. They also tend to grow
    by new investment in stores rather than through mergers and acquisitions,
    in contrast to traditional supermarkets. Figure 34 displays the change in
    food sales by market segment of food retailers between 1993 and 2003.
    Sales from supermarkets decreased from 63 percent to 58.3 percent during
    this time period. However, sales from warehouse clubs and super centers
    increased from 3.6 percent to 9 percent, while those of convenience stores
    and drug stores also increased-from 11.9 percent to 13.6 percent. Overall,
    sales from nontraditional food retailers-warehouse clubs and super
    centers, mass merchandisers, and convenience and drugstores-went from 17.2
    percent in 1993 to 24.4 percent in 2003.

                                       Appendix V
                     Factors That Influence the Price of Milk as It
                          Moves from the Farm to the Consumer

    Figure 34: Percentage of Retail Food Sales by Market Segment, 1993 and
    2003

                                          2003

    1.7% 1.8%

    Mass merchandisers

    3.6%

    Warehouse clubs	Warehouse clubs and super centers

    Convenience stores and drugstores and drugstores

    Other grocery Other grocery stores stores

    Supermarkets

    Source: GAO presentation of USDA data.

    Within the fastest-growing segment, warehouse clubs and super centers, the
    largest food retailer is Wal-Mart, followed by Target and Meijer's, while
    the second fastest growing segment includes the major drug chains, such as
    Walgreen's and CVS. As of 2003, Wal-Mart super center sales reached $103.2
    billion, with estimated grocery sales of $41.3 billion.72 According to a
    recent ACNielsen study, while all U.S. households still shop in
    traditional grocery stores, the annual number of trips to such stores
    continues to decline.73 In contrast, super centers have shown strong gains
    in household penetration as well as gains in the number of trips per year.
    In dairy,

    72Wal-Mart super center sales for 2003 were taken from Supermarket News,
    SN's Top 75 (supplement), January 12, 2004. The estimate of grocery sales
    was provided by USDA. These grocery sales represent about 40 percent of
    total super center sales.

    73"ACNielsen Study Finds Grocery Stores Continuing to Lose Share of
    Customer Shopping Trips," news release, ACNielsen, May 4, 2002,
    http://www.acnielsen.com/news/american/us/2002/200220504.htm (accessed
    Sept. 9, 2004).

    Appendix V
    Factors That Influence the Price of Milk as It
    Moves from the Farm to the Consumer

    however, conventional food stores still offer a larger selection of milk
    products. A recent study by researchers at Cornell and Oklahoma State
    Universities on dairy case management found that the number of milk
    products offered was highest in supermarkets (74) and lowest in drug
    stores (16).74 While the volume of milk products was highest for mass
    merchandisers, the number of products (24) was similar to convenience
    stores (22). The authors explained that historically, mass merchandisers
    concentrated on moving a large volume of product with a limited variety.

    74Todd M. Schmit, Harry M. Kaiser, and Chanjin Chung, The Dairy Case
    Management Program: Does It Mooove More Milk? National Institute for
    Commodity Promotion Research and Evaluation, Department of Applied
    Economics and Management, Cornell University, Ithaca, New York, January
    2004. Specifically, this study evaluated the Dairy Case Management Program
    operated by the American Dairy Council in the Northwestern Hudson Valley
    Market in New York State.

    Appendix VI

    Economic Studies of Price Transmission in the U.S. Fluid Milk Market

    This appendix summarizes the findings of 14 economic studies of price
    transmission in U.S. fluid milk markets. These studies estimated the
    extent to which price changes at one level, such as the farm level, are
    transmitted to other levels, such as the retail level, and the time in
    which these price changes are transmitted. Many of the studies found a
    difference, or asymmetry, in either the extent or speed of price
    transmission, depending on whether the initial price change was an
    increase or a decrease (see table 32).1 Some of the studies analyzed
    possible causes for price asymmetry and often identified the presence of
    noncompetitive markets as a contributing factor.2 Although most studies
    estimated how prices are transmitted from the farm to the retail level, a
    few also estimated how price changes are transmitted from the retail level
    back to the farm level.

    1More generally, a recent article in the economics literature looking at
    77 consumer and 165 producer goods suggested that asymmetric price
    transmission is a broad phenomenon, and that prices rise faster than they
    fall in about two-thirds of the markets that were examined. See S.
    Peltzman, "Prices Rise Faster than they Fall," Journal of Political
    Economy, Vol. 108, No. 3, 466-502.

    2Other factors identified included the costs of changing prices,
    government policies, spatial market competition, asymmetric information,
    economies of scale, and differentiated products.

                                      Appendix VI
                       Economic Studies of Price Transmission in
                               the U.S. Fluid Milk Market

    Table 32: Overview of Fluid Milk Price Transmission Studies and Results on Price
                            Transmission Asymmetry/Symmetry

                                                          Results on
                                                            price
                                                         transmission
                                       Period             asymmetry/  Additional
         Author    Year      Model     of     Geographic symmetry       results
                                       study  area       (long run)a
    Carman and Forth- Econometric   1999-     Nine    Asymmetry in Asymmetry
                         model based           western     certain    in
         Sexton   coming   on Houck     2003     U.S.    milk types    timing in
                            (1977)             citiesb   and markets      CA
                   2005                                                 markets
        Sexton,    2004    Hotelling   1999-     Nine                 Asymmetry
        Xia, and          framework;           western    Asymmetry   in
         Carman           Econometric   2003     U.S.                   timing
                             model             citiesc
                         Houck                Seven U.S.
                   2004  econometric   1994-  citiesd    Asymmetry in
    Capps, Jr.        model                           majority
                         and error
                         correction     2002              of cities
                         model
                         Asymmetric            Ten U.S.
        Linkow,    2004  friction      1997-   citiese
         Gould           model                            Asymmetry
          and                           2004
        Stiegert
        Chidmi,    2004  New Empirical 1996-    Boston
         Lopez,           Industrial                         N/A
          and            Organization   2000
    Cotterill             model
          Lass     2004  Econometric   1982-     New
                         model based           England   Post-compact Pre-compact
                          on Kinnucan   2002              asymmetryf  same as
                          and Forker                                  2001
                            (1987)
                   2003   Structural   1971-   National               Asymmetry
          Wang            econometric                     Asymmetry   in
                          model based   1997                          short run;
                          on Emerick
                            (1994)                                       Symmetry
                                                                           retail
                                                                        to farm
        Romain,    2002    Marketing   1980-  Upstate     Asymmetry          Same
         Doyon,             margin,           New York     UNY and     results in
    and Frigon         econometric   1997  (UNY) and  NYC prior to  short run
                             model               New        price-
                                              York City  gouging law;
                                                (NYC)    only NYC
                                                          after the
                                                             lawg
                         Two-stage
        Dhar and   2002  market        1996-    Boston
                         channel                             N/A
    Cotterill             model      1998

    Lass, Adanu, and Allen

    2001	Econometric model based on Kinnucan and Forker

                                        19821997

    New England Symmetry	Asymmetry in short run

    Frigon, Doyon,

      1999 Marketing margin, 1980-Northeast U.S.; Symmetry in all Asymmetry in all

    and Romain

                           econometric model 1997 UNY and NYC

    markets except asymmetry in NYC after lawg  markets in short run

         Carman   1998 Econometric model  1985- Three       Symmetry    Asymmetry
                       based                    California                     in
                            on Houck      1997    citiesh              short run
        Emerick   1994     Structural     1971-  National
                          econometric                       Asymmetry Symmetry in
                       model based on     1991                         short run
                       Houck
        Hansen,   1994 Econometric model  1983-  National
         Hahn,                                              Asymmetry
    and Weimar                         1990

    Source: GAO analysis using various sources (see table 33).

    aThese results indicate farm-to-retail price asymmetry or symmetry.

    bThese cities include the four California markets of Sacramento, San
    Francisco, Los Angeles, and San Diego and the five non-California markets
    of Seattle, Portland, Salt Lake City, Denver, and Phoenix.

    Appendix VI
    Economic Studies of Price Transmission in
    the U.S. Fluid Milk Market

    cThe cities are the same as in Carman and Sexton (forthcoming 2005).
    dThese metropolitan markets include Atlanta, Boston, Chicago, Dallas,
    Hartford, St. Louis, and Seattle.
    eThese metropolitan markets could not be disclosed.
    fThe Compact refers to the Northeast Interstate Dairy Compact.
    gThis law refers to the New York milk price-gouging law of 1991 (codified
    at NY Gen. Bus. S:396-rr).
    hThese three California cities include Los Angeles, San Francisco, and
    Sacramento.

    How prices are transmitted within the milk marketing chain is important to
    policy makers because it affects both farmers and consumers. Farmers may
    be concerned with price transmission because they may believe increases in
    retail prices are not fully passed back to the farm level, while decreases
    are passed on. Consumers and farmers may believe that decreases in farm
    prices are not fully passed along to the retail level, while increases are
    passed on. Figure 35 illustrates price transmission through the vertical
    milk marketing chain; the arrows show how price signals are transmitted in
    both directions between marketing levels.

    Appendix VI
    Economic Studies of Price Transmission in
    the U.S. Fluid Milk Market

    Figure 35: Marketing Chain and Price Transmission for the U.S. Fluid Milk
                                        Industry

    Source: GAO.

    The first section of this appendix is a detailed table summarizing the
    models, data, and key assumptions used in each study, and each study's
    results. The second and third sections discuss the farm-to-retail results,
    including evidence of price asymmetry, with respect to the extent of price
    transmission and the speed of price transmission. The fourth section
    discusses the retail-to-farm results on price transmission. The last
    section discusses the studies' findings regarding factors that might cause
    price asymmetry.

                                      Appendix VI
                       Economic Studies of Price Transmission in
                               the U.S. Fluid Milk Market

    Summary of Recent Economic Studies of Price Transmission in the U.S. Fluid
    Milk Market

    While most of the studies summarized in table 33 use, as a basis for their
    models, the standard Houck (1977)3 and Kinnucan and Forker (1987) models
    to identify price asymmetry,4 others use newer methods such as the error
    correction model, which some researchers believe provides a more
    appropriate specification for examining asymmetric price transmission.5
    Most of the studies estimated only "forward" price transmission, or price
    transmission from the farm to the retail level, but we also report on one
    study that estimated "backward" price transmission, from the retail level
    to the farm. The studies also differed in whether they estimated short-run
    or long-run price transmission asymmetry or both.6 We take all of these
    differences into account in interpreting the studies' overall conclusions
    and discussing their results.

    3James P. Houck, "An Approach to Specifying and Estimating Nonreversible
    Functions," American Journal of Agricultural Economics 59 (1977): 570-572.
    In the Houck model (1977), changes in the retail price are linked to
    increases and decreases in the farm level price as well as changes in
    other marketing costs. Also, the estimated parameters on the farm-level
    price increases and decreases can be tested to determine if retail price
    movements in response to farm price changes are symmetric or asymmetric.

    4H.W. Kinnucan and O.D. Forker, "Asymmetry in Farm-Retail Price
    Transmission for Major Dairy Products," American Journal of Agricultural
    Economics 69 (1987): 285-292. Kinnucan and Forker combine the mark-up
    model proposed by Heien (1980) and the approach used by Houck (1977) to
    estimate asymmetric functions using a dynamic approach for fluid milk,
    cheese, butter, and ice cream.

    5A recent study by von Cramon-Taubadel and Fahlbusch (1994) points out
    that in the case of cointegration between two time series, an error
    correction model, extended by the incorporation of asymmetric adjustment
    terms, provides for a more appropriate specification for testing for
    asymmetric price transmission. See S. von Cramon-Taubadel and S.
    Fahlbusch, "Identifying Asymmetric Price Transmission with Error
    Correction Models." Poster session at the European Association of
    Agricultural Economists European Seminar in Reading, UK, 1994.

    6Short-run asymmetry occurs when increasing and decreasing prices have
    different immediate responses when the farm price is changed. Long-run
    asymmetry occurs when increasing and decreasing farm prices have different
    responses over the full adjustment period. For most of the studies that we
    examined, both the short run and long run represented fairly short time
    horizons. For example, the short run typically extended from the current
    month to one month out, while the long run was usually from 2 to 4 months.
    Nevertheless, in most of the studies, the long run was the time required
    for the lag structure to run its course.

    Appendix VI
    Economic Studies of Price Transmission in
    the U.S. Fluid Milk Market

    Table 33: Recent Price Transmission Studies of the Fluid Milk Market Model
                         Description Price Transmission Results

    Author/ Study/Year Type of economic model Scope of model and price data
    used Additional assumptions/ variables/ limitations Timing/symmetry and
    degree of price transmissiona Other model results

    Carman and Econometric Average Market power Sexton, model based monthly
    prices based on "Supermarket on the farm-to-for nine hypothesis Fluid Milk
    retail price California and tests of Pricing transmission non-California
    parameter Practices in model of Houck metro markets, size, the Western
    (1977) for 1999-2003. parameter United States," whole, skim, 1 tests for
    Agribusiness, percent, and 2 Farm prices: asymmetry, forthcoming percent
    milk. California: and a 2005. Estimated time Class I departure from

    lags using an California milk cost Almon prices. differences of
    distributed lag Other states: fluid milk model. FMMO Class I products due

    prices.	to different fat contents.

    Retail prices:

    ACNielsen average monthly retail prices.

    Timing/price asymmetry: California and non-California: Contemporaneous to
    3-month period.

    California markets: Some evidence of price symmetry and some of price
    asymmetry, depending on market and product. Non-California markets: Price
    transmission in almost all markets was asymmetric.

    Degree of price transmission:

    California:

    Sacramento: Increases: 72%-122% Decreases: 52%-97% Los Angeles: Increases:
    60%-115% Decreases: 75%-106% San Francisco: Increases: 65%-115% Decreases:
    49%-94% San Diego: Increases: 56%-109% Decreases: 58%-110%

    Non-California:

    Seattle: Increases: 57%-72% Decreases: 39%-64% Portland: Increases: 3%-25%
    Decreases: 4%-30% Phoenix: Increases: 5%-59% Decreases: 6%-63% Salt Lake
    City: Increases: 39%-56% Decreases: 54%-83% Denver Increases: 43%-56%
    Decreases: 40%-55% Analysis revealed evidence of market power in fluid
    milkpricing in each of the nine metro markets analyzed.

    In Portland, estimated retail price coefficients did not respond to farm
    prices.

    In non-California markets, only 3 of 40 estimated coefficients were
    consistent with perfect competition in pricing.

    Addition of retail skim milk, 1 percent, and 2 percent led to different
    results than previous analysis of only whole milk.

    Appendix VI
    Economic Studies of Price Transmission in
    the U.S. Fluid Milk Market

                             (Continued From Previous Page)

                      Model Description Price Transmission Results

    Author/ Study/Year Type of economic model Scope of model and price data
    used Additional assumptions/ variables/ limitations Timing/symmetry and
    degree of price transmissiona Other model results

    Sexton, Xia, Theoretical Average Three and Carman, model based monthly
    prices competition "Horizontal on Hotelling for nine scenarios
    Differentiation framework of California and examined for with horizontally
    non-California retail fluid milk Differential differentiated cities.
    markets: Input Costs: products with California data, perfect Retail Prices
    differential 1999-2003; competition, for Milk by Fat costs. Non-California
    monopoly, and Content." Econometric data, 2000- oligopoly. Paper
    estimation - 2003. presented at seemingly Skim milk the annual unrelated
    Farm prices: (low-cost) and AAEA regression-of a Class I prices whole milk
    meetings, differentiated from California (high-cost) Denver, product,
    market Dairy represent Colorado, competition Information products with
    2004.b model using Bulletin and differential

    metropolitan FMMO Class I costs retail markets component transmitted for
    whole and prices. differently in skim milk. different

    Retail prices: competition
    California Dairy scenarios.
    Information
    Bulletin. Farm prices do

    not contain over-order premiums.

    Timing/price asymmetry:

    California:

    Los Angeles and San Diego have longer transmission periods than Sacramento
    and San Francisco.

    Non-California:

    Prices are transmitted gradually for Denver, Salt Lake City, Portland, and
    Phoenix, while prices in Seattle are transmitted quickly, within 1 month.

    Degree of price transmission:

    N/A Competition results:

    California:

    Results suggest oligopoly scenario for Sacramento, San Francisco, and Los
    Angeles markets. Some evidence of oligopoly scenario for San Diego market.

    Non-California:

    Results suggest oligopoly scenario for Phoenix, Salt Lake City, and
    Seattle markets. Model also suggests Denver market is closer to oligopoly,
    while Portland is closer to monopoly scenario.

    Appendix VI
    Economic Studies of Price Transmission in
    the U.S. Fluid Milk Market

                             (Continued From Previous Page)

                      Model Description Price Transmission Results

    Author/ Study/Year Type of economic model Scope of model and price data
    used Additional assumptions/ variables/ limitations Timing/symmetry and
    degree of price transmissiona Other model results

    Capps, Jr., The standard Monthly data Elasticities of
    "Asymmetry in Houck from January price
    Farm-Retail econometric 1994 to transmission
    Price price October 2002 are calculated
    Transmission transmission for seven U.S. for each
    Associated approach is cities: Atlanta, product and
    with Whole compared to Boston, market.
    Milk and Two the error Chicago,
    Percent Milk in correction Dallas, The model
    Selected U.S. model using Hartford, St. does not
    Cities: A co-integration Louis, and include any
    Comparison of procedures. Seattle. other
    the Model marketing
    Conventional estimates Farm prices: input costs.
    Houck results for USDA
    Approach and whole milk and Agricultural
    the Error 2 percent milk. Marketing
    Correction Service.
    Model
    Approach." Retail prices:
    Working USDA
    paper, Agricultural
    Department of Marketing
    Agricultural Service.
    Economics,
    Texas A&M
    University,
    2004.

    Houck method Error correction model

    Price asymmetry:

    (Whole milk) Asymmetric-Atlanta, Boston, Chicago, Atlanta, Chicago, and
    Dallas, and Hartford and Dallas Symmetric-St. Louis and Seattle St. Louis

    (2 percent) Asymmetric-Atlanta, Boston, Chicago, Atlanta, Chicago, and
    Hartford and Seattle

    Symmetric-

    Dallas, St. Louis, and St. Louis and Seattle Dallas

    Elasticity of price transmission (ranges): (Whole milk)

    Increases: Increases:

    (+0.23)-(+0.58) (+0.24)-(+0.35) Decreases: Decreases: (-0.02)-(+0.12)
    (-0.03)-(+0.06)

                                      (2 percent)

    Increases: Increases:

    (+0.11)-(+0.46) (+0.05)-(+0.29)

    Decreases: Decreases:

    Author notes that results suggest there is a possible market failure due
    to a highly concentrated retail sector, with the exception of St. Louis
    and Seattle.

                            (-0.06)-(+0.25) (-0.006)-(+0.12)

    Appendix VI
    Economic Studies of Price Transmission in
    the U.S. Fluid Milk Market

                             (Continued From Previous Page)

                      Model Description Price Transmission Results

    Scope of model and price data used Additional assumptions/ variables/
    limitations Type of economic model Author/ Study/Year Timing/symmetry and
    degree of price transmissiona Other model results

    Linkow, Gould, and Stiegert, "Retail Consolidation, Market Concentration,
    and Farm-Retail Price Asymmetry in the U.S. Fluid Milk Market." Working
    paper, Department of Agricultural Economics, University of
    Wisconsin-Madison, 2004.

    Authors use an asymmetric friction model that accounts for the existence
    of menu costs (the costs of repricing products). Estimated model uses the
    price of private label whole milk.

    Weekly panel data from 1997--2004 for 10 metropolitan fluid milk markets.

    Farm prices:

    FMMO Class I announced cooperative price.

    Retail prices:

    IRI retail price data; private label (store brand) whole

    c

    milk.

    Price asymmetry and menu costs are allowed to vary by city.

    Includes a marketing cost index variable based on a paper by Romain et
    al., (2002).

    Includes a measure of market concentration and a measure of spatial market
    concentration.

    Timing/price asymmetry:

    Asymmetric-Farm price decreases are passed on less completely than
    increases.

    Responses to price increases do not differ considerably across cities.
    Responses to price decreases do differ across cities.

    Degree of price transmission:

    N/A

    Appendix VI
    Economic Studies of Price Transmission in
    the U.S. Fluid Milk Market

                             (Continued From Previous Page)

                      Model Description Price Transmission Results

    Author/ Study/Year Type of economic model Scope of model and price data
    used Additional assumptions/ variables/ limitations Timing/symmetry and
    degree of price transmissiona Other model results

    Chidmi, The New Weekly data Assesses Lopez, and Empirical from1996-2000
    retail prices Cotterill, Industrial for Boston under four "Dairy
    Organization metropolitan scenarios: Compact, structural fluid milk NEDC,
    no Market Power, model of market. NEDC, with and Milk Appelbaum perfect
    Prices in (1982) that Farm prices: competition, Boston." includes The
    higher of and oligopoly; Working measures of the FMMO estimates paper,
    market power Class I prices market power Department of and price or
    Compact and market Agriculture transmission. Class I prices, conduct and
    Resource The model plus over-order variables. Economics, tests for values
    premiums. University of of these Assumes cost-Connecticut, variables with
    Retail prices: plus pricing 2004. and without the Computed from between

    Northeast IRI retail data processors Interstate Dairy by dividing total
    and retailers in Compact sales by total the Boston (NEDC).d volume.c area.

    Model does not estimate the timing of price transmission.

    Timing/price asymmetry:

    N/A

    Degree of price transmission: Increases: 68% Transmission elasticities
    were estimated at 0.331 pre-Compact and 0.2911 post-Compact.

    Retail price increases due to market power outweighed impact of NEDC
    bynearly 7 times.

    Both the preand post-NEDC retail price markup over marginal cost (the
    competitive benchmark) is about 25% of the retail fluid milk price.

    Market conduct- supermarkets do not ignore each other's actions.

    MILC program provides benefits to farmers, consumers, and retailers at the
    expense of

    e

    taxpayers.

    Appendix VI
    Economic Studies of Price Transmission in
    the U.S. Fluid Milk Market

                             (Continued From Previous Page)

                      Model Description Price Transmission Results

    Author/ Study/Year Type of economic model Scope of model and price data
    used Additional assumptions/ variables/ limitations Timing/symmetry and
    degree of price transmissiona Other model results

    Lass, "Impacts Update of the Monthly time-Longer data of the previous 2001
    series price series than Northeast econometric data for New 2001 paper
    Dairy mark-up model England with time Compact on of Kinnucan (Boston and
    periods split New England and Forker Hartford), 1982 into pre and Prices
    (1987) allowing to 2002. post-Compact; Revisited: for rising and a
    pre-1997 New Data, falling farm Farm prices: period and a New Lessons."
    prices and FMMO Class I 1997-2002 Working different price for the period.
    paper, speeds of New England Department of adjustment. market. Parameters
    of Resource the pre- and Economics, Retail prices: post-Compact University
    of USDA periods were Massachusett Agricultural tested to s, Amherst,
    Marketing determine 2004.d Service retail changes in

    price series for price Boston and transmission. Hartford.

    Assumes constant returns to scale and a competitive market beyond the farm
    gate.

    Included variable to measure changes in processing costs using USDA's Food
    Marketing Cost Index.

    Timing/price asymmetry:

    Pre-Compact period:

    Results were consistent with original findings (Lass et al., 2001); price
    asymmetry in the short run and symmetry in the long run.

    Post-Compact period: Short run: Price asymmetry

    Long run: Price asymmetry.

    Degree of price transmission:

    N/A Boston: There was greater variation infarm prices without the Compact,
    leading to higher retail prices.

    Hartford: There was greater variation infarm prices without the Compact,
    with greater increases in retail prices.

    Appendix VI
    Economic Studies of Price Transmission in
    the U.S. Fluid Milk Market

                             (Continued From Previous Page)

                      Model Description Price Transmission Results

    Author/ Study/Year Type of economic model Scope of model and price data
    used Additional assumptions/ variables/ limitations Timing/symmetry and
    degree of price transmissiona Other model results

    Wang, Price Structural National in Competitive Transmission econometric
    scope; uses fluid milk and the Role model using a national market and of
    Federal simultaneous monthly constant Dairy Policy in system of average
    data returns to U.S. Dairy equations of from 1971- scale. Markets.
    national dairy 1997. Master's prices, Policy variable thesis, Cornell
    including farm Farm prices: for changes in University, and retail fluid
    Announced price support 2003. milk. Models cooperative in 1980s.

    both farm-to-Class I price.
    retail and retail-Price lags
    to-farm price Retail prices: chosen from
    transmission. U.S. retail price dairy market
    Model based from Bureau of literature.
    on a previous Labor
    one by Emerick Statistics
    (1994). USDA.

    1988 - 1997 Period Farm-to-retail: Retail-to-farm:

                                Timing/price asymmetry:

    Short run: Short run: (1 month) (1 month) Asymmetric Asymmetric

    Long run: Long run:

    (3 months) (3 months) Asymmetric Symmetric

                             Degree of price transmission:

    Short run: Short run:

    Increases: 94% Increases: 94% Decreases: 31% Decreases: 2%

    Long run: Long run:

    Increases: 83% Increases: 40% Decreases: 64% Decreases: 34% Decreases in
    dairy price supports in the mid-1980s led to greater asymmetric price
    transmission and more volatility in the post-1988 period than in the
    pre-1988 period for fluid milk and nonfat dry milk.

    Appendix VI
    Economic Studies of Price Transmission in
    the U.S. Fluid Milk Market

                             (Continued From Previous Page)

                      Model Description Price Transmission Results

    Author/ Study/Year Type of economic model Scope of model and price data
    used Additional assumptions/ variables/ limitations Timing/symmetry and
    degree of price transmissiona Other model results

    Romain, Marketing Monthly data Model allows
    Doyon, and margin model from 1980 - for testing of
    Frigon, that includes 1997 for constant
    "Effects of quantity of Upstate New returns to
    State commodity York (UNY) and scale.
    Regulations marketed and New York City
    on Marketing marketing costs (NYC) markets. Model allows
    Margins and combined with for asymmetry
    Price the Houck Farm prices: of other
    Transmission (1977) model. It UNY and NYC marketing
    Asymmetry: includes prices are the costs.
    Evidence from variables FMMO Class I
    the New York measuring prices. Model includes
    City and cumulative state policy
    Upstate New increases and Retail prices: variables-such
    York Fluid Milk decreases in UNY and NYC as
    Markets," farm-level prices are from deregulation of
    Agribusiness, prices. The the New York milk
    2002. Akaike State distribution in

    Information Department of NYC and the
    Criterion was Agriculture. NYC price
    used to gouging law.f
    determine the
    appropriate lag Model does
    structure. not account for

    over-order premiums in farm prices.

    Timing/price asymmetry:

    Short run:

    Asymmetric-NYC and UNY before price-gouging law. Asymmetric-NYC after
    price-gouging law.

    Long run:

    Asymmetric-UNY and NYC, before price-gouging law. Asymmetric-NYC after
    price-gouging law.

    Price transmission elasticities:

    NYC UNY Before the price-gouging law:

                           Increasing elasticities: 0.70 0.62

                           Decreasing elasticities: 0.30 0.49

    After the price-gouging law:

                           Increasing elasticities: 0.52 0.52

                           Decreasing elasticities: 0.43 0.51

    Model results indicate constant returns to scale.

    NYC experienced price asymmetry in the long run prior to 1991, before the
    price-gouging law came into effect, but much less thereafter.

    The deregulation of milk distribution to NYC in 1987 allowed Farmland
    Dairies' entry into the NYC market and significantly reduced marketing
    margins.

    Appendix VI
    Economic Studies of Price Transmission in
    the U.S. Fluid Milk Market

                             (Continued From Previous Page)

                      Model Description Price Transmission Results

    Author/ Study/Year Type of economic model Scope of model and price data
    used Additional assumptions/ variables/ limitations Timing/symmetry and
    degree of price transmissiona Other model results

    Dhar and A two-stage Monthly Model allows
    Cotterill, structural average data for both
    "Price market channel for Boston vertical and
    Transmission model of the market from horizontal
    in Boston milk March 1996 to market
    Differentiated market using a July 1998. channel
    Product nonlinear effects.
    Market model of costs Farm prices:
    Channels: A and demand. Boston FMMO Model allows
    Study of the The model Class I fluid for the
    Boston Fluid looks at the milk price. identification of
    Milk Market Boston fluid cross-firm
    and the milk processor Retail prices: pass-through
    Northeast and retailer IRI data for rates.
    Dairy market aggregate retail
    Compact," channels. and top 4 Authors
    Food supermarket specify three
    Marketing chains in the different
    Policy Center, Boston market.c oligopoly
    Department of games.
    Agricultural
    and Resource Study does not
    Economics, test for the
    University of timing of price
    Connecticut, transmission
    2002. or price

    transmission asymmetry.

    Timing/price asymmetry:

    N/A

    Degree of price transmission (ranges):

    Processor-to-wholesale: 55%-65% Wholesale-to-retail: 54%-62%

    Firm-specific transmission: 32%-47% Industrywide transmission: 88%-100%
    Competition between retailers was lessened dueto focal point pricing and
    the Compact.

    Industrywide and firmspecific cost shocks were not identical, nor did the
    latter aggregate to the former.

    Appendix VI
    Economic Studies of Price Transmission in
    the U.S. Fluid Milk Market

                             (Continued From Previous Page)

                      Model Description Price Transmission Results

    Author/ Study/Year Type of economic model Scope of model and price data
    used Additional assumptions/ variables/ limitations Timing/symmetry and
    degree of price transmissiona Other model results

    Lass, Adanu, Econometric Monthly time-Uses national and Allen model based
    series price data to "Impacts of on the basic data for New determine the
    the Northeast markup model England lag structure Dairy of Kinnucan (Boston
    and for fluid milk- Compact on and Forker Hartford), 1982 uses lags of 1
    Retail Prices," (1987) allowing to 1997. and 2 months. Agricultural for
    rising and and Resource falling farm Farm prices: Model uses Economics
    prices and Class I FMMO impacts of Review, 2001. different price for the
    price

    speeds of New England transmission adjustment. market. to determine

    the impact of Retail prices: the Compact. USDA Agricultural Assumes
    Marketing constant Service retail returns to price series for scale and a
    Boston and competitive Hartford. market beyond

    the farm gate.

    Includes variable to measure changes in processing costs using USDA's Food
    Marketing Cost Index.

    Timing/price asymmetry:

    Boston: Retail prices increased most rapidly in the current period; for
    declines, the greatest decreases occurred after a one-period lag.
    Hartford: Current period effects of rising farm prices were greater than
    current period falling farm prices.

    Boston and Hartford: Short run: Price asymmetry. Long run: Price symmetry.

    Degree of price transmission and elasticities of price transmission:

    Degree of Boston Hartford price transmission: 58% average 48% average

    Elasticities: SR LR SR LR Rising elasticity 0.46 0.35 0.30 0.33

    Falling elasticity 0.14 0.35 0.15 0.25

    In the long run, increases in margins were primarily accounted for by
    other factors, such as processing costs, rather than the Compact.

    Impact of the Compact on retail prices was less than the over-order
    premium, suggesting that less than the full amount of the premium was
    passed on to consumers.

    Appendix VI
    Economic Studies of Price Transmission in
    the U.S. Fluid Milk Market

                             (Continued From Previous Page)

                      Model Description Price Transmission Results

    Author/ Study/Year Type of economic model Scope of model and price data
    used Additional assumptions/ variables/ limitations Timing/symmetry and
    degree of price transmissiona Other model results

    Frigon, Doyon, Hybrid of the Northeast Competitive and Romain, marketing
    cost United States, market and "Asymmetry in model, which Upstate New
    constant Farm-Retail includes the York (UNY), returns to Transmission
    quantity of and New York scale in the commodity City (NYC) assumptions
    Northeastern marketed and markets using are relaxed. Fluid Milk costs,
    with the monthly data, Market," Food Houck model, 1980-1997. A variable
    for Marketing which includes market Policy Center, variables of Farm
    prices: concentration, Department of cumulative UNY and NYC the four-firm
    Agricultural increases and prices are the concentration and Resource
    decreases in Class I FMMO ratio, included Economics, farm-level prices;
    for for UNY and University of prices. Northeast NYC. Connecticut, United
    States- 1999. FMMO Class I Model allows

    average prices for marketing
    of the four costs.
    FMMO regions
    at that time. Model includes

    policy Retail prices: variables such UNY and NYC as the NYC prices from
    price-gouging New York State law. Department of Agriculture; Model does
    Northeast not account for United States over-order prices from the
    premiums in Bureau of farm prices. Labor Statistics.

    Timing/price asymmetry:

    Short run:

    Asymmetry existed for UNY after 2 months, and still existed in NYC and the
    Northeast United States after 3 months.

    Long run:

    After 4 months, the Northeast United States, UNY, and NYC (postgouging
    law) fully adjusted. Only NYC (pregouging law) had not adjusted.

    Symmetry existed in all regions in the long run except NYC prior to 1991.

    Degree of price transmission:

    N/A NYC experienced price asymmetry in the long run prior to 1991, before
    the price-gouging law came into effect.

    Variable for market concentration was found insignificant for both UNY and
    NYC. Authors believed that the problem of consumer information was the
    predominant cause of asymmetric price transmission.

    Appendix VI
    Economic Studies of Price Transmission in
    the U.S. Fluid Milk Market

                             (Continued From Previous Page)

                      Model Description Price Transmission Results

    Author/ Study/Year Type of economic model Scope of model and price data
    used Additional assumptions/ variables/ limitations Timing/symmetry and
    degree of price transmissiona Other model results

         Carman, Response of Three Uses   Timing/price asymmetry: For five of the
                   lags of 1
         "California retail-level milk                             six equations,
           California month for price
        Milk Marketing prices to market                Short run: the one-for-one
              areas: increases and
    Margins," changes in Los Angeles,    Asymmetric-Unlike price increases,
                  2 months for                       there was a price
           Journal of farm prices San      significant 1-month lag between farm
                Francisco, price                    price transmission
        Food using Houck's and deceases.     decreases and total retail price
                                               decreases for each process is
           Distribution (1977) model      city. consistent with
                  Sacramento.
        Research, for estimating Monthly                          constant dollar
              data, Uses an index
        1998. nonreversible January 1985                Long run: markup pricing.
                  of marketing
            functions. The to March 1997.   Symmetric-Retail milk price changes
                           costs from the                were not
                      model is USDA/Econo  significantly different for increases
                                                   and decreases For Los
         estimated using Farm prices: mic of farm prices. Angeles, tests
                                 Research
        prices for whole Class I prices                               showed that
                    Service
        milk. for Northern marketing cost Degree of price transmission: retailers
                                          were
                      and Southern index.         Sacramento: maintaining
                California from              Increases: (111%-112%) prices by
                California Dairy            Decreases: (110%-117%) absorbing some
                  Information             San Francisco: cost increases,
                   Bulletin.              Increases: (117%-118%) and reducing
                                           Decreases: (94%-103%) prices less than
                 Retail prices:                  Los Angeles: farm prices
                California Dairy              Increases: (76%-88%) decreased.
                  Information                      Decreases: (62%-94%)
                   Bulletin.

    Appendix VI
    Economic Studies of Price Transmission in
    the U.S. Fluid Milk Market

                             (Continued From Previous Page)

                      Model Description Price Transmission Results

    Author/ Study/Year Type of economic model Scope of model and price data
    used Additional assumptions/ variables/ limitations Timing/symmetry and
    degree of price transmissiona Other model results

    Emerick, An Structural National scope-Price lags Econometric econometric
    national chosen from Analysis of model based monthly knowledge of Dairy
    Market on Houck's average data the dairy Price method (1977) series,
    1971-market-lag Transmission using a 1991. length 2 Processes.
    simultaneous months for Master's system of 32 Farm prices: farm price
    thesis, Cornell equations and Announced increases and University, a
    distributed cooperative decreases. 1994. lag formulation. Class I price.

    The model Models both estimates price Retail prices: farm-to-retail
    transmission U.S. average and retail-tofor five dairy city retail fluid
    farm price products, milk price from transmission including fluid Consumer
    results. milk. Price Index,

    Bureau of Model uses Labor slope and Statistics. intercept

    dummy variables used to separate time periods into 1977- 1988 and
    1988-1991 to account for government support price decreases and greater
    price volatility.

    Farm-to-retail:

    Timing/price asymmetry

    Short run: Symmetric (Immediate)

    Long run: Asymmetric (2 months)

    Degree of price transmission Short run:

    Increases: 45% Decreases: 41%

    Long run:

    Increases: 107% Decreases: 55% Author estimates causality for fluid milk
    using data from 1971- 1991 and finds it multidirectional.

    Since 1988, different retail price responses (asymmetric) occur 1 and 2
    months after the initial farmlevel price change. Author notes this may be
    due to greater volatility causing difficulties in determining the
    "appropriate" price at wholesale or retail.

    Asymmetry is not a short-run phenomenon in most other dairy products
    including retail butter, wholesale nonfat dry milk, and retail ice cream.

                                      Appendix VI
                       Economic Studies of Price Transmission in
                               the U.S. Fluid Milk Market

                             (Continued From Previous Page)

                      Model Description Price Transmission Results

    Author/ Study/Year Type of economic model Scope of model and price data
    used Additional assumptions/ variables/ limitations Timing/symmetry and
    degree of price transmissiona Other model results

    Hansen, Statistical National Unlike other
    Hahn, and techniques average studies,
    Weimar, similar to those quarterly data, includes the
    Determinants used by Hahn's 1983-1990 for wholesale
    of the Farm-(1989, 1990) farm, market level in
    to-Retail Milk markup model wholesale, and the model.
    Price Spread, in his study of retail levels.
    Economic price
    Research transmission. Farm prices:
    Service, Estimates price Class I FMMO
    USDA, 1994. transmission prices from

    for whole milk.	AMS/USDA plus over-order premiums.

    Wholesale prices:

    Firm-level private costaccounting company data for 30 companies across the
    country.

    Retail prices:

    Bureau of Labor Statistics data based on retail prices in 91 areas.

    Timing/price asymmetry: Farm-to-wholesale:

    Asymmetric
    Farm price increases: wholesale price adjusted in
    three quarters.
    Farm price decreases: wholesale price adjusted in
    one quarter.

    Farm-to-retail:
    Asymmetric
    Farm price increases:
    retail price adjusted in one quarter.
    Farm price decreases: retail price adjusted in 10
    quarters.

    Degree of price transmission:
    Retail price adjustment:
    Asymmetric
    Farm price increases: 173%
    Farm price decreases: 92%

    Wholesale prices exhibit short-run asymmetric responses to farm prices,
    while retail prices exhibit short-run and long-run, or irreversible, price
    adjustments.

    In this study, wholesale milk price adjustments were more rapid for farm
    price decreases than for farm price increases.

    aThe degree or level of price transmission is represented by the
    percentage of full price pass-through from farm to retail. Some studies,
    however, measured instead the elasticity of price transmission, which is
    defined as the percentage change in the retail price of a product due to a
    1 percent change in the corresponding farm price. As noted in the table,
    some studies do not measure the degree of price transmission or the
    elasticity of price transmission and only report on the timing and
    symmetry of transmission.

    bThe AAEA is the American Agricultural Economics Association.

    cIRI stands for Information Resources, Inc.

    dThe Northeast Interstate Dairy Compact was a pricing program established
    by the 1996 Farm Bill that set a minimum price for raw milk to be used for
    and sold as fluid milk in the New England states of Connecticut, Maine,
    Massachusetts, New Hampshire, Rhode Island, and Vermont. This program
    expired on September 30, 2001.

                                      Appendix VI
                       Economic Studies of Price Transmission in
                               the U.S. Fluid Milk Market

    eThe Milk Income Loss Contract program (MILC) is similar to the Compact,
    in that it is based on the Boston raw milk price and provides a partial
    subsidy to dairy farmers; however, it is funded through taxpayers rather
    than processors.

    fThe New York City price-gouging law (codified at NY Gen. Bus. S:396-rr)
    imposed a duty on the New York Commissioner of Agriculture and Markets to
    determine if prices of fluid milk are unconscionably excessive whenever
    the retail price of fluid milk exceeds 200 percent of the price for Class
    I fluid milk. The New York State Legislature passed this law, in part,
    because of a perceived lack of response in retail milk prices to decreases
    in farm prices.

    Results on the Extent On both national and regional or citywide levels,
    the majority of the fluid

    milk studies that we identified found evidence of farm-to-retail price of
    Farm-to-Retail Price transmission asymmetry in price levels. While the
    studies estimated a wide Transmission and Price range of price
    transmission levels, in general, the estimates of price Transmission
    transmission for initial farm price increases were greater than for farm

    price decreases.

    Asymmetry

    National Level Results	The fluid milk price transmission studies that we
    identified using national aggregate data estimated a wide range of price
    transmission levels and generally found evidence indicating asymmetric
    price transmission-farm price increases were more fully transmitted to
    retail prices than farm price decreases. Using national average farm and
    retail prices for whole milk, Emerick (1994) and Wang (2003) developed two
    similar studies that identified the degree of price transmission
    nationally. While both studies used similar models, the Wang study used
    somewhat more recent data. Taken together, both studies' short-run results
    suggest that about 45 percent to 94 percent of farm price increases were
    passed along to the retail level, while only 31 percent to 41 percent of
    farm price decreases were similarly passed along. These studies estimated
    that in the long run, transmission levels for price increases ranged from
    83 percent to 107 percent, while transmission levels for price decreases
    ranged from 55 percent to 64 percent. Both researchers found price
    asymmetry in the long run, but Wang also found price asymmetry in the
    short run. In his study of seven metropolitan markets across the country
    using data from 1994 to 2003, Capps Jr. (2004) also identified price
    asymmetry in a majority of selected fluid milk markets for whole and 2
    percent milk. Measuring the level of price transmission by using the
    elasticity of price transmission, he estimated elasticities for farm price
    increases ranging from 0.23 to 0.58 for whole milk and 0.11 to 0.46 for 2
    percent milk. For farm price decreases, these elasticities were much
    lower, ranging from -0.02 to 0.12 for whole

                                      Appendix VI
                       Economic Studies of Price Transmission in
                               the U.S. Fluid Milk Market

    and -0.06 to 0.25 for 2 percent, respectively.7, 8 Similarly, in Linkow et
    al. (2004), using an asymmetric friction model of 10 metropolitan markets
    across the country, the authors found evidence of price asymmetry-retail
    prices were more responsive to cooperative farm price increases than
    decreases.

    Regional and City-Level Results

    Many studies that used regional or city-level data also estimated a wide
    range of price transmission levels as well as asymmetric price
    transmission. In an econometric model for whole, skim, 1 percent, and 2
    percent milk, Carman and Sexton (forthcoming 2005) estimated farm-toretail
    price transmission for nine metropolitan markets in the Western United
    States. Estimated levels of price transmission for all types of fluid milk
    combined for the California markets ranged from 56 percent in San Diego to
    122 percent in Sacramento for price increases, and from 49 percent in San
    Francisco to 110 percent in San Diego for price decreases. For the
    non-California markets, for both increases and decreases, the estimated
    levels of price transmission were much lower, ranging from 3 percent in
    Portland to 72 percent in Seattle for price increases and 6 percent in
    Phoenix to 83 percent in Salt Lake City for price decreases. The authors
    also noted that none of their price transmission parameters for all types
    of fluid milk for Portland was statistically different from zero,
    indicating no evidence that retail prices responded to farm price changes
    in this market.

    Several researchers have also estimated farm-to-retail price transmission
    for markets in the Northeast United States. Lass et al. (2001) estimated
    price transmission in reference to the Northeast Interstate Dairy Compact
    for the Boston and Hartford metropolitan areas. For price increases, they
    found that the level of price transmission for a farm price increase was
    58 percent for Boston and 48 percent for Hartford. While Lass et al. only
    found price asymmetry in the short run, in a subsequent study, using more
    recent data, Lass (2004) found price asymmetry in the short run and in the
    long run. Using the New Empirical Industrial Organization approach,
    Chidmi, Lopez, and Cotterill (2004) found a similar result: a degree of
    price

    7The elasticity of price transmission from the farm to retail level is the
    percentage change in the retail price of a product due to a 1 percent
    change in the corresponding farm price.

    8While these elasticity estimates are ones obtained from using the Houck
    method, the author found similar results, although smaller, using a
    time-series, cointegration approach: the error correction model (see table
    33).

    Appendix VI
    Economic Studies of Price Transmission in
    the U.S. Fluid Milk Market

    transmission of 68 percent for farm price increases for the Boston
    market.9 Within the same study, the authors also note that Cotterill
    (2003), in other research for Boston, estimated a pass-through rate of
    between 20 and 26 percent for price decreases, suggesting price asymmetry
    in this market. In another study of the Boston market, using a two-stage
    market channel model, Dhar and Cotterill (2002) found that the
    firm-specific price pass through rate was 32 to 47 percent, while
    industrywide pass through was 88 to 100 percent for price increases.10

    In yet another study of the Northeast market, Romain et al. looked at
    price asymmetry before and after the imposition of the New York
    price-gouging law in 1991 and tested for price asymmetry using the
    elasticity of price transmission. Before the price-gouging law, they found
    that a 1 percent increase in the farm price translated into a 0.70 percent
    and 0.62 percent increase in retail prices in New York City and Upstate
    New York, respectively, while a 1 percent decrease translated into a 0.30
    percent and 0.49 percent decrease in these markets. After the law went
    into effect, they found that a 1 percent increase in the farm price
    translated into a 0.52 percent increase in retail prices in both New York
    City and Upstate New York, while a 1 percent decrease translated into a
    0.43 percent and 0.51 percent decrease in these markets, respectively.
    Therefore, long-run price asymmetry was significant in both regions prior
    to the price-gouging law, but remained statistically significant only in
    New York City afterwards, though at a much lower level.

    9The New Empirical Industrial Organization is an approach that focuses
    primarily on the relationship between prices and marginal costs that has
    been used to identify and estimate the degree of oligopoly market power in
    a market. Specifically, the Chidmi et al. study is a structural oligopoly
    model that measures market power, demand, marginal cost, and the
    farm-to-retail price transmission.

    10This approach is a cost-pass through model consisting of a two-stage
    vertical market system where there are two processors at the first stage
    and two retailers at the second stage. Within these stages the authors
    assume different conduct and game theoretic assumptions. This study,
    however, did not address price asymmetry because it did not estimate the
    extent to which price decreases were passed through.

                                      Appendix VI
                       Economic Studies of Price Transmission in
                               the U.S. Fluid Milk Market

    Results on Farm-to-Retail Speed of Adjustment and Price Transmission
    Asymmetry

    We identified fewer studies that examined the speed of adjustment and
    related price asymmetry, or differences in the time required for farm and
    wholesale level price increases and decreases to be passed through to the
    retail level. Hansen et al. (1994), using national aggregate price data
    for whole milk, estimated that it took 3 months after the wholesale price
    increased for the retail milk price to increase, but that it took 30
    months for the retail price to adjust to wholesale price decreases. In
    another study using national data, Wang (2003), using a structural model,
    found that, for farm price increases, retail prices adjusted more quickly
    in the first month after the increase and more slowly in subsequent
    periods. Conversely, for farm price decreases, the speed of price
    adjustment was slower in the initial month and increased in the following
    months, implying speed of adjustment asymmetry.

    Nearly all of the studies of regional or metropolitan price transmission
    found asymmetry in timing-the price adjustment process for price decreases
    much exceeded that for farm price increases. Carman (1998) found a 1-month
    lag for price decreases and no lag for price increases in the California
    markets. In a later study, Carman and Sexton (forthcoming 2005) found that
    for the majority of cities they analyzed, the time lags estimated for
    price decreases generally exceeded those for price increases. For the four
    types of fluid milk, Carman and Sexton found that farm price decreases
    generally took from 1 to 3 months to be transmitted to the retail level,
    while price increases took no more than 1 month. In the California
    markets, the authors found that, in general, retail prices responded more
    quickly to farm price increases than to decreases. Lass et al. (2001)
    found that for the Boston and Hartford markets, retail price adjustments
    to rising farm prices were much more rapid than similar adjustments to
    falling farm prices. Lass (2004) also found evidence of slower price
    transmission to the retail level when farm prices were falling. For
    markets in the Northeast, Frigon et al. (1999) reported short-run
    asymmetry in price adjustment for several markets: price adjustment was
    complete in Upstate New York after 2 months and in New York City and the
    Northeast United States after 3 months. The authors concluded that
    short-run asymmetry seemed to be milder in Upstate New York, because it
    lasted for only 2 months. In the long run, after 4 months, the Northeast
    United States, Upstate New York, and New York City (after enactment of the
    gouging law) markets had fully adjusted, with only the New York City
    (before enactment of the gouging law) market not fully adjusting.

                                      Appendix VI
                       Economic Studies of Price Transmission in
                               the U.S. Fluid Milk Market

    Results for Retail-to-Farm Price Transmission and Price Transmission
    Asymmetry

    Using data from 1971 through 1991, Emerick (1994) tested for causality in
    fluid milk pricing between the farm and retail levels and found that it
    was bidirectional. That is, the author found that for these data, in
    addition to farm price changes affecting retail prices, retail price
    changes also affect prices at the farm level. However, this specification
    resulted in some parameter values for retail-to-farm price transmission
    that were inconsistent with economic expectations. In a later study, Wang
    (2003) estimated results for retail-to-farm price transmission. In the
    short run, which was estimated to be 1 month, the author found that price
    increases were immediately passed on to the farm level with a level of
    transmission of 94 percent, while price decreases were passed on at a
    level of 2 percent. However, in the longer run, which was estimated as 3
    months, price increases were passed through at a level of 40 percent,
    while price decreases were passed through at a level of 34 percent. In the
    long-run specification, neither increases nor decreases in price were
    fully passed through. Thus, while the author found price asymmetry in the
    short run, she found price symmetry in the long run for retail-to-farm
    level price changes. As in Wang's farm-to-retail analysis, increases in
    the retail price were passed through nearly fully in the initial month,
    and then decreased substantially. However, although decreases in the
    retail price were not passed on initially, they were passed on at an
    increasing rate in the following months.

    Possible Causes of Asymmetry in the Extent and Speed of Price Transmission

    Even fewer economic studies have provided evidence on what causes price
    transmission and price transmission asymmetry. For the U.S. fluid milk
    market in particular, we found few studies that examined factors affecting
    the extent of price transmission and price transmission asymmetry. While
    two major explanations are cited in the economic literature as central to
    explaining price transmission and transmission asymmetry- noncompetitive
    markets and adjustment costs-there are several others cited, including the
    role of government policies, spatial market competition, substitution in
    processing technology, asymmetric information, economies of scale, and
    differentiated products. However, only the presence of noncompetitive
    markets and the effects of government policies were examined in the
    studies of price transmission that we identified.

                                      Appendix VI
                       Economic Studies of Price Transmission in
                               the U.S. Fluid Milk Market

    Noncompetitive Markets	In general, economic research has found that a
    higher degree of market power can reduce the degree of price
    transmission.11 Particularly relevant to the fluid milk market,
    researchers have also shown that the number of vertical stages and the
    extent to which a market varies from the competitive norm both influence
    the degree of price pass through.12 Of the 14 studies that we examined,
    only 5 explored the role of competition in combination with the degree of
    price transmission and price transmission asymmetry in the milk marketing
    chain. In particular, 2 of these studies examined market power stemming
    from product differentiation of different milk types. The evidence from
    these studies is somewhat mixed. While 1 study did not find a linkage
    between market concentration and price transmission, other studies using a
    variety of methods did find evidence of either a lack of price
    transmission or price transmission asymmetry in markets that also
    possessed a degree of market power.

    Carman and Sexton (forthcoming 2005), using multiple analytical
    techniques, found that fluid milk markets in the Western United States
    that displayed noncompetitive pricing also tended to lack price
    transmission and show price asymmetry. Using monthly data from 1999
    through 2003, the authors (1) analyzed the effects of horizontal
    differentiation among fluid milk types by ranking milk with different fat
    contents for different markets based on the costs that would be predicted
    under perfect competition, (2) performed correlation analysis between
    changes in the monthly farm and retail prices of milk with different fat
    contents, with a lack of correlation indicating the exercise of market
    power, and (3) analyzed price transmission, along with the estimated price
    transmission coefficients, to determine competition in the market.

    In the first analysis, rank values for all milk types did not conform with
    price expectations, with the exception of whole milk for all the months in
    Seattle. Moreover, except in Portland, they found that the rankings of
    retail milk prices for whole, skim, 1 percent, and 2 percent milk provided

    11S. McCorriston, C. W. Morgan, and A. J. Rayner, "Processing Technology,
    Market Power, and Price Transmission," Journal of Agricultural Economics,
    Vol. 49, No. 2, 1998, 185-201. Steve McCorriston, "Why Should Imperfect
    Competition Matter to Agricultural Economists?" European Review of
    Agricultural Economists, Vol. 29, No. 3, 2002, 349-371.

    12Steve McCorriston and Ian M. Sheldon, "The Effect of Vertical Markets on
    Trade Policy Reform." Working paper, September 1994. Also, S. M.
    McCorriston and I. M. Sheldon, "Agricultural Policy Reform in
    Successive-Oligopolistic Markets: A General Framework," University of
    Exeter and Ohio State University, December 1995.

    Appendix VI
    Economic Studies of Price Transmission in
    the U.S. Fluid Milk Market

    evidence of not being based on costs, as would be expected in perfect
    competition. For the price correlations, the results indicated that only a
    few product pairs in the nine markets have a high degree of
    interdependence, as one would expect for close substitutes. Low
    correlations ranging from nearly complete independence to moderate
    independence for at least one pair of products were evident in each
    market. For instance, retail price changes for skim milk appeared
    independent of other milk prices in Sacramento, Seattle, Portland, Salt
    Lake City, and Denver. The authors explained that these correlations all
    indicated pricing that was inconsistent with competitive pricing.

    For the price transmission analysis, the estimated results differed among
    the California markets, depending on the city and type of milk. For
    instance, in certain California markets, such as Los Angeles and San
    Diego, farm price decreases lagged farm price increases by 2 to 3 months,
    depending on the product, indicating price asymmetry in timing. Some of
    these price coefficients were consistent with competitive pricing and
    others were not. However, price transmission estimates for other
    metropolitan regions in the West (Seattle, Portland, Phoenix, Salt Lake
    City, and Denver) provided stronger evidence of noncompetitive pricing,
    and some also indicated price adjustment asymmetry, such as Salt Lake City
    and Phoenix. For these markets, only 3 of the 40 estimated price
    transmission coefficients were consistent with perfect competition.

    Using another model of horizontal product differentiation, a subsequent
    study by Sexton, Xia, and Carman (2004) econometrically estimated the
    timing of fluid milk price transmission and tested for market power for
    four California and five non-California cities from 1999 to 2003. While
    the results were somewhat mixed, hypothesis tests for the cities
    indicating oligopoly or monopoly scenarios also displayed more gradual
    price transmission results than those indicating more competitive
    scenarios, suggesting a link between noncompetitive market structures and
    a lack of price transmission.

    Chidmi et al. (2004) estimated price transmission and market power for the
    Boston fluid milk market using the New Empirical Industrial Organization
    approach and data from 1996 through 2000. The empirical results of the
    model, in particular the conjectural variation elasticity, suggest that
    participants in this market may possess market power and that

                                      Appendix VI
                       Economic Studies of Price Transmission in
                               the U.S. Fluid Milk Market

    supermarkets do not ignore each other's actions.13 Although the model did
    not account for speed of adjustment, the authors estimated a price
    transmission level of 68 percent, suggesting that market power is
    associated with incomplete price transmission. A study by Frigon et al.
    (1999) includes a measure of market power, the four-firm concentration
    ratio, in its model of price transmission for Upstate New York and New
    York City. However, this variable did not prove to be significant. Later,
    in a similar study (Romain et al., 2002), the authors explain that their
    results of price asymmetry prior to 1991 in New York City were evidence
    that middlemen in the fluid milk market were exercising market power prior
    to the price-gouging law. The authors found that price asymmetry decreased
    after the law went into effect. They acknowledged, however, that to
    rigorously address the issue of a noncompetitive market, an alternative
    market power model would have to be developed.

    Government Policies	Two studies looked at the effects of national
    government intervention on price transmission. Emerick (1994) and Wang
    (2003) both examined the question of whether changes in dairy policy,
    especially the reduction in the dairy price support level that began in
    the mid-1980s, had changed the nature of price transmission for dairy
    products. Both authors basically came to the same conclusions. Emerick
    noted that asymmetry is more likely to have occurred since 1988, adding
    that the greater price volatility may have caused some difficulties for
    retailers and wholesalers in determining the "appropriate" price. Wang,
    using additional data through 1997, found that reductions in the price
    support level tend to have a large impact on the fluid milk and nonfat dry
    milk price transmission relationships. In the fluid milk market, the
    farm-to-retail price transmission process became asymmetric, with the
    greater price volatility in the post1988 period. While the degree of price
    transmission increased for both increases and decreases in price, it
    increased proportionately more for increases than for decreases.

    Six of the studies examined price transmission in conjunction with other
    state and federal policies and programs, such as the New York pricegouging
    law and the Northeast Interstate Dairy Compact. Four studies, Lass et al.
    (2001), Lass (2004), Chidmi et al. (2004), and Dhar and Cotterill

    13For this model, the conjectural variation elasticity, a measure of
    market conduct and firm interdependence within the market, was
    significantly different from zero at the 5 percent level.

    Appendix VI
    Economic Studies of Price Transmission in
    the U.S. Fluid Milk Market

    (2002), estimated price transmission while the Northeast Interstate Dairy
    Compact was in effect. Lass et al. found that processors and/or retailers
    did not fully pass through their price increases and, in fact, may have
    absorbed part of the cost of the Compact's over-order premium. In his 2004
    study, Lass explained that the greater variation in farm prices that
    occurs without the Compact would actually lead to higher retail prices
    because of the larger estimated impacts on retail prices of increasing
    farm prices than decreasing farm prices. Dhar and Cotterill disagreed and
    contended in their study that the risk reduction benefit from the Compact
    was completely overpowered by a shift toward tacit collusion in the
    post-Compact period. In the studies of New York markets (Frigon et al.,
    1999, and Romain et al., 2002) that looked at the effect of the
    price-gouging law, researchers found that after the law took effect, price
    asymmetry was not present or was present at much lower levels.

    Appendix VII

                        Effects of Recent Federal Dairy Program
                         Changes and Alternative Policy Options

    Recent changes in federal dairy programs vary in their effects on policy
    considerations that we identified, such as farm income, milk production,
    federal costs, price volatility, economic efficiency, and consumer
    prices.1 A number of options have been proposed or discussed to further
    modify existing programs or introduce alternative policies, all of which
    could affect these policy considerations in different ways. The likely
    effects of these program modifications or alternative policies are
    influenced by prevailing conditions, such as high and low dairy prices,
    and may be different in the short and long terms.

    Recent Changes in Federal Dairy Programs Vary in Their Effects on Policy
    Considerations We Identified

    Since 2000, three major changes have taken place in federal dairy
    programs. First, in response to legislative requirements, the U.S.
    Department of Agriculture (USDA) reformed the federal milk marketing order
    (FMMO) system. Second, USDA adjusted the relative purchase prices of
    butter and nonfat dry milk under the price support program. Finally,
    Congress authorized and USDA established the Milk Income Loss Contract
    (MILC) program. These changes had mixed effects on the policy
    considerations included in our analysis. Reforms to the FMMO system had
    mixed effects on farm income, depending on the geographic location of the
    farmer, while the overall effects on all farmers are less clear. Because
    of their effect on fluid milk prices, changes in the price support program
    tended to reduce the level of support for farm income and reduce federal
    costs, but increase economic efficiency. Introduction of the MILC program
    typically had the opposite effects, while maintaining production.

    Federal Milk Marketing Order Reforms

    In carrying out requirements in the Federal Agriculture Improvement and
    Reform Act of 1996 to reform FMMOs, USDA conducted extensive research and
    held public hearings. Agricultural Marketing Service (AMS) officials
    indicated that as a result of this process USDA implemented reforms to the
    FMMO system in January 2000 that were consistent with the findings of its
    research. Its major reforms included

    1There can be different kinds of economic efficiency effects. Government
    policies may be more or less economically efficient depending upon the
    extent to which they prevent the transmission of market price signals and
    lead to a misallocation of resources into excess production. Policies may
    also be more or less efficient depending upon the extent to which they
    affect the distribution of production between farmers with high or low
    costs of production.

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    o  consolidating the number of marketing orders from more than 30 to 11;2

    o 	changing the classified pricing structure by creating a new class for
    manufactured milk products, Class IV, with the "higher of" the advanced3
    Class III or Class IV skim milk values as the basis-or mover4-for Class I
    prices; reducing the lag between the Class I and Class III and IV price
    announcements; and establishing a fixed differential of $0.70 per
    hundredweight to be added to the advanced Class IV skim milk value in
    determining the price to be paid for milk used in Class II products;

    o  introducing a new product formula pricing system; and

    o  relaxing restrictions on pooling milk in some marketing orders.5

    2The Federal Agriculture Improvement and Reform Act of 1996 required USDA
    to consolidate the number of marketing orders. Two marketing orders were
    discontinued between 1996 and 1999, so 31 orders were actually
    consolidated.

    3Basing Class I and II prices on the advanced Class III and IV skim milk
    values ensures that minimum prices of raw milk used in these products will
    be known in the month preceding the month to which they apply.

    4The mover links the dairy price support program to the FMMO system, so
    that changes in one program are reflected in the other. The dairy price
    support program maintains the prices of manufactured products throughout
    the United States regardless of whether a particular area is part of the
    FMMO system. By using these manufactured product prices as the basis for
    other milk class prices, the FMMO system aims to ensure that its minimum
    prices will reflect the level of support provided by the price support
    program.

    5In addition to these major reforms, USDA made other changes, including
    modifying the system of differentials used to determine Class I prices.
    USDA increased Class I differentials in 21 markets, ranging from $0.01 per
    hundredweight in New England (Boston) and New York/New Jersey (New York
    City), to $0.50 per hundredweight in the Upper Midwest (Minneapolis).
    Class I differentials in 4 markets were not changed. Class I differentials
    in 8 markets were reduced, ranging from $0.04 per hundredweight in the
    Ohio Valley (Columbus) to $0.18 in Eastern Colorado (Denver). In general,
    these changes retained the existing Class I pricing surface in markets
    east of the Rocky Mountains. USDA originally proposed an alternative set
    of differentials, but the Consolidated Appropriations Act, 2000 required
    adoption of the differentials noted above.

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    USDA implemented additional reforms to the classified pricing system in
    April 2003 that modified aspects of the Class III and IV pricing
    formulas.6

    Federal Order Consolidation	In response to the legislative requirement,
    USDA reduced the number of FMMOs to 11, which were typically combinations
    of pre-existing orders.7 For example, the Central Order is a combination
    of several smaller marketing orders in the central part of the United
    States. According to USDA's final regulatory impact analysis for the order
    reforms, these consolidation decisions were based on structural factors
    such as milk movement, the number of market participants, and natural
    boundaries.8

    USDA officials and other dairy experts told us that nationally, the prices
    received by farmers for their raw milk did not change much as a result of
    FMMO consolidation. One academic study reported that order consolidation
    probably increased the economic efficiency of the FMMO system by more
    closely aligning areas where raw milk is marketed by dairy farmers with
    areas where it is distributed as fluid milk products. Additionally, the
    study noted that consolidation helped to reduce the amount of market
    distortion created by order regulation.

    However, the magnitude of the effects on farm income varied among orders
    because, in some cases, the consolidation combined orders that had
    substantially different raw milk utilization rates for the manufactured
    and fluid products in the various milk classes, particularly Class I
    (fluid milk). As a result, some dairy farmers experienced higher or lower
    utilization of their raw milk in Class I products than they had in the
    past. Changes in utilization rates are significant because farmers receive
    a blend price for their milk based on the utilization rates for the
    different milk classes within an order; thus, farmers in orders where
    Class I utilization rates increased generally saw their incomes increase,
    while farmers in orders where the Class I utilization rates decreased
    generally had their incomes reduced.

    6The Consolidated Appropriations Act, 2000 also required USDA to
    reconsider the Class III and IV pricing formulas that were implemented
    with the 2000 reforms. USDA conducted a hearing on the issue in May 2000.
    The reforms implemented in April 2003 stemmed from the changes USDA
    proposed as a result of this hearing.

    7In some cases the new orders included areas previously unregulated by the
    FMMO system.

    8U.S. Department of Agriculture, Federal Milk Marketing Order Reform: New
    England et al., Final Decision, Regulatory Impact Analysis, Agricultural
    Marketing Service, Dairy Programs, March 1999.

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    The changes in utilization rates associated with FMMO consolidation were
    particularly evident in the Western Order. When USDA created the Western
    Order, it combined the Great Basin and the Southwestern Idaho-Eastern
    Oregon Orders. These orders had substantially different Class I
    utilization rates. In 1999, the Great Basin Order had a Class I
    utilization rate of 51 percent, while the Southwestern Idaho-Eastern
    Oregon Order had a Class I utilization rate of 8 percent. When these
    orders were combined into the Western Order, the resulting Class I
    utilization rate was estimated to be about 23 percent, lowering income for
    the farmers in the Great Basin Order who had previously received much
    higher blend prices. To address this and other concerns, Dairy Farmers of
    America, a cooperative representing a number of farmers in the Western
    Order, requested that USDA hold a hearing to reform the order's
    provisions. USDA made some changes based on the concerns presented at the
    hearing; however, the revised order provisions did not receive the
    two-thirds approval necessary to be adopted, and USDA terminated the order
    as of April 1, 2004, stating that the continuation of the existing Western
    Order would not be in conformance with declared policy.9

    Elimination of the Western Order has raised concerns that increased
    amounts of Idaho milk, which had been pooled on the Western Order, would
    be pooled on the Upper Midwest Order. Based on past experience, this would
    reduce the Class I utilization rate and lower the blend price for Upper
    Midwest farmers. However, dairy experts had mixed views on whether
    additional orders would be terminated. In particular, one industry expert
    noted that it remains unclear whether farmers in the former Western Order
    will be able to receive higher prices for their milk without their order.
    Some of these farmers, particularly those that had been in the Great Basin
    Order, could benefit by not having to pool their Class I milk. On the
    other hand, one source stated that these farmers could face increased
    shipping requirements to pool their milk on a remaining order.
    Additionally, some experts stated that without FMMOs farmers and
    cooperatives do not

    9After USDA holds a hearing, it may decide to issue proposed amended
    regulations for notice and comment. At the end of the administrative
    process, USDA issues a final rule, and those covered by the order must
    vote to adopt the order in its amended form. The amended order must be
    approved by at least two-thirds of the affected dairy farmers, or dairy
    farmers who produce at least two-thirds of the milk produced in that
    order. In addition, the amended order will not become effective until the
    handlers of at least 50 percent of the milk covered by the order have
    signed a marketing agreement, or until a hearing has been held and the
    Secretary of Agriculture makes particular determinations that the
    marketing order should nonetheless be effective.

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    have the market power to obtain high prices for their raw milk in
    negotiations with processors.

    Classified Pricing Structure FMMO reform changed the structure of the
    classified pricing system by

    Changes

    creating a new Class IV, representing the minimum price that processors
    pay for raw milk used in butter, nonfat dry milk, and other dry milk
    powders.10 Additionally, the new mover of Class I prices became the
    "higher of" the advanced Class III or Class IV skim milk values. Use of
    the "higher of" mover was intended to enable fluid milk processors to
    attract milk from butter, nonfat dry milk, and cheese processors by
    helping to ensure that the blend price would exceed both the Class III and
    IV prices. USDA also reduced the lag period-the time between when the
    Class I price is announced and the Class III and IV prices are
    announced-from approximately 8 weeks, to 6 weeks. Class I prices are
    announced in the month preceding the month to which they apply, based on
    the "higher of" the advanced Class III and IV skim milk values.11 However,
    the Class III and IV prices that determine the price of raw milk used to
    manufacture these products are not announced until the Friday on or before
    the 5th of the month following the month to which they apply.
    Consequently, there is a 6week lag between these two price announcements.
    Further, USDA established that the minimum prices paid for skim milk used
    in Class II products would be the advanced Class IV skim milk and
    butterfat values, plus a fixed differential of $0.70 per hundredweight.12
    In its March 1999 regulatory impact analysis, USDA concluded that these
    changes would help to eliminate situations in which prices of milk used in
    manufactured products rise above the price of milk used in fluid milk
    products and thus make the Class I mover more representative of current
    market conditions.

    10Over time, the number of classes has varied by order, from at least two,
    to seven or eight. Class I use has consistently been defined as the milk
    going into fluid milk products. Class II includes soft manufactured
    products such as ice cream and yogurt, Class III includes cheese, and
    Class IV includes butter and nonfat dry milk.

    11Advanced values are derived from formulas that use weighted average
    prices of butter, cheese, dry whey, and nonfat dry milk reported by the
    National Agricultural Statistics Service on the Friday on or before the
    23rd of the month preceding the month to which the prices apply. There is
    a 1-week lag in reporting by the Service, so the advanced values are
    usually based on the commodity prices for the first two weeks of the
    preceding month.

    12Class II butterfat is priced by adding $0.007 per pound to the monthly
    Class III/IV butterfat price. Consequently, Class II skim milk is advanced
    priced but Class II butterfat is not.

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    Academic researchers and an industry official indicated that the creation
    of Class IV continued disincentives that were present prior to the 2000
    reforms to shift milk to its highest-valued use. Previously, separate
    minimum prices were established for raw milk used in manufactured products
    that are now included in the new Class IV. Raw milk used in the production
    of butter was priced under Class III, which also included cheese and other
    products. However, nonfat dry milk was priced in a separate Class III-A.
    According to AMS officials, the development of Class III-A was necessary
    because manufacturers were unable to sell nonfat dry milk at market prices
    that would allow them to pay the Class III minimum price for their raw
    milk. They noted that for a classified pricing system to work, the minimum
    class prices must be below the market clearing prices for products
    produced with that raw milk (taking into account the cost of other inputs
    to these products). However, one study found that the creation of Class IV
    institutionalized separate pricing for nonfat dry milk.13 By separating
    out the price for nonfat dry milk (the lowest-valued use), the classified
    pricing system might maintain production of nonfat dry milk even when
    market signals indicate that raw milk should be used to manufacture cheese
    as the higher-valued use.

    Additionally, a 2004 study sponsored by the American Farm Bureau
    Foundation for Agriculture (American Farm Bureau) reported that creating a
    separate Class IV and then basing Class I prices on the "higher of" the
    advanced Class III or IV skim milk values, has reduced the influence that
    cheese prices traditionally had over other prices in the FMMO system, and
    thus partially isolated Class I prices from market forces.14 For example,
    in every month from January 2000 through July 2001, advanced Class IV skim
    milk values were higher than advanced Class III skim milk values. However,
    as of 2000, utilization of milk for Class IV products across all federal
    orders averaged 7 to 8 percent, while Class III products accounted for
    about 45 percent of milk utilization.15 According to the American Farm
    Bureau study, without the advanced Class III skim milk value as the mover

    13Bob Cropp and Ed Jesse, "The Butter-Powder Tilt," Marketing and Policy
    Briefing Paper Number 72, Department of Agricultural and Applied
    Economics, University of Wisconsin- Madison, June 2001.

    14David Anderson, Bob Cropp, Wilson Gray, Joe Outlaw, and Mark Stephenson,
    "Milk Pricing Policy Options and Consequences," an Analysis for the
    American Farm Bureau Foundation for Agriculture, February 2004.

    15According to a USDA official, Class IV use averages about 12 percent
    across all federal orders and is much higher than 12 percent in several
    orders.

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    for Class I prices, when the Class IV price exceeds the Class III price,
    similar price signals are no longer received by farmers in relatively high
    Class I utilization markets and in high Class III utilization markets.
    This difference occurs because during these times farmers in high Class I
    utilization markets are receiving their price signals based on the high
    Class IV prices, which are heavily influenced by the price support program
    during periods of excess production and low manufacturing product prices.
    Therefore, farmers in high Class I utilization areas receive higher farm
    prices than would otherwise be the case, and higher prices encourage
    increased production by these farmers. However, the higher production
    levels of these farmers puts downward pressure on the Class III prices and
    causes regional inequities in farm income.

    Furthermore, because Class I prices are now more closely related to the
    level at which the price support program sustains nonfat dry milk prices,
    proposed changes to the price support program have become much more
    controversial. Prior to the 2000 FMMO reforms, Class I prices were based
    on the Class III price, which, as noted previously, did not include nonfat
    dry milk. However, with the 2000 reforms, the level of support provided by
    the price support program for nonfat dry milk prices directly influences
    the Class IV price. During periods when the Class IV price is higher than
    the Class III price, changing the price support program in such a way that
    Class IV prices are reduced will cause the Class I price to similarly
    fall, thus having a greater impact on the overall blend prices received by
    farmers.

    Introduction of a New Product As part of FMMO reform, USDA introduced a
    new product formula pricing

    Formula Pricing System	system that established minimum prices for raw milk
    based on milk component values for butterfat, protein, nonfat solids, and
    other solids. These values are derived from the wholesale prices of
    cheddar cheese, butter, nonfat dry milk, and dry whey as announced in
    weekly surveys conducted by the National Agricultural Statistics
    Service.16 The minimum prices also factor in allowances based on estimates
    of manufacturing costs for these products and product yield factors
    representing the amount of a particular product that can be manufactured
    from specified quantities of the underlying components. Seven of the 11
    orders (primarily the Northern orders) adopted the new product formula
    pricing system, while the other

    16Whey is the water and solid components of milk that remain after the
    curd is removed in cheese-making. It contains about 93.5 percent water and
    6.5 percent lactose, protein, minerals, enzymes, water-soluble vitamins,
    and traces of fat.

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    four orders (primarily the Southern orders) use a pricing system that
    bases milk prices on skim milk and butterfat.17

    During much of the time that classified pricing has been part of the
    federal order system, the formulas used to set minimum prices paid to
    farmers were based on competitive pay prices. The pay price was known as
    the Minnesota-Wisconsin price, and it represented the results of state
    surveys of competitive market prices for Grade B milk paid by
    manufacturing plants in Minnesota and Wisconsin. However, with a reduction
    in Grade B milk production, this milk was very thinly traded and the
    pricing series became less representative of the value of Grade A milk
    used for manufacturing.18

    According to a number of dairy experts, the change from a competitive pay
    to a product formula pricing system that incorporates fixed manufacturing
    allowances has enhanced the effects of price volatility on dairy
    farmers.19 As noted in appendix V, there are a variety of input costs to
    the manufacturing process, including labor, energy, and capital. With
    product formula pricing, manufacturing allowances, which are supposed to
    compensate for these other input costs, and product yield factors are
    fixed. To the extent that changes in these other input prices are
    reflected in the prices at which manufacturers sell their products, fixed
    manufacturing allowances will allow changes in other input costs to more
    readily affect the minimum raw milk prices paid to farmers.

    17Raw milk quality is also factored into the pricing formulas in all but
    two orders.

    18As a result of declining Grade B milk production, the
    Minnesota-Wisconsin price was replaced by the basic formula price in the
    mid-1990s. The basic formula price established the minimum prices for raw
    milk by updating the Minnesota-Wisconsin competitive pay price series with
    wholesale product price information on the value of cheese, butter, and
    nonfat dry milk. This system was in place from June 1995 through December
    1999.

    19This is not to say that the FMMO classified pricing system is causing
    additional volatility in milk prices. As noted by AMS officials, an
    historical review of milk prices shows that price volatility existed well
    before the product pricing formulas were introduced in 2000. AMS officials
    indicated that there are several causes of price volatility including: the
    level of support provided by the price support program, exposure to
    international trade, and the responses to changes in prices by farmers and
    consumers. However, according to a number of dairy experts, the fixed
    manufacturing allowances in the new product formula pricing system have
    more readily transmitted price volatility within the classified pricing
    system and thus enhanced its effects.

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    Dairy experts also indicated that the fixed manufacturing allowances in
    the product pricing formulas reduced economic efficiency by reflecting raw
    milk supply and demand conditions less clearly. Moreover, one large
    processor stated that the manufacturing allowances in the pricing formulas
    are too low and do not adequately represent the costs of manufacturing.20
    Regardless of the market price of cheese, butter, or nonfat dry milk, the
    fixed manufacturing allowances provide manufacturing plants with the same
    net returns from 100 pounds of raw milk. Therefore, when market conditions
    reflect higher prices for one of these products, relative to the others,
    manufacturers have less of an incentive to shift production to the
    higher-valued use because any gains they might have realized from selling
    a higher-priced product would be negated by the fact that their
    manufacturing allowance is fixed.21 The 2004 American Farm Bureau study
    noted that prior to the introduction of the new product formula pricing
    system, manufacturers that produced butter, cheese, and nonfat dry milk
    competed more aggressively for raw milk. The study found that if the
    prices of nonfat dry milk and butter, for example, were depressed relative
    to cheese prices, cheese manufacturers would attract milk away from the
    manufacturers of these other products. Therefore, raw milk would more
    readily move to its highest-valued use.22

    Further, some dairy experts noted that the additional volatility
    introduced by the fixed manufacturing allowances in the new product
    formula pricing system, when combined with the disincentives these
    allowances and separate manufacturing classes create against shifting milk
    to its highestvalued use, might have contributed to negative producer
    price

    20AMS officials indicated that USDA has been working with researchers at
    Cornell University to collect manufacturing plant costs, which these
    officials believe will assist them in establishing the proper level of
    manufacturing allowances should the dairy industry propose a change.

    21Other factors that could affect the incentive to shift milk to a
    higher-valued use include transportation costs and changes in processing
    technology. In addition, when cooperatives own the capacity to produce
    butter, cheese, and nonfat dry milk, they may still have an incentive to
    shift milk to the higher-valued use despite fixed manufacturing
    allowances, in order to provide greater returns to their members.

    22One source also noted that by not providing incentives to shift milk to
    its highest-valued use, the product formula pricing system could
    discourage the development of innovative dairy products.

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    differentials23 and de-pooling.24 Negative producer price differentials
    can occur because with the 6-week lag between the Class I and Class III
    and IV price announcements, rapid increases in the manufactured product
    prices from which Class III and IV prices are derived can raise these
    prices above the Class I price.25 USDA officials noted that the change to
    a "higher of" mover for Class I prices and the reduction of the lag period
    were designed to reduce the frequency of negative producer price
    differentials. However, to the extent that the fixed manufacturing
    allowances have introduced additional volatility into the pricing system,
    and the disincentives created by these fixed manufacturing allowances and
    separate manufacturing classes have prevented raw milk supplies from
    moving to their highestvalued use, negative producer price differentials
    and de-pooling have continued.

    During times when the producer price differential is negative, some
    processors of manufactured products who normally receive a draw from their
    federal order pool to pay farmers instead have to pay into the pool. In
    such circumstances, many of these processors choose to de-pool because by
    doing so, they gain a competitive advantage over those that remain and
    have to pay into the pool.26 One study on FMMO pooling issues reported
    that since June 2003, negative producer price differentials and de-pooling
    have become more common.27 The study noted that the producer price
    differential in the Upper Midwest Order was negative from July through
    November 2003 and reached a record low level in April 2004 of $4.11 per

    23The producer price differential represents the difference between the
    value of milk established by the classified pricing system as paid by
    processors and the weighted average value of milk as paid to farmers for
    milk components (butterfat, protein, and other solids). The producer price
    differential is calculated by multiplying the volume of each class of milk
    used in the order by its announced price to obtain a total classified
    value of milk for that order, and then subtracting the total value of milk
    paid to farmers for butterfat, protein, and other solids on a per
    hundredweight basis.

    24This presumes that minimum prices are the effective prices.

    25Rapidly rising Class IV prices are a remote possibility at this time due
    to the surplus of nonfat dry milk.

    26Processors may remain in a federal order pool despite negative producer
    price differentials for a variety of reasons. For example, Class I
    processors are not allowed to depool under FMMO regulations.

    27Bob Cropp and Ed Jesse, "Federal Milk Marketing Order Pooling,
    Depooling, and Distant Pooling: Issues and Impacts," Marketing and Policy
    Briefing Paper Number 85, Department of Agricultural and Applied
    Economics, University of Wisconsin-Madison, June 2004.

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    hundredweight. For example, cheese prices in the Upper Midwest Order began
    to rise sharply in mid-July 2003; thus the advanced Class III skim milk
    value that served as the Class I mover for August did not include these
    higher prices. However, the Class III price that was announced in August
    did include these higher prices, creating a negative producer price
    differential. As a result, a number of cheese processors de-pooled in
    August, reducing the order's Class III utilization, which is usually
    around 75 to 77 percent, to just 8.4 percent. Nationally, negative
    producer price differentials were reported for this month in the 7 FMMOs
    that used the new product formula pricing system. For the 11 FMMOs
    existing at the time, de-pooling resulted in 33 percent less milk being
    pooled compared to the same month in the prior year.

    De-pooling reduces the overall value of the federal order pool and
    increases differences in the abilities of processors to pay for raw milk.
    As a result, dairy farmers do not receive uniform prices. Farmers
    marketing milk with processors who are able to de-pool may receive higher
    prices and thus an increase in farm income, while farmers marketing milk
    with processors who do not de-pool may receive lower prices. According to
    the June 2004 University of Wisconsin study, this situation represents an
    inequity and is contrary to one of the stated purposes of the FMMO system:
    orderly marketing conditions.

    Relaxed Pooling Provisions	In some cases, the 2000 FMMO reforms resulted
    in more relaxed pooling provisions. AMS officials noted that when USDA
    consolidated the marketing orders, the pre-existing orders each had its
    own pooling provisions, such as minimum amounts of raw milk required to be
    shipped to processing plants participating in that order's pool to qualify
    for its blend price or restrictions on rejoining the pool after
    de-pooling.28 AMS officials indicated that where two orders were combined
    that had different pooling provisions, USDA applied the more liberal
    pooling standard to the combined order to prevent farmers from being shut
    out of the consolidated order pool.

    28Because these provisions are established on an order-by-order basis, the
    minimum shipping percentages vary by order. In federal milk orders with
    relatively high Class I use, such as the Southeast and Florida Orders, the
    shipping percentage requirements are higher than in orders with relatively
    low Class I use, such as the Upper Midwest Order. Shipping requirements
    may also vary by months of the year. In orders where milk production tends
    to vary a lot seasonally, the minimum shipping requirements may be greater
    during low production months.

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    According to AMS reports from 2000 and 2001, relaxed pooling provisions
    contributed to the pooling of more distant raw milk to receive other
    orders' attractive blend prices. Pooling was easier because most of the
    milk that was pooled from outside individual federal orders was not
    required to actually be shipped to those orders. Therefore, distant
    farmers were able to share in an order's blend price without incurring
    substantial transportation costs for shipping milk. For example, under the
    Upper Midwest Order's pooling provisions, an Idaho dairy cooperative could
    choose to ship raw milk from some of its Idaho farmers to a processing
    plant that participates in the Upper Midwest Order. All subsequent milk
    deliveries of those designated farmers would be priced under the Upper
    Midwest Order, even if only one day's production was actually shipped to
    the participating processing plant. Other deliveries from these farmers
    would stay in Idaho for processing. In 2001, USDA reported that raw milk
    from California was pooled on the Central, Upper Midwest, and Western
    Orders. However, most of this 4 billion pounds of milk was actually
    processed in California plants that are not regulated by the federal order
    system. Also during 2001, large volumes of raw milk from Minnesota and
    Wisconsin were pooled on the Central, Mideast, and Northeast Orders, while
    increasing amounts of raw milk from Idaho were pooled on the Upper Midwest
    Order.

    According to some dairy experts, the increased pooling of milk across
    orders has had mixed effects on farm income. Those farmers who were able
    to have their milk pooled on distant orders that had higher blend prices
    received an increase in their farm income after accounting for the costs
    of transporting their milk. However, farmers in the receiving orders had
    their farm income reduced as milk from outside the orders reduced the
    value of the pool that could be shared among farmers in the receiving
    orders. The combination of more milk pooled on these orders and constant
    sales of higher-valued Class I and II products decreased the weighted
    average value of the orders' pools by decreasing the utilization rates of
    the higher-valued classes.

    In response to this loss in value, participants in some orders petitioned
    USDA to hold hearings to address relaxed pooling provisions. For example,
    through the hearing process, the Central and Mideast Orders tightened
    their pooling provisions to control the large quantities of milk from
    Minnesota and Wisconsin that were being pooled on these two orders. With
    these tightened provisions, those seeking to pool milk on the Central or
    Mideast Orders have to ship more milk per year or meet other requirements
    to become eligible to share in the receiving orders' blend prices. A
    number

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    of dairy experts indicated that these changes have significantly reduced
    the incentive for distant pooling on these orders.

    2003 Classified Pricing Reforms	USDA made additional reforms to the
    classified pricing system that went into effect in April 2003, modifying
    aspects of the Class III and IV pricing formulas. The principal changes in
    2003 were increasing the manufacturing allowance in the formula that
    established a price for the other solids component of milk used in Class
    III products; eliminating the lower bound of zero on the Class III other
    solids component price;29 reducing the product yield for the nonfat solids
    components of milk used in Class IV products; and altering the Class III
    protein formula to prevent Class III prices from being lowered by rising
    butter prices. The 2003 changes were partly the result of a court-ordered
    injunction against the implementation of other changes that USDA had
    proposed based on the 2000 requirement that USDA reconsider the Class III
    and IV pricing formulas.

    An analysis by researchers at the University of Wisconsin before
    implementation of the changes indicated that the differences from many of
    these changes would not be dramatic.30 However, the researchers estimated
    that the changes would increase Class III prices by as much as $0.57 per
    hundredweight. More specifically, the study found that the 2003 changes
    would eliminate the negative effect that rising butter prices were having
    on the Class III price. Under the prior protein price formula, a $0.10 per
    pound increase in the butter price would lower the Class III price by
    $0.04 per hundredweight. The researchers found that the revised formula
    instead yields about a $0.04 per hundredweight increase in the Class III
    price for a $0.10 per pound increase in the butter price. The study also
    reported that the new protein price formula would make it somewhat less

    29The Class III other solids component price (per pound) is calculated by
    taking the difference between the dry whey price reported by the National
    Agricultural Statistics Service and a manufacturing allowance of $0.159,
    multiplied times a product yield factor of 1.03. The lower bound of zero,
    or "snubber," was designed to prevent the price of other solids components
    from being negative should the market price for dry whey fall below the
    manufacturing allowance. Removing this lower bound created the possibility
    that the other solids component price could actually lower the Class III
    price during periods of low market prices for dry whey, which in fact,
    occurred from April to June of 2003. However, because other solids
    comprise a small percentage of the overall component value of Class III
    milk, the effect of this change was minor.

    30Bob Cropp, Brian Gould, and Ed Jesse, "Federal Milk Marketing Order
    Reform: November 2002 Final Decision on Class III/IV Formulas," Marketing
    and Policy Briefing Paper Number 79, Department of Agricultural and
    Applied Economics, University of Wisconsin-Madison, November 2002.

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    likely that the advanced Class IV skim milk value rather than the advanced
    Class III skim milk value would consistently serve as the mover for Class
    I prices.31 Increased Class III prices would most likely benefit farmers
    in areas where cheese is an important commodity and where processors do
    not typically pay premiums in excess of federal order minimum prices.

    Dairy Price Support Program Adjustments

    Since 2000, USDA twice adjusted-or tilted-the purchase prices of butter
    and nonfat dry milk as part of its efforts to administer the dairy price
    support program. The first tilt occurred in May 2001, when USDA reduced
    the nonfat dry milk purchase price by approximately $0.10 per pound (to
    $0.90 per pound) and increased the butter purchase price by about $0.20
    per pound (to approximately $0.85 per pound). USDA adjusted the tilt again
    in November 2002 by reducing the nonfat dry milk purchase price another
    $0.10 per pound (to $0.80 per pound) and increasing the butter purchase
    price approximately $0.20 per pound (to $1.05 per pound). USDA took these
    actions because the Commodity Credit Corporation (CCC) was accumulating
    large stocks of nonfat dry milk, leading to high purchase and storage
    costs for USDA, as well as significant market distortions.

    As a result of the 2000 FMMO reforms, the federal order class prices and
    the level of support provided by the price support program for nonfat dry
    milk were tied more closely. Many dairy experts noted that, subsequently,
    tilts became more politically controversial because they can have a
    greater negative effect on the FMMO class prices. Lowering the purchase
    price of nonfat dry milk while raising the purchase price of butter
    decreases the overall Class IV price when market prices for nonfat dry
    milk are at the level of the purchase price and market prices for butter
    are above the level of the purchase price. When the advanced Class IV skim
    milk value is serving as the mover for the Class I price, this reduction
    in Class IV prices also reduces Class I prices. Further, because the
    advanced Class IV skim milk value serves as the basis for Class II prices,
    Class II prices are similarly reduced. This scenario occurred during both
    the May 2001 and November 2002 tilts. A representative of one dairy
    cooperative stated that these impacts were particularly pronounced in
    areas with high Class I utilization rates, such as the Northeast and
    Southeast.

    31However, the study noted that Class III prices would have been the
    driver in only one additional month between January 2001 and November
    2002.

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    According to a report published by the International Trade Commission in
    May 2004, estimates of the actual impacts of these tilts on farm prices
    varied.32 The study presented a USDA estimate that the November 2002 tilt
    reduced fiscal year 2003 average milk prices from $12.10 to $11.90 per
    hundredweight. While USDA reported that this decrease lowered the amount
    of raw milk produced and thus was partially offset by an increase in
    butter prices from reduced production, it still led to a loss in net farm
    income of $192 million.33 Alternatively, the study reported that the
    National Milk Producers Federation estimated that the two tilts ultimately
    lowered farm prices by $0.19 per hundredweight in 2001, $0.48 per
    hundredweight in 2002, and $0.76 per hundredweight in 2003. With these
    price reductions, the organization projected that farm income would fall
    by $156 million in 2001, $816 million in 2002, and about $1.3 billion in
    2003. Another study cited by the International Trade Commission's report
    estimated that the 2002 tilt could have decreased average milk prices by
    $0.16 per hundredweight, reducing production by 814 million pounds and
    farm income by $371 million. However, that study also found that these
    impacts varied substantially, depending upon the assumption of high or low
    prices and the effects of other government programs.

    While the tilts reduced farm income and raw milk production, a number of
    dairy experts indicated that USDA's tilts have increased economic
    efficiency and reduced federal costs associated with the dairy price
    support program. Additionally, some experts noted that by maintaining
    nonfat dry milk prices at artificially high levels, the price support
    program was inducing surplus production of nonfat dry milk. In some cases,
    nonfat dry milk was produced specifically for sale to the government at
    the CCC purchase price. From the beginning of October 2000 through the end
    of May 2001, the CCC purchased approximately 330 million pounds of nonfat
    dry milk (more than 40 percent of national production), and government
    purchase costs exceeded $340 million. Furthermore, in 2002, the CCC stocks
    of nonfat dry milk were equivalent to two-thirds of domestic production
    and exceeded annual domestic consumption by more than 30

    32U.S. International Trade Commission, Conditions of Competition for Milk
    Protein Products in the U.S. Market, Publication 3692 (Washington, D.C.:
    May 2004). The U.S. International Trade Commission is an independent
    federal agency. Its purpose is to assist in the administration of trade
    laws and to protect U.S. industry, as well as to provide advice and
    research on trade issues.

    33The USDA estimate also factored in the benefits provided by the
    introduction of the Milk Income Loss Contract program.

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    percent. By reducing the purchase price of nonfat dry milk, USDA reduced
    the incentive to produce surplus nonfat dry milk. The International Trade
    Commission study reported that while production of nonfat dry milk
    continued to rise between 2001 and 2002, after the second tilt production
    declined by about 5 percent between 2002 and 2003. The tilts also helped
    to reduce federal costs associated with purchasing and storing nonfat dry
    milk.

    Some sources also indicated that the tilts affected the balance of trade
    in dairy products between the United States and its trade partners. The
    International Trade Commission study reported that during the majority of
    the period from January 1998 to November 2002, U.S. prices for nonfat dry
    milk exceeded international market prices by more than $500 per metric
    ton. Consequently, domestic manufacturers had an incentive to import
    alternative dairy protein products such as milk protein concentrates. By
    lowering the purchase price of nonfat dry milk through the tilts, USDA
    decreased this incentive because domestic manufacturers could obtain
    nonfat dry milk more cheaply.

    Introduction of the Milk Income Loss Contract (MILC) Program

    With the introduction of the MILC program in 2002, dairy farmers began
    receiving payments on milk production up to 2.4 million pounds annually
    when the Class I price in Boston dropped below $16.94 per hundredweight.
    MILC payments are equal to 45 percent of the difference between $16.94 and
    the lower Boston Class I price. From the program's inception, MILC
    payments were made every month from the retroactive start date of December
    2001 through August 2003 because there was an extended period of depressed
    farm prices, which reached a 25-year low in early 2003. Prices temporarily
    recovered from September through December 2003, so no MILC payments were
    made in those months; however, payments resumed during January and
    continued through April 2004. During the spring of 2004, farm milk prices
    reached record highs and remained strong through the fall of 2004, so no
    MILC payments were required for the remainder of fiscal year 2004.

    As a result of depressed farm milk prices during 2002 and 2003, federal
    costs associated with MILC payments exceeded original estimates. Based on
    market conditions in March 2002, the Congressional Budget Office estimated
    total federal costs of the MILC program at $963 million over the life of
    the program (i.e., about 4 years). However, 1 year later, the
    Congressional Budget Office revised its total cost estimate for the MILC
    program to $4.2 billion. USDA distributed approximately $1.8 billion in

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    MILC payments to dairy farmers in fiscal year 2003.34 Thus, the cost of
    MILC through fiscal year 2003 alone exceeded the previously estimated
    total costs for the entire 4-year period through 2005 by about $800
    million. The Congressional Budget Office's March 2004 estimate for total
    MILC program costs was $3.8 billion, somewhat lower than the 2003 estimate
    because of higher farm milk prices in 2004.35

    Many dairy experts indicated that by providing income support during
    lowprice periods, the MILC program has helped keep some farmers,
    particularly smaller farmers, in business.36 For example, some academic
    experts noted that some farmers received MILC checks of about $20,000 to
    $25,000, and others said that despite low prices, fewer farmers exited the
    market in 2003 than in previous years. USDA officials indicated that these
    payments delayed the supply response to low prices and maintained
    depressed milk prices over a longer period of time. By providing direct
    payments when prices were low, MILC obscured market signals that would
    normally cause farmers to decrease production, and continued high levels
    of production retained downward pressure on milk prices. To the extent
    that these lower farm prices were passed on through the retail level,
    consumers may have experienced lower prices for dairy products.

    Despite this effect, dairy experts stated that smaller farmers receive a
    net benefit from MILC because those with about 100 to 130 cows can have
    all of their production covered under the 2.4 million-pound annual cap. In
    contrast, larger farmers do not receive net benefits from MILC because the
    negative farm income effects of reduced milk prices are greater than the
    payments they receive under the production cap. A couple of dairy experts
    noted that the break-even size, at which MILC payment benefits just offset
    the negative farm income effects of prolonged low prices, is about 400
    cows. Because the effects of MILC vary by producer size, they also vary

    34This included retroactive payments made for production in fiscal year
    2002.

    35The $3.8 billion estimate comprises actual outlays of about $1.8 billion
    in fiscal year 2003 and forecasts of $935 million in fiscal year 2004,
    $963 million in fiscal year 2005, and $77 million in fiscal year 2006.
    Some MILC payments will extend into fiscal year 2006 for milk produced in
    fiscal year 2005. USDA noted that its estimate of MILC payments for fiscal
    year 2004 is $300 million, much less than the Congressional Budget
    Office's estimate.

    36While MILC has helped some farmers to weather low price periods, USDA
    officials stated that the program has not necessarily changed the
    long-term strategy of farmers to exit production. When making a decision
    to remain in production, farmers have to weigh a number of considerations
    in addition to MILC payments, particularly costs and market conditions.

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    regionally. States with many small dairy farmers, such as Pennsylvania,
    Wisconsin, and Vermont, have received greater proportional benefits from
    MILC. However, the MILC program has disadvantaged states with larger
    producers, such as western states.

    Effects of Alternative Dairy Policies Differ under Various Scenarios

    A number of options have been proposed or discussed to further modify
    existing programs and policies or introduce alternative ones, all of which
    could affect the policy considerations we identified in different ways.
    These options span a range of existing and potential federal dairy
    programs and policies, including FMMOs, price supports, MILC, target price
    deficiency payments, the proposed National Dairy Equity Act, trade
    restrictions and export incentives, risk management, and supply
    management. Current international trade agreements and ongoing
    negotiations can have implications for certain of these policy options,
    such as price supports, export incentives, and trade restrictions.37 The
    purpose of this analysis is not to take a position for or against any of
    these options or to analyze them in terms of their overall economic
    impacts, but simply to discuss their likely effects on the policy
    considerations we identified. The likely effects of these alternatives
    sometimes differ under various scenarios, such as high or low prices, and
    may be different in the short and long terms.

    In general, options that increase farm income over the short term also
    tend to increase milk production and thus the potential for oversupply and

    37In the 1994 Uruguay Round Agreement on Agriculture of the General
    Agreement on Tariffs and Trade, World Trade Organization (WTO) members,
    including the United States, made commitments to improve market access,
    reduce export subsidies, and limit and in some cases reduce
    trade-distorting domestic agricultural supports. For example, Uruguay
    Round commitments on domestic agricultural subsidies include annual
    aggregate ceiling levels for certain types of direct government support,
    which include price supports for dairy products. The United States and
    other WTO members are currently engaged in another round of multilateral
    trade negotiations that began in Doha, Qatar, in 2001, where they
    reaffirmed their commitment to agricultural trade liberalization, and in
    July 2004, WTO members agreed on a framework to guide negotiations on
    agriculture. The U.S. negotiating position has emphasized harmonizing,
    reducing, and further disciplining agricultural subsidies. In the interim,
    existing Uruguay Round commitments will continue at established levels.
    WTO members found to be in violation of these commitments can be subject
    to retaliatory measures, such as punitive tariffs on exports.

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    lower average farm prices over the long term.38 These options also tend to
    be costly for the federal government during periods of low prices. In some
    cases options that increase the economic efficiency of federal dairy
    programs also increase price volatility because they allow clearer
    transmission of market price signals.39 Further, to the extent that price
    changes at the wholesale level are passed through to the retail level, a
    number of options would likely have mixed effects on consumer prices
    depending upon the particular product under consideration (e.g., butter,
    cheese, or fluid milk). The potential impacts of the options also vary
    according to the size of the producer and region of the country. In
    general, options that affect farm income without respect to farm size or
    cost of production could further shift production towards larger, western
    farms. Production shifts toward larger farms could increase the potential
    for oversupply in the market, because such farms have a greater capacity
    to increase production in response to policy incentives. In some cases,
    options that reduce support for farm income could have disproportionately
    negative impacts on smaller farmers, who often have higher costs of
    production.40

    Change the Federal Milk Marketing Order Program

    Dairy experts have cited a number of concerns with FMMOs, including that
    with the increasing ability to transport milk products longer distances,
    the differences in Class I differentials provide incentives for
    overproduction in some regions; that recent revisions to the classified
    pricing system enhanced the effects of price volatility on dairy farmers;
    that changes in pooling restrictions increased the flow of milk between
    different regions of the country, which disrupts the market; that
    consolidation of the FMMOs combined some areas of the country that were
    not part of the same natural "milksheds;" and that it takes too long to
    change the federal order system

    38Small surpluses or shortages in the short term may be the result of
    market corrections and may not represent inefficiencies in the allocation
    of production resources.

    39The level of price volatility could influence both the supply and demand
    for milk products. For example, manufacturers of products using dairy
    ingredients might purchase larger quantities of these ingredients if
    prices are more stable.

    40To evaluate the impacts of various options on policy considerations such
    as farm income, milk production, and federal costs, we compared these
    options against a baseline scenario of the policies in place as of August
    2004: FMMO regulations, a MILC program that is scheduled to expire at the
    end of fiscal year 2005, a price support program at $9.90 per
    hundredweight, a Dairy Export Incentive Program (DEIP), trade
    restrictions, and milk regulatory policies in some states.

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    through the USDA hearing process. A number of options have been proposed
    or discussed to modify the FMMO program, including revising the classified
    pricing system, making administrative changes such as tightening pooling
    provisions, or eliminating FMMOs altogether. Figure 36 shows the effects
    of various options to change the FMMO program over the short and long
    terms.

    Figure 36: Potential Effects of Options to Change FMMOs on Various Policy
                                     Considerations

    Increase Decrease Mixed impacts ? No/unclear impacts

    Source: GAO analysis based on interviews with dairy experts and reviews of
    relevant studies.

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    Note: The figure does not indicate the degree of increase or decrease for
    each policy consideration as it relates to a policy option. In addition,
    as discussed in this appendix, limitations affecting some policy options
    could affect the degree of an option's potential impact on a policy
    consideration.

    Revise Classified Pricing	Academic, industry, and government sources cited
    a variety of concerns with recent reforms in the classified pricing
    system, including that these changes enhance the effects of price
    volatility on farmers; lessen the transmission of market price signals;
    reduce incentives for market participants to shift milk to its
    highest-valued use; discourage innovation; and contribute to de-pooling
    during periods of price volatility. A number of options exist to revise
    the classified pricing system, including basing the class pricing formulas
    on competitive pay prices instead of product prices, combining Class III
    and IV into a single manufacturing class of milk, and changing the Class I
    mover from being the "higher of" the advanced Class III or IV skim milk
    values to a weighted average of these prices.

    Use Competitive Pay Prices Instead of Product Formula Pricing

    One option to reform the classified pricing system would be to return to a
    system of competitive pay prices as the basis for the minimum prices that
    manufacturers pay for raw milk. As indicated by AMS officials, the change
    to a product formula pricing system has enhanced the effects of price
    volatility on the prices that farmers receive for their raw milk. The AMS
    officials, as well as academic and industry sources, noted that
    competitive pay prices for raw milk would be a better basis for the
    minimum class prices. However, the officials noted that the lack of good
    data is a major challenge to developing a competitive pay system that is
    more broadly based than the old Minnesota-Wisconsin price series.41

    In an earlier report, we compared the concept of a competitive pay system
    to a product formula pricing system, among other options.42 We found that
    while a product formula pricing system would be superior to other
    mechanisms in reflecting national prices of manufactured dairy products,

    41With declining Grade B milk production, any alternative competitive pay
    system would have to include Grade A milk. Consequently, a key challenge
    in developing a good competitive pay price series is obtaining data that
    are not already influenced by the FMMO classified pricing system. AMS
    officials noted that during FMMO reform and consolidation, AMS
    commissioned a blue-ribbon committee of academics to evaluate various milk
    pricing methods. Although the committee's preference was for a competitive
    pay price series, they were unable to develop or suggest a way of creating
    such a series.

    42GAO, Milk Pricing: New Method for Setting Farm Milk Prices Needs to Be
    Developed, GAO/RCED-90-8 (Washington, D.C.: Nov. 3, 1989).

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    the accuracy of price levels under the system would depend on a number of
    factors, including whether the manufacturing allowances-deductions made
    for the costs of manufacturing different dairy products-are accurate.
    Setting accurate manufacturing allowances is difficult because individual
    plants could have different cost structures. As noted earlier, we heard
    from several academic, industry, and government sources that the fixed
    manufacturing allowances in the current product pricing formulas have
    negative impacts on the economic efficiency of the classified pricing
    system by reflecting supply and demand conditions less clearly.43

    On the other hand, we found that while a competitive pay system for Grade
    A milk was similar to a product formula pricing system in that it would
    generally reflect national prices of manufactured dairy products, it would
    more readily reflect national supply and demand conditions for raw milk
    used for manufacturing. Also, it would more accurately reflect competitive
    pressures from the fluid milk market because Grade A milk is used to meet
    shortages in areas of the country with high Class I utilization.
    Furthermore, we reported that a competitive pay system would be better
    than a product formula pricing system at self-adjusting automatically
    because the competitive system would be based on actual reported prices.
    Therefore, a competitive pay system could improve the economic efficiency
    of the classified pricing system by providing clearer market price
    signals.

    AMS officials stated that if it were possible to obtain adequate data,
    returning to a competitive pay system would introduce greater stability
    into farm milk prices because basing the price formulas on competitive pay
    prices allows manufacturers' margins to be set outside the federal order
    system. According to the officials, when manufacturing costs increase,
    manufacturers tend to decrease their margins; they then increase their
    margins when costs go back down. The AMS officials also stated that to the
    extent the effects of price volatility are reduced by eliminating fixed
    manufacturing allowances, raw milk production would increase, holding
    average milk prices constant.

    43Another alternative modification to the classified pricing system would
    be to raise the manufacturing allowances; however, the accuracy of any
    adjustment that does not change according to market forces would
    eventually decrease. Further, the problem of trying to develop an
    allowance that adequately represents costs of production in an environment
    of widely varying cost structures would still exist.

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    Combine Class III and IV

    A second option discussed by some of the academic and industry sources we
    contacted would be to combine Class III and IV into a single manufacturing
    class.44 While an objective of USDA's FMMO reforms, including developing
    separate manufacturing classes on which to base fluid milk prices, was to
    avoid situations in which the price of milk used in manufactured products
    rises above the price of milk used in fluid products; as we noted earlier,
    this change has muted market price signals and has reduced incentives to
    move milk to its highest-valued use. However, an academic source indicated
    that a potential challenge in combining Class III and IV is identifying an
    appropriate formula that considers the products in an expanded class. In
    addition, AMS officials cited this issue noting that one barrier would be
    finding a way to price the lowest-valued use, nonfat dry milk, so that
    manufacturers of this product would be able to afford to pay the minimum
    class price to farmers.

    A number of industry and academic sources said that combining Class III
    and IV into a single manufacturing class would allow milk to move to its
    highest-valued use. With a separate Class IV, processors of butter and
    nonfat dry milk can pay less for their raw milk supplies under certain
    market conditions, which can stimulate additional allocation of raw milk
    into Class IV products. Under such conditions, by reducing these market
    distortions, combining Class III and IV might help to increase the
    economic efficiency of the classified pricing system.45 It could also help
    to limit the decline in market prices caused by overproduction of nonfat
    dry milk and thus reduce the federal costs of CCC purchases of this
    commodity. Over the long term, limiting overproduction incentives will
    help all farmers by maintaining higher average farm prices. However, these
    benefits could be limited by constraints on the extent to which raw milk
    is free to move between different uses. Some USDA officials have indicated
    that manufacturing capacity for different products varies by region and
    that manufacturing plants are often specialized. In addition, fixed supply
    agreements within the dairy industry may not allow manufacturers

    44Class I includes fluid milk products, Class II includes soft
    manufactured products such as ice cream and yogurt, Class III includes
    cheese, and Class IV includes butter and nonfat dry milk.

    45As discussed later in this appendix, this distortion could also be
    reduced by changing the price support program.

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    significant freedom to shift raw milk between uses in response to price
    signals in the short term.

    Combining Class III and IV could have mixed impacts by region on farm
    income because with a combined manufactured product price, high prices for
    one particular use of milk would offset low prices for other uses in
    creating a weighted average price. Utilization rates for the different
    manufacturing uses vary among orders, and farmers whose average blend
    prices might be higher based on utilization of their raw milk for a
    highervalued use under a separate class price scenario could experience
    lower average returns under a combined class price scenario if the price
    of their higher-valued use were weighted down by the inclusion of the
    lower-valued use. Conversely, farmers whose average blend prices might be
    lower based on utilization of their raw milk for a lower-valued use under
    a separate class price scenario could experience higher average returns
    under a combined class price scenario. For example, in regions with higher
    Class IV utilization, the loss of a separate Class IV could result in
    lower average farm income during periods when Class IV prices would
    otherwise be higher than Class III prices. In regions with higher Class
    III utilization, however, the loss of a separate Class IV could result in
    higher average farm income during periods when Class III prices would
    otherwise be lower than Class IV prices.

    Change Class I Mover

    If Class III and IV prices are kept separate, a third option to modify
    classified pricing would be to use a weighted average of Class III and IV
    prices as the mover for Class I prices. This option would tie fluid milk
    prices more closely to market related manufacturing prices, particularly
    when prices of Class III products are depressed relative to Class IV
    products. One academic study that modeled the price volatility impacts of
    using a weighted average of Class III and IV prices to set Class I prices
    reported that using the weighted average, rather than the "higher of" the
    advanced Class III or IV skim milk values, slightly decreases the
    volatility of farm prices, largely through a more substantial decrease in
    the volatility of the Class I price.46 As a result of this reduced
    volatility, the study estimated that the average Class I price would
    decline by roughly $0.40 per

    46Charles F. Nicholson and Thomas Fiddaman, "Dairy Policy and Price
    Volatility." Paper presented at the 10th Annual Workshop for Dairy
    Economists and Policy Analysts, Memphis, Tennessee, April 2003.

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    hundredweight, causing an average farm price decline of $0.09 per
    hundredweight. The study found that there would be essentially no change
    in the volatility of other class prices or product prices.

    These effects are likely to vary by region. As the Class I price is
    expected to decrease more than the average farm price, the effects of this
    option could be more significant in regions with high Class I utilization
    of raw milk. The reduction in farm prices could cause a marginal downward
    supply adjustment over the long term, the effects of which would also be
    stronger in high Class I utilization areas. The effects of reduced prices
    on farm income could be partially offset by increased MILC payments as
    long that program remains in existence. Increased MILC payments would
    raise federal costs, particularly during periods of low prices. However,
    this option could also help USDA minimize the costs of the price support
    program by making it less controversial to adjust the tilt between butter
    and nonfat dry milk purchase prices because these prices would no longer
    exert as great an influence on the Class I price.

    AMS officials cautioned, however, that this option could increase the
    likelihood that manufactured product prices would rise above blend prices,
    leading to more frequent negative producer price differentials and
    depooling.47 The officials noted that the purpose of implementing the
    "higher of" the advanced Class III or IV skim milk values provision was to
    reduce the frequency of negative producer price differentials. They said
    that implementing an option that reduces blend prices makes it more likely
    that the value of one of the manufacturing class prices will rise above
    the blend price. The officials also indicated that consumers may benefit
    from lower prices to the extent that the Class I and blend price decreases
    are transmitted through the milk marketing chain. One AMS official
    questioned the extent to which this option would reduce the volatility of
    Class I prices, noting that since January 2000 the volatility of Class I
    prices would have been about the same under a weighted average mover.

    Change the Administration of Another set of options to modify FMMOs
    involves changing their

    FMMOs	administration. Pooling provisions could be tightened by increasing
    the amount of milk that must be shipped to an order to qualify for that
    order's blend price or by placing restrictions on de-pooling.
    Alternatively, federal

    47AMS officials noted that other alternatives, not discussed in this
    appendix, that could prevent negative producer price differentials include
    eliminating the advanced Class I price announcement and setting minimum
    prices for all classes in advance.

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    order reform could be reconsidered by splitting up some of the
    consolidated orders. Finally, USDA may be able to shorten the time between
    a hearing request and implementation of a final decision.

    Tighten Pooling Provisions with Increased Minimum Shipment Requirements

    Federal order reforms relaxed the pooling provisions of many orders, which
    negatively affected some farmers by diluting their Class I utilization
    rates and lowering their blend prices as increased amounts of distant milk
    were pooled on their orders. In response, participants in some orders
    called for hearings to tighten their pooling provisions, often by
    increasing the minimum amount of milk that must be delivered to processing
    plants participating in their pool to qualify for the blend price. With
    the end of the Western Order, the concern that some milk formerly pooled
    on that order could be pooled on the Upper Midwest Order led two groups of
    dairy cooperatives operating there to request a hearing to tighten the
    order's pooling provisions.48

    According to some AMS officials, restricting the pooling of raw milk
    through increased shipping requirements would not have a significant
    national impact. However, they said there could be mixed regional effects
    on farm income and production. Farmers in areas seeking to pool milk to
    other orders would generally see a negative impact on their farm incomes
    because they would incur greater transportation costs trying to share in
    the value of another order's pool and would, therefore, pool less milk in
    other orders. However, farmers in the receiving order could see an
    increase in their farm income because with less milk pooled from outside
    the order, their pool would retain more of its value and they would
    receive higher blend prices. In each case, there could be localized
    production effects depending upon whether farmers experience an increase
    or a decrease in their farm income. The AMS officials stated that
    tightening pooling provisions would have minimal effects on price
    volatility because the tighter provisions would not change overall supply
    and demand conditions. However, the officials also indicated that the
    economic efficiency of the FMMO system would increase to the extent that
    reducing the amount of milk pooled on distant orders would reduce the
    amount of money spent on transporting milk. Because impacts on national
    production levels are likely to be limited, impacts on federal costs would
    be minimal.

    48This hearing took place in August 2004.

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    Tighten Pooling Provisions with Restrictions on De-Pooling

    A second option for tightening federal order pooling provisions is to
    place additional restrictions on those who choose to de-pool. As noted
    earlier, price volatility leading to negative producer price differentials
    and depooling can negatively affect those who remain in a federal order
    pool because the overall value of the pool is reduced.49 Some orders
    restrict depooling by preventing milk handlers who choose to de-pool from
    re-pooling for a specific period of time.50 One such restriction recently
    proposed by cooperatives in the Upper Midwest Order would limit a
    processor's pooled milk in any month to a specified percentage of that
    processor's pooled milk in the previous month. Under that restriction, if
    a processor partially depooled in one month, it could only partially
    re-pool in the subsequent month. If it fully de-pooled, it would have to
    wait a month before it could re-pool.

    Restricting de-pooling would have mixed effects on farm income. Because
    de-pooling allows some processors to pay farmers higher prices, some
    farmers would be harmed if de-pooling were restricted. Conversely, those
    farmers who are harmed by de-pooling could benefit if more of the pool
    value were retained during periods of volatile prices. While nonuniform
    farm prices do not help to achieve orderly marketing, restricting
    de-pooling could make this problem worse if it encourages some processors
    to leave the order system permanently. In that case, the reserve supply of
    milk for fluid production would shrink, and orders would have to increase
    minimum shipping requirements for remaining pooled processors and dairy
    cooperatives. If restricted de-pooling actually caused fewer processors to
    be associated with the federal order system, volatility in fluid milk
    prices could increase because with less milk available in reserve to
    supply the Class I market, seasonal or episodic fluctuations in milk
    supply and demand could have greater price impacts. However, an AMS
    official indicated that in general processors benefit over the long term
    from being pooled, and so restrictions on de-pooling would not necessarily
    decrease the supply of milk available for fluid milk products. If the
    supply of milk

    49Changes in federal dairy policy that reduce price volatility, such as
    increasing the level of support provided by the price support program,
    would help to reduce instances of negative producer price differentials
    and de-pooling.

    50Handler is the federal order term for cooperatives, processors, or
    dealers of milk who commonly purchase raw milk and sell pasteurized milk
    and milk products. See 7 C.F.R. S:1000.9 for a more complete definition.

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    available for fluid milk products did not decrease, then the volatility of
    fluid milk prices would not increase. The effects of restricted de-pooling
    on other policy considerations, such as federal costs or consumer prices,
    are unclear.

    Split Up Consolidated Federal Orders

    A third option to revise the administration of FMMOs is to split up some
    of the consolidated orders where the combination of orders with different
    utilization rates of the different classes of milk has created problems.
    Many industry, academic, and government sources stated that federal order
    consolidation has had some significant regional effects, including the
    demise of the Western Order. One source stated that because of order
    consolidation, some orders have become so large that they include milk
    that would not normally be in the milkshed for particular marketing areas.
    This increases the potential that some farmers' blend prices will decrease
    with lower utilization rates of raw milk in Class I products. To address
    this problem, USDA is currently considering a proposal to split up the
    Southeast Order and create a "Mississippi Valley" Order.51

    Splitting up certain orders could have mixed effects on farm income. In
    cases in which experts have cited problems with federal order
    consolidation, the problems developed because two previously existing
    orders that had largely different Class I utilization rates were combined.
    With the additional milk pooled under the consolidated order, farmers that
    had been in the order with the higher Class I utilization rate saw a
    decrease in their blend price. However, farmers that had been in the order
    with the lower Class I utilization rate experienced an increase in their
    blend price. Therefore, splitting up the consolidated orders in these
    instances would affect farmers differently depending on the Class I
    utilization rates of the new orders. AMS officials indicated that
    splitting up orders would affect the distribution of farm income but would
    not affect overall production and therefore would have minimal impacts on
    federal costs. They also noted that splitting up orders could increase the
    movement of milk because having smaller orders makes farm prices more
    closely reflect local supply and demand conditions. Therefore, to the
    extent that smaller orders would increase the blend prices in some areas,
    this option could create incentives to transport more milk to those areas.

    51Also under consideration are alternative proposals that would merge the
    Southeast and Appalachian Orders, as well as add areas to the merged
    orders.

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    Accelerate USDA's Hearing Process

    Some experts suggested that USDA's federal order hearing system is too
    slow to effectively respond to problems and changing market conditions.
    The American Farm Bureau study reported that it can take 2 or more years
    from the time USDA receives a request for a hearing or direction from the
    Congress before USDA implements the rules of a final decision. The study
    noted that within this long time frame, either the industry may have
    struggled under faulty rules or, by the time final rules are effective,
    industry changes may have occurred rendering the final rule obsolete. For
    example, a couple of industry sources stated that the dairy industry is
    changing rapidly, with a number of new products coming onto the market.
    They indicated that USDA would have difficulty regulating these products
    because it takes too long to get a decision on the class under which they
    would be priced.

    USDA faces a number of challenges in shortening the time between receiving
    a hearing request and implementing the rules of a final decision, while
    still ensuring the promulgation of economically sound regulation.

    o 	The USDA hearing process is set forth by law.52 Before issuing or
    amending marketing orders, the Secretary of Agriculture must conduct a
    formal on-the-record rulemaking proceeding. USDA must notify the public
    and provide an opportunity for a public hearing and comments. Before an
    order regulation or amendment to a milk marketing order can become
    effective, it must meet certain requirements including that it be approved
    by at least two-thirds of the affected dairy farmers in the order, or
    dairy farmers who produce at least two-thirds of the milk produced in that
    order.

    o 	If individual parties do not agree with the USDA decision, they can
    seek review of that decision in federal court. For example, after the 2000
    FMMO reforms, several industry groups received an injunction that
    prevented USDA from implementing new pricing rules that would have
    established separate Class III and IV butterfat prices. In response, USDA
    issued a revised decision, but these new rules were not implemented until
    April 2003.

    527 U.S.C. S:608(c).

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    o 	Making informed decisions about changes in complex federal dairy policy
    can be time-consuming. For example, such decisions require thorough
    analysis and possibly modeling. In addition, AMS officials indicated that
    hearing participants are not always ready on time, and keeping a stricter
    schedule could result in an incomplete hearing record. Furthermore, they
    stated that it is difficult to compile the hearing transcripts quickly and
    accurately. However, they noted that USDA has recently begun evaluating
    its transcript contracts using an approach that considers timeliness and
    accuracy.

    o 	The politicized nature of dairy policy makes it difficult to agree on
    proposed changes to FMMOs. Because FMMO provisions affect cooperatives and
    processors in different ways, these entities may not always agree on a
    proposed change. Moreover, given regional differences in production and
    utilization, farmers in different regions may not agree on changes in
    federal dairy policy.

    AMS officials said that delays are also caused by the lack of available
    judges and attorneys who deal with milk pricing issues. The officials said
    that increasing the speed of the decision-making process is likely to
    increase federal costs because more of these resources would be required.
    USDA officials indicated that they do not believe the hearing process
    inhibits the ability of FMMOs to respond to changing market conditions or
    the marketing of new dairy products.

    Eliminate FMMOs or Classified Rather than trying to reform the FMMO
    system, some dairy experts have

    Pricing	considered the possibility of eliminating FMMOs and thus the
    classified pricing system.53 To the extent that manufactured product
    prices stay above the level of the price support program, market forces
    would set prices for all uses of milk. In a 1988 report on FMMOs,54 we
    found that the production and marketing conditions used to justify
    federally guaranteed milk prices under marketing orders no longer existed
    because most milk

    53This would be such a major change in federal dairy policy that its
    impacts are uncertain. This uncertainty is reflected in the differences in
    the estimated impacts of various empirical studies that considered this
    alternative. AMS officials indicated that without the FMMO system of
    minimum prices set for milk based on wholesale dairy product prices, it is
    unclear whether or not a structure would evolve that similarly transmits
    wholesale price signals to farmers.

    54GAO, Milk Marketing Orders: Options for Change, GAO/RCED-88-9
    (Washington, D.C.: Mar. 21, 1988).

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    being produced is now Grade A and is eligible to serve the fluid milk
    market during periods of supply and demand imbalance.55 Also, our study
    noted that improvements in refrigeration and the transportation system
    have made it less expensive to rely on milk supplies from other markets.
    Further, we reported that the differences in Class I differentials-which
    were, in part, intended to represent the costs of producing and
    transporting milk from areas with a surplus to areas with a
    deficit-actually bear little relationship to differences in either
    production or transportation costs for milk, thereby providing incentives
    for overproduction in certain regions. A 2002 University of Wisconsin
    study argued that this overproduction has hurt farmers in areas with low
    Class I utilization through an overall reduction in the price of milk used
    for manufacturing purposes.56

    Academic and USDA studies have generally concluded that without the
    classified prices established by FMMOs, fluid milk processors would likely
    pay lower average prices to farmers, which would decrease farm income in
    high fluid milk utilization areas, especially in the short term. Estimates
    of impacts on farm prices varied among studies. For example, the American
    Farm Bureau study estimated that average farm prices for raw milk would
    fall by about $0.50 per hundredweight during the first couple of years
    following federal order elimination.57 Another study, published by USDA,
    estimated that eliminating the federal order system would decrease Class I
    prices an average of $0.95 per hundredweight over the period from 2002

    55Dairy farmers sell two grades of milk. Grade A may be used for fluid
    consumption or in manufactured products. Grade B may be used only for
    manufactured products. Farmers producing Grade A milk must adhere to
    higher sanitation requirements than for Grade B milk. The FMMO system was
    developed to ensure an adequate supply of Grade A milk to meet the fluid
    milk needs of consumers.

    56Tom Cox, Bob Cropp, Randy Fortenbery, and Ed Jesse, "Rethinking
    Dairyland Chapter 3: The Effects of Federal Dairy Programs on the
    Competitiveness of Dairying in Wisconsin," Marketing and Policy Briefing
    Paper Number 78C, Department of Agricultural and Applied Economics,
    University of Wisconsin-Madison, September 2002.

    57This analysis assumed that a fluid milk premium of $0.50 per
    hundredweight would remain nationally and that California would make no
    changes to its state milk marketing system. If the assumption of a fluid
    milk premium is dropped, the study showed a farm price decrease of closer
    to $0.70 per hundredweight during the first couple of years following FMMO
    elimination.

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    through 2007.58 Further, the 2002 University of Wisconsin study estimated
    that farm prices would decrease around $0.05 to $0.10 per hundredweight.
    AMS officials indicated that farmers would likely reduce production to the
    extent they receive lower average farm prices.

    The effects of FMMO elimination could be different based on farm size.
    Some of the academic and industry sources we contacted noted that farmers
    are at a disadvantage in terms of market power within the dairy industry.
    Without the pooling of milk proceeds and the payment of uniform blend
    prices, larger farms would have increasing incentives to establish
    contracts directly with processors, and processors would increase their
    efforts to procure milk directly from larger farms closer to their own
    plants. Smaller and more distant farms could be more likely to be
    bypassed. Also, to the extent that dairy cooperatives are unable to cover
    the costs of balancing and other services they provide, processors may be
    able to deflect the costs of these operations back to farmers.

    Studies also indicated that the magnitude of these effects could vary by
    region. Without classified pricing, the prices of raw milk used in fluid
    milk products are likely to fall, while the prices of raw milk used in
    manufactured products are likely to rise. As a result, farmers in regions
    with higher utilization of raw milk for fluid purposes, such as the
    Northeast, would be worse off without classified pricing, while farmers in
    regions with high utilization of raw milk for manufacturing purposes, such
    as the Upper Midwest, could be better off without classified pricing. For
    example, the American Farm Bureau study reported that states with less
    than 20 percent fluid utilization of raw milk would have higher average
    farm prices with the elimination of federal orders, while those states
    with fluid utilization of raw milk in excess of 35 percent have higher
    farm prices with the federal order system in place.

    In the short term, to the extent that lower farm prices paid for raw milk
    used in fluid products are passed on to consumers, fluid milk consumption
    could marginally increase. The American Farm Bureau study estimated a

    58J. Michael Price, U.S. Department of Agriculture, Effects of U.S. Dairy
    Policies on Markets for Milk and Dairy Products, Market and Trade
    Economics Division, Economic Research Service, Technical Bulletin Number
    1910, May 2004. This analysis assumed a national fluid milk premium of
    $1.30 per hundredweight. According to the USDA study, this change is in
    the effective Class I price. Since Class I prices and prices for raw milk
    used for manufacturing purposes would move in opposite directions with
    elimination of the FMMO program, the change in average prices would be
    less than $0.95 per hundredweight.

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    2.5 percent increase in fluid milk demand, while the USDA study estimated
    a 2 percent increase. On the other hand, the University of Wisconsin study
    reported that the combination of less milk production and more fluid milk
    consumption would reduce the amount of raw milk available for manufactured
    products and increase manufactured product prices accordingly.59 To the
    extent that manufactured product prices increase, consumers may buy less
    of these products.

    Over the long term, increased prices for milk used in manufactured
    products could limit reductions in both farm income and production
    resulting from elimination of FMMOs and classified pricing. In fact, the
    American Farm Bureau study found that once a supply adjustment occurs,
    average milk prices would return to levels similar to those prior to FMMO
    elimination. However, to the extent that farmers in areas with high
    manufacturing use experience higher prices for their milk, the incentive
    to produce more milk could limit potential increases in manufacturing
    product prices. In the end, some decline in production could be expected
    over the long term because the overproduction incentive resulting from the
    classified pricing system would be removed.

    Eliminating FMMOs and classified pricing could also affect other federal
    dairy policies and, therefore, affect federal costs. If MILC payments were
    still based on the relationship between what fluid milk processors pay to
    acquire milk in Boston and a target price of $16.94, MILC payments would
    likely increase in size and frequency.60 At the same time, elimination of
    FMMOs could decrease federal costs related to the price support program
    because an increase in manufactured dairy product prices resulting from
    eliminating classified pricing could reduce the need for dairy commodity
    purchases by the CCC. However, it is unclear whether this effect would be
    large enough to offset additional payments under the MILC program.

    Some AMS officials also indicated that farmers could experience increased
    price volatility without FMMOs. In the absence of minimum class prices,
    greater price volatility could result, in part, from seasonal production
    variation or short-term factors, such as holidays or weather events.
    Further, while some sources questioned the extent to which a state

    59The May 2004 USDA study estimated that manufactured product prices would
    increase by 2 percent above the study's baseline estimate for the period
    2002 through 2007.

    60Should the MILC program not be extended beyond fiscal year 2005, this
    scenario would only exist in the short term.

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    regulatory system, such as California's, could continue to exist in the
    absence of the federal classified pricing system, others indicated that
    state regulation of milk could increase if the federal system were
    eliminated. A couple of industry sources that we contacted indicated that
    an increase in the number of states that regulate milk could make it more
    difficult for them to do business and would be a less efficient system of
    regulation.

    On the other hand, eliminating FMMOs and classified pricing could also
    provide greater incentives for product innovation. Without classified
    pricing, the market would price products more openly based on supply and
    demand and would increase the incentives for processors to develop
    alternative dairy products. To the extent that alternative products
    generate new demand for milk, this innovation could benefit farmers. For
    example, a recent study by researchers at Cornell University on the
    assignment of new products under a classified pricing system found
    significant difficulties.61 The study reported that the assignment of a
    new product to a higher-priced class increases farm income in the short
    run; however, the incentive to increase production provided by the use of
    raw milk in this higher-priced class and reduced demand for raw milk
    stemming from these higher prices can offset farm income gains in the long
    run. Furthermore, the study found that whether the new product detracts
    from sales of existing fluid milk products could also affect whether
    assignment to a higher-priced class increases net revenues to farmers. One
    USDA representative stated that a number of new products, such as
    low-carbohydrate milk beverages, have recently entered the market. In some
    cases, according to the representative, these products are intended to
    compete with Class I products but are formulated to avoid regulation as
    Class I products. Processors seek to avoid having these products regulated
    as Class I products because they would then be required to pay more for
    raw milk. Conversely, farmers want these products classified as Class I
    products so that their raw milk used in these items will be priced at the
    higher level.

    Some sources suggested that classified pricing could be eliminated without
    eliminating FMMOs altogether. In this case, FMMOs might continue to
    perform functions such as pooling revenue, auditing, verifying weights and
    milk components, and collecting statistical information. A few dairy
    experts indicated that these particular aspects of the FMMO system benefit

    61Andrew M. Novakovic, Charles F. Nicholson, and Mark W. Stephenson,
    "Assignment of New Products Under Classified Pricing: A Conceptual Dynamic
    Model of Class Assignment Outcomes," Cornell University, January 2004.

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    the dairy industry. While some of these functions might be picked up by
    the private sector if FMMOs were eliminated, they would come at a cost to
    dairy farmers.

    Retaining FMMOs while eliminating classified pricing would probably lessen
    the impacts of deregulating raw milk prices but would be unlikely to
    change the direction of most effects or who benefits. For example, while
    farm income would still fall without classified pricing, continuing to
    pool revenues through FMMOs, if possible, could help cooperatives
    negotiate over-order premiums because pooling could help cooperatives
    maintain their market power relative to processors. Thus, farm income
    might fall by less than it would if FMMOs were eliminated entirely.
    Moreover, by continuing to pool revenues, retaining FMMOs could limit
    increases in price volatility resulting from the elimination of classified
    pricing. In addition, the orders would continue to aim to ensure equitable
    treatment for producers and processors. Maintaining orders is not likely
    to change the fact that farmers in regions with high fluid milk
    utilization would experience greater reductions in farm income from
    eliminating classified pricing than farmers in regions with high
    manufacturing utilization. Production would still adjust downward in
    response to lower milk prices, and retail fluid milk prices would also
    decrease to the extent that lower prices for raw milk used in fluid milk
    products are passed on to the consumer. However, to the extent that
    cooperatives are able to maintain higher over-order premiums by retaining
    FMMOs, these production and consumer price effects might be less than they
    would be if orders were eliminated entirely. Effects on federal costs
    would still be mixed.

    Change the Dairy Price Support Program

    Dairy experts have raised several concerns about the price support program
    in recent years, including that the support level is too low to adequately
    support farmers; that the program provides incentives to overproduce milk
    and certain commodities purchased by the CCC; that USDA has not managed
    the program to maintain the established support price during periods of
    low market prices; that there are additional costs of selling dairy
    products to the government, which diminish the effectiveness of the
    support price; and that the program stifles innovation in the industry.
    Accordingly, a number of options have been discussed to modify the price
    support program, including raising the overall level of the support price
    (and thus the related commodity purchase prices), making administrative
    changes such as allowing the CCC to purchase a wider range of dairy

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    products, and eliminating the program altogether.62 Figure 37 shows the
    effects of various options to change the dairy price support program under
    low- and high-price scenarios over the short and long terms.

                     Raise support price
                     Raise support price               LP
                                                       HP  ?  ? ? ? ? ?
        Change administration of price support program
        Allow CCC to purchase wider range of products  LP  ?  ?   ?      ? ?  ?
                                                       HP       ?   ? ?
                 Tilt prices based on market           LP         ?           ?
                                                       HP  ?  ? ?   ? ?
         Reflect cost differences in selling to CCC    LP         ?           ?
                                                       HP  ?  ? ?   ? ?
               Eliminate price support program
               Eliminate price support program         LP
                                                       HP  ?  ?   ? ? ?

    Increase

    Decrease

    Mixed impacts ? No/unclear impacts LP: Low price scenario HP: High price
    scenario Source: GAO analysis based on interviews with dairy experts and
    reviews of relevant studies.

    62Changes in the dairy price support program could potentially conflict
    with the U.S.'s WTO commitments.

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    Note: The figure does not indicate the degree of increase or decrease for
    each policy consideration as it relates to a policy option. In addition,
    as discussed in this appendix, limitations affecting some policy options
    could affect the degree of an option's potential impact on a policy
    consideration.

    Raise the Level of the Support One option for modifying the dairy price
    support program is to raise the

    Price

    support price and the related commodity purchase prices. Many dairy
    experts indicated that the support price has fallen below the costs of
    production for most farmers and, therefore, is not providing an effective
    safety net during periods of low prices. Additionally, sources cited the
    reduction in the support price as a factor in increasingly volatile milk
    prices. For example, one academician we contacted stated that recent
    volatility in milk prices has resulted from the virtual elimination of the
    price support system as an effective price floor during periods of low
    milk prices. The price support program also worked to reduce price
    volatility during periods of high milk prices by releasing CCC stocks of
    purchased dairy commodities when market prices reached 110 percent of the
    support price.63 However, without purchasing sufficient quantities of
    manufactured dairy products, the program does not perform this balancing
    function.

    According to an economist with USDA's Farm Service Agency (FSA), raising
    the support price would increase farm income and, thus, raw milk
    production. The economist indicated that this option, by raising the floor
    for milk prices, would also reduce price volatility; however, increased
    purchases of dairy products would mean higher federal costs for the price
    support program. Similarly, the American Farm Bureau study found that
    while raising the support price would reduce price volatility, it could
    create a situation in which the CCC purchases surplus dairy products in
    most years. The FSA economist noted that these federal costs might be
    offset, at least in part, by a reduction in payments under the MILC
    program. The economist also said that consumer costs would likely be
    higher, on average, because increasing the support price would limit the
    fall of prices for manufactured products.

    The FSA economist also noted that increasing the support price would
    decrease the economic efficiency of federal dairy policies, particularly
    to the extent that a higher support price stimulates increased production.
    Under this scenario, increased production would represent an allocative
    inefficiency because resources would go into producing milk that is not

    63USDA indicated that currently, the price support program allows the CCC
    to release its commodity stocks if the market price for a particular
    commodity exceeds that commodity's purchase price.

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    needed to supply the market. Some sources cited examples of how high
    support prices under the program led to misallocation of resources into
    surplus milk production. For example, from 1977 to 1981, the support price
    for Grade A milk rose from $8.26 to $13.10 per hundredweight, and annual
    government expenditures on dairy price supports increased from a few
    hundred million dollars to over $2 billion.

    Change the Administration of the A number of options have been proposed or
    discussed to change the

                                 Price Support Program

    administration of the dairy price support program. These options include
    allowing the CCC to purchase a wider range of products, adjusting
    commodity purchase prices based on market conditions, and setting
    commodity purchase prices to reflect cost differences between selling to
    the CCC and selling in the marketplace.

    Allow the CCC to Purchase a Wider Range of Products

    One potential modification to the administration of the price support
    program would be to allow the CCC to purchase a wider range of products
    than butter, cheese, and nonfat dry milk. Some dairy experts and studies
    indicated that by focusing on the purchase of a few specific commodities,
    the price support program distorts the market by providing incentives to
    overproduce these commodities, while at the same time dampening incentives
    for innovation in the dairy industry. Manufacturers that develop
    innovative products incur more risk because they will not be able to sell
    their products to the government if they cannot obtain a market price high
    enough to cover their costs. One cooperative representative said that
    while nonfat dry milk contains protein and calcium-both valuable
    components that could be used in other products, such as protein
    bars-manufacturers continue to produce nonfat dry milk in excess
    quantities because that is what the government is buying. A number of
    other sources, including industry representatives, academicians, and a
    report by the International Trade Commission, noted that by purchasing
    nonfat dry milk, the price support program may be impeding development of
    a domestic milk protein concentrate industry by creating disincentives to
    shift raw milk supplies to innovative products.

    USDA officials cautioned that in order for a product to function well as a
    price support product, it must (1) represent a major use of milk; (2) have
    enough extra capacity to absorb a substantial amount of milk; (3) be
    storable for long periods; and (4) have an active, liquid wholesale
    market. Given these conditions, it is questionable whether some
    alternative products, such as protein bars, would be effective as price
    support

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    products. Furthermore, the officials argued that requiring the price
    support program to incur the risk of product innovation through this
    approach would alter the fundamental purpose of the program-supporting
    farm prices.

    If the CCC were to purchase a wider range of products, manufacturers would
    have greater incentives to use milk in alternative ways because the price
    support program would decrease the risks of trying to produce and market a
    greater number of products. Consumers could benefit as innovative products
    gained easier access to the market, causing consumer prices to fall.
    However, one FSA economist stated that this option would greatly increase
    the complexity of the price support program, potentially increase federal
    costs, and require new legislation. Moreover, he noted that this change
    would require close coordination between trade policies and the price
    support program. For example, without tariff-rate quotas on some products
    such as milk protein concentrates, the CCC could end up supporting
    additional imports if the purchase prices were set too high. The economist
    stated that this option could reduce production of nonfat dry milk but
    would be less likely to affect price volatility.

    Adjust Commodity Purchase Prices Based on Market Conditions

    A second potential modification would be to adjust-or tilt-commodity
    purchase prices based on market conditions. Some dairy experts, as well as
    academic studies, reported that because USDA does not tilt CCC purchase
    prices frequently enough to maintain a balance between butter and nonfat
    dry milk purchase prices that is based on current economic conditions, the
    price support program has distorted the market with unclear price signals
    and induced surplus production of certain goods (notably nonfat dry milk).
    Therefore, some experts indicated that tilting prices based on established
    criteria would be better. For example, one dairy processor recommended
    changing the balance of butter and nonfat dry milk purchase prices
    automatically if the ratio of CCC purchases of butter and nonfat dry milk
    falls outside a certain range. Similarly, the American Farm Bureau study
    suggested that to achieve the support program's objectives without
    distorting the market and increasing government costs, changes to
    commodity purchase prices should be based on market conditions so that
    they would not be subject to political pressure.

    Basing the tilt of commodity purchase prices on market conditions would
    increase the economic efficiency of the price support program by reducing
    the price distortions that lead to surplus production of goods that are
    not

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    required to supply the market. Falling market prices for a particular
    commodity suggest that the quantity supplied temporarily, at least,
    exceeds the quantity demanded. If the CCC continues to buy the commodity
    in significant amounts while the market price remains low, it distorts the
    market by providing an incentive to produce that commodity purely for the
    purpose of selling it to the government. This incentive not only delays a
    market response to the lower commodity price but also prevents that milk
    from going toward a higher-valued use. Moreover, a study by researchers at
    the University of Wisconsin found that tilts make it more likely that
    fluid milk prices will be driven by cheese prices because the price
    support program would no longer be supporting the manufacturing prices of
    Class IV products above market levels.64 This study reported that
    tightening the relationship between cheese prices and Class I prices
    improves market signals to dairy farmers because nationally, as noted
    earlier, a greater percentage of raw milk is used in Class III products
    (cheese) than in Class IV products (butter and nonfat dry milk).

    According to one FSA economist, lowering the purchase price of a
    particular commodity in the short term could reduce farm income; however,
    by encouraging production levels to respond more quickly to low price
    periods, tilting CCC purchase prices to reflect market conditions could
    maintain higher farm prices over the long term. The economist also
    indicated that this change could decrease federal costs for purchasing and
    storing dairy products. The consumer price effects of market-based tilts
    are less clear. For example, if market butter prices are high and market
    nonfat dry milk prices are low, a market-based response would indicate
    that USDA should raise the CCC butter price and lower the CCC nonfat dry
    milk price. However, further price adjustments could result in the CCC
    purchase price for butter exceeding the market price, which could trigger
    CCC purchases of butter and raise the market price even higher. In such
    cases, assuming that price changes at the wholesale level are passed on
    through the retail level, consumers would benefit from lower prices on
    some commodities, while potentially experiencing higher prices on others.
    The net effect to consumers would then depend on the relative price
    changes for these products and the quantities of each that were purchased.

    64Bob Cropp and Ed Jesse, "The Butter-Powder Tilt," Marketing and Policy
    Briefing Paper Number 72, Department of Agricultural and Applied
    Economics, University of Wisconsin- Madison, June 2004.

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    Reflect Cost Differences in Selling to the CCC

    A third option to change the administration of the price support program
    would be to set CCC purchase prices to reflect cost differences in selling
    to the CCC versus selling in the marketplace. In recent years market
    prices have fallen below the support price level in some months. For
    instance, between July 2002 and June 2003, the Class III milk price was
    below the $9.90 target level in 9 months. Although FSA officials indicated
    that USDA is required to set product purchase prices in such a way that
    only the average annual farm milk price, not the monthly price, is at the
    support price, the Farm Security and Rural Investment Act of 2002 (2002
    Farm Bill) simply states that the price of milk should be supported at
    $9.90 per hundredweight.65 Concerns over USDA's management of the price
    support program led to language in the Consolidated Appropriations Act,
    2004 requiring the Secretary of Agriculture to more diligently support the
    farm price of milk.66 Some dairy experts and studies indicated that one
    reason that market prices sometimes fall below the CCC support price is
    because there are additional costs of selling to the government that are
    not reflected in the commodity purchase prices. Therefore, the effective
    support price is actually below $9.90 because with higher costs of selling
    to the government, the market price has to fall below the CCC purchase
    price before processors are better off selling to the CCC than to the
    market. Some of these additional costs include packaging for longer-term
    storage, meeting stricter grading standards, and a time lag between when
    the product is made and when it is approved for sale to the federal
    government. An FSA economist estimated that these cost differences amount
    to about $0.04 to $0.05 per pound for cheese.67

    One option for reflecting the differences in cost between selling dairy
    products to the government and selling in the marketplace would be to
    raise the CCC purchase prices of these products to reflect the additional

    65USDA also averages the Class III and Class IV prices in determining if
    the $9.90 per hundredweight support price has been met.

    66The Consolidated Appropriations Act, 2004 required the Secretary of
    Agriculture to more diligently support the farm price of milk at the farm
    bill-mandated support price of $9.90 per hundredweight or lose funding for
    the administration of the program. Pub. L. No. 108-199 S:780.

    67The FSA economist also stated that there are minimal cost differences
    for Class IV products (butter and nonfat dry milk). An academic expert
    indicated that with the exception of April to June 2003, the Class IV
    price has not dropped below the support price.

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    costs of manufacturing product for sale to the government.68 This would
    help ensure that manufacturers receive a price for their products that
    allows them to return at least $9.90 per hundredweight (the support price)
    to farmers. One FSA economist indicated that this change could cause
    farmers to marginally increase production, leading to increased CCC
    purchases. Increased CCC purchases, in addition to higher purchase prices,
    would increase the federal costs of the price support program and, at the
    same time, higher manufactured product prices could translate into higher
    consumer prices. However, it is difficult to estimate the added costs of
    selling to the CCC because these costs are likely to vary widely among
    different manufacturers. Thus, raising the product purchase prices could
    provide unwarranted benefits to some manufacturers while still being
    insufficient to induce sales to the government by some others. In
    addition, according to one academic study, there is no clear evidence that
    higher selling costs are the major barrier in selling to the government.
    Some experts have put forth the possibility that fixed contracts between
    dairy product manufacturers and their buyers may prevent manufacturers
    from selling to the government.

    An alternative way to reflect the differences in cost between selling
    dairy products to the government and selling them in the market place
    would be to require the CCC to alter product specifications and payment
    terms to conform to those used on the Chicago Mercantile Exchange (the
    Exchange).69 An FSA economist stated that some changes to product
    specifications are already being considered and have been put out for
    comment to the dairy industry.70 The economist stated that while these
    proposed changes will help bring CCC product specifications into greater
    conformance with market standards, some differences would remain. Most
    notably, the CCC requires that products be storable for up to 3 years, a
    longer period than is generally required in the market. To the extent that
    this proposal reduces additional costs of selling manufactured dairy

    68The National Milk Producers Federation has asked the CCC to increase its
    purchase prices for cheese by $0.056 per pound.

    69The Chicago Mercantile Exchange is a central marketplace with
    established rules and regulations where buyers and sellers trade
    agreements known as futures contracts to, for example, buy or sell a
    commodity at a future date.

    70USDA put the proposed draft Announcement Dairy 6 out to the dairy
    industry for comment on April 5, 2004. The proposal includes a number of
    changes such as increasing lot quantities for manufactured dairy product
    purchases, as well as changing commodity, packaging, and marking
    specifications.

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    products to the CCC by more closely aligning product specifications with
    market standards, it could induce greater manufactured product sales to
    the CCC and would keep market prices higher. Therefore, aligning these
    specifications could increase farm income, provide a marginal production
    stimulus, and raise federal costs related to additional CCC purchases.
    Also, this option would not necessarily prevent the Exchange prices from
    falling below CCC purchase prices because if there are barriers other than
    costs (such as contractual obligations) that prevent manufacturers from
    selling to the government, these barriers would still exist.71

    Eliminate Dairy Price Supports	Another policy option would be to eliminate
    the price support program altogether and rely on alternatives available to
    farmers to assist them in managing risk of low and/or highly volatile
    prices for their milk. A number of dairy experts have argued that the
    support price has been set so low at $9.90 per hundredweight that it is
    not having significant impacts. Thus some academicians, as well as USDA,
    have studied the potential effects of eliminating the program.

    In the short term, eliminating the program would have a greater impact if
    market prices were at or below the level of the support price. The May
    2004 USDA study estimated that eliminating the price support program would
    cause wholesale prices of nonfat dry milk to decline by 15 to 20 percent
    over the first couple of years.72 For subsequent years, the study
    estimated that prices would recover somewhat to 10 percent below baseline
    levels. Further, the study estimated that the decline in nonfat dry milk
    prices would encourage diversion of this milk to alternative uses, leading
    to lower prices for these alternative uses. Generally, lower prices would
    reduce farm income and potentially lead to lower consumer prices. Farmers
    would likely respond to these lower prices by producing less milk.

    71Another proposed alternative would be to have the CCC place bids for
    commodity purchases on the Exchange as a better way to provide a price
    floor for manufactured products. However, because the CCC cannot entirely
    change its product standards to conform to industry requirements, an FSA
    economist indicated that this alternative is not feasible.

    72The study established a baseline assumption whereby CCC purchases of
    nonfat dry milk averaged approximately 17 percent of total U.S. production
    over the period 2002 through 2007. Purchases of other commodities were
    assumed to be minimal. However, this assumption was based on a nonfat dry
    milk purchase price of $1.01 per pound. The actual purchase price was
    lowered to $0.80 per pound and, thus, the study may overstate the effects
    of eliminating this program.

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    According to an FSA economist, eliminating the price support program would
    increase economic efficiency by allowing market price signals to be
    transmitted more clearly. The economist also stated that volatility in
    milk prices would increase. He noted that the combination of increased
    volatility and reduced farm income would force less efficient farmers to
    exit production. This exit would increase the economic efficiency of
    national resource allocation by enhancing current shifts in production to
    more efficient dairy farms. He added that in the absence of a price
    support program, new entrants to dairy production would likely be larger,
    more efficient operations. The FSA economist also said that eliminating
    the price support program would provide a cost savings for the federal
    government because the CCC would no longer have to purchase or store dairy
    commodities. These savings would be greater during periods when farm
    prices are low because when they are high, even if the program remains in
    effect, the government purchases fewer dairy products and incurs less
    cost. However, when farm milk prices are low, savings from eliminating the
    price support program could be partially offset by increased payments
    under the MILC program for as long as that program continues.

    Over the long term, reduced production would mitigate some of the impacts
    of eliminating the price support program, because reduced supplies lead to
    increased prices (assuming demand stays the same). However, the USDA study
    estimated that even with the positive price effects resulting from reduced
    production, farm income would still decrease by approximately $3.5 billion
    over the long term. Additionally, without CCC purchases of dairy
    commodities, USDA would be unable to balance high market prices by
    releasing these stocks, thereby contributing to increased price volatility
    over the long term.

    Extend the Milk Income Loss Contract Program

    The MILC program has benefited many smaller dairy farmers during the most
    recent period of low farm prices by providing them income support.
    However, by providing support to some farmers who otherwise might have
    exited the dairy industry, the program has slowed the normal downward
    supply response to lower farm prices and kept aggregate production higher
    during this period than it otherwise would have been. The MILC program is
    scheduled to expire at the end of fiscal year 2005. If it is not extended
    in some form, aggregate production is likely to respond more rapidly to
    future low-price periods because smaller farmers are likely to exit
    production at greater rates than they did during the most recent period of
    low farm prices. With this more rapid production response, farm prices
    would likely start rising again sooner than in the recent past when the
    MILC program

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    has been in place. However, although production levels in the short term
    would likely decrease more during low-price periods, in the long term
    aggregate production might not decrease substantially because higher
    average farm prices would stimulate additional production from the dairy
    farmers that stay in business. In addition, by allowing the MILC program
    to expire, the government can avoid the costs of the payments to farmers
    that the program provides.

    There are several options to maintain the benefits of the MILC program to
    some dairy farmers by extending it beyond 2005. One option is to extend
    MILC at its current target price and eligible production limit. A second
    option, a proposal introduced in the Senate in the 108th Congress, would
    extend MILC through fiscal year 2007 with an increase in the eligible
    production cap from 2.4 million pounds to 4.8 million pounds.73 A third
    option would extend MILC with a lower target price but a higher or no
    eligible production limit. Figure 38 shows the effects of various policy
    options to extend the MILC program under low-and high-price scenarios over
    the short and long terms.

    73The draft legislation is known as the Milk Income Loss Contract
    Extension, S. 2609 (2004). A bill that would extend authorization for the
    MILC program to 2007, but would not increase the eligible production cap,
    has been introduced in the House, H.R. 3990 (2004). Additionally, a
    separate bill, S. 2825 (2004), was introduced in the Senate. Section 426
    of this proposed legislation would extend authorization for the MILC
    program to 2007, increase the target price for the MILC program from
    $16.94 per hundredweight to $17.10, and eliminate a provision for
    determining whether producers are on separate dairy operations for
    purposes of determining payment eligibility. However, the bill would not
    change the MILC program's eligible production cap of 2.4 million pounds.

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    Figure 38: Potential Effects of Options to Extend MILC on Various Policy
    Considerations

    Increase

    Decrease

    Mixed impacts ? No/unclear impacts LP: Low price scenario HP: High price
    scenario Source: GAO analysis based on interviews with dairy experts and
    reviews of relevant studies.

    Note: The figure does not indicate the degree of increase or decrease for
    each policy consideration as it relates to a policy option. In addition,
    as discussed in this appendix, limitations affecting some policy options
    could affect the degree of an option's potential impact on a policy
    consideration.

    Extend MILC in Its Current Form	One analysis conducted by a researcher at
    the University of Missouri estimated that compared to a baseline estimate
    in which the MILC program expires in 2005, extending the MILC program
    through 2012 in its current form would result in greater milk production
    and lower farm prices.74

    74Scott Brown, "The Effect on the United States Dairy Industry of Removing
    Current Federal Regulations," Report Number 03-03, Food and Agricultural
    Policy Research Institute, University of Missouri, April 2003. Both the
    baseline estimate and the estimate for the MILC extension scenario are
    based on the assumption that the price support program, federal milk
    marketing orders, import restrictions, and the Dairy Export Incentive
    Program remain in effect.

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    Production was estimated to be 0.8 billion pounds higher in 2006 and to
    average 1.4 billion pounds per year higher from 2008 through 2012. The
    estimated price difference was also greater in the longer term than
    initially.75 Greater production and lower farm prices are consistent with
    the expectation that extending the MILC program would keep some smaller
    dairy farmers in the industry who otherwise might exit after 2005 if the
    MILC program is allowed to expire then. This study also estimated that due
    to the MILC payments, farm income would increase if the program were
    extended, despite lower farm prices. Initially, in 2006, the estimated
    increase in farm income was $0.43 per hundredweight, and even in 2012,
    when the estimated farm price was $0.50 per hundredweight below what it
    would be if MILC expires after 2005, the estimated increase in farm income
    was $0.08 per hundredweight. In addition, extending MILC in its current
    form would increase federal costs. This study estimated that, on average,
    annual government costs from 2006 through 2012 would be about $1.2 billion
    higher than if the MILC program expires after 2005.76

    According to an FSA economist, lower farm prices resulting from extending
    MILC in its current form could be passed on as lower retail prices for
    consumers. However, the economist indicated that the effects on price
    volatility are less clear. He added that the extension of the MILC program
    as currently designed would continue to favor smaller farmers over larger
    farmers, because a greater percentage of smaller farmers' production is
    eligible for MILC payments. Thus, in general, the MILC program would
    continue to benefit farmers in the eastern and upper midwestern states
    over farmers in the western states. Therefore, for a given level of milk
    production and to the extent that larger farmers in the West are more
    efficient than smaller farmers in the East, extension of the MILC program
    as currently designed would reduce the economic efficiency of the
    allocation of dairy production resources nationally compared to the
    allocation that would occur if MILC expires.

    75Although, as discussed above, one might expect that the price and
    production differences would become smaller over time, according to the
    author of this study the model assumes competitive markets and, therefore,
    does not fully capture long-term adjustments.

    76However, the baseline assumption for farm milk prices was lower than the
    prevailing prices of the past few months and, according to the study's
    author, with higher assumed farm prices, the effect on government costs of
    extending the MILC program would be less. The accuracy of the other
    estimates also depends on the accuracy of the market prices assumed in the
    baseline.

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    Extend MILC with a Higher Cap or with No Cap

    An alternative proposal has been introduced in the Senate in the 108th
    Congress that would extend the MILC program at its current target price
    but increase the cap on eligible production. The University of Missouri
    study examined the impacts of a similar option in which the cap on
    eligible production is removed in 2003 and MILC is extended through 2012
    without a cap.77 This study estimated that extending MILC without a cap
    would result in a larger increase in production and a larger decrease in
    farm prices than extending MILC with a cap. For example, production in
    2006 was estimated to be 2.3 billion pounds per year higher than if MILC
    is allowed to expire or 1.5 billion pounds greater than if MILC is
    continued in its current form. Greater production and lower farm prices
    are consistent with the expectation that making all milk eligible for MILC
    payments would provide farmers who might otherwise exit the industry after
    2005 (if MILC is allowed to expire) an even greater incentive not to leave
    than is provided by extending MILC in its current form. As with the
    previous option, this study estimated that due to MILC payments, farm
    income would increase if MILC were extended without a cap despite lower
    farm prices. Initially, in 2006, the estimated increase in farm income
    would be $0.63 per hundredweight, and even in 2012, when the farm price
    was estimated to be $1.05 per hundredweight below what it would be if MILC
    expires after 2005, the estimated increase would be $0.18 per
    hundredweight. Moreover, this study estimated that farm income would be
    higher with this option than with extending MILC in its current form
    because the additional payments to farmers due to eliminating the cap
    would more than offset the additional farm price reduction resulting from
    greater production. Extending MILC without a cap would increase federal
    costs even more than extending MILC in its current form. This study
    estimated that, on average, annual government costs from 2006 through 2012
    would be about $2.5 billion higher than if the MILC program expires after
    2005, more than $1 billion per year more than was estimated if MILC is
    extended in its current form.78

    77Because the University of Missouri study's baseline included a MILC
    program through 2005, its results can only be used as estimates of the
    impact of extending MILC with a higher cap compared to letting MILC expire
    for years beyond 2005. The study's results comparing this option with the
    study's baseline for 2003 through 2005 are estimates of the difference
    between having a MILC program with no cap and one with the current cap.

    78However, the baseline assumption for farm prices was lower than the
    prevailing prices of the past few months and, according to the study's
    author, with higher assumed farm milk prices, the effect on government
    costs of extending the MILC program would be less. The accuracy of the
    other estimates also depends on the accuracy of the market prices assumed
    in the baseline.

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    An FSA economist indicated that consumers would likely benefit from
    reduced retail prices under this scenario. Additionally, without the cap
    on eligible production levels, the equity concerns about MILC would be
    eliminated because the program would no longer favor smaller farmers over
    larger farmers. However, the FSA economist also indicated that in addition
    to the inefficiencies of increased surplus milk production, this
    alternative would reduce economic efficiency of milk production compared
    to allowing MILC to expire after 2005 to the extent that it provided
    incentives for production by smaller producers with higher costs of
    production.

    Extend with Lower Target Price A third alternative, considered in the
    American Farm Bureau study, is to

    and Higher or No Cap	extend MILC with a lower target price and a higher or
    no cap on eligible production. The study argued that the $16.94 per
    hundredweight target price is too high because MILC payments are triggered
    any time the Class I mover is less than $13.69 per hundredweight; at this
    target price, MILC payments could be expected in most months given that
    from 1990 through 1999 the Class I mover averaged $12.28 per hundredweight
    and was below the $13.69 threshold in 104 of 120 months. The analysis
    concluded that a target level for MILC payments of a Class I mover at
    $12.00 per hundredweight or lower would help to make the program more
    marketbased. Further, expanding the cap or eliminating it completely would
    help to make the program more equitable among farmers of different sizes.

    The effects of extending MILC in the absence of a cap on eligible
    production depend significantly on the level of the target price. If the
    target price were set too high, it would stimulate surplus production.
    During periods of low prices, the government would have to contribute
    additional MILC payments to counteract the effects of lower prices.
    Additional production would also decrease manufactured product prices,
    potentially increasing the costs of the dairy price support program
    because these prices would be more likely to reach the support level. At
    the same time, these lower prices could provide benefits for consumers.
    While a lower target price without a cap would treat farmers with
    different sized herds the same way, it might not provide enough payments
    to keep farmers in areas with high costs of production from exiting during
    periods of low prices. Therefore, this option could increase the economic
    efficiency of national dairy production, while also accelerating shifts in
    dairy production to the West.

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    Introduce a New Target Price Deficiency Payment Program

    Some dairy experts indicated that in lieu of maintaining both the dairy
    price support and MILC programs, operating one new target price deficiency
    payment program could be a better alternative.79 USDA and other dairy
    experts stated that having both the price support and MILC programs is
    problematic, particularly during periods of low prices. As noted in the
    American Farm Bureau study, the idea behind establishing a target price
    deficiency payment program is to allow markets to work to clear dairy
    products at market prices and then, when the market price is below the
    target price, to pay farmers based on the difference between these prices.
    But with both dairy programs in force, MILC maintains and encourages
    surplus milk production that must then be purchased by the CCC under the
    price support program. This market distortion adds to the costs of both
    programs.

    Under a new target price deficiency payment program, dairy farmers would
    receive a payment when the market price of Class III milk products drops
    below a specific target level. Thus, the program would establish a floor
    on farm income through a countercyclical payment to dairy farmers instead
    of a floor on manufactured product prices with purchases by the CCC.80
    Instead of providing an incentive for manufacturers to continue producing
    a particular product that the CCC is purchasing, the program would allow
    the market to clear a wholesale product price and then pay farmers the
    difference if the price were too low. This option would provide
    manufacturers the incentive to shift raw milk supplies to their
    highestvalued use, further promoting the development of new and innovative
    products. This option could also potentially reduce federal costs,
    depending on the level of the target price; one expert estimated that with
    a target price of $10.50 per hundredweight for Class III milk, the
    government would have spent $300 million less than under the MILC program
    since its inception in December 2001. With a target price of $10.00 per
    hundredweight for Class III milk, these savings would have reached $1.2
    billion.

    Notwithstanding these potential benefits, dairy experts indicated that a
    new target price deficiency payment program could have its own challenges
    depending upon how it is designed. In particular, such a program would
    require some key decisions regarding price level and

    79The MILC program is a target price deficiency payment program. 80A
    countercyclical payment is a payment provided during periods of low
    prices.

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    regional differences, and whether to cap program benefits based on
    payments or quantities of production.

    Set Price Level and Consider Some dairy experts said that a problem with
    the target price deficiency

    Regional Differences

    Place Cap on Payments or Production

    payment approach is that it would be hard to determine the appropriate
    target price without creating distortions in production incentives. If the
    target price were set too high, it would have the same effect as setting
    the support price too high: it would lead to excess production by
    supporting farm income at higher levels than would be available if farmers
    received market prices. Long-term overproduction would place additional
    downward pressure on market prices and increase federal costs for the
    program. If the target price were set at a low level to avoid stimulating
    production and increasing government costs, it might not maintain adequate
    support for farm income, and could increase price volatility.
    Additionally, by influencing domestic production levels, which in turn
    influence U.S. market prices, the level of the target price can affect the
    incentives of other countries to export manufactured products to the
    United States. However, these incentives are also affected by the export
    subsidies and lower production costs of some other countries.

    The difficulty in setting the appropriate target price is exacerbated by
    regional differences in costs of production. A certain Class III target
    price might provide adequate support during periods of low prices based on
    the costs of production in one region, but not in another. However,
    increasing the target price to provide adequate support for higher-cost
    regions would not only support production in areas where it is less
    economically efficient to do so, but would also provide greater benefits
    to farmers in lower-cost regions. These higher benefits would increase the
    incentives to overproduce in those areas. Given current trends in the
    United States, this scenario would encourage the western shift in dairy
    production.

    Another challenge in designing a target price deficiency payment program
    would be to determine whether to cap the program's benefits either by
    limiting the payment a farmer could receive or by limiting the quantity of
    milk production on which a farmer would be eligible to receive payments.
    The MILC program calls for payments equal to 45 percent of the difference
    between $16.94 and the Boston Class I per hundredweight price and has a
    production cap (2.4 million pounds of production per dairy operation each
    fiscal year). These controls have helped to keep federal costs lower than
    they otherwise would have been during periods of depressed prices by
    limiting incentives for overproduction. However, the production cap has

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    targeted the program's benefits primarily to smaller farmers, raising
    questions of equity.

    If a target price deficiency payment program were implemented without any
    controls, the risk of market distortions and increased federal costs from
    establishing a target price level that is too high could increase
    substantially. At the same time, a couple of researchers noted that
    establishing the target price deficiency payment program without a
    production cap could encourage farmers to enhance the efficiency of their
    dairy operations. With a cap limiting eligible production, farmers have
    less incentive to adopt new technologies that would increase production.
    However, whether or not a cap is placed on eligible production, the
    program is likely to confer benefits to farmers in varying degrees. If the
    program did not cap eligible production, farmers who could increase their
    production efficiency with new technology might have more of an incentive
    to do so. But the farmers who would be most likely to take advantage of
    this incentive would be larger farmers who may be more efficient, and
    might have the resources and access to capital to undertake such an
    investment. Conversely, capping eligible production would target benefits
    to smaller farmers in the same way as MILC.

    Adopt the National Dairy Equity Act

    To address concerns about the pending expiration of the MILC program and
    provide additional support to dairy farmers, the National Dairy Equity Act
    of 2004 (NDEA) has been introduced in the House and the Senate.81 This
    proposed legislation would change the federal regulation of milk marketing
    through the establishment of regional dairy marketing areas in which
    boards created to administer these areas would set minimum prices that
    processors would have to pay for raw milk used to make fluid milk products
    sold in those areas.82 The NDEA would have a similar effect as the MILC
    program in that it might lead to higher incomes for some dairy farmers.
    However, concerns have been raised about its impact on farm

    81This proposed legislation was introduced in the 108th Congress as S.
    2525 and H.R. 4597.

    82In earlier legislation, the Federal Agriculture Improvement and Reform
    Act of 1996, Congress authorized the six New England states to enter into
    an agreement called the Northeast Interstate Dairy Compact, which was
    implemented in July 1997. The Compact functioned similarly to the proposed
    dairy marketing boards of the NDEA in that it supplemented the FMMOs 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. The authorization
    for the Compact expired on September 30, 2001.

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    incomes in some regions, retail fluid milk prices, coordination of milk
    prices across regions, and existing trade agreements. Figure 39 shows the
    effects of adopting the NDEA over the short and long terms.

          Figure 39: Potential Effects of Adopting the NDEA on Various Policy
                                     Considerations

    Increase Decrease Mixed impacts ? No/unclear impacts Source: GAO analysis
    based on interviews with dairy experts and reviews of relevant studies.

    Note: The figure does not indicate the degree of increase or decrease for
    each policy consideration as it relates to a policy option. In addition,
    as discussed in this appendix, limitations affecting some policy options
    could affect the degree of an option's potential impact on a policy
    consideration.

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    Elements of the NDEA	The NDEA would create five marketing areas that
    together would encompass the entire nation. States in the Northeast,83
    Southern,84 and Upper Midwest85 regions would automatically be
    participating in the marketing area program established by the NDEA upon
    enactment of the legislation. States in the Intermountain86 and Pacific87
    regions could become participating states by providing written notice to
    the Secretary of Agriculture. The NDEA would authorize each region's board
    to set an "overorder" minimum price for Class I sales that exceeded the
    FMMO Class I price in that region, with an initial maximum of $17.50 per
    hundredweight, subject to approval by farmers within the region in a
    referendum.88 Although the boards would have discretion in setting the
    over-order price, the legislation directs the boards to consider several
    factors including the

    o 	balance between production and consumption of milk and milk products in
    the regulated area;

    o  costs of milk production in the regulated area;

    o  prevailing price for milk outside the regulated area;

    o  purchasing power of the public; and

    o  price necessary to yield a reasonable return to an eligible farmer.

    The NDEA would establish a fund in the U.S. Treasury to carry out the
    program. During months in which a region's over-order price exceeded the

    83States in this region include Connecticut, Delaware, Maine, Maryland,
    Massachusetts, New Hampshire, New Jersey, New York, Ohio, Pennsylvania,
    Rhode Island, and Vermont.

    84States in this region include Alabama, Arkansas, Florida, Georgia,
    Kansas, Kentucky, Louisiana, Mississippi, Missouri, Nebraska, North
    Carolina, Oklahoma, South Carolina, Texas, Tennessee, Virginia, and West
    Virginia.

    85States in this region include Illinois, Indiana, Iowa, Michigan,
    Minnesota, North Dakota, South Dakota, and Wisconsin.

    86States in this region include Arizona, Colorado, Idaho, Montana, Nevada,
    New Mexico, Utah, and Wyoming.

    87States in this region include Alaska, California, Hawaii, Oregon, and
    Washington.

    88The NDEA would allow the maximum to increase over time in accordance
    with changes in the Consumer Price Index for All Urban Consumers published
    by the Bureau of Labor Statistics in the Department of Labor.

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    FMMO Class I minimum price in Boston, processors would be required to pay
    the Secretary of Agriculture an amount equal to the difference between
    those two prices, known as the over-order premium, times the quantity of
    milk purchased for use in Class I products. The Secretary would deposit
    these amounts into the U.S. Treasury fund, and the fund would make
    payments to each board, which would distribute the payments to eligible
    farmers in its region.89 Each month the board would receive at a minimum
    an amount equal to the over-order premium times 50 percent of the milk
    produced in that region.90 The proposed legislation would require CCC
    funds to be transferred to the fund when necessary to allow the fund to
    make the required payments; according to one analysis, such contributions
    would typically be necessary because only one of the proposed dairy
    marketing areas has a Class I utilization rate equal to 50 percent or
    higher.

    The NDEA also would require boards to compensate the CCC for any
    additional costs of CCC purchases of milk products resulting from
    increases in milk production that exceed the national average growth rate.
    To manage overproduction of milk that could result from the NDEA, the NDEA
    would authorize boards to take action, including developing and
    implementing incentive-based supply management programs.

    In addition, the NDEA would link participation in the dairy marketing
    areas with participation in the current MILC program. Farmers who
    participate in the new program would not be able to continue to receive
    MILC payments. If states in the Intermountain and Pacific regions chose
    not to participate in the NDEA program, farmers in those states could
    continue to receive MILC payments, and the NDEA would extend the
    authorization period for the MILC program until the end of September 2007.
    States in the other regions, which would become participants upon
    enactment of the NDEA, could withdraw their participation. If they did,
    farmers in those states could also continue their MILC payments through
    the end of September 2007. Individual farmers in states that participated
    in the NDEA program could

    89Other payments from the fund would include compensation for
    administrative costs that USDA or the boards incur in carrying out the
    program, increased costs of specified federal nutrition programs that
    might result from the program, and increased costs that the states might
    occur due to the program in carrying out the Child Nutrition Act of 1996.
    Boards could also collect assessments from processors in their region not
    to exceed $0.03 per hundredweight to cover the boards' administrative
    costs.

    90Each month the board would receive the greater of (1) this amount or (2)
    the amount of payments made by processors to the fund for purchases of
    Class I milk that will be sold in the region during the month.

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    choose not to participate in the new program and would then be able to
    continue receiving MILC payments. However, those farmers would not be able
    to extend their payments beyond September 2005 and would not be eligible
    for subsequent participation in the NDEA program.

    Impacts of the NDEA	Although the NDEA may lead to higher incomes for some
    dairy farmers, academicians and industry participants have raised many
    concerns about the proposed legislation's impacts. These concerns include
    regional divisiveness due to lower incomes for dairy farmers in some
    regions, higher retail prices, reduced coordination of dairy prices across
    regions, and potential conflict with World Trade Organization (WTO) rules.

    The NDEA could lead to higher incomes for farmers in participating states
    when milk prices are relatively low because processors would have to pay
    the over-order prices set by the boards for Class I milk; however, the
    total effect on farmers would depend on what happens to the price of milk
    used for manufacturing purposes as well.91 To the extent that higher blend
    prices stemming from higher Class I prices lead farmers to increase milk
    production, the result could be lower prices for Class III and IV milk
    both in participating and nonparticipating states. Even if all states
    participated in the dairy marketing areas, the large differences in Class
    I utilization rates across regions imply that different regions would be
    affected differently by the combination of higher Class I prices and lower
    Class III and IV prices, and farmers in regions with low Class I
    utilization rates might see a decline in their incomes. If some states do
    not participate, their farmers would be even worse off because unless
    these farmers pool milk in states that are included in the marketing
    areas, they would not receive any benefits of higher Class I prices. In a
    report that we issued in September 200192 in which we analyzed the
    inter-regional impacts of various scenarios in which some states were
    grouped in dairy compacts that functioned like the NDEA's dairy marketing
    areas, we reported that one effect of compacts was to reduce farm income
    in noncompact regions. We estimated this effect to be minimal when we
    examined the impact of the Northeast Interstate Dairy Compact because the
    six New England states included in that Compact

    91Even the extent to which income from Class I sales might rise from the
    NDEA is hard to estimate because it is unclear to what extent the
    over-order premiums that processors would be required to pay for Class I
    milk might be replacements for market-driven overorder premiums that would
    exist without the NDEA.

    92GAO, Dairy Industry: Estimated Economic Impacts of Dairy Compacts,
    GAO-01-866 (Washington, D.C.: Sept. 14, 2001).

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    produced only 3 percent of the nation's milk. However, we estimated that
    the effect was somewhat greater in a scenario in which states producing 27
    percent of the nation's milk supply were included in compacts.

    To the extent that the NDEA would result in fluid milk processors paying
    more to buy their milk from farmers, the NDEA would also lead to increases
    in retail fluid milk prices. In our report on compacts, we reported that
    several studies concluded that the Northeast Interstate Dairy Compact
    resulted in higher retail prices for fluid milk in New England, with
    estimated impacts ranging from $0.03 to $0.20 per gallon. Higher retail
    prices could have a greater effect on retail sales in upcoming years than
    occurred in the past, as some dairy experts believe that the demand for
    fluid milk has become more responsive to price changes, given the
    increasing number of beverages that are considered substitutes for fluid
    milk, among other reasons. Consequently, retailers with whom we spoke
    generally opposed the NDEA. Furthermore, declines in fluid milk sales
    would cause more milk to be available for manufacturing purposes, which
    would further depress the prices for Class III and IV milk.

    Several academicians told us that they believed the NDEA would also create
    regional distortions because price-setting in each dairy marketing area
    would be controlled by its board, and prices for raw milk used in fluid
    products would no longer be closely linked to prices for raw milk used in
    manufactured products. This would be a major change from the current
    system in which Class I prices are set based on differentials added to the
    "higher of" the advanced Class III or IV skim milk values, with the
    differentials still somewhat reflective of the costs of transporting milk
    from the Upper Midwest, a key dairy surplus region. Before the 1960s,
    Class I prices in different orders were not coordinated, and the resulting
    disorderly marketing system led to the coordinated system that we now
    have. Adopting the decentralized price-setting system of the NDEA risks
    losing the advantage of more orderly marketing that the coordination of
    the 1960s brought to the dairy industry.

    Concerns about whether the NDEA would make U.S. dairy policy less
    consistent with existing agreements under the WTO arise because of the
    effects of the NDEA on milk production and, hence, U.S. milk prices. As
    indicated previously, recent U.S. commitments under the General Agreement
    on Tariffs and Trade are leaning in the direction of more liberalized
    trade. To the extent that the NDEA provides a subsidy for U.S. milk
    production and reduces the prices of manufactured dairy products, the act
    would reduce the competitiveness of imported products.

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    We identified one study that estimates the effects of the NDEA on milk
    production, farm prices, and government costs compared to a baseline
    scenario that did not include the NDEA.93 This study estimated that the
    NDEA would increase milk production compared to the baseline by an average
    of about 7.6 billion pounds per year during the period from 2006 through
    2013. The increased production would result in estimated declines in Class
    III and IV prices from the baseline such that average milk prices would be
    $1.17 per hundredweight below the baseline estimate. The estimated annual
    average increase in federal costs for payments to the boards was $1.7
    billion.94

    Change Trade Restrictions and Export Incentives

    Recent concerns about the effects of imported dairy products, most notably
    milk protein concentrates, on U.S. dairy prices have highlighted the
    importance of U.S. trade policy-trade restrictions and subsidy programs-as
    a foundation for domestic dairy policies. Several policy options related
    to international trade in dairy products have been suggested. As noted
    previously, current international trade agreements and ongoing
    negotiations can have implications for certain policy options that have
    been suggested. These options include (1) increasing trade restrictions,
    specifically for imports of milk protein concentrates;95 (2) relaxing
    trade restrictions; (3) introducing domestic subsidies for products
    significantly affected by international trade competition, specifically
    establishing a subsidy program for domestic production of milk protein
    concentrates; and (4) changing the Dairy Export Incentive Program (DEIP),
    either by using it more effectively or by eliminating it. Those options
    that succeed in limiting imports or encouraging exports of manufactured
    dairy products could support higher farm income, production levels, and
    consumer prices. These options may also reduce

    93Scott Brown, "An Introductory Examination of the National Dairy Equity
    Act," in Dairy Policy and Product Innovation, 11th Annual Workshop for
    Dairy Economists and Policy Analysts, April 15-16, 2004.

    94These estimates were developed under a particular set of assumptions,
    including that all states would participate in the NDEA and that
    over-order prices were set relatively high. These estimates, as
    acknowledged in the study, are likely to cause the estimated effects of
    the NDEA to be larger than if, alternatively, it had been assumed that few
    states participated and the over-order prices were relatively low.

    95Milk protein concentrate is a concentrated milk protein product that
    contains both of the major forms of protein found in milk: casein and
    whey. The protein content of this product can vary considerably from 42 to
    over 90 percent.

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    federal costs if higher farm prices reduce costs to the price support
    program to a greater degree than the cost of these trade options. Figure
    40 shows the effects of options to change trade restrictions and export
    incentives over the short and long terms.

    Figure 40: Potential Effects of Changing Trade Restrictions and Export
    Incentives on Various Policy Considerations

    Increase

    Decrease

    Mixed impacts ? No/unclear impacts LP: Low price scenario HP: High price
    scenario Source: GAO analysis based on interviews with dairy experts and
    reviews of relevant studies.

    Note: The figure does not indicate the degree of increase or decrease for
    each policy consideration as it relates to a policy option. In addition,
    as discussed in this appendix, limitations affecting some policy options
    could affect the degree of an option's potential impact on a policy
    consideration.

    Increase Trade One international trade policy that has been proposed is to
    increase trade Restrictions/Establish a Tariff-restrictions within the
    constraints of existing international trade Rate Quota for Milk Protein
    agreements. More specifically, a bill entitled the Milk Import Tariff
    Equity Concentrates

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    Act96 has been introduced in the Congress that would impose tariff-rate
    quotas on dairy protein products such as milk protein concentrates and
    certain casein products. Import quotas prior to the WTO Uruguay Round
    Agreement on Agriculture did not cover milk protein concentrates and
    casein.97 Therefore, no tariff-rate quota was established for these
    products after the agreement was implemented. The May 2004 report by the
    International Trade Commission showed that U.S. imports of some dairy
    proteins increased significantly from 1998 through 2000 and then declined.
    Some of these protein imports displaced domestic dairy proteins,
    particularly those used in making processed cheese products not covered by
    the Food and Drug Administration's standards of identity.98

    The International Trade Commission report concluded that imports of milk
    protein concentrates to the United States have the effect of lowering U.S.
    farm prices either directly or indirectly, depending upon whether U.S.
    market prices for manufactured dairy products are above or at the level of
    the support price. If U.S. prices are above the support price, then
    imports of dairy proteins could directly lower the market prices of nonfat
    dry milk, butter, and cheese to the extent these proteins can be imported
    at lower prices than proteins available in the domestic market. In turn,
    lower product prices could reduce the prices received by U.S. farmers for
    their raw milk. If U.S. prices are at the support price, then imports of
    dairy proteins could indirectly affect U.S. market prices. Increasing
    imports of proteins when U.S. market prices for manufactured dairy
    products are at the support price will cause the CCC to purchase more
    nonfat dry milk as this alternative protein source is displaced in the
    market. Eventually, these increasing stocks could cause USDA to lower the
    purchase price of nonfat dry milk in an attempt to reduce federal costs.
    This adjustment

    96This proposed legislation was introduced in the 108th Congress as S. 560
    and H.R. 1160.

    97As a result of the agreement, the United States committed to convert
    quotas and fees that had been established pursuant to section 22 of the
    Agricultural Adjustment Act of 1933 into tariffs in the form of
    tariff-rate quotas. Further, the United States agreed not to use section
    22 in the future against imports from other WTO members. Virtually all
    section 22 quotas were converted to tariff-rate quotas in 1995.

    98Standards of identity were introduced under the 1938 Federal Food, Drug,
    and Cosmetic Act and are enforced by the Food and Drug Administration.
    Standards of identity define food products by establishing what
    ingredients must or may be used in the food manufacturing process, as well
    as the quantity of such ingredients. In most cases, milk protein
    concentrate is not accepted for use in cheeses covered by the standards of
    identity.

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    would then lower prices for manufactured dairy products, in turn
    decreasing the prices received by U.S. farmers for their raw milk.99

    Because introducing tariff-rate quotas on milk protein concentrate and
    casein would likely reduce imports of these products, federal costs due to
    CCC purchases and storage of nonfat dry milk under the price support
    program would likely decrease. When U.S. market prices are above the
    purchase prices established by the price support program, a reduction in
    imports could maintain prices of some products, such as cheese, at higher
    levels due to reduced domestic supply of dairy proteins used in these
    products. Higher product prices could increase farm prices and thus
    stimulate additional production. These effects could be more significant
    in regions of the United States where raw milk is used to a greater extent
    in the manufacturing of Class III products. (If U.S. trading partners
    successfully challenge tariff-rate quotas on dairy proteins, compensation
    such as increased market access for other products could be required,
    reducing the benefits to U.S. dairy farmers.) Because production
    adjustments tend to lag behind price changes, this additional production
    could delay adjustments to lower market prices in the future. Therefore,
    to the extent that the exclusion of imports masks market price signals
    that would exist without the exclusion, this policy option would decrease
    economic efficiency. Additionally, to the extent that changes in the
    manufacturing prices of dairy products are passed on through the retail
    level, consumers could experience higher prices for some products (such as
    cheese) and lower prices for other products (such as butter).100

    Relax Trade Restrictions	A second option is to relax trade restrictions by
    reducing or eliminating tariffs on dairy products. Trade restrictions such
    as tariff-rate quotas support domestic programs such as the FMMO
    classified pricing system and the dairy price support program by limiting
    the available supply of dairy products to take advantage of higher U.S.
    market prices. Unilaterally

    99Despite its conclusion that imports of dairy proteins to the United
    States could lower manufactured product prices, the International Trade
    Commission was unable to conclude that these imports actually caused USDA
    to tilt commodity purchase prices in May 2001 and November 2002. The
    International Trade Commission found that between 1996 and 2002, CCC
    stocks of nonfat dry milk grew from zero to 1 billion pounds. However, of
    this amount, the commission estimated that only 25 to 35 percent of the
    stocks came from nonfat dry milk that had been displaced by imports of
    dairy proteins. Therefore, 66 percent of the increase in CCC stocks was
    due to factors other than imports.

    100Butter prices could decrease as higher production levels, among other
    things, increase the supply of butterfat.

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    relaxing U.S. trade restrictions would likely increase imports of
    manufactured products as foreign producers seek to take advantage of the
    higher prices available in the U.S. market. Despite higher transportation
    costs for imported products, some manufacturers might be able to import
    certain dairy products from U.S. trading partners at prices below U.S.
    market prices either because those partners provide export subsidies (as
    the European Union does) or because they have lower milk production costs
    (as Australia and New Zealand do). Relaxing trade restrictions such as
    tariff-rate quotas is unlikely to increase imports of fluid milk products
    because of health restrictions, transportation costs, and the perishable
    nature of these products.

    Increased imports could put pressure on the CCC to purchase larger
    quantities of manufactured dairy products, thereby increasing federal
    costs.101 At some point these pressures could become unsustainable,
    leading to a reduction in the support price or the end of the price
    support program and to a decline in the price of milk used for
    manufacturing purposes. Moreover, because the price of milk used in fluid
    milk products is based on the price of milk used in manufactured products,
    a decline in the prices of manufactured products from increased imports
    could lower average farm prices. As long as MILC is authorized, these
    lower prices could trigger additional MILC payments to farmers, further
    increasing government costs.

    In the short term, increased imports could cause U.S. prices to fall,
    resulting in a decline in farm income for U.S. dairy farmers. With reduced
    farm income, production would also decrease as less efficient farmers exit
    production. Over the long term, the decline in production could cause farm
    prices to rebound toward the levels that existed before trade restrictions
    were relaxed. Similarly, in the short term, lower farm prices are likely
    to lead to lower consumer prices for fluid milk and other dairy products,
    but as farm prices rise toward their previous levels due to production
    decreases, consumer prices for fluid milk and other dairy products would
    likely rise as well. Economic efficiency will increase with relaxed trade
    restrictions because such relaxation will allow market price signals to be
    more visible than with restrictions in place. These signals will lead to
    increased imports when it is cheaper to substitute increased imports for

    101The extent to which increased imports put pressure on the CCC to
    increase its purchases depends on the extent to which increased imports
    replace commercial sales of domestically produced dairy products.

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    some domestic dairy production. Additionally, the economic efficiency of
    U.S. dairy production resource allocation could increase with relaxed
    trade restrictions as the reduction in domestic production is more likely
    to come from less efficient domestic farmers.

    Subsidize Domestic Milk Protein Another proposed option is to support the
    development of domestic casein

    Concentrate Production	and milk protein concentrate production. Under the
    proposed U.S. Dairy Proteins Incentive Program, the CCC would make subsidy
    payments, on a bid basis, to entities that produce and market dairy
    proteins from skim milk.102 The proposed legislation would provide, among
    other things, that receipt of a payment is contingent upon the end use of
    the dairy proteins produced; that no applicant receives a payment if the
    contract submitted for review would undercut domestic prices for milk,
    nonfat dry milk, or dairy proteins; and that the sale of the dairy
    proteins represents a new use of domestically produced dairy proteins.

    This program's potential impact on domestic dairy protein production
    depends on the relative profitability of these proteins, which, in turn
    depends on production costs and demand. The International Trade
    Commission's May 2004 study on milk protein products found that, given
    disincentives inherent in the price support program and constraints on
    U.S. demand for dairy proteins other than nonfat dry milk, the
    profitability of domestic protein production could be limited. For
    example, the study reported that the price support program creates a
    disincentive for U.S. processors to produce dairy proteins other than
    nonfat dry milk because by purchasing nonfat dry milk the price support
    program reduces the financial risk of manufacturing that product.
    Processors of other proteins would need to invest in production facilities
    and then market their product without the benefit of a standing government
    offer of support. The study found that only under the most favorable
    conditions (high skim milk protein yield103 and low variable costs) would
    it be beneficial for U.S. processors to begin producing milk protein
    concentrate instead of nonfat

    102A bill to create this program was introduced in the U.S. House of
    Representatives as H.R. 4223 on April 27, 2004. The bill defines dairy
    proteins as whey, whey protein concentrate, casein, or milk protein
    concentrate.

    103The protein content of raw milk can change with the age of the cow,
    seasonally, and with feeding and management practices.

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    dry milk. Even then, positive returns were only for milk protein
    concentrates with protein concentrations above 70 or 80 percent.104

    The classified pricing system could create an impediment to the
    development of a domestic protein industry depending upon how milk protein
    concentrate is classified. Based on analysis presented in the
    International Trade Commission's report, classification under a
    highervalued class would require producers of milk protein concentrate to
    pay more for their raw milk supplies, thus reducing their profits.105 In
    addition, the report noted that since May 2002, the CCC has had a program
    to provide incentives to convert nonfat dry milk held in its stocks to
    casein. Under this program, the CCC accepts competitive bids for CCC-owned
    nonfat dry milk stocks for the manufacture of casein. However, while USDA
    has accepted some bids, in many cases processors' bids have been so low
    that USDA has rejected them.

    Finally, the International Trade Commission's report found that while milk
    protein concentrate is considered a useful additive to standardize protein
    content, the limitation on its use inherent in the Food and Drug
    Administration's standards of identity further restrict domestic milk
    protein concentrate production. This limitation keeps the market for milk
    protein concentrates relatively small in comparison to the market for
    other dairy proteins. Given these restrictions, the International Trade
    Commission estimated that the total U.S. market for milk protein
    concentrate is 40,000 to 50,000 metric tons per year. A new production
    facility in New Mexico reportedly is capable of producing 16,000 tons
    annually. Therefore, barring a large drop in imports or changes to the
    standards of identity, the demand for milk protein concentrate would have
    to increase substantially to induce additional domestic production.

    To the extent that the proposed program can overcome these challenges, it
    could provide incentives for manufacturers to produce alternative dairy
    proteins domestically. Should these proteins replace some nonfat dry milk
    production, they could reduce federal costs for the price support program.

    104The International Trade Commission reached these conclusions by
    estimating the price, cost, and returns for U.S. producers who produce
    nonfat dry milk and sell it to the CCC. The Commission then compared the
    result with what producers in its survey had earned from producing and
    selling milk protein concentrate.

    105However, USDA officials noted that this may be a moot issue because
    they believe milk protein concentrates will be classified as Class IV
    products.

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    However, the overall impact on federal costs would depend on whether these
    reductions are offset by the cost of the subsidy program itself. Various
    dairy experts disagree as to whether subsidizing domestic dairy protein
    production would result in a net increase or decrease in federal costs.
    For example, a study that was published in May 2004 by researchers at
    Cornell University concluded that reduced costs to the price support
    program would not be great enough to offset the cost of the subsidy
    program.106 Conversely, an analysis by the National Milk Producers
    Federation found that a protein subsidy program providing assistance up to
    $2.30 per hundredweight of skim milk would result in a net cost savings
    for the federal government. The study by Cornell University researchers
    also estimated that a subsidy program for casein and milk protein
    concentrate would raise average milk prices by $0.40 per hundredweight,
    yielding an increase in farm income of $913 million. These increases would
    have greater impacts on farm income and milk production in areas of the
    country with higher Class IV utilization, such as the West.

    Also, should these proteins replace some nonfat dry milk production, the
    resulting effects on the prices that consumers pay for products made with
    dairy proteins could be mixed. If dairy protein prices increase with
    reduced imports, consumer prices for those products for which they are an
    ingredient (such as cheese), could also increase to the extent that these
    price changes are passed through. However, additional production resulting
    from higher farm prices could lower consumer prices for butter. Over the
    long term, increased domestic production of casein and milk protein
    concentrate could lower their production costs and also the costs of other
    products for which they are ingredients. With the subsidy program in
    place, the economic efficiency of resource allocation would likely
    decrease as the government provides incentives for the production of
    proteins that could potentially be supplied more cheaply through imports.

    Change the Dairy Export Some dairy experts indicated that DEIP can help
    reduce government

    Incentive Program	expenditures by allowing USDA to subsidize exports
    rather than purchase products and maintain high stock levels through the
    price support program. However, in some cases, academic experts indicated
    that under current market conditions the impact of DEIP on U.S. prices is
    limited. For

    106Phillip M. Bishop and Charles F. Nicholson, "Dairy Market Impacts of
    U.S. Milk Protein Imports and Trade Policy Alternatives," Department of
    Applied Economics and Management, Cornell Program on Dairy Markets and
    Policy, R.B. 2004-08, Cornell University, Ithaca, N.Y. (May 2004).

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    example, one source noted that with CCC purchases of nonfat dry milk at
    over 800 million pounds in 2002, and with over 1 billion pounds of CCC
    stocks on hand, DEIP currently has no impact on U.S. prices. Also, WTO
    commitments have limited the scope of DEIP. For example, in the Uruguay
    Round Agreement on Agriculture the United States committed to reducing the
    quantity of subsidized exports by 21 percent and the value of these
    exports by 36 percent over the period from 1995 to 2000. Therefore, a
    couple of alternative policy options have been discussed with regard to
    DEIP, using it more effectively or eliminating it entirely.

    Use DEIP More Effectively

    Some dairy experts suggested that the government could make greater use of
    DEIP.107 The American Farm Bureau study concluded that DEIP may be
    underutilized, noting that it is difficult to develop foreign markets
    unless a commitment is made to serving the market. Such a commitment is
    more difficult if a given product is made available only when it is in
    surplus. The study criticized USDA for (1) being slow to invite and accept
    bids and (2) concentrating on products in surplus. Other dairy experts
    indicated that invitations for DEIP bids may be announced too late in the
    year for potential exporters to participate in the program due to seasonal
    sales patterns. To improve the effectiveness of DEIP, the American Farm
    Bureau study recommended three potential changes:

    o 	Exporters should be encouraged to submit bids for products and
    countries that offer the greatest potential for longer-term market
    development. USDA should use DEIP in conjunction with the Foreign
    Agricultural Service to coordinate export assistance programs to fully
    develop markets.

    o 	USDA should consider DEIP bids for any eligible products and not base
    acceptance primarily on removing surplus products from the domestic
    market. Bids should be accepted for products that may have the greatest
    market development potential and do not violate WTO subsidization volume
    limits.

    107As an alternative to government export subsidies, the National Milk
    Producers Federation's Cooperatives Working Together program includes,
    among other things, an export subsidy element.

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    o 	USDA needs to act under shorter time frames in reviewing and accepting
    DEIP bids to maximize the volume allowable under WTO rules.

    USDA indicated that it has announced and awarded subsidies under the DEIP
    program up to the limits allowed by WTO rules for nonfat dry milk and
    cheese and that DEIP-assisted exports of butterfat have varied depending
    on market conditions. USDA also noted that the Foreign Agricultural
    Service has worked closely with the dairy industry to ensure that national
    and annual DEIP assistance optimizes longer-term market development
    prospects and minimizes any potential detrimental effects on the U.S.
    market. For example, a Foreign Agricultural Service official stated that
    the Service generally tries to wait until the market for a particular
    product, such as butterfat, is in surplus before inviting bids for DEIP
    export subsidies. The official said that if the market is not in surplus,
    subsidized exports would increase U.S. market prices for products
    manufactured with butterfat, such as ice cream. USDA further indicated
    that expanding the use of DEIP is not possible as the program is bound by
    quantitative and monetary caps under WTO rules. Finally, USDA noted that
    the bid review and acceptance process occurs within a time span equivalent
    to less than one working day. Specifically, another Foreign Agricultural
    Service official stated that USDA responds to all bid proposals by 10:00
    a.m. on the next business day after the proposals are submitted.

    To the extent that USDA could identify ways to make greater use of DEIP,
    the effects on the dairy industry of increased exports of U.S. dairy
    products could be similar to the effects of an increase in demand.108 In
    the short term, greater demand for dairy products would increase wholesale
    prices, raising farm prices and, to the extent that these changes are
    passed on to consumers, retail prices. While higher retail prices could
    cause marginal declines in domestic consumption, higher farm prices over
    the long term could stimulate additional production, which could put
    downward pressure on wholesale and retail prices. Under such a scenario,
    price volatility could decrease as the government balances swings in
    domestic manufactured product prices by adjusting its level of support for
    DEIP. However, economic efficiency would decrease to the extent that
    increased use of DEIP induces additional production that would not have
    occurred

    108As is the case with other export subsidy programs, the degree to which
    demand is increased under a program such as DEIP depends on the degree to
    which the exports under the program are additional to those that would
    have occurred in the absence of the program.

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    without the government program. Finally, in relation to federal costs,
    while increased use of DEIP could increase federal costs for the program,
    these increases might be offset by decreases in the costs of purchasing
    and storing commodities under the price support program. Further, greater
    competition for milk supplies used in manufactured products could increase
    Class I prices, decreasing MILC payments while the MILC program remains in
    existence.

    Eliminate DEIP

    Eliminating DEIP could lower U.S. market prices and increase government
    costs, specifically for nonfat dry milk.109 For example, the May 2004 USDA
    study estimated that exports of nonfat dry milk under DEIP account for
    approximately 9 percent of total U.S. production. The study further found
    that in comparison to just eliminating the price support program,
    eliminating DEIP as well would reduce wholesale nonfat dry milk prices
    another 5 percent below baseline levels. Under this scenario, the study
    reported that for 2002 through 2007, farm income would decline by
    approximately $5.3 billion and payments required under the MILC program
    would increase by approximately $900 million. Therefore, while ending DEIP
    would eliminate the costs of the subsidies provided by the program, these
    cost savings could be offset by increased MILC expenditures. Also, should
    DEIP be eliminated without eliminating the price support program, there
    would be an increase in federal costs for purchases of commodities that
    would otherwise have been exported.

    The American Farm Bureau study reported that in the short term eliminating
    DEIP would cause dairy products formerly exported under the program to be
    commercially exported. However, the study found that over the long term
    dairy product prices in the U.S. market would be too high relative to
    world prices to allow formerly subsidized products to move as commercially
    exported products. In the short term, a decline in the prices of some
    manufactured products formerly exported under DEIP, such as nonfat dry
    milk and cheese, would lower the blend prices farmers receive which, in
    turn, would cause a decline in milk production. This reduced production
    could cause butter prices to increase. However, the overall effect is a
    decrease in both average milk prices and milk supplies. With lower prices
    for some manufactured dairy products and higher prices for

    109The degree to which the U.S. market would be affected depends on the
    degree to which the exports under DEIP would be eliminated if the program
    were eliminated.

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    others, consumer prices may rise or fall depending on the extent to which
    these price changes are passed on by retailers. In other respects, the
    elimination of DEIP could increase price volatility because USDA would
    lose an outlet to help balance surplus production. However, the supply
    adjustment could marginally increase economic efficiency as excess supply
    is wrung out of the market. Further, to the extent that DEIP is providing
    incentives for nonfat dry milk production rather than production of other
    dairy products, elimination of these incentives would also marginally
    increase economic efficiency.

    Facilitate Risk Management for Dairy Farmers

    The increased volatility in farm milk prices has increased dairy farmers'
    interest in managing the risk that low prices will reduce farm incomes.
    Risk management alternatives to stabilize dairy farmers' incomes can take
    many forms. These include, among others, increased use of forward
    contracting to guarantee prices, such as through USDA's Dairy Forward
    Pricing Pilot Program;110 revenue insurance policies that pay farmers when
    dairy proceeds fall below specified levels; and tax-deferred savings
    incentives that encourage setting money aside during higher income years
    that could be withdrawn during lower income years. Figure 41 shows the
    effects of options to facilitate risk management under low-and high-price
    scenarios over the short and long terms.

    110Trading in milk futures and options represents another alternative for
    farmers to reduce the risks associated with price volatility by locking in
    prices, or setting price floors, for future production. This alternative
    would remain available to farmers even if some dairy programs, such as the
    dairy price support program, were eliminated.

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    Figure 41: Potential Effects of Options to Facilitate Risk Management on
    Various Policy Considerations

        Dairy forward pricing program           ?  ?     ?  ?      ?  ?     ?  ?
              Revenue insurance         LP            ?  ?               ?  ?
                                        HP   ?  ?
            Tax-deferred savings        LP            ?  ?               ?  ?
                                        HP   ?  ?

    Increase

    Decrease

    Mixed impacts ? No/unclear impacts LP: Low price scenario HP: High price
    scenario Source: GAO analysis based on interviews with dairy experts and
    reviews of relevant studies.

    Note: The figure does not indicate the degree of increase or decrease for
    each policy consideration as it relates to a policy option. In addition,
    as discussed in this appendix, limitations affecting some policy options
    could affect the degree of an option's potential impact on a policy
    consideration.

    Continue Dairy Forward Pricing Forward contracting of milk-entering into a
    contract with a processor or

    Program	cooperative to sell milk in the future at a guaranteed price-is
    one way for farmers to manage the risk that volatile prices create for
    their income. Although forward contracting may prevent farmers from
    benefiting from price increases, this risk management tool stabilizes
    their income and ensures that the price they receive does not fall below
    the contracted price. In this respect, forward contracting, like the MILC
    program, limits the decline in farm income from a fall in farm milk
    prices.

    Most, but not all, dairy cooperatives offer their members the ability to
    enter into forward contracts to guarantee the prices members will receive
    for

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    their milk. One option that could allow dairy farmers to make more use of
    forward contracting to manage their price risk would be to extend and
    expand the Dairy Forward Pricing Pilot Program to cover Class I milk. The
    program was mandated by the Congress in 1999 and is scheduled to expire at
    the end of 2004.111 Under the pilot program, farmers are not allowed to
    enter into forward contracts for Class I milk. However, if the program
    were extended or made permanent, it could also be expanded to allow
    forward contracting on all classes of milk.

    The forward contracting pilot program offers farmers who sell to
    proprietary processors an option to enter into fixed-price forward
    contracts by providing processors with an exemption from paying the
    otherwise required FMMO minimum prices. (Dairy cooperatives are already
    exempt from paying the FMMO minimum prices.)112 Normally, when either
    cooperatives or proprietary processors buy milk from farmers under forward
    contracts, they can offset their risk that farm prices might be lower at
    the end of the contract period (in which case they would pay more for milk
    than their competitors who buy later at the lower price) with a futures
    market transaction in which they would gain an amount equivalent to the
    decrease in the farm price of milk.113 However, when prices rise during
    the contract, the cooperatives or processors will lose money on the
    futures market transactions and cannot afford to pay farmers more than the
    contracted price. The pilot program encourages proprietary processors to
    enter into forward contracts with farmers by exempting these processors
    from having to pay farmers the relevant order minimum

    111Legislation has been introduced in the U.S. House of Representatives
    and the U.S. Senate to make permanent the authority for the Dairy Forward
    Pricing program, H.R. 3308 (2003) and S. 2565 (2004).

    112As a practical matter, it could be difficult for cooperatives to
    continue paying their members less than the regulated minimum price for an
    extended period of time because farmers could choose to market their milk
    with a different cooperative. However, farmers' ability to switch
    cooperatives could be limited by the extent to which individual
    cooperatives dominate milk marketing over a wide area.

    113Most forward contracts for milk are for a base Class III price, which
    in multiple component pricing orders, is the sum of milk component values
    per hundredweight of milk at standardized test. Class III milk futures and
    options contracts are actively traded on the Chicago Mercantile Exchange.
    To offset their price risk from the forward contracts to buy milk,
    proprietary processors and cooperatives can take an equal but opposite
    position in the futures market by selling futures contracts for an
    equivalent amount of Class III or IV milk. Then, if the price of farm milk
    falls during the life of the contract, when the contract period ends,
    their gain in the futures market will equal their loss from buying milk
    under a fixedprice forward contract rather than buying after the price
    fell.

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    price for the portion of their milk that is under forward contract.
    Without this program, proprietary firms might not readily enter into
    forward contracts because if they offset their risk of a price decline in
    the futures market and the prices were to rise above the contract price,
    they might have insufficient funds-including their futures market loss-to
    pay their forward-contracted farmers the minimum price.

    Some cooperatives have opposed proposed legislation that would make
    permanent the authority for forward contracting by proprietary processors
    on the grounds that allowing those processors to pay farmers less than the
    minimum price could undermine the federal order pricing system. However,
    one academic analysis of options to address price volatility indicated
    that this exemption would not undermine the federal order pricing system
    because while proprietary processors could pay farmers less than the
    minimum price, these processors would still have to pay minimum class
    prices into their federal order pools.114 Another academician told us that
    even if allowing forward contracting on Class I milk caused farmers to
    receive lower minimum prices in return for reduced risk, neither that
    price reduction nor any other rationale would be a good reason for not
    making fluid milk eligible for forward contracting by those farmers who
    want to enter into such contracts.

    In October 2002,115 USDA released a report that examined the performance
    of the pilot program from its inception, in September 2000, through March
    2002. The report found that the average monthly price received for milk
    sold under forward contracts authorized by the pilot program was lower
    than the average monthly price that would have been received for that same
    milk if it had not been under contract by about $0.50 per hundredweight,
    but that the variation in price for milk sold under forward contracts was
    much less. At times the contract price exceeded the price that would have
    been received without the contracts, and at times it was lower. More
    recent USDA data show that the contract price exceeded the price that
    would have been received without the contracts in each month

    114Bob Cropp, "Innovations To Address Price Risk Management and Price
    Volatility" in Dairy Policy and Product Innovation, 11th Annual Workshop
    for Dairy Economists and Policy Analysts, April 15-16, 2004.

    115"A Study of the Dairy Forward Pricing Pilot Program and Its Effect on
    Prices Paid Producers for Milk," prepared for the Senate Committee on
    Agriculture, Nutrition and Forestry and the House Committee on Agriculture
    by Dairy Programs, Agricultural Marketing Service, U.S. Department of
    Agriculture.

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    from April 2002 through July 2003, but for the remainder of 2003 the
    contract price was lower. On average, for the entire period from April
    2002 through December 2003, the contract price was about $1.40 per
    hundredweight higher.

    Participation in the program during the period covered by the USDA report
    was relatively small and was concentrated most heavily in the Upper
    Midwest Order, which has a low Class I utilization rate. More recent USDA
    data show that participation remained relatively low through the end of
    2003. Farmers in orders with high Class I utilization rates had less
    opportunity to participate because Class I milk was ineligible, so it is
    uncertain whether participation rates in those orders would have been
    higher if farmers were allowed to enter into forward contracts for Class I
    milk. One academic source also noted that even if the program were
    expanded to include Class I milk, fluid milk processors might be reluctant
    to engage in forward contracting for this milk because there is no good
    hedge in the futures market for Class I prices. In addition, the USDA
    study reported that participating farmers were generally more accustomed
    to using risk management tools than were nonparticipants. Farmer education
    on using forward contracting may be important to increase participation.

    Provide Revenue Insurance	Another option to help dairy farmers manage
    their price risk is revenue insurance. Revenue insurance allows farmers to
    protect themselves against loss of revenue from, for example, low market
    prices, high feed prices, or reduced production due to natural disasters.
    Revenue insurance can stabilize farm income, reducing the need for direct
    payments such as under the MILC program, during periods of low prices.
    Whether there would be a savings to the government would depend on whether
    the subsidies required to induce farmers to participate in the insurance
    program would offset the savings from reduced direct income support.
    Overall production could increase with this type of option because the
    revenue insurance would step in when prices are low representing in
    effect, a countercyclical payment. With this type of income support,
    downward supply adjustments during periods of low prices might not happen
    as quickly. Consumers would then benefit from prolonged periods of low
    prices to the extent that price changes are passed through the retail
    level.

    USDA's Risk Management Agency currently operates several pilot programs in
    selected states, using three different approaches to revenue insurance.
    Although none of these programs applies to dairy farming, they could, in
    theory, be extended to cover dairy farmers. Doing so could be difficult,
    however, because the complexity of the dairy industry and the

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    variation in management expertise among farmers would make it hard to
    estimate the probability of losses, a calculation that is necessary for
    pricing the insurance.

    Institute Tax-Deferred Savings	Tax-deferred savings accounts allow farmers
    to manage fluctuations in farm income by accumulating cash reserves during
    higher income years with deferral of some tax liability. Farmers could
    then withdraw from these accounts in lower income years and, in essence,
    receive tax benefits if they accumulated funds in these accounts. One
    study suggested that farmers might be more comfortable with this risk
    management tool than with forward contracting because these accounts
    resemble individual retirement accounts and other familiar tax-deferred
    savings vehicles.

    Similar to revenue insurance, this option has the potential for reducing
    direct income support payments from the government, such as MILC payments,
    by stabilizing farm income during periods of low prices. However, whether
    these accounts worked as a risk management tool would depend on whether
    the authorization of these new accounts-with their tax benefits-led to
    substantial additional savings by farmers in higher income years, or
    whether the new accounts were simply funded with savings that would have
    been made anyway in other, not tax-favored, accounts. Also, like revenue
    insurance, withdrawals from tax-deferred savings would represent, in
    effect, countercyclical payments during periods of low prices. Thus
    withdrawals from tax-deferred savings accounts could maintain overall
    production by dampening supply adjustments during periods of low prices.
    Similarly, consumers would benefit from the prolonged periods of low
    prices to the extent that price changes are passed through the retail
    level.

    Many issues would have to be resolved to start this type of account, such
    as the amount that farmers would be allowed to deposit in any year,
    whether the government would match any funds deposited, and whether there
    would be restrictions on farmers' ability to withdraw funds from the
    accounts based on price drops or income losses. Canada and Australia both
    offer these accounts, and they were first proposed in the United States in
    1996. Since then, there have been several proposals to adopt them here,
    but none has been implemented.

    Manage Raw Milk Supplies	According to one dairy expert, given the
    long-term declining demand for fluid milk as well as the increasing
    productivity of dairy farmers, the best way to maintain farm income is
    through some form of effective supply

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    management. Following periods of excess supply in the 1980s, the U.S.
    government introduced supply management initiatives, such as the Dairy
    Termination Program.116 Other options, such as production quota systems,
    have been tried by different dairy-producing nations. Thus, a number of
    options have been discussed to try to manage dairy supplies, including
    reintroducing a program similar to the earlier Dairy Termination Program,
    or establishing mandatory supply controls through quota allocations, as
    has been done in other countries. Figure 42 shows the effects of options
    to manage raw milk supplies under low-and high-price scenarios over the
    short and long terms.

     Figure 42: Potential Effects of Options to Manage Raw Milk Supplies on Various
                                 Policy Considerations

        Reintroduce Dairy Termination Program               ?                ?
         Establish a production quota system

    Increase Decrease Mixed impacts ? No/unclear impacts Source: GAO analysis
    based on interviews with dairy experts and reviews of relevant studies.

    Note: The figure does not indicate the degree of increase or decrease for
    each policy consideration as it relates to a policy option. In addition,
    as discussed in this appendix, limitations affecting some policy options
    could affect the degree of an option's potential impact on a policy
    consideration.

    116Another initiative was the Milk Diversion Program. Both of these
    programs were in effect for only a short time.

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

                       Reintroduce the Dairy Termination Program

    One option that has been discussed to manage milk supplies is to
    reintroduce the Dairy Termination Program.117 This program was first tried
    as part of the Food Security Act of 1985. Under the Dairy Termination
    Program, farmers submitted competitive bids for the minimum raw milk price
    per hundredweight for which they would be willing to comply with the
    program requirements. If their bids were accepted, farmers were required
    to sell for slaughter or export their entire herds and not participate in
    dairying for the next 5 years. The program was in effect from April 1986
    through September 1987 and resulted in the removal of more than 1 million
    cows, or about 9 percent of the national dairy herd in 1985. In total,
    this culling of the national dairy herd was estimated to decrease milk
    supplies by about 39.4 billion pounds between 1986 and 1990 at a cost of
    more than $1.8 billion.118 California farmers accounted for the largest
    portion of this reduced production, but farmers in southeastern states had
    the highest rates of participation.

    In a 1989 report looking at the effects of the Dairy Termination Program,
    we indicated that it was unlikely to have a lasting effect on milk
    production, given that some participants would likely return to production
    after the 5-year waiting period.119 In the short term, high market prices
    resulting from lower levels of production reduced federal purchases of
    surplus dairy products. In 1989, we estimated that these reduced purchases
    provided a net cost savings to the government of $2.4 billion for fiscal
    years 1986 through 1990. However, over the long term, we predicted that
    increased production would bring the return of excess milk supply.

    The effects of reintroducing this supply management alternative would
    depend on a variety of factors. In particular, the effects on federal
    costs and milk production would depend heavily on how much farmers needed
    to be paid to terminate their herds and agree not to produce for a
    specific period of time. Farmers' decisions about whether to participate
    in a new Dairy Termination Program at a certain price would rest on the
    individual profitability of dairy farms, the long-term production outlook
    of the

    117The National Milk Producers Federation's Cooperatives Working Together
    program, started in July 2003, is an industry-led supply management
    initiative. Among other things, it includes a herd retirement element
    similar to the Dairy Termination Program.

    118Over one-third of this cost was funded by an industry assessment.

    119GAO, Dairy Termination Program: An Estimate of Its Impact and
    Cost-Effectiveness, GAO/RCED-89-96 (Washington, D.C.: July 6, 1989).

      Appendix VII Effects of Recent Federal Dairy Program Changes and Alternative
                                     Policy Options

    individual farmer, and the expectation of certain market conditions. For
    example, with today's high market prices, farmers may be unlikely to agree
    to stop production except at payment levels that could make the program
    prohibitively expensive. During low-price periods, the program could
    potentially reduce supply to a level that reduces overall government costs
    for both the price support program and the MILC program, as long as the
    latter program remains in existence. In either case, the program would
    likely increase price volatility and consumer prices, although higher
    consumer prices for manufactured products could be mitigated by additional
    imports. Given the fact that farmers in southeastern states had the
    highest rate of participation in the Dairy Termination Program, a
    reintroduction of this program is likely to strengthen western shifts in
    production. As compared to western farmers, eastern farmers tend to have
    lower profitability and higher costs of production. Consequently, they are
    more likely to participate in this kind of program and less likely to
    return to production after the program, because their re-entry costs are
    higher. Thus, a new Dairy Termination Program could have disparate
    regional effects.

    Establish a Production Quota A second option that has been discussed for
    supply management is to

    System	implement a quota system, as has been done in Canada and in the
    European Community.120 Under this option, production would be controlled
    by allocating production shares, or quota shares, limiting how much milk
    each dairy farmer could market. Such quota shares could be set based on a
    farmer's historical marketing level. Any milk marketed over the allocated
    quota shares would be priced far below the cost of production. Quota
    shares could be traded and increased over time as additional supplies are
    needed.

    A quota system would help manage supply by taking away incentives to
    increase production based on the benefits provided by government

    120California also has a quota system; however, it does not function as a
    supply management program. In California, milk receipts are pooled, and
    those farmers who own quota shares get $1.70 per hundredweight more than
    the California butter/nonfat dry milk/cheese price for the number of quota
    shares they own. The original allocation of quota shares was made in 1969
    based on Class I sales, and because not many additional quota shares have
    been allocated, quota shares currently cover about 25 percent of
    California's milk production. Most farmers have some quota shares, but
    some larger newer operations have come into the system without a quota.
    While the California quota shares are traded through brokers, people are
    not allowed to purchase them for investment purposes. Purchasers have to
    be farmers, and the quota shares come with minimum shipping requirements.
    One representative of a major California dairy cooperative said that the
    effect of the quota system is purely a way to distribute the proceeds of
    California's classified pricing system.

    Appendix VII Effects of Recent Federal Dairy Program Changes and
    Alternative Policy Options

    programs, such as MILC or the price support program. Moreover, compared to
    other supply management alternatives, a quota system has a greater
    likelihood of achieving long-term supply management, because production
    incentives would continue to be limited by the number of quota shares
    available in the system. With more effective supply management, federal
    costs for other programs such as MILC and the price support program would
    be reduced. Additionally, federal costs for administering a quota system
    are relatively low. In the short term, price volatility might increase,
    but as the market adjusts to a stabilized production level, longterm price
    volatility could be reduced.

    Nonetheless, there are some drawbacks to implementing a quota system. As
    quota shares reduced production, consumer prices could increase. While
    demand for fluid milk products is relatively price inelastic, higher
    prices could reduce long-term consumption by providing incentives to
    purchase substitute goods. Also, the distribution of quotas would provide
    a substantial benefit to current farmers to the detriment of farmers who
    might try to enter the system in the future, entrenching geographical
    production patterns and stifling incentives for technological
    enhancements. Given the high production costs in some areas and the
    greater efficiency of larger, newer dairy operations, this would represent
    an economic inefficiency because milk would not be produced and marketed
    as cheaply as possible. However, this drawback could be limited to the
    extent that a well-functioning market is established to trade quota
    shares. If participation costs in this market were kept low, farmers would
    still realize incentives to adopt technology enhancements. The most
    efficient dairy farmers' willingness to pay for additional quota shares
    would represent their cost advantage over less efficient farmers plus some
    assessment of risk. To the extent that this willingness to pay was greater
    than the profits realized by less efficient farmers, these less efficient
    farmers would have an incentive to sell their quota shares to more
    efficient farmers. Thus, in the long term, the quota system might not
    hamper increased economic efficiency if trade is relatively easy.

    Appendix VIII

    Comments from the U.S. Department of Agriculture

    Note: GAO comments supplementing those in the report text appear at the
    end of this appendix.

    See comment 1.

    See comment 2.

    See comment 3.

    See comment 4.

    Appendix VIII
    Comments from the U.S. Department of
    Agriculture

                                     See comment 5.

                             See comment 6. See comment 7.

                                     See comment 8.

                                     See comment 9.

                                    See comment 10.

    Appendix VIII
    Comments from the U.S. Department of
    Agriculture

                                    See comment 11.

                                    See comment 12.

                                    See comment 13.

                                    See comment 14.

    Appendix VIII
    Comments from the U.S. Department of
    Agriculture

                                    See comment 15.

                                    See comment 16.

                                    See comment 17.

                                    See comment 18.

    Appendix VIII
    Comments from the U.S. Department of
    Agriculture

                                    See comment 19.

                                     Appendix VIII
                          Comments from the U.S. Department of
                                      Agriculture

    The following are GAO's comments on the Department of Agriculture's letter
    dated October 22, 2004.

    GAO Comments 1.

    2.

    3.

    4.

    5.

    We revised the report to reflect that farm prices during 2002 and 2003
    were the lowest since 1979.

    We revised the report to reflect that USDA has estimated that average 2004
    farm prices will be more than $3 per hundredweight higher than they were
    in 2003.

    We agree that there are limitations on the use of commissary data as a
    proxy for proprietary wholesale data. However, as noted in USDA's
    comments, there seems to be no viable alternative. We revised the report
    to further discuss the limitations of using these data.

    During the course of our work, USDA declined to provide us with a draft of
    its study. Although USDA indicates that it submitted its study to the
    Congress on September 10, 2004, we were unable to obtain a copy until
    early October 2004, well after we had provided a draft of our report to
    USDA for review and comment. Because of this timing, we were unable to
    fully consider and analyze the results of USDA's study and related
    documents. Furthermore, although USDA notes that it developed quantitative
    estimates of the effects on producers (dairy farmers) and consumers and
    the cost of various federal programs under various policy scenarios, the
    scope of USDA's analysis was more limited than the range of policy options
    discussed in our report.

    We agree that the potential effects of various policy options in appendix
    VII are examined independently and qualitatively within the existing
    program structure. Our discussion of dairy policy options are not policy
    recommendations. As stated in the report, to identify these policy options
    and their potential impacts we relied heavily on a synthesis of the views
    of leading dairy experts and the results of an extensive literature
    search, including our review of more than 50 studies and other
    publications. Time and resource constraints for completing our work
    precluded us from developing or contracting for the use of an economic
    model that would have provided quantitative estimates of these potential
    impacts. In addition, some of the policy options would have been difficult
    to model and quantify, such as the potential impacts of accelerating
    USDA's hearing and rulemaking process for amending FMMOs. The report also
    notes that we compared the policy options

    Appendix VIII
    Comments from the U.S. Department of
    Agriculture

    identified against a baseline scenario of policies in place as of August
    2004. This baseline scenario existed at the start of our work and was
    needed to provide a consistent context for our analysis.

    6.	Regarding caveats, as noted in the report, we examined the impact of
    federal dairy program changes and policy options on six policy
    considerations: farm income, milk production, federal costs, price
    volatility, economic efficiency, and consumer prices. We acknowledge in
    the report that other stakeholders may have different views on the
    importance of these policy considerations or other considerations that we
    did not include in our analysis. The report also states that the potential
    effects of policy options on these considerations could vary depending
    upon economic conditions and other policy decisions. In this regard, we
    did not assess the options' overall economic or budgetary impacts, or
    their consistency with U.S. international trade commitments or positions
    in ongoing negotiations. As indicated in the report, each option has
    varying potential impacts on the policy considerations used in our
    analysis. Despite these caveats, we believe this analysis is informative
    and helpful to congressional decision makers who must weigh competing
    interests in determining dairy policy.

    7.	We have made some technical corrections and clarifications in light of
    USDA's comments, but we do not agree that we mischaracterized the
    operation of current programs or the effects that changes to current
    programs or the introduction of new programs would have on program
    outlays, producers (dairy farmers), and consumers. See also our responses
    in comments 8 through 19 below.

    8.	Although during the course of our work, USDA officials suggested that
    it was possible that dairy farmers might divide their holdings to make
    more of their milk eligible for compensation through the MILC program, we
    deleted this discussion from the report in light of USDA's comment that it
    has no evidence that farmers have done this.

    9.	We correctly state in the report that farmers may choose the month that
    they begin accepting their payments. However, in response to USDA's
    comment we revised the report to clarify that farmers' discretion on when
    they receive MILC payments is limited by USDA's regulations for
    implementing this program. Specifically, these regulations prohibit a
    farmer from selecting a month to receive payments if the month has already
    begun, if the month has already passed, or during which no

    Appendix VIII
    Comments from the U.S. Department of
    Agriculture

    milk was produced. A farmer also cannot change a previously selected start
    month after the 15th of the month before the month selected. Once monthly
    payments begin, a farmer has no discretion in determining in which month
    or months to receive payments.

    10. The discussion of expanding the use of DEIP in the draft report did
    not suggest that WTO rules, including quantitative and monetary caps and
    product-specific restrictions, be violated. Rather, this discussion
    identified ways in which dairy experts suggested that DEIP might be used
    more effectively as a marketing tool. However, we have revised the
    language in the report to more fully reflect USDA's views and to minimize
    confusion as to what we mean by increasing the use of DEIP as a marketing
    tool without exceeding WTO caps.

    11. We revised the language in the report to clarify that USDA has not
    proposed or considered any proposal to eliminate the Dairy Price Support
    Program. However, USDA analyzed the potential effects of eliminating this
    program in the study it prepared in response to the 2002 Farm Bill
    mandate.

    12. We agree with USDA that ensuring an adequate level of milk production
    is not an objective of the FMMO program. We revised the report accordingly
    and added language suggested by USDA to better describe the FMMO program's
    objectives.

    13. We agree that price volatility contributes to disorderly market
    conditions, and we revised the report to better explain the potential
    causes of price volatility. We also agree that FMMOs cannot directly
    address price volatility in wholesale dairy markets. However, by setting
    minimum prices that must be paid to farmers for raw milk, the FMMOs can
    affect the extent to which price volatility is reflected in the prices
    that farmers receive.

    14. We revised the report to reflect that cooperatives owning the capacity
    to produce multiple products may still have an incentive to shift milk to
    the higher-valued use, in order to provide greater returns to their
    members. We also expanded our discussion of other factors that might
    influence how milk is used, such as transportation costs and changes in
    processing technology.

    15. We acknowledge that the report does not explain how a competitive pay
    price series could be created for use in the FMMO program.

    Appendix VIII
    Comments from the U.S. Department of
    Agriculture

    However, this option was identified by stakeholders during the course of
    our work. Other options discussed in the report also may present
    challenging implementation issues and in many cases the report discusses
    those issues. Nonetheless, we revised the report to reflect that USDA and
    a panel of academicians attempted to devise a competitive pay price series
    but ultimately were unsuccessful. We also revised the report to note that
    a key difficulty in developing a competitive pay price series is the need
    for data that are not already influenced by the FMMO classified pricing
    system.

    16. We acknowledge that the report does not explain how, after combining
    Class III and Class IV, milk would be priced in the expanded class.
    However, this option was identified by stakeholders during the course of
    our work. Other options discussed in the report also may present
    challenging implementation issues and in many cases the report discusses
    those issues. Nonetheless, we revised the report to reflect that a barrier
    to combining Class III and IV is identifying an appropriate pricing
    formula that considers the products in an expanded class.

    17. We revised the report to reflect this clarification and added language
    suggested by USDA to better describe the FMMO program's objectives.

    18. We agree with USDA that any area's supply of fluid milk can come from
    local or distant farmers. USDA noted that the Class I price surface,
    generated from different minimum Class I prices in different locations,
    reflects the cost of moving milk from surplus to deficit markets. However,
    as we pointed out in a 1988 report, when the price surface does not also
    account for regional differences in production costs, it can result in
    incentives for overproduction in certain regions. Furthermore, the Class I
    price surface that resulted from the 2000 federal order reform differs
    from USDA's recommended option.

    19. The report accurately reflects the views of some stakeholders that the
    slowness of USDA's hearing and rulemaking process used to modify FMMOs
    inhibits the agency's ability to respond to changing market conditions or
    the marketing of new products. The report also discusses challenges USDA
    faces to improving this process while ensuring the promulgation of
    economically sound regulation. Further, the report notes that USDA has
    made efforts to improve the hearing process, particularly in the way it
    evaluates its contracts for hearing transcripts.

    Appendix IX

                         GAO Contacts and Staff Acknowledgments

    Contacts	Lawrence J. Dyckman, (202) 512-3841 James R. Jones, Jr., (202)
    512-9839

    Acknowledgments	In addition to the individuals named above, Jay Cherlow,
    Barbara El Osta, Joshua Habib, Eileen Harrity, Christopher Murray, and
    Cynthia Norris made key contributions to this report. Important
    contributions were also made by Beverly Ross, Jena Sinkfield, and Amy
    Webbink.

    Related GAO Products

    Dairy Industry: Estimated Economic Impacts of Dairy Compacts. GAO01-866.
    Washington, D.C.: September 14, 2001.

    Dairy Industry: Information on Milk Prices and Changing Market Structure.
    GAO-01-561. Washington, D.C.: June 15, 2001.

    Fluid Milk: Farm and Retail Prices and the Factors That Influence Them.
    GAO-01-730T. Washington, D.C.: May 14, 2001.

    Dairy Products: Imports, Domestic Production, and Regulation of
    Ultrafiltered Milk. GAO-01-326. Washington, D.C.: March 5, 2001.

    Dairy Industry: Information on Prices for Fluid Milk and the Factors That
    Influence Them. GAO/RCED-99-4. Washington, D.C.: October 8, 1998.

    Dairy Industry: Information on Marketing Channels and Prices for Fluid
    Milk. GAO/RCED-98-70. Washington, D.C.: March 16, 1998.

    Dairy Programs: Effects of the Dairy Termination Program and Support Price
    Reductions. GAO/OCE-93-1. Washington, D.C.: June 15, 1993.

    Federal Dairy Programs: Insights Into Their Past Provide Perspectives on
    Their Future. GAO/RCED-90-88. Washington, D.C.: February 28, 1990.

    Milk Pricing: New Method for Setting Farm Milk Prices Needs to Be
    Developed. GAO/RCED-90-8. Washington, D.C.: November 3, 1989.

    Dairy Termination Program: An Estimate of Its Impact and
    Cost-Effectiveness. GAO/RCED-89-96. Washington, D.C.: July 6, 1989.

    Milk Marketing Orders: Options for Change. GAO/RCED-88-9. Washington,
    D.C.: March 21, 1988.

    Overview of the Dairy Surplus Issue-Policy Options for Congressional
    Consideration. GAO/RCED-85-132. Washington, D.C.: September 18, 1985.

    Effects and Administration of the 1984 Milk Diversion Program.
    GAO/RCED-85-126. Washington, D.C.: July 29, 1985.

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