The Value Of Dairy Quota Under A Commercial Export Milk Program

This paper argues that under a commercial export milk program the market value of quota will be determined by the spread between the domestic market price and the export price rather than the conventional wisdom that it is determined by the spread between the domestic milk price and the marginal cost of production. Under this new economy it was argued that ultimately the market price of dairy quota will be priced independently of firm marginal costs, which implies that low cost (or high margin) producers will not hold an economic advantage in bidding for quota over higher cost producers. Regression results are consistent with the hypothesized positive relationship between quota value and the difference between domestic and export milk price. The average export price has generally increased over time and is approximately equal to the marginal cost for an average producer. The results have implications for the WTO challenge. New Zealand and US feel the domestic program acts as an export subsidy by cross-subsidizing production of commercial export milk. The results here suggest that the prices for the filled export contracts are approximately the marginal cost of production for the average producer, and not lower as suggested by the challenge. Export contracts were found to have higher price risk than domestically produced milk. The risk is compounded by the short-term nature of most export contracts. The increase in risk for the CEM implies that it is unlikely many farmers will greatly diversify into CEM contracts unless the uncertainty is reduced.