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Free Markets Just Don’t Have This Problem, Projectile Milk Edition…

October 7th, 2009 · 9 Comments
Markets · Policy

I have been perplexed/amused by this picture for a couple of days now (via Gawker):

Hehe, the title of the post is “Weapon of Mass Lactation,” and the comments contain some awesomely bad puns. But I digress. The caption on the photo reads “A farmer sprays milk on police forces during a protest against falling milk prices outside the European Union headquarters yesterday.” Being one who is inclined to think in terms of free markets, I had to think about this for a good long while. In a free market, prices are driven down either by decreased demand or increased supply, and supply and demand are in turn influenced by factors such as income, prices of substitutes and complements, tastes, input costs, technology, etc. So who exactly are these protesters supposedly upset with? Are they upset with customers for not wanting (or being able to afford) more milk? Are they upset with their fellow farmers for crowding the market? These grievances, while unconventional, would at least make sense. But no, they were instead mad at the government, of course…

Wait, what? How is this the government’s fault? Did it impose a new tax on milk that drove down the prices to the milk producers? Clearly I needed to do some more digging. Obviously this wasn’t terribly difficult to do, since searching for “projectile milk protest” did in fact give me what I was looking for. This article from the WSJ sums up the situation:

BRUSSELS — Hundreds of dairy farmers and tractors clogged traffic outside European Union headquarters to push for EU aid Monday, as agriculture ministers met for a “milk summit” to discuss how to relieve the stress that dropping prices have put on small farms.

Ah, so they weren’t protesting the low prices directly, they were protesting the potential lack of subsidies in the face of falling prices. And this was the result of the milk summit:

The ministers decided to allow up to €15,000 ($22,000) in emergency cash relief for each dairy farmer, in addition to existing subsidies, and to set up a committee to study the problem. Earlier this year, the EU reintroduced some temporary export subsidies.

Wow, a committee. That’s going to be exciting…I wonder if they can figure out the situation with American cars while they’re at it. Export subsidies are also fun…basically, if the government is paying you to ship your product to other countries, it makes the product harder to get (read, more expensive) in the home country. I am guessing that a lot of people don’t realize this, since otherwise lactating moms would be protesting by….oh, never mind.

The reality of the situation is that there are market forces driving down the price of milk. If the force is demand-driven, i.e. people don’t really want as much milk as they used to, then it makes sense that some of these farmers should shift to doing something else. If the force is supply-driven, it’s because some producers figured out how to produce milk more cheaply and thus could profitably enter the market even though they knew they were going to drive prices down. In this case, shouldn’t the lower cost guys win?

Apparently logic can’t compete with “but I have these cows, and I am therefore a dairy farmer. As such, I am entitled to be a profitable dairy farmer, regardless of whether the circumstances in my industry have changed.” Compounding the problem is the fact that these farmers have been getting generous subsidies that are now being cut back:

Mr. Grain is building a €1.5 million barn with a robotic milking system and plans to expand his herd to 150 dairy cows. They currently get €43,000 in EU subsidies but expect that to fall to €36,000 by 2020. “We will have to produce more to make the same amount of money,” says Mr. Grain.

(Sidenote: I wonder if it has ever occurred to Mr. Grain to shift to producing wheat, or rice, or, I don’t know, some other sort of….grain?) See, it’s probably easier to not give a subsidy in the first place than to give a subsidy and then take it away, since loss aversion kicks in and people get really cranky. The beauty of free markets is that prices serve as the incentive to direct reseources to their best uses. The downside of free markets is that these “best uses” don’t stay constant over time and people (and organizations) have to learn to adapt to changing conditions. Luckily, the upside usually wins out- otherwise we would be driving around very heavily subsidized horses rather than cars, for example.

Maybe these farmers would be better off if they named their cows, since apparently this makes cows happy and happy cows are more productive. (No, I’m not kidding. I swear that is what the article says.) I’m not sure that I quite buy the conclusion of the study, since I would prefer instead to think that even cows are subject to the Hawthorne effect.

Tags: Markets · Policy

9 responses so far ↓

  • 1 Milk Subsidies « Daniel Joseph Smith // Oct 7, 2009 at 3:10 pm

    […] Milk Subsidies By Daniel J. Smith http://www.economistsdoitwithmodels.com/2009/10/07/free-markets-just-dont-have-this-problem-projecti… […]

  • 2 Niall // Oct 7, 2009 at 8:27 pm

    Most of the problem with EU farmers= http://en.wikipedia.org/wiki/Common_Agricultural_Policy

  • 3 J S // Oct 8, 2009 at 1:52 am

    There are a few other dynamics influencing this particular market:

    -Market price controls may exist .. US example is PA has some state price controls so all retailers must sell at some state set price. Meanwhile MI does not and so a retailer can sell below market costs to be a loss-leader for getting people to shop for other more profitable items. Prices paid to farmers is based on government pricing formulas.

    -Majority of US dairy farmers are smaller family run operations (probably the same in the EU). The smaller farmers are often self-subsidized by having a regular ‘day-job’ like factory assembly work and then farm all the remaining hours. This way they can support themselves with dairy business margins that are skim-milk thin – including any government subsidies.

    -The grocery retailers are usually large corporations. While they use milk as loss-leaders, they keep a constant high consumer price and push the purchase costs down. Dairies are usually large corporations too and so they push the costs lower to the farmer. A farmer has few options for which dairy they can sell to – they have no way to send their milk across the country to a competing dairy, their product is perishable. So the farmers have no leverage. Meanwhile the end consumer sees retail milk prices going up and thinks the farmer is the one somehow gouging.

    “Dairy farming is a unique business as dairy farmers are price takers and cannot pass along any increase in operating costs”
    http://www.comefarmwithus.com/MilkMoney.htm

    Data from here:
    http://future.aae.wisc.edu/tab/prices.html

    Jan 2009 retail = $ 3.58 / gal
    farmer = $ 1.11 / gal
    Sep 2009 retail = $ 2.97
    farmer = $ 1.06

    So when the milk price was high, the farmers were only getting a 5% premium while the retailers were getting a 30% premium.

    There are also some interesting dynamics playing out in the pork and beef industries.

  • 4 josh frank // Oct 8, 2009 at 6:39 pm

    I know you (Jodi) probably know better and are just trying to make it funny. But noone thinks that naming cows makes them happy. Naming cows is correlated with happiness, because naming animals implies a different level of attachment and treatment (individuals are named–units of production are not)(also, hurricanes are named, but I don’t think it probably makes them happy).

    Also, there are many studies that suggest that improved animal welfare does improve productivity. So I don’t think the link is so crazy.

    Of course, the higher productivity is per animal. Unfortunately this does not mean that it is more cost effective to treat animals well (some animal ag-interests claim animal welfare laws are unnecessary because it is in the best interest of the firm to treat animals well, which of course is flawed logic even if happy animals are more productive).

  • 5 josh frank // Oct 8, 2009 at 11:21 pm

    Now that I think about it, perhaps we should stop naming hurricanes, since it will cause them to be less productive (perhaps weakening to tropical storms).

  • 6 Bill Morrison // Oct 9, 2009 at 12:44 pm

    Interesting, if you do analyse this with a supply demand diagram for the market theory would tell us that the subsidy would lower costs of production and lead to an increase in supply which would reduce the price further!! So you need to look at individual farmer decisions and assume the old perfect competition model with farmer currently making a loss. Subsidy then lowers average cost curve back down to the productively efficient level of output!

  • 7 Bill Morrison // Oct 9, 2009 at 2:17 pm

    erm having second thoughts here. Anyone like to draw the firm cost diagram and market s&D diagram where a subsidy is given to farmer currently making a loss on milk production? Go Jodie

  • 8 Bill Morrison // Oct 9, 2009 at 4:35 pm

    Panic not, the dumb english economist has now got his head round it… that’s the problem with trying to draw mc and ac curves, move them about etc on a friday night after a hard week of teaching.. best keep to drinking the wine…

  • 9 Dave // Oct 10, 2009 at 8:21 am

    JS, the point is that an increase in the operating cost of dairy farmers means that the alternative uses of the resources that those farmers are currently using to produce their output have become more valuable. Therefore, it is efficient for the economy to have the supply of dairy milk reduced, freeing up the resources for there now more valuable uses….

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