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Economic Effects of Bargaining in the Dairy Industry¹

Department of Agricultural Economics, University of Wisconsin, Madison 53706

ABSTRACT

Milk producers have recently obtained relatively large increases in milk prices. Producer cooperatives have the power and incentives to negotiate with handlers for additional class I price increases. In this study a computer model was used to simulate the operation of the Federal order market system over time under higher Class I prices for the purpose of drawing inferences about the short and longer term effects of negotiated premium prices. The results indicate that sizable income gains for producers could be obtained from higher Class I prices. However, if producers use present bargaining strategies to seek higher prices there may be undesired consequences for the industry since present strategies (a) ignore geographical differences in the response of consumers and producers to milk price increases and (b) ignore differences in the ability of processors with different size plants to pay negotiated premiums. Aggregate returns to producers could be increased and the competitive position of medium-size milk processing plants might be strengthened if price negotiators took account of the differential effects of present bargaining strategies.

¹ This paper is based partly on the author's Ph.D. thesis at Purdue University. Helpful comments by Professor J. R. Schmidt are gratefully acknowledged.