Dairy Policy and Price Volatility
20 pages. Copyright © 2003 by Charles F. Nicholson and Thomas Fiddaman. http://www.systemdynamics.org.
NOTE: At the time of publication, the author Charles F. Nicholson was not yet affiliated with Cal Poly.
The US dairy industry is shaped by a patchwork of regulations accumulated over a long history of intervention to achieve various, sometimes conflicting, policy goals. Price supports have long been a central feature of dairy markets, but were largely withdrawn beginning in 1988. Since that time, there has been a dramatic increase in the variability of farm milk and milk product prices. The origins and desirability of volatility has been the subject of much debate; unfortunately models in existence to date have shed little light on the question due to their adoption of essentially non-dynamic methods. This article introduces a dynamic, behavioral dairy model to investigate variability and possible countermeasures.
The model suggests a number of factors that may contribute to price volatility, in addition to the usual explanation of supply-chain amplification of random supply and demand shocks. The behavioral response of industry participants to price and inventory signals, the use of long-term contracting, speculative hoarding, coupled long-term cycles of processing capacity and herd size each contribute their own component of volatility. Some well-intentioned regulatory and industry policies attenuate the price signals directing milk supply to demand, exacerbating volatility, whereas price supports and the availability of trade provide some damping.
Charles F. Nicholson and Thomas Fiddaman. "Dairy Policy and Price Volatility" Proceedings of the 21st International Conference of the Systems Dynamics Society: New York, NY.. Jul. 2003.
Available at: http://works.bepress.com/cfnichol/5