A University of Missouri economist says two changes in USDA's final rule on milk marketing order reform will decrease farm milk income by $583 million, $140 million of it due "exclusively" to a decline in Class I (fluid) prices.

Ken Bailey believes when the overall impact of the final rule, "after all changes are accounted for," is to lower the average farm price in all 11 federal orders by $0.46 per cwt.  In addition, milk marketings in all orders decline 0.4%.  "These two changes result in a drop in milk farm income of $583 million or 3.8%," he says.  Of that, $140 million is due to a decline in Class I prices.

He has four "suggestions" for USDA and Congress to consider if they want to "fix" the final rule:

1. Change Class I differentials: The current plan to implement a modified Option 1B "is not very popular in many parts of the Untied States.  It doesn't even make good economic sense and won't promote `efficiencies.'  It is suggested that some form of Option 1A be implemented by Congress."

2. Fix the Class III formula: The Class III formulas were reduced in the final rule so processors in western orders could compete more effectively with California, says Bailey.  "Why not implement regional class formulas that are a function of regional commodity prices?  Each order could adopt its own formula."

3. Rethink NASS survey prices: What is the advantage of using National Agricultural Statistics Service (NASS) survey prices instead of commodity markets? Bailey wonders.  "They are not audited and introduce a two-week lag in the system.  There are established commodity markets for butter, nonfat dry milk, cheese, etc., in Chicago and elsewhere.  Using established markets instead would allow everyone to compute class prices without delay."

4. Maintain an effective price support program: "One big problem with the final rule is that it depends in part on prices for nonfat dry milk which is expected to decline significantly once the dairy price support program ends," notes Bailey.  A cost effective price support program with a limit on stocks "would help maintain stability in commodity markets at a reasonable cost."  That would be an advantage to farmers, processors, retailers and consumers, he adds.