Milk markets are considered inherently unstable for several reasons: perishability of the raw product, continuous production, and seasonal changes in supply and demand. As a result a variety of government programs work to address potential market failures in milk production and pricing. Among the policy initiatives are Federal Milk Marketing Orders (FMMOS) and commodity specific price support programs. FMMOS employ a classified pricing system based on the end use of milk and a revenue blending program to announce and enforce minimum farm payments. Price supports and counter-cyclical payment program provides milk price support when milk prices of specific commodities fall below specified thresholds. Designed for an environment with stable milk and feed prices these programs are now viewed to be inadequate as they fail to address the industry need to manage price volatility. Private market solutions do exist, such as commercially traded futures contracts, but contract design specifications and capital commitments (margin accounts) make these risk management alternatives less than ideal. Policy solutions in the dairy industry include addressing and potentially limiting the role of FMMOS in milk pricing, and providing subsidized risk management tools. The potential for significant changes in the marketing and pricing of milk exists and it is useful to consider policy options for managing risk in a modern dairy economy. In order to contribute to this discussion the dissertation is comprised of three research manuscripts addressing the role of the government in facilitating or designing cost-effective risk management platforms.
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