Evaluating class I differentials in the new federal milk marketing order system

In this article, a spatial equilibrium model that allows for the inclusion of any degree of market structure from perfect competition to monopoly is developed and applied to the U.S. dairy industry. This model is used to simulate possible Class I premiums, which could be negotiated by U.S. dairy cooperatives in the absence of FMMOs, under alternative assumed market structures. These premiums are then compared with the newly adopted Class I differentials to determine what degree of market competitiveness is equivalent to the new Class I differential structure. The results suggest the new FMMO Class I differentials are equivalent to a small degree of imperfect competition. In addition, because Class I differentials virtually disappear in the perfect competition case, our findings indicate it is difficult to justify the existence of Class I differentials solely on the basis of transportation costs from surplus to deficit areas [EconLit citations: Q11, Q13, Q18]. © 2001 John Wiley & Sons, Inc.