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Abstract

The Class I price differentials for milk were established in 2000 and continue in use today. These differentials are to reflect transport and other factors that vary across space. Since 2000 some key factors have changed like fuel price and supply/demand locations. We examine how the differentials match up with the distribution of shadow prices in a spatial transport model. We find consideration of fuel costs and supply demand location shifts raises the magnitude of the differentials by about 75%. We also find that consideration of seasonality also affects the differentials. Collectively the results indicate that it may be desirable to revisit the policy determined price differentials.

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