Dairy Pricing Policy, Production, and Water Quality in the Chesapeake Bay Watershed

Team lead: David Abler

Collaborator: Zeya Zhang

What is the Issue?

The Chesapeake Bay Watershed (CBW) is the largest estuary in the United States and a region of significant agricultural activity, with livestock production playing a critical role in its agricultural economy. Dairy farming contributes nearly one-third of all livestock sales in the watershed, with a large portion of land devoted to pasture and feed crops. Despite its economic importance, dairy and other livestock production is also a source of nutrient runoff into the Bay. Livestock manure is estimated to account for roughly 18% of the nitrogen and 27% of the phosphorus loads entering the Chesapeake Bay each year. These nutrient discharges contribute to water quality degradation, including algal blooms, hypoxic zones, and loss of aquatic habitat.

The COVID-19 pandemic in early 2020 created a sudden and severe disruption in U.S. dairy markets. With the closure of restaurants, schools, and hotels, demand for dairy products dropped sharply, causing milk prices to plummet from $17.51 per hundredweight (cwt) in February 2020 to $12.81/cwt in May 2020—the lowest since 2009. In response, dairy cooperatives requested the U.S. Department of Agriculture (USDA) to provide more support for dairy prices by setting a minimum Class I milk price mover of $15.68/cwt for June–August 2020. The Class I milk price mover helps determine the price of milk received by dairy farmers. Although USDA rejected the request, the proposal highlighted the sector’s vulnerability to price shocks and renewed interest in a minimum pricing policy under the Federal Milk Marketing Order (FMMO) system.

While such a pricing policy could provide more economic stability for dairy farmers, its potential economic and environmental consequences remain largely unexplored. Would higher milk prices incentivize dairy farms to keep economic resources in dairy production rather than shifting them to other livestock production such as beef or poultry? How would changes in the types of livestock produced in the CBW affect nitrogen and phosphorus loads from manure in local and downstream water bodies?

Figure 1. REAP Regions in the Chesapeake Bay Watershed (CBW)

Note: The figures are inventories for beef cattle, dairy cows, and layers, and the annual number sold for hogs, broilers, and turkeys.

What Did We Find and Why Does It Matter?

Our study used an economic-environmental model of livestock production in the CBW to estimate the potential impacts of a minimum dairy pricing policy. The model divides the CBW into 12 regions, called REAP regions, based on differences in soils, hydrology, topography, and climate. We examined milk price increases of 10%, 20%, and 30% with other prices and production costs held constant. A 30% increase corresponds to what would have happened to milk prices if the Class I price mover had been set at $15.68/cwt starting in 2020.

Our findings reveal that a milk price increase leads to substantial expansion in the dairy sector across all regions in the CBW. Dairy production increases an average of 14% with a 10% milk price increase, 27% with a 20% price increase, and 41% with a 30% price increase. We also find that increased dairy production draws economic resources (land, labor, and capital) from other livestock products into dairy, and keeps existing resources in dairy that would have otherwise moved out. Beef cattle, hogs, and broilers are the products most impacted by these shifts in economic resources.

We find that a shift in economic resources from other livestock products to dairy results in an increase in total nitrogen emissions to water bodies but a decrease in total phosphorus emissions. With a 20% milk price increase, total nitrogen emissions in the CBW increase by about 1% and phosphorus emissions decrease by about 0.5%. Percentage changes in estimated deliveries of nitrogen and phosphorus to the Chesapeake Bay are similar. These changes occur because manure from dairy cows generally has a lower phosphorus-to-nitrogen ratio than manure from other livestock species. Our findings have implications for nutrient management strategies, as strategies for nitrogen and phosphorus are often different.

What Did We Do?

We constructed an economic-environmental model of livestock production in the CBW that divides the CBW into 12 distinct agricultural regions based on the spatial disaggregation in USDA’s Regional Environment and Agriculture Programming Model (REAP). Our model covers six livestock sectors: dairy cows, beef cattle, hogs, broilers, layers, and turkeys. The model was calibrated to baseline data from the 2017 Census of Agriculture and USDA estimates of commodity production costs and returns, with model parameters drawn from previous studies. The model uses a positive mathematical programing (PMP) framework that allows it to exactly replicate baseline production patterns while responding realistically to price changes.

Water quality impacts were estimated by linking modeled changes in livestock numbers to nitrogen and phosphorus emissions. Species-specific nutrient emission rates were drawn from previous studies and adjusted for storage and application losses. To translate emissions into nutrient loads delivered to the Chesapeake Bay, we applied regional delivery factors from the Chesapeake Assessment Scenario Tool (CAST), which account for nutrient transport from land to water, through streams and rivers, and ultimately to the Bay.

Finally, a scenario analysis was conducted to compare baseline conditions with the milk price increase scenarios. Results were validated against previous nutrient budget studies and were found to be consistent in terms of magnitude and spatial patterns.

Publication completed for this work

Zhang, Z., & Abler, D. (2023). Dairy pricing policy, production, and water quality: Application to the Chesapeake Bay watershed. Journal of the Agricultural and Applied Economics Association, 2(2), 350–365. https://doi.org/10.1002/jaa2.62