• The Georgia Agricultural Experiment Stations (!; College of Agriculture, The University of Georgia

Research Report 550 September 1988

ANDREW N •. NOVAKOV/C

Financial Viability and Other Factors Affecting Bid Prices of Participants in the

Dairy Termination Program

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Dale H. Carley

U.S. Abbr.

mi yd tt or . in or"

sq mi or mi2

acre sq tt or tt2

gal qt pt floz bu cu tt or tt3

ton Ib oz

Metric Abbr.

km m cm mm

ha

liter ml cc

MT kg g mg

Conversion Table

Unit

mile yard foot inch

Length

Area

Approximate Metric Equivalent

1 .609 kilometers 0.9144 meters 30.48 centimeters 2.54 centimeters

square mile 2.59 square kilometers acre 0.405 hectares or 4047 square meters

square foot 0.093 square meters

Volume/Capacity gallon quart pint

fluid ounce bushel

cubic foot

3.785 liters 0.946 liters 0.473 liters 29.573 milliliters or 28.416 cubic centimeters 35.238 liters 0.028 cubic meters

MasslWeight ton

pound ounce

Unit

kilometer meter

centimeter millimeter

hectare

Length

Area

0.907 metric ton 0.453 kilogram 28.349 grams

Approximate U.S. Equiv91ent

0.62 mile 39.37 inches or 1 .09 yards 0.39 inch 0.04 inch

2.47 acres

Volume/Capacity liter

milliliter cubic centimeter

61.02 cubic inches or 1.057 quarts 0.06 cubic inch or 0.034 fluid ounce 0.061 cubic inch orO 035 fluid ounce

MasslWeight 1.1 tons 2.205 pounds 0.035 ounce

metric ton kilogram

gram milligram 3.5 x 10-5 ounce

Clive W Donoho, Jr. Director

Gerald F. Arkin Associate Director Northern Region

Robert S. King Publications Editor

Charles W. Laughlin Associate Director

Gale Buchanan Associate Director Southern Region

William Reeves Art Director

ISSN 0072-128X

Introduction Data Source Contract Acceptance Bid Prices and Factor Relationships

Contents

Bid Prices and Reasons for Participation Bid Price-Financial Relationships . . Bid Price-Dairy Farm Operations Bid Price-Dairy Farmer Characteristics Bid Price-Information and Expectations

Analysis of Factors Affecting Bid Prices Summary References . . . . . . . . . . . .

1 2 2 3 3 4 7 9

.10

.12

. 14

. 15

Preface

The Dairy Title in the Food Security Act ofl985 contained provisions for a Dairy Termina­tion Program (DTP). Dairy farmers choosing to participate determined their milk marketing base and submitted bids in dollars per hundredweight to the Secretary of Agriculture. If the bid contract was accepted, the dairy farmer agreed to cease milk production for five years.

Bids were accepted up to and including $22.50 per hundredweight of milk without regard to regional differences in the proportion of milk removed from the market. Dairy farmers in some southern states tended to bid lower, relatively, than those in the nation as a whole. Thus, there was a higher rate of accepted contracts in these states.

This report evaluates factors that may have influenced bid prices by dairy farmers in Alabama, Georgia, Louisiana, and Mississippi. An earlier report evaluated the reasons for par­ticipation in the DTP (Carley et a1. 1988).

Acknowledgments

This publication is based on cooperative research conducted by state agricultural experi­ment stations in Alabama, Georgia, Louisiana, and Mississippi. Cooperators sent question­naires to each dairy farmer in their state who participated in the dairy termination program. The responses were coded by the Department of Agricultural Economics located at the Georgia Experiment Station in Griffin, Georgia . The more than 200 dairy farmers providing informa­tion are thanked for their participation in the survey.

The following cooperators are acknowledged and thanked for their participation: Dr. Lowell Wilson, Auburn University; Dr. Wayne Gauthier, Louisiana State University; Dr . Charles Powe, Mississippi State University; and Dr. William Thomas, Extension Marketing Economist, University of Georgia , who suggested the need for such a study.

Financial Viability and Other Factors Mfecting Bid Prices of Participants in the

Dairy Termination Program in Four Southern States

Dale H. Carley

In trod uction

A major component of the Dairy Ti tie in the farm legislation passed by Congress in Decem­ber 1985 was the Dairy Termination Program (DTP). Dairy farmers in any state could volun­tarily sell their rights to produce milk to the Secretary of Agriculture. The procedure called for dairy farmers to determine their milk marketing base and submit a dollar-per-hundredwei ght bid to the Secretary. If the bid was accepted, the dairy farmer agreed to cease producing milk for five years.

On a national basis, bids were accepted up to and including $22.50 per hundredweight of milk. For terminating milk production by a certain time, the dairy farmer received payments from the Secretary equal to the accepted bid, multiplied by the base marketings. The program, designed for reducing milk production, was a rather unique system in agricultural policy in that it called for dairy farmers to make bid decisions. Dairy farmers did not know prior to accep­tance the maximum bid that the Secretary would accept. Therefore, bids by farmers ranged from as low as $3.40 per hundredweight to over $1000 (USDA 1986).

Heavy participation in the dairy-termination program occurred in most of the southern states. Three southern states, Alabama, Georgia, and Mississippi, ranked in the top eight states in the percentage ofl985 milk marketings that were expected to be removed from the market. An earlier study shows the reasons for DTP participation in four southern states (Carley et al. 1988). Relationships between reasons for participation and dairy farmer characteristics were a major part of the study.

This study was designed to analyze the factors affecting the accepted bids of dairy farmers. Since bidding was a somewhat unique procedure in a farm policy program, some insight into the characteristics of dairy farmers, and the relationships between these characteristics and their bid prices, may provide some guidelines for future policymakers.

The objectives of this analysis of bid prices by DTP participants were 1) to determine the relationships between bid prices and dairy farmer characteristics, 2) to identify the factors af­fecting the ranges of bid prices, and 3) to determine the relationships of bid prices to the finan­cial viability of DTP participants.

Dale H. Carley is a professor in the Department of AgTicultural Economics, University of Georgia College of Agriculture, Georgia Experiment Station, Griffin, GA 30223-1797. This research was supported by state and Hatch funds. The report contributes to the Southern Regional Dairy Marketing Research Project S-217, "Economic and Technical Forces Shaping the Southern Dairy Industt-y."

2

Data Source

The information on bid prices, the reasons for DTP participation, and the characteristics of the dairy farmer participants were obtained from a survey of all participants in Alabama, Geor­gia, Louisiana, and Mississippi. Questionnaires were mailed to each DTP participant in late 1986 with a follow-up mailing two weeks later. Usable questionnaires were received from 206 dairy farmers (39% of the total participants).

Contract Acceptance

The acceptance of a contract from a dairy farmer producing milk anywhere in the 48 con­tiguous states of the U.S. was based on the bid level. Contracts were accepted to a maximum level of$22.50 per cwt of milk . For the 39,534 contracts submitted in the U.S ., bids ranged from $3.40 to over $1000 per cwt. In the four-state region of this study, 887 contracts were submitted ranging from a low bid of$3.98 in Mississippi to a high of$200 in Georgia (table 1).

Table 1. Number of Contracts Submitted and Accepted, and Bid Ranges of Dairy­Termination-Program Participants, Four Southern States and the United States, 1986

Sign-up data

State Contracts Bids submitted Contracts Percent Average submitted low high accepted accepted bida

no. $ per cwt no. % $/cwt Alabama 134 5.00 199.00 91 68 13.13 Georgia 309 5.09 200.00 179 58 15.35 Louisiana 177 5.49 99.99 90 51 13.48 Mississippi 267 3.98 150.00 173 65 14.94 Total or avg. 887 533 60 14.56 U.S. 39,534 3.40 999.99b 13,980 35 15.80

S OURCE: USDA (1 986) a. Determined by dividing total expected payment by the estimated tota l milk base of the con t racts accepted. b. Bid exceeded $1000.

For the UB., only 35% of the contracts were accepted. In the four southern states, 533 con­tracts or 60% of those submitted were accepted. Thus, there was a much higher rate of accep­tance in these four states than in the U.S . Based on the expected total payment to dairy farmers for the contracts accepted , divided by their estimated total milk base, the U.S . bid price averaged $15.80 per cwt of milk base. On the same basis, the average bid price in the four southern states ranged from $13.13 per cwt in Alabama to $15.35 in Georgia .

An analysis of the relationship of the percentage of contracts accepted and bid price was performed. The following results were obtained:

percent of bids accepted in each state = 132.81 - 5.556 (average bid in each state),

R2 = 0.263 and coefficients bo and bi significant at probability .001.

For each $1.00 increase in the average bid price in a given state, the percentage of contracts ac­cepted decreased by about 5.6%. This implies that bid prices tended to range lower in the four southern states than for the U.S. as a whole, since a higher percentage of the contracts were ac­cepted rela ti ve to the accepted bid maximum of $22.50.

3

Bid Prices and Factor Relationships

For the sample of dairy farmer participants in this four-state study, 55% bid less than $15.00 per cwt of milk, with 26% bidding in the $19-to-$22.50 range (table 2). More than 60% of the Alabama and Louis iana participants bid less than $15.00, while 53% in Georgia and 42% in Mississippi bid less than $15.00. The simple average of the bid prices ranged from $13.86 in Louisiana to $15.39 in Georgia. The bid price distribution was bimodal with a lower group bid­ding in the $11-to-$15 .00 range and a higher gToup peaking in the $19-to-$21.00 range.

Table 2. Bid Price Accepted and Location of Dairy Farmer Participant, by State, 1986

Location

Bid price Alabama Georgia Louisiana Mississippi Total

- $ per cwt- - - - - - - - - - - - - - - - - - % of operators - - - - - - - - - - - - - - - - -

Less than 7.00 3 5 6 0 4 7-8.99 12 2 6 5 6 9-10.99 12 10 19 16 14 11-12.99 21 11 17 13 15 13-14.99 17 25 14 8 16 15-16.99 3 8 7 18 9 17-18.99 6 10 14 8 10 19-20.99 16 19 14 24 18 21-22.50 10 10 3 8 8 Total 100 100 100 100 100

No. of operators 34 61 36 67 198

Simple average $/cwt 14.49 15.39 13.86 15.38 14.95

SOURCE: Survey results.

Bid Prices and Reasons for Participation

Farmers were asked why they submitted bids . The relationships between bid prices and reasons for submitting bids are shown in table 3. Fifty-seven percent of the unprofitablelhigh­debt dairy operators bid less than $15.00. Of the retirement group, 44% of the unprofitable group bid less than $15.00, while 64% of the retirement group reporting profitable operations bid less than $15.00. The simple average bid pr ice was lowest at $13.71 for those giving retire­ment as the reason for participating in the DTP (table 4). The farmers who were profitable, had little debt, and had decided to quit had the highest average bid ($16.27).

It may be reasoned that the retirement group of dairy farmer participants could afford to bid lower in that their net worth position may have been relatively good, providing them an op­portunity to "get paid" for going out of business. The unprofitablelhigh-debt farmers may have averaged on the low side in order to be sure their bid would be accepted so they could exit dairy farming and possibly pay off their debts. Farmers who were profitable, had little debt, and had decided to quit may have averaged higher in bid price because th ey reasoned, "I'll bid this high, and ifmy bid is accepted it's a good chance to gain a good profit; ifnot, I can continue to operate at a profit." However, the chi-square test indicates that the differences in the range of bids could not be attributed to the different reasons for participating in the the DTP.

4

Table 3. Bid Prices Accepted and Reasons For P articipation, by Percent of Total for each Reason; Alabama, Georgia, Louisiana, and Mississippi, 1986

Bid price ($ per cwt)

Reasons for Less 10.00- 15.00 20.00- Oper-participation than 10 14.99 19.99 22.50 Total ators

- - - - - - - - - - - - - - % of operators - - - - - - - - - - - no. Unprofitable, high debt 22 35 25 18 100 40 P rofitable, high debt,

chance to payoff debt 7 40 40 13 100 30 Profitable , little debt,

decided to quit 18 18 29 35 100 17 Profitable , little debt,

future not bright 8 48 29 15 100 48 Unprofitable ,

retirement age 19 25 37 19 100 16 Profitable,

retirement age 22 42 19 17 100 36 Other 12 25 25 38 100 8 Percent of total 15 37 29 19 100 195

SOURCE: Survey results. NOTE: Chi-square = 23.78 with 21 d.f. ; prob. = .304.

Table 4. Simple Average of Bid Prices by Reasons fOl' Participation; Alabama, Georgia, Louisiana, and Mississippi, 1986

Reasons for partici pa tion

Profitable, retirement age Unprofitable, retirement age Unprofitable, high debt Profitable, little debt,

future not bright Profitable , high debt,

chance to payoff debt Profitable, little debt,

decided to quit

SOURCE: Survey results.

Bid Price-Financial Relationships

Range in bid price

Average bid price

- - - - - - - - - - - $ per cwt - - - - - - - -

5.95 - 22.00 13.71 7.00 - 22.50 13.72 5.89 - 22.00 14.49

8.00 - 22.00 15.03

4.95 - 22.50 15.83

6.99 - 22.44 16.27

Almost 70% of the dairy operators received 90% or more of their farm income from their dairy operation in 1985. About 50% of this group had bid prices within $10.00 to $14.99, and another 32% had bids within $15.00 to $19.99 (table 5). Nearly 80% of the farmers receiving up to 69% of their income from dairy farming bid less than $15.00, while only 31 % in the 70%­to-79% income range bid less than $15.00. The chi-square test indicates that differences in the bids could be attributed to the degree of dairy farm specialization.

5

Table 5. Bid Price Accepted and Percentage of Total Farm Income Received from Dairy Operation in 1985; Alabama, Georgia, Mississippi, and Louisiana

% of income from dairy operations

Bid price 1-69 70-79 80-89 90-100 Total

- $ per cwt- -------- - - - - - - - - - % of farms - - - - - - - - - - - - - - - - - -

Less than 10 2.6 1.0 3.1 8.7 15.4 10-14.99 6.6 1.5 3.1 25 .1 36.3 15-19.99 1.5 3.1 2.6 22.1 29.3 20-22.50 1.0 2.6 3.1 12.3 19.0 Total 11.7 8.2 11.9 68.2 100.0

No. of farms 23 16 23 133 195

SOURCE: Survey results. NOTE: Chi-squa re = 24.54 with 15 d.f. ; prob. = .058.

In terms of net farm income in 1985, there was no distinct bid pattern related to the level of income. For the 130 dairy farmers who indicated a negative net income in 1985, just over 50% bid less than $15 .00 (table 6). About 85% of the farmers with net incomes in the $50,000-to-$100,000 range bid less than $15.00.

Table 6. Bid Price Accepted and Net Farm Income in 1985; Georgia, Alabama, Louisiana, and Mississippi

Net farm income (thous dol)

Bid Lost more Lost Lost Made Made Made 100 price than 50 25-50 1-24.9 0-49.9 50-99.9 or more Total

-$ per cwt- - - - - - - - - - - - - - - - - - - - - - -% of operators- - - - - - - - - - - - - - - - - - - - - - - -Less than 10 11.1 11.1 16.8 11 .8 42.9 0.0 15.6 10-14.99 44.5 33.3 36.3 38.2 42.9 40 .0 37.1 15-19.99 22.2 38.9 26.5 35.3 0.0 40 .0 28.5 20-22.50 22.2 16.7 20.4 14.7 14.2 20.0 18.8 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0

No. of operators 9 18 113 34 7 5 186

SOURCE: Survey results.

Dairy farmer participants were asked to estimate the percentage ofthe funds received from the disposal of the herd, funds from the buyout contract, and other related income that they would be able to retain after paying all farm-related debts. The percentage remaining is an estimate of their net worth. When the net worth was related to the bid prices of DTP par­ticipants, it showed that 61 % ofthe 56 dairy operators who indicated a zero net worth bid less than $15.00 (table 7). A higher percentage of the farmers with a net worth ranging from 75% to 100% bid less than $15.00, compared to farmers with a net worth ranging from 25% to 75%. As indicated by the chi-square test, there was not a significant difference in the bid prices on the basis of net worth, indicating that the bid price was not related to the level of net worth of the DTP participant.

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Table 7. Bid Price Accepted and Percentage of Funds Received That Participan t Will Be Able to Retain after Paying All Debts; Alabama, Georgia, Louisiana, and Mississippi, 1986

Bid price

100-debt free

% of funds able to retain (net worth) a

75-99 50-74 25-49 1-24

None­all

needed Total

-$ per cwt­Less than 10 10-14.99 15-19.99 20-22.50 Total

- - - - - - - - - - - - - - - - - - - - - - % of operators - - - - - - - - - - - - - - - - - - - - - - - -2l.1 19.4 3 .8 17.4 13.6 14.3 15.3 34.2 32.3 38.5 26.1 36.4 46.4 37.2 23.6 32.3 34.6 43.5 45.5 16.1 29.1 2l.1 16.0 23.1 13 .0 4.5 23.2 18.4

100.0 100.0 100.0 100.0 100.0 100.0 100.0

No. of operators 38 31 26 23 22 56 196

S OURCE: Survey results. NOTE: Chi-square = 17.47 with 15 d.f. ; prob. = .29l. a. Net worth stated as percentage of tota l funds remaining from fund s received from disposa l of herds , from buyou t

contract, a nd from other sales, a fter paying a ll debts.

Nearly 19% ofthe DTP participants indicated they had positive net incomes and were debt free (table 8). At the other extreme, about 16% of the participants indicated a negative net in­come and a zero net worth. However, about 23% reported positive net incomes but a net worth ranging from zero to 25%. These data indicate that there was a wide range in the financi al situation ofDTP participants.

A financial health indicator was developed based on the estimated net farm income in 1985 and the net worth of each dairy farm participant. The level of financial health ranged from those that had a positive net farm income in 1985 and were debt free, which were designated as level 1 (best-ofD, to those who lost money in 1985 and had a net worth of less than 25%,

Table 8. Percentage of Farms by Estimated Net Income and Net Worth; Alabama, Georgia, Louisiana, and Mississippi, 1986

Net worth (%)a

Net Debt free income 100 75-99 50-74 25-49 1-24 0 Total

-000$- - - - - - - - - - - - - - - - - - - - - - - - - - % of farms - - - - - - - - - - - - - - - - - - - - - - - -100 2.1 l.1 l.1 0.0 0.5 0.0 4.8 50-99 3.2 2.1 1.1 0.5 0.5 2.7 10.1 0-49 13.2 12.2 8.5 7.4 9.0 10.0 60 .3 -1 to -25 0.5 0.0 2.1 2.7 1.6 11 .6 18.5 -25 to -50 0.0 0.0 0.5 0.5 0.0 2.7 3.7 -50 or more 0.0 0.5 0.0 0.5 0.0 l.6 2.6 Percent of

total 19.0 15.9 13.3 11.6 11 .6 28 .6 100.0b

SOURCE: Survey results, a, Net worth s tated as percentage of tota l fund s remaining from funds received from di sposal of herd s , from buyout

contract, and from other sal es, after paying all debts, b, Based on 189 fa rms,

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designated as a level 7 (worst-om (table 9). Based on the financial health indicators, about one­third of the DTP participants in Alabama and Georgia were in levels lor 2 and were considered in good financial condition (table 10). More than 40% of the DTP participants in Mississippi were also in levels lor 2, but only 16% of those in Louisiana were in good financial condition.

Table 9. Financial Health Indicator, Dairy Farm Participants; Alabama, Georgia, Louisiana, and Mississippi, 1986

Estimated 1985 Net worth Level of indicator net farm income percenta

1 (best) Positive 100 2 Positive 75-99 3 Positive 50-74 4 Positive 1-49 5 Positive 0 6 Negative 25-100 7 (worst) Negative 0-24

SOURCE: Survey results. a . Net worth stated as percentage of total funds remaining from funds received from disposal of herds, from buyout

contract, and from other sales, after paying all debts .

Table 10. Percentage Distribution of Dairy Farm Participants, by Financial Health Indicator, by State, 1986

Financial health indicatora Alabama Georgia Louisiana Mississippi Total

- - - - - - - - - - - - - - - - - - - % of farms - - - - - - - - - - - - - - - - - -

1 (best) 14.7 16.4 8.1 28 .5 18.5 2 20.6 18.2 8.1 14.3 15.3 3 11.8 7.3 5.4 15.9 10.6 4 14.7 16.3 27.0 15.9 18.0 5 17.6 12.7 10.8 11.1 12.7 6 5.9 9.1 13.6 3.2 7.4 7 (worst) 14.7 20.0 27.0 11.1 17.5 Total 100.0 100.0 100.0 100.0 100.0

No. of farmers 34 55 37 63 189

SOURCE: Survey results . a. See table 9 for method of determ ination.

About 40% of the DTP participants in Louisiana were in ievels 6 or 7, designated as worst­off financially . Only 14% of the participants in Mississippi were in levels 6 or 7, 29% of those in Alabama, and 20% of those in Georgia. Participants in Mississippi were best-off financially, with higher bids, and Louisiana participants were worst-off financially and had the lowest average bid.

Bid Prices-Dairy Farm Operations

Size of dairy farm operation, as determined by the number of cows and total milk base marketings; production level per cow; and type of facility , may affect the level of the bid price.

8

A larger percentage of the dairy farmer participants with herds offewer than 100 cows bid less than $15.00 percwtofmilk than farmers with larger herds (table 11 ). Almost 60% ofthe farmers with the smaller herds bid less than $15.00, compared to only 36% of the farmers with 100 to 149 cows. The size factor also shows up when the volume of the base marketings is examined. More than 60";(' of the dairy farmers with base marketings ofless than 1,000,000 Ib bid less than $15.00, compared to 36% ofthe farmers in the range of1 to 2 million Ib and 46% of the farmers with 2,000,000 Ib or more (table 12). These relationships show that the bid price level may have been positively related to the size of the operation.

Table 11. Bid Price Accepted and Number of Dairy Cows Sold; Alabama, Georgia, Louis iana, and Mississippi, 1986

Bid price Fewer

than 50 50-99

Number of cows sold

100-149 150-199 200 or more Total

-$ per cwt­

Less than 10 10 -14.99 15-19.99

- - - - - - - - - - - - - - - - - - - % of farms - - - - - - - - - - - - - - - - - - - -

20 - 22.50 Total

NO.offarms

23.1 38.5 10.3 28.1

100.0

39 --.--~ --- ~----

SOURCE: Survey results .

21.8 35.9 26.9 15.4

100.0

78

NOTE. Ch i-square = 25.89 with 12 d.f.; prob. = .011 .

9.1 27.3 51.5 12.1

100.0

33

0.0 3.6 15 .6 46.7 42.9 36.8 40.0 28.5 29.0 13 .3 25.0 18.6

100.0 100.0 100.0

15 28 193

Table 12. Bid Price Acce pted and Base Marke tings of Milk; Alabama, Ge orgia, Louisiana, and Mississippi, 1986

Bid price Less than

500

Base marketings (thous lb)

2000 500-999 1000-1999 or more Total

-$ per cwt­

Less than 10 10 -14.99

- - - - - - - - - - - - - - -- - - - % of farms - - - - - - - - - - - - - - - - - -

15 -19.99 20 - 22.50 Total

No. of farms

SOURCE: Survey results.

23.3 37.2 20 .9 18.6

100.0

43

NOTE. Chi-squ are = 19.56 with 9 d.f.; prob. = .021.

23.6 41.8 18.2 16.4

100.0

55

4.3 5.4 14.8 31.9 40.5 37.8 44.7 37.8 29.7 19.1 16.3 17.7

100.0 100.0 100.0

47 37 182

Efficiency of operation, as measured by production per cow and the use of herringbone milk­ing parlors, may have had an influence on the farmer's bid price level. Table 13 shows the relationships between bid price and production per cow. About two-thirds of the farmers with production of less than 10,000 Ib of milk per cow bid less than $15.00, in contrast to only 28% of farmers with production of16,000 or more lb who bid less than $15.00. The farmers in the 10,000- to 16,000-lb per cow groups were split about evenly in numbers bidding below $15.00 and $15.00 or more.

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Table 13. Bid Price Accepted and Production per Cow; Alabama, Georgia, Louisiana, and Mississippi, 1986

Production per cow (lb)

Less than 10,000- 12,000- 14,000- 16,000-Bid price 10,000 11,999 13,999 15,999 or more Total

-$ per cwt- - - - - - - - - - - - - - - - - - - - % of farms - - - - - - - - - - - - - - - - - - - -

Less than 10 20.0 12.5 14.3 19.0 0.0 14.2 10 -14.99 46.7 43 .8 33.3 35.7 27.8 36.4 15 -19.99 20.0 15.6 39.7 28.6 44.4 31.2 20 - 22.50 13.3 28.1 12.7 16.7 27.8 18.2 Total 100.0 100.0 100.0 100.0 100.0 100.0

No. of farms 15 32 63 42 18 170

SOURCE: Survey results. NOTE: Chi-squa re = 14.72 with 12 d .f.; prob. = .257.

The herringbone parlor, which is considered an efficient milking facility compared to other types offacilities, was used by about 50% of the DTP participants (table 14). Of those farmers, about 46% bid less than $15.00. In contrast, 70% of the farmers with other types of parlors and 54% of the farmers with stanchion operations bid less than $15.00. There was some indication that the more efficient dairy farmers, as measured by production per cow and type of milking facility , may have bid higher than other farmers . However, the chi-square tests indicated no significant relationships.

Table 14. Bid Prices Accepted and Type of Milk Facility Used; Georgia, Alabama, Louisiana, and Mississippi, 1986

Type of facili ty

Herringbone Other type Stanchion Bid price parlor parlor operations Total

-$ per cwt- - - - - - - - - - - - - - - - - - - - - - - -% of farms- - - - - - - - - - - - - - - - - - - - - - - -

Less than 10 10 -14.99 15 - 19.99 20 - 22.50 Total

NO. offarms

10.2 35.7 36.7 17.4

100.0

98

SOURCE: Survey results .

25.9 44.4 18.5 11.2

100.0

27

NOTE: Chi-squa re = 12.34 wi th 9 d. f. ; prob. = .195.

Bid Price-Dairy Farmer Characteristics

18.1 15.3 36.1 37.1 22.2 28.9 23 .6 18.7

100.0 100.0

72 197

Bid prices may be related to such dairy farmer characteristics as age, years of experience, education, and ownership . Age, as a factor, indicated that 60% of those under 40 and 54% of those over 60 bid less than $15.00 (table 15). Farmers in the age group of 40 to 59 were split about even, with slightly fewer than one-half bidding under $15.00. Those farmers with fewer than 10 years of experience in dairy farming had the highest percent (64%) bidding less than $15 .00 (table 16). As years of experience increased, the percentage offarmers bidding less than $15.00 decreased.

10

Table 15. Bid Price Accepted and Age of Dairy Farm Operator; Georgia, Alabama, Louisiana, and Mississippi, 1986

Age of operator (years)

Under 40- 50- 60 or Bid price 40 49 59 more Total

-$ per cwt- - - - - - - - - - - - - - - - - - % of opera tors - - - - - - - - - - - - - - - - -

Less than 10 22.9 14.9 7.1 19.3 15.3 10 - 14.99 37.1 34.0 39.3 35.1 36.5 15 -19.99 28.6 34.0 28.6 26.3 29.2 20 - 22.50 11.4 17.1 25.0 19.3 19.0 Total 100.0 100.0 100.0 100.0 100.0

No. of operators 35 47 56 57 195

SOURCE: Survey results. NOTE Chi-square = 7.32 with 9 d.f. ; prob. = .604.

Table 16. Bid Price Accepted and Years of Experience in Dairy Farming; Georgia, Alabama, Louisiana, and Mississippi, 1986

Years of experience

Fewer 30 or Bid price than 10 10-19 20-29 more Total

-$ per cwt- - - - - - - - - - - - - - - - - - - % of operators - - - - - - - - - - - - - - - -

Less than 10 12.0 20.8 6.5 17.7 15.1 10 - 14.99 52.0 35.4 43.5 30.4 37.4 15 - 19.99 28.0 27.1 28.3 30.4 28.8 20 - 22.50 8.0 16.7 21.7 21.5 18.7 Total 100.0 100.0 100.0 100.0 100.0

No. of operators 25 48 46 79 198

SOURCE: Survey results. NOTE: Chi-square = 9.09 with 9 df. . prob. = .429.

Dairy farmer participants were grouped into three levels of education: fewer than nine years, 9-12 years, a nd 13 or more years (table 17). With this grouping, a few more than one-third of those with the fewest years of education bid less than $15.00. In comparison, 53% ofthose with nine to 12 years and 55% with 13 or more years of education bid less than $15.00.

The chi-square test indicated no significant relationship between bid price level and age, years of experience, or years of education.

Bid Price- Infonnation and Expectations

Many economic and noneconomic factors had to be evaluated by dairy farmers in deciding whether or not to bid and in determining the actual bid price. The bid price determination was a somewhat difficult procedure since several factors needed to be taken into account. Dairy farmer publications, extension service personnel, dairy farmer organizations , and USDA per­sonnel provided many types of guidelines and assistance.

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Table 17. Bid Price Accepted and Years of Formal Education of Operator; Georgia, Alabama, Louisiana, and Mississippi, 1986

Bid price Fewer than 9

Years of education

9-12 13 or more Total

-$ per cwt­

Less than 10 10 - 14.99

- - - - - - - - - - - - - - - - - - - - - - -% of operators- - - - - - - - - - - - - - - - - - - - -

15 - 19.99 20 - 22.50 Total

No. of operators

9.1 27.3 45 .5 18.1

100.0

11

SOURCE: Survey results. NOTE: Chi-squa re = 5.10 with 6 d.f.; prob. = .531.

14.6 17.0 15.4 38.2 38.3 37.7 24.7 31.9 29 .4 22.5 12.8 17.5

100.0 100.0 100.0

89 94 194

The dairy farmer participants were asked to list the sources of information they used to help them determine their bid prices. Dairy publications were the most popular source of informa­tion , followed by extension service personnel and extension service publications (table 18). About one-third of those farmers using their own information bid in the $20.00 to $22.50 range.

Farmers were asked to list the one most important source of information used. These were arranged according to bid price level to determine if there was any relationship. About the same number of dairy farmers listed dairy publications, extension personnel and publications, and their own information as the most useful information source (table 19). Around 54% of those using dairy publications and 59% of those using USDA sources bid less than $15.00. In com­parison, 43% to 45% of those using the extension service and dairy farm organizations bid less than $15.00. About 41 % of those using their own information bid under $15.00.

Table 18. Bid Price Accepted and Source ofInformation Used to Help in Determin ing Bid; Georgia, Alabama, Louisiana, and Mississippi, 1986

Bid price ($ per cwt)

Source of information Less than 10 10-14.99 15-19.99 20-22.50

- - - - - - - - - - -% of operatorsa - - - - - - - - - - - -

Dairy publications 50 61 46 37 Extension service personnel 25 38 28 22 Extension service publications 25 20 18 25 Dairy cooperatives 14 23 21 25 Other dairy organizations 17 9 16 Other farm organizations 11 12 9 9 USDA 4 14 7 6 ASCS 25 28 19 19 Used own information 21 19 23 34

No. of operators 28 69 56 32

SOURCE: Survey results . a . Pe rcent of total using the information source shown by each bid price group; many used more th a n one source of

information.

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Table 19. Bid Price Accepted and Information Source That Was Most Useful in Determining Bid Price; Georgia, Alabama, Louisiana, and Mississippi, 1986

Information source most useful

Less than 10.00

10.00-14.99

Bid price ($ per cwt)

15.00- 20.00- Total 19.99 22.50 Total operators

----------------- - - -% of operators - - - - - - - - - - - - - - - no.

Dairy publication University extension

personnel & pubs. Dairy & farm organ. USDA, ASCS Used own information Total

SOURCE: Survey results.

10.3

13.2 9.5

13.6 12.2 11.8

43.6 33.3 12.8

3l.6 36.8 18.4 33.3 28.6 28.6 45.5 31.8 19.1 29.3 31.7 26.8 36.0 33.0 19.2

Analysis of Factors Affecting Bid Price s

100.00 39

100.00 38 100.00 21 100.00 22 100.00 41 100.00 161

The previous section, in which the relationship of bid prices was compared to various single factors, indicated that some factors may explain the bid price variation ofDTP participants. It was hypothesized that some of the financial factors, dairy farm operation factors, farmer charac­teristics, sources of information, and reasons for participation in the DTP may explain the bid price variation among dairy farmer participants in the four southern states.

The model used to estimate bid price variability was developed from variables shown in table 20. A multiple-regression equation was used to obtain the coefficients explaining variability in bid prices. The variables were used in several different combinations in order to obtain results that may best explain the variation. Those coefficients that had probability levels of .50 or greater were removed from the equation. These included number of cows, type of milking facility, net farm income, and age and experience of the dairy farmer. Because of possible variability by location, the state location of the dairy farmer was included in the equation.

Pounds-of-milk base marketings and percentage of total farm income from dairy farming positively influenced bid prices (table 21). These are factors relating to size and specialization, implying that the farmers with larger herds who relied on dairy farming for their income bid a higher price . Education exhibited a negative, nonsignificant effect on bid prices.

The information sources showed mixed patterns of influence on bid prices. Participation in the diversion progTam, which should have provided some knowledge about helping to determine bid prices, had a negative influence on bid prices . Dairy farmers who participated in the diver­sion program bid $1.42 less than those not participating. Since farmers who participated in the diversion program received $10.00 per cwt of milk in that program, they may have bid toward that same level, believing that $10 was near the cut-offlevel.

Those who used the extension service for information bid $0.84 less than those who did not. A positive and significant influence on bid prices was shown for farmers using dairy and other organizations, and those using their own information .

The effects that the reasons for participation have on bid prices need to be viewed together. A dairy farmer could be in only one reason category. The effect of each reason is to be compared with the variables retirement and profitable, which form the base reason . Each of the other reasons showed a positive influence on bid price compared to the base reason. For example, farm ers who participated because of retirement age but unprofitable operations (RTNP), had a

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Table 20. Identification of Variables Used to Explain Variation in Bid Prices of DTP Participants

Variable

Dependent BIDP

Independent Dairy fann operation

COWS PRDC

MLBA MFAC

Financial factors NETT PINC

Dairy fanner characteristics AGE YREP EDUC

Source of infonnation EXTB

ORGN

UOWN PART

Reasons for DTP participation

Definition

bid price per cwt of milk for each dairy farmer participant

number of milk cows in the herd that would be sold average production per cow in the dairy herd for 1985, in

thousand pounds base ma rketings of milk for each farm, in thousand pounds type of milking facility, herringbone = 1, other types = 0

net farm income in 1985 percent offarm income from dairy farm operation in 1985

age of the dairy farmer in years years of experience in dairy farming since the age of 18 formal education of dairy farmer in years

used extension service personnel and/or extension publica­tions for information = 1, did not use = 0

used dairy and other farm organizations for information = 1, did not use = 0

used own information = 1, did not use = 0 participated in the 1984-1985 milk diversion program = 1,

did not participate = 0

HDNP high debt, not profitable HDPR high debt, profitable, payoff debt PRQT profitable, decided to quit PRNB profitable, future not bright for dairy farming RTNP retirement age, not profitable RTPR retirement age, profitable (designated the dummy variable

Location of dairy farmer AL MS LA GA

for the reason factors )

Alaba ma Mississippi Louisiana Georgia (designated as the dummy vari able for location)

bid of $2.25 more than the base-reason farmers . The farmers with a high-debt, profitable operation (HDPR) bid $l.35 more than those base farmers, while farmers with high-debt, un­profitable operations (HDNP) bid $0.77 more than base farmers. However, the reasons for par­ticipation did not have a statistically significant effect on bid prices.

The location of the farmers by state had little influence on bid prices. The rela tionships did indicate that Mississippi farmers bid $0.51 more and Louisiana farmers bid $0.28 less than Georgia fa rmers. The equation explained about 18% of the variation in bid prices. In general , it showed that the factors chosen for thi s model did not have a strong influence on bid prices,

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Table 21. Estimated Coefficients for Equation Explaining Variability in the Bid Prices of DTP Participants, Four Southern States, 1986

Variables Coefficient t-value

Intercept 12.713 4.45;' MLBA (millb) 0.454 1.95'" PINC (%) 0.032 l.46* EDUC (yrs) -0.133 -l.00 PART (yes) -l.897 -2.65* EXTN (yes) -0.836 -l.05 ORGN (yes) 1.716 2.14" UOWN (yes) l.617 l.71'" HDNpil 0.770 0.72 HDPR l.348 l.22 PRQT l.402 l.04 PRNBO .731 0.77 RTNP 2.252 1.42'" ALb -0.375 -0.35 MS 0.512 0.59 LA -0.284 -0.27 R2 0.177

SOURCE: Survey results. a. RTPR = retirement age , profitable is the base for the reason s for participation. b. GA = Georgia is the base state for location.

Indicates stati stical significance at .20 proba bility level or better.

either alone or together. However, the factors did indicate some direction in bid prices as well as some differences resulting from the reasons given for participating.

Summary

Heavy participation in the dairy termination program (DTP) occurred in some southern states. Three states included in this study, Alabama, Georgia, and Mississippi, ranked in the top eight states in the U.S. in the percentage ofl985 milk marketings expected to be removed from the market. In the four-state region ofthis study, which also included Louisiana, the ac­ceptance rate of bid price contracts submitted by dairy farmers ranged from 51 % in Louisiana to 68% in Alabama. The acceptance rate for the U.S. was only 35%. Based on expected pay­ments divided by milk base of accepted contracts, the bid prices of accepted contracts averaged from a low of$13.13 per cwt of milk for Alabama participants, $13.48 for Louisiana, $14.94 for Mississippi, to a high of$15.35 for Georgia. The average for the U.S. was $15.80.

This analysis concerns the factors affecting the bid prices of the accepted participants in the four states. The study is based on the answers from questionnaires mailed to all DTP par­ticipants in these states. Usable responses were received from 206 dairy operator participants (a 39% return).

For the sample farmer participants, more than 60% in Alabama and Louisiana bid less than $15.00 per cwt of milk, while 53% in '~}eorgia and 42% in Mississippi bid less than $15.00. The dairy farmers who gave retirement as the reason for DTP participation had an average bid of $13.71. In contrast, those farmers who gave profitable, with little debt, but decided to quit as a reason for participation had an average bid of$16.27. Farmers with high debt and unprofitable operations had lower average bids than those with little debt and profitable operations.

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Dairy farm specialization, as determined by the percent of total farm income received from dairy farming, had some effect on bid prices. Total farm income, net farm income, and net worth did not have any effect on bid prices. An analysis ofthe combination of net income and net worth relationships to reasons for participation indicated that the financial aspects of DTP par­ticipants were important in their decision to participate.

A larger percentage of the dairy farmers with herds ofless than 100 cows bid under $15.00 than farmers with larger herds. Also, farmers with smaller base marketings tended to bid lower than the larger operations. More farmers with herds producing less than 10,000 Ib per cow bid less tha n $15 .00, compared to farmers with herds producing above 16,000 lb. There was an in­dication that size of operation and production efficiency had a positive influence on bid price. The pattern of bid price as related to farmer characteristics such as age, dairy farm experience, and education was a mixed one with no clear-cut relationship .

Dairy farmers used information from many sources in determining their bid price, but the differences in information sources used may have influenced bid price decisions. This is sug­gested in the situation where farmers using their own information and input from dairy or­ganizations bid somewhat higher than those using other sources. Farmers who participated in the dairy diversion program of 1984 to 1985 tended to bid lower than those who did not partici pa teo

A multiple-variable regression showed that the pounds of base marketings and percentage of total farm income received from dairy farming had a positive effect on bid prices made by dairy farmers. Information sources generated mixed effects, with the use of dairy organiza­tions and own information having a positive influence. The use of a cooperative extension ser­vice and participation in the 1984 to 1985 milk diversion program had a negative influence .

Farmers who indicated that their reason for participating was their retirement age and un­profitable operation, bid the highest of all farmers, while those who indicated that they were at retirement age and profitable as the reason, bid the lowest. Farmers with high debt and un­profitable operations tended to bid lower than farmers with profitable operations.

In general, this study of bid prices by dairy farmer participants in the DTP indicated a wide range of bid prices. There were no specific factors that appeared to explain farmers' bid price levels in the four southern states. The program was set up as a voluntary one with few guidelines, except to determine a bid price level that would become an accepted contract.

References

Carley, D. H., W. A. Thomas, W. M. Gauthier, C. E. Powe, and L. E. Wilson. 1988. An evalua­tion of characteristics of participants in the dairy termination program in four southern states. Univ . of Ga. ColI. of Agri. Exper. Sta . S. Cooperative Series Bul. 328.

U.S. Dept. of Agriculture . 1986. USDA announces results of dairy termination program. USDA News Division, Mar. 28.