Economics

a) Milk production is a daily process which costs farmers substantial money in terms of cattle feed, veterinary services, transport, storage and labor. Since it is a highly perishable product, delays in getting fresh milk processed will lead to huge losses to the farmers. For this reason all their production should be collected and delivered to the processing plants for immediate processing. Unless a serious shortage occurs, reconstituting powdered milk will only lead to a glut in the market and push down the farm gate prices of milk. Price reductions will adversely affect the operations of farmers and force them to cut costs or abandon production altogether.

b) Milk is a basic good which is in high demand and has few substitutes.  A shortage of the product will lead to a sharp increase in price, making the good too expensive for a majority of people (Estrin, et al., 2008). To ensure stable prices and affordability, each region should be able to supply its markets needs. With a relatively inelastic demand curve, the ideal situation is that milk supply should intersect the demand curve at a price level that is affordable to all and which compensates farmers for their work.

c) I believe the Senator is correct in his observation because of the following analysis. Farmers depend on dairy price supports to meet their running expenses and make a modest profit. A decrease in such supports will reduce their income and cause them substantial losses (NMPF, 2009). In the short run, most farmers will have to continue producing milk at a loss because of the large investments they have made in purchasing cattle, setting up the necessary infrastructure and the need to fulfill contractual obligations like paying off bank loans or supplying certain clients. In the long run, those farmers that are able to reduce their costs and operate efficiently will remain in business while others will close down their farms. These efficient farmers will be able to increase production to meet the shortfall occasioned by the exit of other producers.