Question

In August 2018, the U.S. Department of Agriculture (USDA) announced the decision to purchase 11 to 13 million gallons of milk from dairy farmers, amounting to $50 million in total.

With the above information, which do you think was occurring in the dairy market that prompted USDA to make the purchase--a shortage or a surplus? Which person or group of people will USDA's purchase help? And finally do you think the purchase will impact the dairy market in terms of price, supply, and/or demand?

Answer 1

US government is committed to helping farmers in case of any economic distress or government tends to help farmers to maintain a minimum level of income. If the supply of any agro-products rises, it leads to a fall in its price and farmers are unnecessarily penalized in forms of reduced profits. They do not want to produce more to avoid such situation of a glut that drives down the price.

Hence, government pre-commit to buy surplus produce if the price tumbles down. The same policy has been pursued by the government over here. Since the output of milk had increased massively, so the government went for purchase to avoid a steep fall in price.

Such move of the government has helped farmer or dairy farmers. while the consumers are not benefitted from such move. Purchase of milk by the government would reduce the supply in open market and price would go up in course of time. Demand might fall substantially after the rise in the price level.