Imputing Dairy Producers' Quota Discount Rate Using the Individual Export Milk Program in Quebec

Trade liberalization scenarios are often evaluated using sophisticated programming models that rely on a number of assumptions related to demand and supply parameters. One challenge researchers often encounter in the calibration of dairy trade liberalization models is to identify the supply response of producers under production quotas. The existence of production quotas in the Canadian dairy industry implies departures from standard marginal cost pricing. Under traditional net present value models, an assumption about the discount factors attached to production quotas must be made to infer the supply response of Canadian dairy producers following a change in the economic environment (e.g., import tariffs). The Individual Export Milk (IEM) program in Quebec generated an opportunity to estimate dairy producers’ discount factors for production quotas conditional on different assumptions about structural parameters such as producers’ risk preferences and cost efficiency.