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Has Price Responsiveness of U.S. Milk Supply Decreased?

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  • Marin Bozic

    ()
    (The Institute of Economics, Zagreb)

  • Brian W. Gould

    ()
    (Department of Agricultural and Applied Economics, University of Wisconsin)

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    Abstract

    This study has three main objectives: (i) to quantify the impacts of milk and feed price changes on the primary milk supply in the U.S.; (ii) to examine the impacts of technological changes on the price responsiveness of supply and specific herd characteristics; and (iii) to generate dynamic long-run forecasts of the milk supply response to price changes and possible future technological advancements. The econometric analysis contained in this study is an update of the model by Chavas and Klemme (1986). We used the residual-based bootstrap to test hypotheses regarding the long-run price-responsiveness of supply, and found that the 10-year elasticity of milk supply to milk price is lower in 2007 than it was in 1980. This result is most surprising. One might expect that with better genetics, improved heifer management and larger farms the industry would be likely to react to prices more quickly than almost thirty years ago, when small and medium-sized dairy operations played a major role. A detailed analysis of the predicted herd structure supports the conjecture that a decrease in price responsiveness is a consequence of decades-long excessive focus on yield improvement in genetic selection. The intensive production process could make cows susceptible to health problems, imposing biological constraints on the economic lifetime of a cow. Hence, herd expansion decisions will be harder to implement, as culling rates are not easily reduced, and more replacement heifers are needed just to keep the herd size stable.

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    Bibliographic Info

    Paper provided by The Institute of Economics, Zagreb in its series Working Papers with number 0902.

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    Length: 37 pages
    Date of creation: Nov 2009
    Date of revision:
    Handle: RePEc:iez:wpaper:0902

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    Keywords: milk supply; long-run elasticities;

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    References

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    1. Lee, David R. & Boisvert, Richard N., 1985. "Factors Affecting Participation In The Milk Diversion Program In The U.S. And New York," Northeastern Journal of Agricultural and Resource Economics, Northeastern Agricultural and Resource Economics Association, vol. 14(2), October.
    2. Jeffrey T. LaFrance & Harry D. Gorter, 1985. "Regulation in a Dynamic Market: The U.S. Dairy Industry," Monash Economics Working Papers archive-34, Monash University, Department of Economics.
    3. Blayney, Donald P. & Gehlhar, Mark J. & Bolling, H. Christine & Jones, Keithly G. & Langley, Suchada V. & Normile, Mary Anne & Somwaru, Agapi, 2006. "U.S. Dairy at a Global Crossroads," Economic Research Report 7209, United States Department of Agriculture, Economic Research Service.
    4. J.-P. Chavas & A. F. Kraus, 1990. "Population Dynamics And Milk Supply Response In The Us Lake States," Journal of Agricultural Economics, Wiley Blackwell, vol. 41(1), pages 75-84.
    5. Thraen, Cameron S. & Hammond, Jerome W., 1987. "Price Enhancement, Returns Variability, And Supply Response In The U.S. Dairy Sector," Southern Journal of Agricultural Economics, Southern Agricultural Economics Association, vol. 19(02), December.
    6. John D. Schmitz, 1997. "Dynamics of Beef Cow Herd Size: An Inventory Approach," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 79(2), pages 532-542.
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