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Empirical dairy profits under fluctuating prices

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  • Masato Nakane
  • Loren Tauer

Abstract

Production theory suggests that average profits would be greater with more variation in prices, if farmers correctly adjust use of inputs and outputs to changes in prices. We provide an empirical nonparametric analysis of farmers' profits under price changes over 12 years using an unbalanced panel of dairy farmers. Each year that a farm participated, we have quantities of milk and other outputs and usage of 30 different inputs. If that farmer participated in the survey the following year, the profit that farmer would have earned that following year using the netput vector of the previous year and the price vector of the following year was calculated. This passive profit was compared to the actual profit the farmer produced the following year. Of the 2371 observations, 56% show netput vector changes which enhanced net profit implying that as a group, these farmers were not generally able to correctly adjust inputs in response to price changes consistently. Logit regression failed to differentiate characteristics of farmers who were successful.

Suggested Citation

  • Masato Nakane & Loren Tauer, 2009. "Empirical dairy profits under fluctuating prices," Applied Economics, Taylor & Francis Journals, vol. 41(1), pages 5-15.
    • Handle: RePEc:taf:applec:v:41:y:2009:i:1:p:5-15
    DOI: 10.1080/00036840801935393
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    References listed on IDEAS

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    1. Loren W. Tauer, 1995. "Do New York Dairy Farmers Maximize Profits or Minimize Costs?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 77(2), pages 421-429.
    2. Afriat, Sidney N, 1972. "Efficiency Estimation of Production Function," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 13(3), pages 568-598, October.
    3. Featherstone, Allen M. & Moghnieh, Ghassan A. & Goodwin, Barry K., 1995. "Farm-level nonparametric analysis of cost-minimization and profit-maximization behavior," Agricultural Economics, Blackwell, vol. 13(2), pages 109-117, November.
    4. Loren Tauer & Zdenko Stefanides, 1998. "Success in maximizing profits and reasons for profit deviation on dairy farms," Applied Economics, Taylor & Francis Journals, vol. 30(2), pages 151-156, February.
    5. Hanoch, Giora & Rothschild, Michael, 1972. "Testing the Assumptions of Production Theory: A Nonparametric Approach," Journal of Political Economy, University of Chicago Press, vol. 80(2), pages 256-275, March-Apr.
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    7. Varian, Hal R, 1984. "The Nonparametric Approach to Production Analysis," Econometrica, Econometric Society, vol. 52(3), pages 579-597, May.
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    Cited by:

    1. Yacob Abrehe Zereyesus & Allen M. Featherstone & Michael R. Langemeier, 2021. "Are Kansas farms profit maximizers? A stochastic additive error approach," Agricultural Economics, International Association of Agricultural Economists, vol. 52(1), pages 37-50, January.

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