The Dynamics of the U.S. Milk Supply: Implications for Changes in U.S. Dairy Policy

There is continuing pressure by various farm groups to attempt to solve the chronic problems in the U.S. dairy industry represented by increased milk price variability, inability to generate positive returns at the farm level, increasing role of dairy exports as an important market for U.S. dairy products, etc. As such it is important for analysts and policy makers obtain an estimate as to how responsive dairy producers are to changing economic and technological conditions. Examples of previous research used to examine supply response in the U.S. dairy sector include LaFrance and deGorter (1985), Chavas and Klemme (1986), Thraen and Hammond (1987), Chavas, Krauss and Jesse (1990), Chavas and Krauss (1990), Yavuz, et al, (1996) and USDA (2007). These analyses are limited in that either they are either fairly dated or they do not account the dynamics that are inherent in the dairy herd expansion/contraction process. The above overview of the dairy industry points to a changing industry as represented by reduced but larger dairy operations, the changing nature of U.S. dairy policy and pricing, production of new types of dairy products, etc. with much of the adjustments have occurred since the above previous analyses were undertaken and may no longer reflect the industries supply characteristics. The present study will incorporate data encompassing the 1975-2007 period and provide an update of the model original developed by Chavas and Klemme (1986). This study has three main objectives: (i) quantify the current supply structure of the U.S. dairy industry, (ii) gain insight into impacts of technological changes that have occurred over the last 25 years, (iii) based on (i) and (ii), generate forecasts of long-run milk supply response to price changes and possible future technological advancements.