Tracing the evolution of the aggregate U.S. milk supply elasticity using a herd dynamics model
2012
The U.S. dairy sector is characterized by increasing volatility of milk prices, and consolidation in production as evidenced by declining number of dairy farms with an increasingly larger share of milk supplied from a small number of very large farms. Using aggregate national data, we build a mixedâfrequency herd dynamics econometric model of the U.S. milk supply that updates and substantially amends the model first proposed by Chavas and Klemme. We implement a dynamic residualâbased bootstrap technique that can be used in testing for changes in nonmarginal simulated longârun supply responsiveness, and trace the evolution of longârun milk supply elasticity from 1975 through 2010. Several papers in the past have suggested that longârun supply elasticity increases with dairy farm size, which implies that increased importance of large farms would increase aggregate longârun supply responsiveness. Contrary to this conclusion, we find a declining trend in longârun supply elasticity from 1975 through 2005. Persistence of such a decline would be a major cause for worry, as ever larger price swings would be needed to equilibrate the market in face of demand shocks. However, we find that milk supply is becoming more responsive since 2005 both to milk and feed price changes. Increasing responsiveness to feed prices further justifies focusing the next generation of the dairy policy instruments on managing dairy profit margins rather than just revenue streams.
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