Tracing the evolution of the aggregate U.S. milk supply elasticity using a herd dynamics model

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 mixed‐frequency 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 residual‐based bootstrap technique that can be used in testing for changes in nonmarginal simulated long‐run supply responsiveness, and trace the evolution of long‐run milk supply elasticity from 1975 through 2010. Several papers in the past have suggested that long‐run supply elasticity increases with dairy farm size, which implies that increased importance of large farms would increase aggregate long‐run supply responsiveness. Contrary to this conclusion, we find a declining trend in long‐run 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.     

产业链视角下乳制品价格溢出效应研究——基于VAR-BEKK-GARCH(1,1)模型

奶业产业链是乳制品价格形成的基础,从产业链着手有助于发现乳制品价格溢出效应的本质特征。本文选取牛奶、酸奶、婴幼儿奶粉、老年奶粉作为乳制品的代表,基于2010年5月至2018年5月乳制品产业链月度价格数据,使用VAR-BEKK-GARCH(1,1)模型分析乳制品产业链各环节间的价格溢出效应。研究发现:婴幼儿奶粉产业链上、中、下游价格间存在显著的单向均值溢出效应,而牛奶、酸奶、老年奶粉产业链的中游对上游、下游对中游价格存在显著的单向均值溢出效应;牛奶、酸奶、婴幼儿奶粉、老年奶粉产业链各环节价格在自身和彼此间具有显著双向波动溢出效应,但从显著性水平来看,牛奶产业链和婴幼儿奶粉产业链各环节间的双向波动溢出效应最为明显。     

Expected Economic Effects of BST in The Netherlands

The calculated profitability of using Bovine Somatotropin (BST) on typical dairy farms in The Netherlands ranges from Dfl.160 to 300 per cow per year, assuming 1985 prices and circumstances, and ignoring the costs of BST. A 20% increase in milk production and no change of the feed/milk relation were used for the calculations. BST is more profitable on intensive farms or on farms with more opportunities for alternative uses of land, buildings and labour. The quota system, however, leads to a considerable reduction of profitability. At a national level, and with an unchanged milk price, a 28% adoption rate of BST would increase national income about Dfl.120 million. However, the cost of BST or any decrease in milk price could reduce this amount, even to below zero. It is apparent that some dairy farmers who apply BST will earn more income whereas others will lose income.     

Marketing,cooperatives and price heterogeneity: evidence from the CIS dairy sector

Drawing on survey data, this article identifies the determinants of variations in farm gate milk prices for three CIS countries (Armenia, Moldova, and Ukraine). We apply a multi‐level modeling approach, specifically a bootstrapped mixed‐effects linear regression model. The analysis suggests three main strategies to improve the price received by farmers for their output: consolidation, competition for output, and stable supply chain relationships. In Armenia and Ukraine selling through a marketing cooperative has a significant, positive, albeit modest, effect on farm gate milk prices. In all three countries studied, the size of dairy operations, trust, and contracting also affect positively the prices received by farmers.     

Comovement of dairy product futures and firm value: returns and volatility

This study investigates the exposure of dairy firm stock prices to the prices of dairy product futures, in terms of returns and volatility, from May 2013 to April 2018. Stock price returns are regressed against an index of the futures price returns to four dairy products – milk, cheese, butter and dry whey – to isolate the effects of the dairy futures price returns. Dairy product futures price returns are found to be significant in the regression in the first three years of the sample period, with a mean coefficient of ?0.024. Using the Diebold‐Yilmaz volatility spillover method of forecast error variance decomposition, we show that the volatility of the four dairy product futures accounted for an average of 5.49 per cent of the volatility of dairy stock prices. These results suggest that the prices of dairy firms have minimal exposure to dairy product futures prices. This has implications for dairy firms and investors, who seek to understand volatility and returns in the dairy products and the stocks they trade in, and for policymakers, who seek to control or mitigate undesirable dairy product price volatility.     

A SUPPLY FUNCTION FOR DAIRY PRODUCTS

Results of an investigation into factors affecting the aggregate supply of dairy products in Australia are presented. Empirical estimates of the parameters of the supply function, using ordinary least squares, indicate that some concept of average prices for dairy products is a more important determinant of supply than ratios of prices of dairy products relative to prices of production substitutes such as beef cattle or sheep and lambs. The empirical results also indicate that the quota-type effects of the various metropolitan fluid milk schemes are important in determining supply. Effects of new technology on supply could not be quantified due to intercorrelation of explanatory variables.     

Estimation of time-varying price elasticity in 1970–1997 Japanese raw milk supply by structural time-series model

The price elasticity of raw milk supply in Japan is estimated over time by a structural time-series model in state space form, and the changes in elasticity are tested by the diagnosing test of de John and Penzer in 1998. The supply function is modeled with a local linear trend and a strictly exogenous autoregressive distributed lag price. The seasonality in the data is adjusted by a structural time-series model. In the 1970–1997 period, there were major dairy policy changes in Japan: a production adjustment, related penalties, and two-tier pricing. Hokkaido is the region that mainly provides the supply of raw milk for milk products, while Tofuken is the region that mainly produces drinking milk. The estimated price elasticity in Hokkaido became stable after imposition of the production adjustment. On the other hand, price elasticity in Tofuken became stable after the inflation of the mid-1970s. Price elasticity is estimated to be more inelastic as well as more likely to converge in inelasticity in Hokkaido than in Tofuken. We discuss the relationship between changes in dairy policy and changes in price elasticity.     

Canadian Hog Supply Response: A Provincial Level Analysis

Canada's hog sector has faced two decades of tumultuous growth, yet there are no recent estimates of supply response. This study uses state‐space methods to account for a multiplicity of autonomous structural changes impacting the sector and determines if the fundamental relationship between supply response and hog prices has changed from previous estimates. The results are consistent with prior research but offer the reader previously unavailable estimates of supply response with respect to feed prices and the variability of hog and feed prices. Feed price elasticities are somewhat larger than hog price elasticities. The effects of price risk for supply response appear quite muted but the impacts of feed price risk are greater than for hog price risk.     

Establishing Indices of Genetic Merit Using Hedonic Pricing: An Application to Dairy Bulls in Alberta

This study investigates the use of hedonic pricing to identify the value of relevant production and type traits for dairy bulls in Alberta. A hedonic pricing model is estimated that considers semen price as a function of individual production and longevily characteristics for a sample of Holstein bulls. The results suggest that the most important characteristics used by Alberta daity producers in valuing dairy bulls are milk volume, protein and fat content, general conformation, body capacity and the popularity of the bull. For a given set of such characteristics, the probability that the bull's semen may be in short supply does not significantly affect the value. This methodology may be used to establish a method of forecasting semen prices for newly proven bulls. The valuation procedure may be easily updated and adjusted as producers'breeding objectives change over time because of the changing economic environment. The results of this analysis suggest that hedonic pricing may be a better method of placing a value on production and type characteristics for dairy bulls than the Lifetime Profit Index currently being used by the Canadian dairy industry.     

Agricultural Policies and Structural Change in French Dairy Farms: A Nonstationary Markov Model

The aim of this paper is to gain an understanding into how agricultural policies have affected structural change in the French dairy sector. A nonstationary Markov model is estimated using a Generalized Cross Entropy approach. Results show that while the price of cow's milk encourages farm growth, direct payments and quota restriction favor small farms. The price signal is a key factor of structural change. As a result, higher milk prices may accelerate the trend toward the further growth of dairy farms. Settlement policy and technical change seem not to slow this trend.     

The Swiss payment for milk processed into cheese: ex post and ex ante analysis

We make use of both an ex post and an ex ante evaluation to analyze the Swiss payment for milk processed into cheese. This payment for each kilogram of raw milk processed into cheese is issued to milk producers through dairy processors. In the ex post evaluation, by applying a vector autoregressive model, we estimate the effects of reductions of the payment for prices of raw milk used to produce Emmentaler, Gruyère, and industrial cheese. Past declines in the payment have only been partially transmitted to raw milk prices. The rate of transmission is higher for milk used for the production of industrial cheese than for artisan cheeses. In the ex ante impact evaluation, we use a partial equilibrium model and develop a counterfactual scenario in which the payment is removed. The payment for milk processed into cheese is found to have effects on cheese production and exports but also has important indirect effects on other dairy products. Our findings suggest that about two‐thirds of the payment are benefiting milk producers. At the same time, the overall welfare losses resulting from the elimination of the aid are smaller than the budget allocated to this measure, suggesting a net welfare gain from elimination.     

Structural Change and Policy Reform in the UK Dairy Sector

Estimation of a cost function for a representative sample of UK dairy producers allows future re‐structuring of the industry to be simulated using a model which incorporates producers' differential costs and milk prices. Consideration is also given to reductions in producer prices and to the introduction of an A/B quota system. The results indicate that, despite the history of quota trading in the UK, there is considerable scope for further restructuring in the industry to take advantage of differential incentives between producers. It is also projected that UK milk supply would increase if quota restrictions were removed.     

Estimation of dynamic maize supply response in Zambia

Increased attention on government pricing policies among African nations leads directly to a need for information about producer responses to price adjustments. This is especially true in the case of Zambian maize production. Maize is the most important crop grown in Zambia. It accounts for more than 80% of the value of marketed food crops, is heavily relied on for subsistence consumption, and is a staple food in the diet of all Zambian citizens. This paper analyzes the aggregate price response of maize supply in Zambia using a dynamic regression analysis. As a result, short, intermediate and long-run multipliers/elasticities are measured which can be used to analyze the effect of future price policy changes. It was found that a second-order rational distributed lag model best fits the available data. Estimates of short-run elasticities of supply for maize and fertilizer prices are 0.54 and –0.48, respectively. The corresponding estimated long-run elasticities are 1.57 and – 1.44.     

HERD STRUCTURE AND MILK SUPPLY RESPONSE

Research on milk supply response has previously concentrated on changes in the national herd and changes in yield. It is argued that this does not provide a sound foundation for understanding the secular increase in milk output given generally declining real milk prices. A recent theory of farm size is outlined and adapted to explain changes in dairy herd size. The herd size determinants are the relative costs of labour and capital. The theory is used to specify equations which are estimated to explain changes in the number of herds, the average size of herds, and yields in England and Wales 1964–1982.     

Supply and demand for commodity components: implications of free trade versus the AUSFTA for the US dairy industry*

During the negotiations on the Australia–US free trade agreement (AUSFTA), the US dairy industry vigorously opposed opening the US market to imports of Australian dairy products on the grounds that the US industry would be devastated. Subsequently, the agreement signed in February 2004 made an exception for dairy, providing for only limited quota expansion and no free trade, even at the end of the long implementation period. This paper presents a simulation model of world dairy markets, represented by supply and demand equations for fat and non‐fat components of milk and manufactured dairy products. We use the model to analyse the effects on US milk markets of both a hypothetical agreement, allowing free bilateral trade in dairy products, and the actual AUSFTA. An important contribution to the literature is the derivation of explicit supply and demand relationships for milk components. The components model allows an analysis of long‐term production, consumption, and trade patterns that is not tied to specific, fungible products. Simulations indicate that increased imports from Australia resulting from bilateral trade liberalisation would have resulted in small reductions in US milk prices and production. The much smaller increases in Australian access to the US market under the actual AUSFTA will have even smaller, almost negligible, impacts.     

Canadian Cattle Cycles and Market Shocks

We analyze Canadian beef cattle cycles using time‐series properties of four variables: total cattle inventories, beef cow inventories, beef supply, and beef prices. Our aim is to provide up‐to‐date estimates of the duration of the cycles, and to determine whether or not some of the recent market shocks can be associated with changes in the nature of the cycles. Spectral decomposition of the variables reveals 10‐year cycles in total cattle inventories, beef cow inventories, beef supply, and beef prices. Seasonal and annual cycles are also found in beef supply and prices, respectively. Using intervention analysis, exchange rate appreciation, feed price escalation, and bovine spongiform encephalopathy (BSE) are modeled as pure jumps. Exchange rate and feed price shocks are modeled as having started in 2002 and 2007, respectively, and persisted up to the end of the sample period, while BSE is modeled as a shift for the period 2003 to 2005. We find significant impacts of the three shocks on total inventories, but beef supply appears to have been impacted by exchange rates and BSE. A spectral comparison of the pre‐ and post‐shock periodograms of beef supply reveals a 58% reduction in the peak amplitude of the beef supply cycle.     

Cow-calf profitability and leptin genotyping

Profitability of cow-calf production is determined largely by market prices, calf weaning weights, and cow productive life. While producers individually have no effect on prices, weaning weights and productive life have genetic influences and hence can be altered by selection programs implemented by producers. We investigate the impact of a mutation in the leptin gene (exon 2; single nucleotide polymorphism [SNP] 305) on cow-calf profitability. Prior research shows that this mutation has effects on performance and traits of fed cattle and milk production in dairy cows. Using data from a teaching-research herd, we find that it is also associated with calf weaning weights and cow productive life. A bio-economic stochastic simulation demonstrates that the mutation has statistically positive impacts on profits, suggesting that producers can profitably make use of this information.     

The role of retail market power and state regulations in the heterogeneity of farm‐retail price transmission of private label and branded products

Given the leading role of private label brands in the fluid milk market, it is of special interest to focus on possible differences in farm‐retail price transmission between private label and branded milk as well as the causes of heterogeneity. This article examines the heterogeneous effects of private label and branded products on price transmission in the fluid milk market using a panel threshold asymmetric error correction model. Results indicate that upward retail‐price adjustment is faster than the downward price adjustment for both private label and branded milk. The speed of adjustment of private label products is significantly faster than branded products in three different price regimes. We further investigate the reasons of heterogeneity in farm‐retail price transmission of private label milk. We find that both retailer market power and state pricing regulations contribute to the heterogeneity in asymmetric price transmission. Higher retailer market power causes retail prices of private label milk to rise faster and to fall slower. The existence of a state pricing regulation slows down the adjustment speed of retail prices of private labels back to the long‐run equilibrium, regardless of whether the retail price is low or high.     

SIMULTANEITY IN THE UK DAIRY SECTOR*

Because of the high degree of interdependence in the livestock sector, the endogenous variables of econometric models should be simultaneously determined. This paper describes the specification, estimation and evaluation of a model of the UK dairy sector in which the herd size, number of culls, replacement heifer price and milk price are determined simultaneously. The major policy conclusion that emerges from the model is that any attempt to increase the price of milk received by farmers via a structural change in the policy rule used to fix the price will be offset by over 50% as a result of increases in the supply of milk.     

WELFARE IMPLICATIONS OF MORE ACCURATE RATIONAL FORECAST PRICES

Models are constructed to assess the welfare effects for producers, consumers and society of producers using forecast prices based on more accurate estimates of variables causing shifts in the demand for and supply of commodities. The basic model is a stochastic cobweb model in which producers' forecast price is the rational forecast price. The model is extended for many commodities, for partial producer response to more accurate forecast prices, and to include stock holding. In terms of economic surplus, producers and consumers gain from more accurate estimates of demand shift variables, producers gain and consumers lose from more accurate estimates of supply shift variables, and in both cases there is a net society gain.