Brazilian Dairy Model: Impacts of Agricultural Policies and Exogenous Shocks

Abstract

Brazil is the fourth largest country in milk production with numerous small scale family farms. During the last three decades many transformations were in place that includes price regulation, dairy policies and international competition on the entire supply chain. Understanding how the dairy sector reacts to exogenous shocks and policy changes is of interest. This research aims to analyze economic consequences of exogenous shocks and policy changes in the Brazilian dairy sector. Impacts of changes in gross domestic product, subsidized interest rate, milk price support, renewable fuel standard requirement in the United States, and sugar cane acreage in Brazil on the entire sector is considered for a 10-year forecasts ending in 2022.

A structural econometric model of the Brazilian dairy sector is used to analyze the consequences of changes in policies and other variables of interest on the production, consumption, and milk prices. A stochastic approach is also developed that incorporates risk into the model. Data from 1980 to 2012 are used to estimate the system of equations. Annual equilibrium prices are solved by minimizing the squared difference between supply and demand for four different markets: cheese, butter, milk powder, and fresh dairy products.

This is the first model developed for the Brazilian dairy sector that allows for policy analysis. The findings suggest that the sector is not very responsive to changes in exogenous variables. Shocks from the demand side appear to have greater impacts on milk prices and production than shocks from the supply side. Contributions to the agricultural economic literature, policy makers, private companies, and future researches are expected.