The impacts of regional structural changes on the supply response of milk in the United States

Abstract

During the 1980s, there were major structural changes in the U.S. dairy industry. These structural shifts are exemplified by changes in regional location of production, as well as, disparate regional changes in the number and size of operations all of which have implications for milk supplies. As a result of these structural changes, the economic models used to forecast policy impacts on the dairy industry proved inaccurate. Traditionally, dairy supply models utilized long time series data to forecast milk production and thus their results may be dominated by trend variables rather than economic variables. There have been few analyses that incorporate the natural biological process of herd growth to determine future herd inventories and milk supply. Another, more important problem with previous modelling attempts has been the lack of attention given to the structural changes that have occurred in the dairy industry. The majority of the current milk supply models are aggregate or national models and are therefore incapable of providing detailed information about dairy industry changes. For example, there have not been any analyses providing information about replacement heifer movement from areas raising surplus replacement to deficit areas. This analysis developed a methodology that utilized biological information about herd dynamics to determine future daily herd size and milk supplies. Two models to predict future milk supply were developed using this methodology: an aggregate U.S. model and a regional model. Due to the limited amount of data, econometrics combined with optimal control was used to estimate values for unknown parameters in the models. Results from the regional model indicated that the Pacific, Upper Midwest, Corn Belt, Appalachian, and Northeast regions are net exporters of replacement heifers to other regions, while the Southern Plains and Southeast regions are net importers. The aggregate model tracked the historical trends better than the regional model in an ex post simulation and also provided more reasonable milk production forecasts. The regional model's forecasts were unacceptable.