with Brent Hueth
Milk production is allegedly inelastic to changes in milk price and feed cost in the short-run. In the literature on dairy farm supply response, studies almost always find short-run response to be small or insignificant. Such studies, however, are usually done at the herd and quarterly level where the mechanisms of supply response cannot be distinguished. Using a monthly, animal level data set, we analyze supply response at the animal level which isolates the intensive margin response, that is use of more inputs, subject to the production process. In our empirical analysis of over ten million animal records, we reject the null hypothesis of no response, finding that dairy cow milk production is impacted by changes in milk price and slaughter price. Specifically, milk production increases in response to milk price at the point in the lactation curve where the marginal returns to feeding are highest. We also find that current month milk price does not explain milk production but the milk price lagged two months does. Further, movements in the slaughter price have a much larger effect on production than milk or ration prices, suggesting a future area of research for dairy farm supply response.
For an interactive graph of our regression results, click here (made with Dash, Heroku, and Plotly in python)