Empirical dairy profits under fluctuating prices

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Production theory suggests that average profits would be greater with more variation in prices, if farmers correctly adjust use of inputs and outputs to changes in prices. We provide an empirical nonparametric analysis of farmers' profits under price changes over 12 years using an unbalanced panel of dairy farmers. Each year that a farm participated, we have quantities of milk and other outputs and usage of 30 different inputs. If that farmer participated in the survey the following year, the profit that farmer would have earned that following year using the netput vector of the previous year and the price vector of the following year was calculated. This passive profit was compared to the actual profit the farmer produced the following year. Of the 2371 observations, 56% show netput vector changes which enhanced net profit implying that as a group, these farmers were not generally able to correctly adjust inputs in response to price changes consistently. Logit regression failed to differentiate characteristics of farmers who were successful.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036840801935393

Affiliations: Department of Applied Economics and Management, Cornell University, Ithaca, New York, USA

Publication date: January 1, 2009

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