The milk supply response of Virginia dairy farmers

The objective of this study was to estimate the milk supply response of Virginia dairy farmers, including estimation of supply elasticities with respect to relevant prices. The supply response was estimated using linear regression techniques and quarterly data from 1965 through 1982.

The hypothesis that producers are profit maximizers was not rejected. For the entire period the estimated supply responded positively to own-price changes, negatively to feed and cull-cow prices, and positively to technical change using time as a proxy variable. Estimated own-price elasticities for total and Grade A milk supplies were 1.19 and 0.94, respectively, and for Grade B milk supply was 2.11. Responses to own-price changes were completed within two years.

The Chow test for structural change in the estimated coefficients of explanatory variables resulted in rejection of the hypothesis that supply responses were constant over the entire period. Producers continued to adjust supply positively to own-price changes for the years 1974 through 1982. However, estimated own-price elasticities for total, Grade A and Grade B milk supplies decreased to 0.84, 0 80 and 0.97, respectively. Technological efficiency, using time as a proxy, continued to contribute to increased output. Producers did not respond to feed price changes. Grade A supply response to own-price changes was completed within three years, and it took two years for total and Grade B supply to complete responses to own-price changes.