DAIRY POLICIES, ECONOMIES OF SCALE, AND THE CHANGING STRUCTURE OF THE U.S. DAIRY INDUSTRY

The overall goal of this project is to examine the impacts of all dairy policies and the economies of scale on US dairy farm consolidation and foreclosures. The specific objectives are to1. develop a model of risk-averse dairy farms that are heterogeneous in size to study the implications of dairy policies (DMC and Revenue Protection Insurance), structural transformation toward larger farms, and survivability of dairies;2. econometrically estimate(a) multivariate distributions of regional milk prices, national milk prices, and feed price index,(b) dairy productivity distribution using farm-level ARMS data to capture the heterogeneity in size,(c) cost function using farm-level ARMS data to capture economies of scale and analyze cost efficiency across farm sizes (small, medium, and large dairy farms), and(d) structurally estimate parameters in the heterogeneous dairy farm model;3. undertake policy analyses by(a) simulating the model to analyze the effects of DMC and Dairy Revenue Protection on optimal input use, expected production, economies of scale, survivability of dairies, coverage level, coverage percentage, and program payments to determine the optimal policy combination for different farm sizes in various regions, and(b) measuring the risk mitigation effect of DMC and Dairy Revenue Protection on small and medium dairy farms and comparing to that of large dairy farms;4. examine the basis risk and regional markets by quantifying the effects of DMC and Dairy Revenue Protection on(a) regional milk supply and prices,(b) dairy margins, financial performance, and profits.5. study alternate specifications of DMC to better protect dairies against margin risk by(a) investigating the impact of a DMC policy with actuarially fair premiums instead of the government-set premiums, and(b) analyzing DMC using regional milk prices and feed prices instead of national milk prices and feed prices as set forth in the current DMC.