Dr. Roger Ginder Econ 338 Fall 2009 Lecture # 6 Dairy Marketing Dr. Roger Ginder Econ 338 Fall 2009 Lecture # 6

Top Milk Production States, 2008 http://usda2.mannlib.cornell.edu/reports/nassr/dairy/pmp-bb/1998/milk_production_02.17.98 Source: NASS, USDA, Milk Production, 2/15/09 2

USDA, Federal Milk Marketing Administrator, Tulsa, 2/2005

USDA, Federal Milk Marketing Administrator, Tulsa, 2/2009

DAIRY PRODUCTON GEOGRAPHIC DISTRIBUTION Would you expect the production to grow in the south and northeast where per-capita production is low? Why or Why not? Iowa has surplus per-capita consumption– Is that good or bad for the future of the industry here

Geographic Distribution of U.S. Milk Production Where is the milk produced Which areas are increasing production Which areas are decreasing production

USDA, Federal Milk Marketing Administrator, Tulsa, 2/2009

Milk Production: 2007 vs 2002 USDA, Federal Milk Marketing Administrator, Tulsa, 2/2008

Regional Milk Production as a Percent of Total U.S. Production Central Source: Federal Milk Market Administrator, Tulsa, April, 2008

Increases in CA + FO Milk Marketings December 2007 vs December 2002

Decreases in CA + FO Milk Marketings December 2007 vs December 2002

Production Costs By Region How do the different regions in the U.S. compare with respect to production costs and net returns? What effects are the differences in cost structure likely to have on where U.S. production takes place?

Statistical Regions Pre 2002 MILK: NORTHEAST: New York, Pennsylvania and Vermont SOUTHEAST: Florida and Georgia UPPER MIDWEST: Michigan, Minnesota and Wisconsin CORN BELT: Iowa, Missouri and Ohio SOUTHERN PLAINS: Texas PACIFIC: Arizona, California and Washington Source: ERS, USDA

Source: USDA, ERS

Regional Production Returns Per Cwt., 2003 Source: ERS, USDA

Regional Production Returns Per Cwt., 2008 Source: ERS, USDA

Production Costs & Returns Per Cwt., Heartland Region Source: ERS, USDA 24

Production Costs & Returns Per Cwt., Heartland Region Source: ERS, USDA 25

Production Costs & Returns Per Cwt., Fruitful Rim Region Source: ERS, USDA

Production Costs & Returns Per Cwt., Fruitful Rim Region Source: ERS, USDA 27

Production Costs & Returns Per Cwt., How can producers in California pay more for feed and get lower prices for milk and still be more profitable than midwest producers??? Lower Variable Costs Per Hundred Weight More Hundred Weight of Milk Sold

Example Average Cost Curve Cost/Cwt. Example Average Cost Curve $23/cwt $20cwt 17.5 k 20.5 k Cwt. of Milk Produced

FEED COST PER CWT – IMPACT OF VOLUME California = 110.00/mo to feed/cow prod = 20,500 Iowa = 105.00/mo to feed/cow prod = 17,500 Annual Av Cost/CWT CA = $110/mo * 12 mo = $1320  20,500# = $6.40/cwt Iowa = $105/mo * 12 mo = $1260  17,500 = $7.20/cwt Iowa = $100/mo * 12 mo = $1200  17,500# = $6.80/cwt Iowa = $95/mo * 12 mo = $1140  17,500# = $6.50/cwt Iowa = $90/mo * 12 mo = $1080  17,500# = $6.17/cwt

Supply Curve Concept What producers will choose to supply at different product prices ---with all variables other than product price equal Technology, Regulation, Prices of Inputs, Prices of Other Commodities etc. are held constant A very restrictive set of assumptions

Price $/# Supply P m 1 Pm Q m 1 Quantity # of milk supplied Q m

Demand Curve Concept What Consumers will choose to buy at different product prices ---with all variables other than product price equal Consumer tastes and preferences, Consumer Income, Prices of Other Goods, Prices of Substitutes, Prices of Complements Also A very restrictive set of assumptions

Price $/# Supply Pm Demand Quantity # of milk demanded Qm

Price $/# Supply Pm Demand Quantity # of milk supplied # of milk demanded Qm

Elasticity of Supply Percent change in quantity supplied that results from a 1% change in price Determines how much more producers will put on the market when price increases Determines how much less producers will put on the market when price falls

Relatively Inelastic Supply Price $/# Supply P1 Po Qo Q1 Quantity # of milk Relatively Inelastic Supply

Relatively Elastic Supply Po P1 Qo Q1 Supply Price $/# Quantity # of milk Relatively Elastic Supply

Do You Think That Elasticity of Supply Could Differ by Region? Different Production Systems Different Cost Structures Which Regions Would You Expect to Have a Less Elastic Supply Curve? Which Would You Expect to Have a More Elastic Supply Curve?

Relatively Inelastic Supply Price $/# Supply P1 Po Qo Q1 Quantity # of milk Relatively Inelastic Supply

Relatively Elastic Supply Po P1 Qo Q1 Supply Price $/# Quantity # of milk Relatively Elastic Supply

Shifts in the Supply Curve If we relax the assumption that all else is equal the supply curve can shift For example assume that input costs decrease for all producers Producers will be willing to supply more product at all points on the supply curve The supply curve will shift downward and to the right

Factors that can shift supply: 1. New technology Price So S1 Po P1 Do Qo Q1 Quantity Factors that can shift supply: 1. New technology 2. Changes in input costs 3. Raw material or resource availability 4. Legal or government program constraints on production

Questions?

Appendix

Statistical Regions Pre 2002 MILK: NORTHEAST: New York, Pennsylvania and Vermont SOUTHEAST: Florida and Georgia UPPER MIDWEST: Michigan, Minnesota and Wisconsin CORN BELT: Iowa, Missouri and Ohio SOUTHERN PLAINS: Texas PACIFIC: Arizona, California and Washington Source: ERS, USDA 46

Production Costs & Returns Per Cwt., 2000 Source: ERS, USDA 47

Production Costs & Returns Per Cwt., 2000 Source: ERS, USDA

Production Costs & Returns Per Cwt., Heartland Region Source: ERS, USDA