Short- and long-run adjustments in dairy production: a profit function analysis

A dual profit model is developed to analyse the structure of dairy technology using farm level data for Vermont. Potential short- and long-run effects of milk price reductions on output supply, input demand, farm size, and profitability are studied. The observed levels of the quasi-fixed inputs (family labour and herd size) are found to be significantly lower than their optimal or long-run equilibrium values, which is consistent with a continuing shift towards fewer and larger dairy farms. The analysis suggests that lower milk prices threaten the short-run survival of small and medium size farms, and reduce the optimal farm size in the long-run.