Abstract
This study addresses a common empirical problem where researchers are only able to obtain financial records for farmers, which limits the potential for analyzing exit decisions. In particular, dairy cost-of-production studies (e.g., Farm Credit East and Cornell) often grant researchers access to online record systems, which contain only farm cost and revenue data. We develop and apply a simulation approach to coping with such data to analyze exit decisions. We model exit decisions as a function of profitability and seasonality. We find that the tier program reduces the number of farms that exit and allows farms to remain in business longer. Dairy farms are an important source of livelihood in rural Maine communities. With price floors in place, dairy farms are less affected by price volatility, and rural communities have improved financial sustainability.
Highlights
The rapid decline in the number of U.S dairy farms over the past few decades has made dairy farm exit decisions an important topic for research
A negative coefficient for output and positive coefficient for squared output were observed. These results were significant at the 1% level and consistent with the hypothesis that Average variable cost (AVC) fell at a diminishing rate with output. These results indicate that economies of scale existed in the Maine dairy industry, which could be explained by volume discounts received on large purchases from larger farms
This study develops a novel approach of simulation modeling that deals with the empirical problem of an incomplete dataset to model farm exit decisions
Summary
The rapid decline in the number of U.S dairy farms over the past few decades has made dairy farm exit decisions an important topic for research. The structural change taking place is apparent: average farm size is growing, while the number of farms is declining [1]. From 2001–2009, the number of dairy operations declined 33%, despite a 15% increase in total milk production [2]. The number of farms with more than 500 cows increased by approximately 20% in this period [2]. The trend of increasing farm size and decreasing number of farms has been consistent in the New England states (New England includes Maine, New Hampshire, Massachusetts, Connecticut, Vermont and Rhode Island), as well. Sobson [3] found that from 1993–2003, the average number of cows rose from 122–212, an increase of nearly 74%. The number of conventional dairy farms in Maine has fallen by nearly 100 farms from 2004–2014 (Maine Milk Commission, personal communications)
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