Examining the impacts of the 2020 Farm Bill and insurance programs on the U.S. dairy industry’s economies of scale and dairy farm consolidation, along with the sector’s profitability and foreclosure levels, is the focus of a research project being led by a Texas Tech University professor in the College of Agricultural Sciences & Natural Resources.
Stephen Devadoss, the Emabeth Thompson Endowed Professor in the Department of Agricultural and Applied Economics , will conduct the research project, “Dairy Policies, Economies of Scale, and the Changing Structure of the U.S. Dairy Industry.” This project is supported by a nearly $500,000 grant from the United States Department of Agriculture (USDA).
“The dairy industry is an important part of West Texas agriculture,” Devadoss said. “This project will help us undertake research to study and find solutions related to the problems faced by the dairy farmers. Even under normal economic conditions, small-dairy farmers face numerous difficulties.
“With changing structure of the industry and the problems exacerbated by the COVID-19 pandemic, it is important now, more than ever, to work on research to solve dairy farmers’ economic challenges.”
Devadoss said the project falls within the realm of his research related to risk management in agriculture. It is supported by the USDA’s Agriculture and Food Research Initiative Foundational Program and will run for the next four years. It will be directed by Devadoss and Jeff Luckstead, an associate professor of agricultural economics at Washington State University.
In these tough times, many dairy farmers are having difficulty coping with an onslaught of financial losses arising from structural changes due to low milk prices, high feed costs, consolidation, economies of scale and demand fluctuations for milk products.
Today, U.S dairy policies such as Dairy Margin Coverage aim to manage risk by insuring against fluctuations in market margin (the difference between average milk price and feed costs). The 2018 Farm Bill authorized the Dairy Margin Coverage program, which is a voluntary risk management program for dairy producers.
Meanwhile, the Dairy Revenue Protection insurance policy mitigates risk faced by the dairy farmers. It is designed to insure against unexpected declines in the quarterly revenue from milk sales relative to a guaranteed coverage level.
Devadoss and Luckstead plan to develop a theoretical model of risk-averse dairy farms that are heterogeneous in size to study the implications of dairy policies, structural transformation toward larger farms and dairy survivability. They also will econometrically estimate the multivariate distributions of regional and national milk prices, feed price index, productivity distribution, cost function, economies of scale and heterogeneous dairy models.
In addition, the research team is set to analyze the effects of Dairy Margin Coverage and Dairy Revenue Protection on optimal input use, production, economies of scale, survivability of dairies, coverage level, coverage percentage and program payments as well as examine the basis risk and regional effects of Dairy Margin Coverage and Dairy Revenue Protection and provide policy recommendations.
