Bovine somatotropin and the Canadian dairy industry : an economic analysis

Bovine Somatotropin (BST) is a naturally occurring hormone in dairy cows which affects milk production levels (Chalupa and Galligan, 1988). The effects of BST have been known since the 1930's but limited supply of this hormone made any large scale commercial use impossible. Recently a low cost source of BST became available through recombinant DNA technology. This low cost availability of the hormone has led to research experiments which show that recombinant BST can significantly increase a cow's ability to produce milk (Peel and Bauman, 1987; Burton et al, 1987; Soderholm et al, 1988; De Boer et al, 1988). A number of studies have examined the firm level impacts of BST on the Canadian dairy industry. This present work will build upon these earlier studies by examining the impacts of BST at the both the firm and aggregate levels for all of the dairy producing regions in Canada. To facilitate this analysis at an aggregate level a linear programming model of the Canadian dairy industry was used. This model describes the dairy sector for each province, including the production, processing, trade and marketing subsectors, and is incorporated into the Canadian Regional Agricultural Model (CRAM), (Webber et al, 1986). Several scenarios were examined representing different government policy responses with the introduction of BST to the Canadian dairy industry. These scenarios are compared to a 1986 "base case" situation of the dairy industry. The first scenario examined represents a "no policy change" situation. Provincial quota levels, producer prices, levies and subsidies all remain unchanged and BST adoption rates are assumed for each province. In order to maintain existing milk production levels with BST a 5% reduction in the national cow herd results. This lower number of animals producing the same amount of milk as in the base case results in a 5% increase in dairy producer income at the national level. In the second scenario the impact of BST on quota values is examined. As in the first scenario all dairy policy instruments remain at 1986 base levels. The decrease in marginal costs for a producer fully adopting BST is then estimated. Using a marginal cost estimate of $32 per hi, the fall in marginal cost was nearly 6% or $2.00 per hi on average for Canada. This results in an 18% increase in what these producers can pay for quota. Using lower marginal cost estimates would result in a greatre increase in this variable and smaller quota increases. In scenario 3 some of the benefits of BST adoption are passed on to consumers. This is done by allowing production levels to expand such that the difference between farm-gate price and supply price remains the same as prior to the introduction of BST. Quota values remain at their base case level. This resulted in a 2% increase in the national supply of raw milk. In the fluid milk market the supply of standard milk increased by 2% and lowfat milk production increased by approximately 3 percent. In the industrial market cheese production increased by 6%, butter production increased by 2% and skim milk powder production fell by approximately 4 percent. In the final scenario the benefits of BST adoption are passed on to the taxpayers. This is accomplished by reducing the dairy subsidy by an amount which just offsets the cost savings in each province as a result of BST adoption. This leads to a decrease in the dairy subsidy of $80 million at the national level or approximately 30% of the 1986 subsidy payment. At the firm level, given the assumptions of this study, the main impacts of BST are a fall in marginal costs of $2 per hi and an increase in quota values of 18%. While these estimates of firm level changes resulting from BST adoption are not trivial they are much less than would be expected with earlier results of milk yield increases of over 25 to 3 5% accompanied by dry matter feed increases of only 10 to 15 percent (Bauman et al, 1985; Soderholm et al, 1988) . Given the assumed Canadian adoption rates of approximately 50% the aggregate level impacts of BST are more moderate. The national herd size falls by 5% and dairy producer incomes are increased by 5% to produce at the base case 198 6 production levels.Land and Food Systems, Faculty ofGraduat