Feed prices and production costs on Spanish dairy farms

This paper analyses the impact of livestock feed prices and pasture quality on the long and short-term costs of milk production in a region of Spain (Navarre). The empirical results are obtained from the estimation of a flexible short-run cost function, followed by the approximation of long-run equilibrium based on the quasi-fixed factors adjusted to their optimal levels. The results reveal a high sensitivity of milk production costs to changes in livestock feed prices due to two reasons. One is that, as milk production expands, it tends to become technologically more intensive. The other is that, in the current structure of dairy farming, land input is suboptimal, particularly in the case of large farms and areas of poor pasture. The results reveal that short-run substitution between feed and livestock is a potential strategy for farms to respond to feed price increases. They also suggest that structural policies designed to strengthen the dairy sector’s competitiveness should vary according to agro-climatic conditions. In areas of poor pasture, herd growth might be used as a long-term measure to increase competitiveness through economies of scale; while the alternatives for farms in better-endowed regions also include extensification of dairy production.This paper analyses the impact of livestock feed prices and pasture quality on long and short-term milk production costs in a region in Spain (Navarre). The empirical results are obtained by estimating a flexible short-run cost function and then approximating long-run equilibrium by adjusting the quasi-fixed factors to their optimal levels. The results reveal a high sensitivity of milk production costs to changes in livestock feed prices due to two reasons. One is that milk production tends to become technologically more intensive as milk production expands. In optimum conditions, large dairy farms appear to become less land-dependent and to rely more heavily on purchased livestock feed. The other is that the current dairy farm structure shows suboptimal quantity of land, particularly by large farms and in areas with poor pasture quality. The results reveal that short-run substitution between feed and livestock is a potential strategy for farms to respond to feed price increases. The results also suggest that structural policies to strengthen the dairy sector’s competitiveness could be made to vary across agro-climatic areas. In poor pasture areas, herd growth might be used as a long-term measure to increase competitiveness through economies of scale; while the alternatives for farms in better-endowed regions also include extensification of dairy production