Managerial Perspective Of The Likely Economic Benefits And Costs Of Environmental Regulations To The Michigan Dairy Industry PDF Download

This dissertation is a study of the economics of the environmental regulation of agricultural and food production, with a focus on the dairy industry in California. Dairy (milk and cream) is the number-one farm commodity in California, with cash receipts of $7.68 billion in 2011, accounting for 19.4 percent of the total value of the U.S. dairy output. California is even more important as a producer of some manufactured dairy products: in 2011, California produced 34.5, 20.5, and 51.8 percent of U.S. butter, cheese, and nonfat dry milk, respectively. In this dissertation, I examine two sets of environmental regulations related to the dairy industry in California: the greenhouse gas (GHG) cap-and-trade program adopted by the California Air Resources Board in 2011, and the air quality rule on confined animal facilities introduced in the San Joaquin Valley in 2006. Previous economic studies of the effects of GHG cap-and-trade programs have concentrated on the electricity sector and other carbon-intensive industries that are likely to be regulated by any GHG policy. Even though the GHG emissions of industrial sources, such as large dairy product manufacturers, may also be covered by a cap-and-trade program, the majority of carbon allowances are likely to be grandfathered to industrial sources. Consequently, most manufacturing industries will be affected by carbon pricing policies only through changes in factor prices, especially energy prices.To understand the implications of policy-induced changes in energy prices on manufacturing industries, it is important to evaluate factor demand relationships, especially between energy and other inputs, and to assess the long-run potential for energy-saving technical changes. I therefore model and measure factor demand relationships and the rate and biases of technical changes in the U.S. dairy processing and manufacturing industry. My estimates indicate that possibilities for substitution between energy and other inputs are generally limited in the U.S. dairy processing and manufacturing industry. Estimates of the cross-price elasticities indicate that capital and energy are used in fixed proportions, labor is a complement for energy, and milk and other materials are substitutes for energy. A 10% increase in the price of energy would lead to a 0.3% decrease in the demand for milk, and a 0.1% decrease in the demand for other processing materials. The estimated rate of technical change is moderate. The estimates indicate that technical change in the dairy industry has been capital-using and labor-saving. The cost share of capital has been increasing by about 1-4% per year and the cost share of labor has been decreasing by about 2% per year. For other factors--energy, milk, and other processing materials--biases of technical change are small in magnitude.The dairy industry in the United States is highly influenced by government policies. Examining the effects of environmental regulations without considering the presence of other policies may lead to erroneous results. Therefore, in analyzing the effects of carbon pricing on the dairy industry in California, I explicit model dairy policies that affect the relative prices of milk. Using a multi-market model, which reflects the linkages between dairy products in both production and consumption, I first examine analytically the influences of dairy policies on the effects of an increase in energy price on the dairy processing and manufacturing industry in California. Increases in energy prices have effect on factor demand that can be partitioned into two elements—output effect and substitution effect. Analytical results indicate that carbon pricing leads to 1) higher prices of dairy products, 2) lower energy use, and 3) lower prices of farm milk when output effect dominates the substitution effect, and vice versa. I also conduct numerical simulations with the most likely parameter values to measure the effects of carbon pricing on the dairy industry in California. Numerical results confirm most of the analytical findings and indicate that output effect is stronger than substitution effect such that the prices of milk decrease. Quantity of milk used for fluid dairy products and consumption of fluid dairy products increase in most simulated scenarios. Carbon pricing results in a diversion of milk from manufactured dairy products to less energy-intensive fluid dairy products and increases in welfare for consumers of fluid dairy products. The magnitudes of the changes in the equilibrium prices and quantities depend primarily on the elasticity of supply of milk, the own-price elasticity of demand for manufactured dairy products, and the elasticity of substitution between milk and energy in the production of manufactured dairy products. Numerical simulations indicate that the influence of dairy policies on carbon-pricing induced changes are small in magnitude. The existence of dairy policies lowers the potential welfare gains for consumers of fluid dairy products from carbon pricing.The last part of the dissertation examines the effects of Rule 4570—a local air quality regulation—on the costs of milk production for dairy farms in the San Joaquin Valley. Rule 4570 was adopted in June 2006, as an important part of the 2004 Ozone Implementation Plan of the San Joaquin Valley Air Pollution Control District, to reduce emissions of Volatile Organic Compounds from large confined animal facilities. Applying a difference-in-differences method, I estimate the effects of Rule 4570 on the costs of producing milk. Estimates indicate that neither Rule 4570, nor the amended version of the Rule adopted in 2010, significantly affected the total costs of milk production. Estimation results imply that Rule 4570 had some negative effects on feed costs, and positive effects on hired labor costs and operating costs. Rule 4570 significantly reduced feed costs in 2008 by $0.35 per cwt of milk. In 2012, Rule 4570 increased hired labor costs by $0.23 per cwt of milk and increased operating costs by $0.25 per cwt of milk. These estimated effects of the amended Rule are equivalent to a 16% and a 10% increase in hired labor costs and operating costs for dairy farms covered by the Rule.