Entry, Exit, and Structural Change in Pennsylvania's Dairy Sector

By Stokes, Jeffrey R. | Agricultural and Resource Economics Review, October 2006 | Go to article overview

Entry, Exit, and Structural Change in Pennsylvania's Dairy Sector


Stokes, Jeffrey R., Agricultural and Resource Economics Review


Data on the number of Pennsylvania dairy farms by size category are analyzed in a Markov chain setting to determine factors affecting entry, exit, expansion, and contraction within the sector. Milk prices, milk price volatility, land prices, policy, and cow productivity all impact structural change in Pennsylvania's dairy sector. Stochastic simulation analysis suggests that the number of dairy farms in Pennsylvania will likely fall by only 2.0 percent to 2.5 percent annually over the next 20 years, indicating that dairy farming in Pennsylvania is likely to be a significant enterprise for the state in the foreseeable future.

Key Words: dairy, maximum entropy, farm size, Markov chain, simulation

(ProQuest Information and Learning: ... denotes formulae omitted.)

The structure of American agriculture continues to evolve toward fewer, larger farming units. For example, according to the U.S. Department of Agriculture, since 1940 the number of farms in the United States has declined by about 66 percent, while over the same period average farm size (in acres) increased by about 161 percent. In Pennsylvania, the number of dairy farms operating within the state was about 22,000 in 1980 and about 9,600 in 2003, representing a decline of 56 percent (USDA, various issues). The declining number of dairy farms and questions regarding what the future holds for dairying in Pennsylvania are critically important for policymakers, agribusinesses, dairy producers, and those involved in higher education through research, extension, and teaching. States like Pennsylvania perhaps have more at stake regarding the issue, given the predominance of a single commodity (i.e., dairy).

While not often thought of as an agricultural state, Pennsylvania's dairy sector is sizeable. In 2003, Pennsylvania dairy farms managed about 575,000 milk cows that produced a total of 10.3 billion pounds of milk. Both of these statistics make Pennsylvania the fourth largest dairy state in the nation with respect to cow numbers and milk production. However, dairy production in Pennsylvania oftentimes co-exists with a population that is less than enthusiastic about large dairy farms and, somewhat paradoxically, less than enthusiastic about fewer dairy farms as well.

Much of the state's dairy cows and production are in the Chesapeake Bay watershed, with high concentrations in the southeastern part of the state near large population centers. The nature of the relationship between production agriculture and the urban fringe in Pennsylvania has given rise to numerous legislative efforts to protect the environment as well as agriculture. For example, the U.S. Environmental Protection Agency's Air Quality Consent Agreement and Concentrated Animal Feeding Operation regulations are clearly designed to protect the environment. Programs such as the Pennsylvania Department of Agriculture's Agricultural, Communities and Rural Environment Initiative (ACRE), farmland preservation programs, and the Next Generation Farmer Loan Program are all designed to protect current and future generations of agricultural producers in Pennsylvania.

The future of dairy farming in Pennsylvania and Pennsylvania's role as a leading dairy state are important issues for others as well. Agribusinesses have a stake in the livelihood of the state's dairy sector through the inputs they provide to the sector such as purchased feed, pharmaceuticals, and machinery and equipment. In addition, the state has a large investment in milk processing infrastructure, which employs many of the state's rural residents. Dairy producers themselves have an interest in better understanding the drivers of structural change in the sector since many are facing critical issues such as whether or not to expand, when to retire, and how best to facilitate intergenerational transfer. Perhaps one of the most concerned entities is Pennsylvania State University's College of Agricultural Sciences, which has a commitment to conduct research and provide resident and non-resident education that is in large part related to dairy farming. …

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