Organic Milk Demand and Supply in the U.S. And
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ORGANIC MILK DEMAND AND SUPPLY IN THE U.S. AND IMPLICATIONS FOR ORGANIC MILK INDUSTRY _______________________________________________________ A Dissertation presented to the Faculty of the Graduate School at the University of Missouri-Columbia _______________________________________________________ In Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy _____________________________________________________ by YE SU Dr. Michael Cook, Advisor MAY 2016 The undersigned, appointed by the dean of the Graduate School, have examined the dissertation entitled CONSUMER DEMAND FOR ORGANIC MILK IN THE U.S. AND IMPLICATIONS FOR ORGANIC RAW MILK SUPPLIERS Presented by Ye Su, A candidate for the degree of doctor of philosophy of Agricultural and Applied Economics, and hereby certify that, in their opinion, it is worthy of acceptance. Professor Michael Cook Professor Wyatt Thompson Professor Scott Brown Professor Isaac Miller Professor David O’Brien DEDICATION To my daughter Allison, my husband Zhenyu Shen, and my parents Jinpei Su and Shuhua Wu. ACKNOWLEDGEMENTS I would like to express my great appreciation to my adviser Dr. Michael Cook for his guidance, time, patience, and encouragement, which have made my achievements, including this dissertation, possible. He has sparked my interest in applied research in organizational economics and cooperative management. He has not only been my academic adviser, but also a great mentor for my everyday life. I would like to thank my other committee members, Dr. Wyatt Thompson, Dr. Scott Brown, Dr. Isaac Miller, and Dr. David O’Brien, for their guidance, time, and insightful comments regarding this dissertation and throughout my research. In addition, I would like to thank Dr. Abner Womack for his encouragement and recognition of my study and research. I would also like to thank Kristi Livingston and Amanda Michelle Swaim for their assistance with English, logistics, and budgeting over the last a few years and during the completion of my dissertation. Finally, I would like to thank my fellow students Jing Zhao, Jingjing Wang, Susan Webb, Andrew Vanengelenhoven, Jasper Grashuis, and Elisavet Levogianni for their help, comments and friendship along with my academic journey. ii TABLE OF CONTENTS TABLE OF CONTENTS ................................................................................................... iii LIST OF TABLES………………………………………………………………………..ix LIST OF FIGURES……………………………………………………………………….xi Abstract...............................................................................................................................1 Chapter One: Background, Motivation and Research Objectives………………………………………………………………………....5 1 Dairy Farm Problems ........................................................................................................5 1.1 Low Return ..............................................................................................................6 1.2 Fluctuating Price for Conventional Milk ...............................................................10 2 Dairy Farmer Decision Making ......................................................................................16 2.1 How to Produce (Organically or Conventionally) .................................................17 2.2 How Much to Produce (Expand, Reduce, or Status Quo) .....................................18 3 Background .....................................................................................................................19 3.1 Demand for Organic Food and Organic Milk ........................................................19 3.2 Profitability of Organic and Conventional Dairy Farms ........................................22 4 Motivation .......................................................................................................................26 5 Research Objectives ........................................................................................................27 Chapter Two: Consumer Demand Theory and Empirical Demand Models………………………………………………………………………..….29 1 Consumer Preference and Representation ......................................................................29 iii 2 Utility Function and its Derivatives ................................................................................30 2.1 Indirect Utility Function ........................................................................................31 2.2 Expenditure Function .............................................................................................32 3 Demand Functions ..........................................................................................................33 3.1 Marshallian Demand Function ...............................................................................33 3.2 Hicksian Demand Function....................................................................................34 3.3 Slutsky Equation ....................................................................................................35 4 Relationship of the Functions .........................................................................................36 5 From Consumer Theory to Empirical Consumer Demand Model..................................38 5.1 Generalized Axiom of Revealed Preference ..........................................................38 5.2 Aggregate Consumers and Aggregate Products ....................................................38 6 Empirical Demand Models for Consumer Analysis .......................................................40 6.1 Linear Expenditure Model .....................................................................................41 6.2 Rotterdam Model ...................................................................................................43 6.3 Translog Demand System ......................................................................................45 6.4 Almost Ideal Demand System ...............................................................................46 6.5 Linear Approximation of Almost Ideal Demand System (LAIDS) .......................49 6.6 Quadratic Almost Ideal Demand System (QAIDS) ...............................................50 6.7 Challenges for Empirical Estimation .....................................................................51 6.7.1 Large Number of Parameters .................................................................................51 6.7.2 Aggregation of Consumers ....................................................................................51 6.7.3 Endogeneity ...........................................................................................................51 7 Summary .........................................................................................................................52 iv Chapter Three: Literature Review for Organic Milk Demand in the U.S……………………………………………………………………..………...53 1 Introduction .....................................................................................................................53 2 Econometric Models .......................................................................................................53 3 Data Sources ...................................................................................................................53 4 Demographic Variables ..................................................................................................54 4.1 Income....................................................................................................................54 4.2 Education ...............................................................................................................54 4.3 Children and Household Size.................................................................................55 4.4 Age of Household Head .........................................................................................55 4.5 Race and Ethnicity .................................................................................................55 4.6 Regions ..................................................................................................................56 5 Elasticity .........................................................................................................................56 5.1 Own Price Elasticity ..............................................................................................56 5.2 Cross -price Elasticity ............................................................................................56 5.3 Expenditure Elasticity ............................................................................................57 6 Summary .........................................................................................................................58 Chapter Four: A Vector Error Correction Almost Ideal Demand Model for Organic Milk in the USA……...………………………………………………….……………..60 1 Introduction .....................................................................................................................60 2 Vector Error Correction Model (VECM) Almost Ideal Demand System (AIDS) .........62 3 Hypotheses and Expected Signs of Coefficients ............................................................66 v 4 Data 68 5 Endogeneity of Prices and Expenditure ..........................................................................73 5.1 Endogenous Prices .................................................................................................73 5.2 Endogeneity of