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International Dairy Model

The FAPRI International Dairy Model examines and projects the area, production, usage, stocks, prices, and trade for fluid milk, butter, cheese, nonfat dry milk, and whole milk powder for several countries and regions of the world.

Structure of the FAPRI/CARD International Dairy Model

The FAPRI/CARD International Dairy Model is a partial equilibrium, multi-market model organized along commodity lines with country or regional modules. Depending on data availability, most country and regional modules contain equations for five commodities: milk, butter, cheese, nonfat dry milk (NFD), and whole milk powder (WMP). Key price and quantity variables are passed between the dairy model and the other FAPRI models to accommodate intercommodity interactions. For example, feed prices are passed from the grain model and oilseed models to the dairy model to approximate feed-cost impacts on the cattle inventories and milk yields. Likewise, dairy cow numbers are passed to the grain and oilseed models to facilitate computation of feed demands. During the simulation process, the system of models is iterated until a vector of world prices and trade is found that achieves equilibrium in all markets. The dairy model solves for equilibriums in international markets for the four derived products, and a domestic equilibrium for fluid milk is maintained at all times.

Consumer demands for dairy products are modeled by a set of independent, per capita demand equations that include own-price and real income variables. Butter demand in some countries also includes vegetable oil prices to proxy prices of substitute goods. Urban and rural demands are only modeled separately in the China module. All other modules contain a single representative consumer demand. Per capita demand is multiplied by population to compute total food demand. Stock demands are determined by independent demand equations in some countries. These equations typically depend on domestic market prices, support prices, and some measure of available supply. In most cases, stock demands are exogenous. The choice between endogenous and exogenous specifications depends on the historical significance of the particular demand in the total demand for the commodity and on the quality of the available data. For example, data is not available for many Eastern European and Asian countries, so stocks are exogenously set to zero.

Milk production is determined by dairy cow inventories and the average milk yield per cow. Dairy cow inventories depend on lagged inventories, milk prices, feed prices, and milk marketing quotas where applicable. Milk yields are largely driven by a time trend, but milk and feed prices enter into the yield equation in several countries. Total fluid milk demand and feed use are subtracted from milk production and the remainder is designated as factory milk. The factory milk is divided among competing product uses. Soft and fresh products (other than fluid milk) are modeled as "other milk consumption." The equation for other consumption depends on the milk price and real income. Factory milk used for cheese, NFD, and WMP are typically modeled by an equation that depends on the relative milk-equivalent value of cheese, NFD, and butter. In most modules, only two of the three products are modeled by behavioral equations, and the third commodity is determined by an identity that maintains a balance between total milk production and use. When all three commodities are modeled by behavioral equaions, other milk consumption is the market-clearing identity. Butter is treated as a by-product derived from production of other dairy products. Consequently, butter production depends on milk used for cheese, NFD, and fluid milk.

The standard approach for generating domestic prices is to transmit world prices into the domestic market through a price linkage equation. Price linkage equations generally include the exchange rate, the average tariff rate, and may include a fixed component to adjust for historical differences (transportation or marketing costs) between domestic and international prices. Where appropriate, tariff rate quotas are included in the model to account for the change in marginal procurement costs when import demand exceeds the quota level. With market prices determined by the world price, trade is modeled as the excess supply or demand that clears the domestic market. In the European Union module, trade is determined by behavioral equations that depend on domestic prices, international prices, tariff rates, and the exchange rate. This allows the domestic market price to act as the market-clearing mechanism in the EU module. This structure assumes that EU markets are sufficiently insulated from international markets to allow domestic policies and local supply conditions to drive market prices.

View the current FAPRI-ISU 2011 World Agricultural Outlook.

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