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Economics and the 2008 crisis: a Keynesian view
Economics and the 2008 crisis: a Keynesian view

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Cost of inputs

In 2012, farmers argued that income received for milk fell below the cost of production. The video clip suggests part of the reason for this is due to rising input costs in dairy production. The next activity presents some data on dairy costs, which can be analysed to see if this supports the material given in the clip.

Activity 28

Look at the data table below, which shows an extract from the National Farmers’ Union (NFU) 2011 report on dairy production cost. There is also a time series chart showing the monthly price of feed cost, given in pence per litre of milk, in the years leading up to 2012.

Does the data below support the view of farmers in the video?

Extract from NFU (2011) Report. Fixed and variable cost of dairy production (Source: DairyCo. 2012a)
Figure 44 Dairy production costs data
Source: DairyCo. 2012a, author calculation
Figure 45 Total feed cost in pence per litre (ppl) of milk produced over time, shown in red with a linear trend line shown in black
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Here are some notes made on the Dairy Co. (2012a) and NFU (2011) data:

The NFU (2011) table reports data for two years: 2009/10 and 2010/11. It reports that total costs have increased 6 per cent over the two years. Notice that the costs are given per litre – effectively this is average cost data – average cost per litre. Notably the rise in cost is due to variable costs having risen by 11 per cent between 2009/10 and 2010/11, whilst fixed costs have only risen by 0.5 per cent.

In particular, the cost of variable inputs per pint, such as fertilisers and veterinary costs, show rises between 2009/10 and 2010/11. This would seem to support that profits (margin) in dairy are being squeezed – prices are falling whilst costs are rising. However, we have to be cautious – this is only one year of data – it could be a one-off or ‘outlier’ year. In the short run, if dairy producers increased output, then average variable cost could rise as a result of diminishing returns.

The graph using DairyCo. (2012a) data shows some data on feed cost – a raw material for dairy producers. This seems partially to support the NFU report – the linear trend, as shown by the black line, shows variable costs, such as feed costs, rise on average over time. For instance, the price of feed in 2004 ranges from approximately 3 ppl to 4.5 ppl, compared to a range of 5.5 ppl to 8.5 ppl in 2011. However, although the trend is for increasing prices, the chart also shows considerable variability in the cost of feed within each year, possibly due to seasonal changes in the cost of feed.

There seems to be evidence that variable costs are rising. However, notice that we have no data on how fixed costs are changing over time.