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

Start this free course now. Just create an account and sign in. Enrol and complete the course for a free statement of participation or digital badge if available.

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
To use this interactive functionality a free OU account is required. Sign in or register.
Interactive feature not available in single page view (see it in standard view).


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.

Take your learning further

Making the decision to study can be a big step, which is why you'll want a trusted University. The Open University has 50 years’ experience delivering flexible learning and 170,000 students are studying with us right now. Take a look at all Open University courses.

If you are new to University-level study, we offer two introductory routes to our qualifications. You could either choose to start with an Access module, or a module which allows you to count your previous learning towards an Open University qualification. Read our guide on Where to take your learning next for more information.

Not ready for formal University study? Then browse over 1000 free courses on OpenLearn and sign up to our newsletter to hear about new free courses as they are released.

Every year, thousands of students decide to study with The Open University. With over 120 qualifications, we’ve got the right course for you.

Request an Open University prospectus371