Profits and cost
The evidence in this section suggests milk producers are relatively helpless: dairy producer profit per litre is declining as costs rise and milk prices fall. However, not everyone agrees with this view.
DairyCo., a division of the Agriculture and Horticulture Development Board (AHDB) responsible for making UK agriculture competitive and sustainable, produced a report in 2012 which looked at factors that influenced producers’ margins (profits). It found a significant variation in the production cost per litre of different firms. Some firms could produce milk more efficiently than others. The report stated that:
The relationship between milk price and margin is actually not that strong. Cost of production, on the other hand, is very clearly related to margin. This represents a real opportunity for dairy producers, as at least some of the costs of production that they face are within their control.(DairyCo., 2012b, p. 9)
The report also concludes:
- Milk can be produced efficiently from any of the major systems that are currently practised in Britain.
- Moreover, efficient milk production is possible at almost any scale of production.
- Different factors drive profit for each system.
- The impact these factors have on returns varies considerably.
- The need to fit the system that you use to your own circumstances has never been more important.(DairyCo., 2012b, p. 4 )
Given what you have learned so far, what options could producers investigate to control their production cost?
To save cost, producers may need to consider long run changes to their processes to become more efficient. This means trying to achieve the types of economies of scale and technological advances highlighted in the milk video that reduce the average cost of production. However, the second quote from DairyCo. suggests that increasing scale is not necessarily a path to efficiency. The quote indicates that there are different techniques of production that firms can use, and as a result each technique will be associated with different shaped cost curves. Some of the techniques may have economies of scale, but like in the mega dairy example in the video, may only provide a cost saving if firms can produce at very high quantities. It suggests for firms to maximise profit, they will need to find the right combination of technology and determine the optimum level of output that maximises their efficiency. The idea of searching for maximum profit by changing the quantity of output is a key economic model of the firm.