Saturday, December 4, 2010
The Failure of Conventional Thinking
(click on image to enlarge)
A few post ago, I cited an article which mentioned a milk glut because of high farm milk prices a couple years ago. I said some, not all farmers expanded.
However, the real economic measure is not high milk price for a few months, but rather, profitability. Many dairy economist have used milk/feed ratio as a measure of profit. Some have even mentioned that expansion is only likely when the ratio is over three.
A look at the above graph shows there is no relationship between expansion (number of cows) and the milk feed ratio. The trend for the ratio is down and yet the cow numbers have grown. The statistical correlation between the two sets of data should be positive - the higher the milk feed ratio, the higher the number of cows should be. Instead, the statistical correlation is -.61.
Clearly, there is something else at work with expansion. If policy makers and the public media do not understand the total picture, how sound can any dairy policy be?