We investigate the impacts of technological changes on supply structure of the US milk production. The econometric model used is based on aggregate annual U. S. data and is composed of three stochastic equations defining the size and herd structure of the U.S. dairy herd, average productivity and the heifer replacement rate and an identity equation defining total U.S. milk production as the product of herd size and average productivity. As our main contribution to existing literature, we have found a way to use bootstrap to test hypotheses regarding long-run price-responsiveness of supply, and we have found that 10-year elasticity of milk supply to milk price has decreased and that change in elasticity is statistically significant. We simulate the effects of different price scenarios on long-run U.S. milk supply. One finding is that using large quantities of feed stocks for bio-fuel production could affect significantly affect price of milk. We use the above results to indicate the consequences of changes in dairy policy in EU to local development. As EU abandons production quotas in milk production, we can expect strong consolidation and regional shifts in production. This can potentially have strong adverse impacts on local development in rural areas where small farms dominate.


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