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Abstract

A parametric approach was followed in this study to analyse milk production and supply systems based on farm level production cost data from a cross-section of dairy farms in South Africa for the 1997/1998 production year. Both single equation and system estimation techniques were applied to Normalised Quadratic, Normalised Translog and standard Translog specifications of the profit and derived output supply and input demand functions. Estimated functions were evaluated for adherence to structural properties. Results showed that convexity of the profit function in all prices holds in South African milk production. Uncompensated and compensated price elasticities of supply and demand were calculated. The results indicated that milk production and livestock trading activities are complements in the production activities of the observed multi-input, multi-output dairy farms. Both activities were intensive in the use of purchased and self-produced feed inputs, with a higher intensity in purchased feed use. The variable inputs are gross complements in the long-run and net substitutes in the short term. The long-term expansion effects overshadow short-term substitution between inputs. The results from this study suggest that dairy producers in South Africa are rational profit maximisers who use resources efficiently to the point where the marginal returns are zero. They allocate bought and self-produced feed components as substitutes in the short-run but treat both inputs as complements in the long-run.

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