Costs, Profits, Entry and Exit in the California dairy industry

Conditions Sour for California's Dairy Farmers

by: Ilan Brat
Oct 09, 2015
Click here to view the full article on WSJ.com

TOPICS: Production

SUMMARY: California dairy farmers are retrenching amid falling prices and drought in the largest milk-producing state, a shift that could further reshape the U.S. industry by enabling farmers in other states to expand.

CLASSROOM APPLICATION: The article offers a case for students to evaluate about the relationship between costs of production and entry and exit decisions. In California, where due to water shortages costs of producing milk are now high, farmers are exiting the industry, and in the upper-Midwest, where water is plentiful, farmers are increasing production.

QUESTIONS: 
1. (Advanced) Why were California's dairy farms in the past cheaper to run? Why in the past decade have costs been increasing?

2. (Introductory) Why did U.S. dairy exports fall in the first seven months of this year?

3. (Advanced) Why is the California dairy market contracting while the upper-Midwest dairy is expanding?

Reviewed By: James Dearden, Lehigh