Hedonic cost models and the pricing of milk components

To assess likely producer response to milk price reform, we examine the technology of protein, butterfat, and fluid carrier production on 1,924 U.S. dairy farms. A variant of a hedonic cost model is proposed in which the output aggregator is expressed as a function of total output and of the percentage concentrations of its components. Dairy farmers have responded rationally to artificially low protein prices. Due to the cow's appetite limit, farmers operate in stage I of feed-to-milk production functions; yet protein's marginal cost rises sharply with protein output. Only modest substitutability is evident among feed inputs or milk component outputs.