Explaining growth in demand for dairy products in Finland: an econometric analysis

Abstract

The dairy sector represents the cornerstone of Finnish agriculture but faces new challenges linked to the decoupling of farm subsidies and abolition of milk production quotas. Because of its increasing exposure to market forces, the sector must anticipate future changes in demand and deliver precisely what Finnish consumers want. This paper contributes to that goal by analyzing retroactively the drivers of demand for dairy products over the period 1975–2010 using National Accounts Data. After presenting the evolution of consumption for dairy products, we estimate a complete system of demand for food and dairy products and use it to decompose demand growth into a substitution effect, income effect, and trend effect. The analysis points to the severity of the challenges that the sector is facing. Stagnant consumption is at least partially the result of continuous but adverse taste changes, and as Finnish consumers grow more prosperous, they allocate an increasingly smaller share of their food budget to the dairy group. The low own-price elasticity of demand for dairy products also limits the benefits to the sector of growth in milk production. Hence, business-as-usual will result in the dwindling importance of the dairy sector in the Finnish food chain. Innovation and product differentiation, perhaps emphasizing the attributes of livestock production processes, are clearly required to counter this evolution.

Keywords:

• Consumption
• food
• almost ideal demand system
• decomposition
• elasticities
• milk
• demand analysis
• farm

Funding

This paper is a part of the project “Adaptation of the food sector and socio-economic impacts of climate change in North-East Europe” funded by the Academy of Finland [grant number 255954].

Acknowledgments

The authors acknowledge the help of Statistics Finland for the provision of data.

Notes

1. As an example, the conditional own-price elasticity of demand for butter is measured holding the total expenditure on dairy products constant. The unconditional elasticity relaxes that assumption and only considers that total food expenditure is constant.

2. Edgerton (1997) proposed similar formulas for the unconditional expenditure elasticities but different ones for the unconditional price elasticities. As explained by Carpentier and Guyomard (2001), Edgerton's formulas violate some theoretical properties of consumer theory except under the restrictive assumption of homotheticity of the subutility functions. We therefore opt for the more general formulas of Carpentier and Guyomard (2001).

3. Unless specified otherwise in the text, all consumption figures correspond to constant price expenditure.

4. Increase in cheese consumption is also observed in a number of other high-income countries, (e.g. UK; DEFRA Family Food Survey, 2010), Austria, Ireland, and France, among other countries. Furthermore, cheese consumption is expected to continue an upward trend (USDA, 2012).

5. The consumption of butter shows the same negative trend in a number of EU countries (e.g. Prättälä et al. 2003)

Additional information

Funding

Funding: This paper is a part of the project “Adaptation of the food sector and socio-economic impacts of climate change in North-East Europe” funded by the Academy of Finland [grant number 255954].