Determinants, differentiation, and development of short-term marginal costs in dairy production: an empirical analysis for selected regions of the EU

This work provides evidence on the determinants, cost differentiation, and development of short‐term marginal costs of dairy farms in important production regions of the European Union. The empirical study is based on the estimation of multi‐input multi‐output Symmetric Generalized McFadden cost functions using an unbalanced panel data set of the European Farm Accountancy Data Network. The results show considerable regional differences in the impact of the outputs, input prices, and fixed factors on marginal costs. Strong evidence can be found that marginal costs decrease over time and is further underlined by the development of derived regional aggregated short‐term supply curves. Marginal cost elasticities and correlation coefficients validate the hypotheses that a high degree of farm specialization, large milk output, and low milk prices are associated with lower marginal costs. Furthermore, the marginal cost spread in the data sample is analyzed. We show that milk output, milk yield, herd size, labor input, and fodder production can be attributed to significant marginal cost differentiation of farms, whereas for crop and animal output, grassland, stock of other animals, and depreciation only minor differentiation can be found.     

Enhancing productivity on suburban dairy farms in China

Dairy farms in China's suburban areas have been playing an important role in providing urban markets with fresh milk. With the rising demand for fluid milk and dairy products in the cities, there is a perception that small and scattered dairy farms in China's provinces are gradually disappearing and more concentrated dairy cattle farming is being formed near suburban areas. This article uses farm‐level survey data and stochastic input distance functions to make estimates of total factor productivity (TFP) on suburban dairy farms, as well as for the entire dairy sector. The results show that over the past decade TFP growth has been positive on suburban dairy farms, and this rise in productivity has been driven mostly by technological change. However, at the same time we find that, on average, the same farms have been falling behind the advancing technical frontier. We also find one of the drivers of the suburban dairy sector is the relatively robust rate of technological change of these farms, which has been more rapid than on farms in the dairy sector as a whole. The results suggest that efforts to achieve greater adoption of new technologies and better advice on how to use the technologies and manage production and marketing within the suburban dairy sector will further advance productivity growth in the sector.     

Deregulation reforms,resource reallocation and aggregate productivity growth in the Australian dairy industry

Deregulation reforms in the Australian dairy industry had long‐lasting repercussions for Australian agriculture and the wider Australian economy. Using farm‐level data from 1979 to 2013, we investigate the effect of these reforms on productivity in the Australian dairy industry which arose from correcting resource misallocation between farms and across segregated state milk markets. Our results demonstrate that after the dairy reforms in 2000, relative market share shifted from less productive farms to more productive ones, and between farms using different production systems – generating additional productivity gains for the farm sector, but imposing some costs on downstream manufacturers by strengthening the seasonality of milk supply. Lessons from the Australian experience provide timely guidance for those countries exploring deregulation now or in the future to improve the industry‐level agricultural productivity growth through facilitating resource reallocation from less efficient to more efficient farms.     

Impacts of Norwegian Milk Quotas on Output Growth: A Modified Distance Function Approach

Quota regulations that prevent output expansion of farms and reallocation of output between farms can cause lower growth in output and productivity. The aim of this study was to explain the output growth rate of Norwegian dairy farms since 1976, and to decompose it into output, input, socioeconomic and technical change components. Instead of using the standard distance function approach for multi‐output technologies, we use a growth rate formulation, which automatically removes the farm‐specific effects. This formulation also helps to impose non‐negativity constraints on marginal products of inputs (input elasticities), which are often violated for many observations, especially when flexible functional forms are used. The farm‐level panel data cover three periods: before the quota scheme was introduced (1976–1982); the period with the most output‐restricting quota scheme (1983–1996); and the period with a more flexible quota scheme (from 1997 onwards). Results show that the milk quota regulations had a significant constraining effect on output growth, in particular on milk output in the period 1983–1996. Furthermore, the output mix has shifted towards meat production for the average farm. What emerges from this study is that output growth and technical change are negatively influenced by policy aims where productive performance has not been the primary objective, and that there is scope for increased farm growth if the quota regime is liberalised.     

Growth of milk production in German dairy farms: an empirical study based on event history analysis

This article investigates determinants of growth of milk production in German dairy farms with the use of event history analysis. This methodology enables the analysts to consider time as a proxy for not measurable effects on growth. The likelihood of a farm's moving from a nongrowth episode into a growth episode is estimated and the impact of various covariates on that likelihood is assessed. The analysis is based upon a balanced panel of annual farm accounts from 616 specialized dairy farms in Germany, covering the financial years 1995/1996–2008/2009. The results from event history analyses are presented for low and high growth rates. For both groups, it was found that the probability of entering a growth episode, defined as the event to be analyzed, increases over time, e.g., as a consequence of an increasing need to improve competitiveness. Moreover, several covariates, such as the share of subsidies in returns, farmer's age, and milk price, had a significant impact on growth in a farm's milk production. The analysis revealed, however, that the effect‐direction of some explanatory variables differed between the two groups.     

Is there a future for small farms in developed countries? Evidence from the French case

This research aims to identify the specific characteristics of small farms in developed countries and the factors that influence their survival and growth. Using the case of France, we employ statistical and econometric analysis of data from the Farm Structure Survey (N = 70,000) for the period 2000–2007. The principal findings suggest that small farms are no more likely than other farms to employ “alternative” strategies to the predominant model of increasing farm size, nor are they more likely to diversify on‐farm activities or operate under quality‐labeled production systems, with the notable exception of organic agriculture. However, where small farms do adopt or practice these activities, they are seen to have a favorable effect in ensuring their survival and growth. In contrast, we are unable to conclude that pluriactivity of farm households has a positive impact on the survival of small enterprises. The effect of geographical location on small farms is largely expressed in their concentration in mountainous or disadvantaged regions. Overall, the trajectory of small farms is marked by farm exit, principally as the result of farmers retiring at the end of their careers. The small farm sector is also revitalized by both larger farms declining and thus being reclassified as small farms, as well as the progressive entry into agriculture of small farm holders whose income was previously derived largely off‐farm.     

Can technology help achieve sustainable intensification? Evidence from milk recording on Irish dairy farms

This article explores the potential of a farm technology to simultaneously improve farm efficiency and provide wider environmental and social benefits. Identifying these ‘win-win-win’ strategies and encouraging their widespread adoption is critical to achieve sustainable intensification. Using a nationally representative sample of 296 Irish dairy farms from 2015, propensity score matching is applied to measure the impact of milk recording on a broad set of farm sustainability indicators. The findings reveal that the technology enhances economic sustainability by increasing dairy gross margin and milk yield per cow. Furthermore, social sustainability is improved through a reduction in milk bulk tank somatic cell count (an indicator of animal health and welfare status). Conversely, milk recording (as it is currently implemented) does not impact farm environmental sustainability, represented by greenhouse gas emission efficiency. While the study shows that milk recording is a ‘win-win’ strategy, ways of improving current levels of utilisation are discussed so that milk recording achieves its ‘win-win-win’ potential in the future.     

Tracing the evolution of the aggregate U.S. milk supply elasticity using a herd dynamics model

The U.S. dairy sector is characterized by increasing volatility of milk prices, and consolidation in production as evidenced by declining number of dairy farms with an increasingly larger share of milk supplied from a small number of very large farms. Using aggregate national data, we build a mixed‐frequency herd dynamics econometric model of the U.S. milk supply that updates and substantially amends the model first proposed by Chavas and Klemme. We implement a dynamic residual‐based bootstrap technique that can be used in testing for changes in nonmarginal simulated long‐run supply responsiveness, and trace the evolution of long‐run milk supply elasticity from 1975 through 2010. Several papers in the past have suggested that long‐run supply elasticity increases with dairy farm size, which implies that increased importance of large farms would increase aggregate long‐run supply responsiveness. Contrary to this conclusion, we find a declining trend in long‐run supply elasticity from 1975 through 2005. Persistence of such a decline would be a major cause for worry, as ever larger price swings would be needed to equilibrate the market in face of demand shocks. However, we find that milk supply is becoming more responsive since 2005 both to milk and feed price changes. Increasing responsiveness to feed prices further justifies focusing the next generation of the dairy policy instruments on managing dairy profit margins rather than just revenue streams.     

Estimation of time-varying price elasticity in 1970–1997 Japanese raw milk supply by structural time-series model

The price elasticity of raw milk supply in Japan is estimated over time by a structural time-series model in state space form, and the changes in elasticity are tested by the diagnosing test of de John and Penzer in 1998. The supply function is modeled with a local linear trend and a strictly exogenous autoregressive distributed lag price. The seasonality in the data is adjusted by a structural time-series model. In the 1970–1997 period, there were major dairy policy changes in Japan: a production adjustment, related penalties, and two-tier pricing. Hokkaido is the region that mainly provides the supply of raw milk for milk products, while Tofuken is the region that mainly produces drinking milk. The estimated price elasticity in Hokkaido became stable after imposition of the production adjustment. On the other hand, price elasticity in Tofuken became stable after the inflation of the mid-1970s. Price elasticity is estimated to be more inelastic as well as more likely to converge in inelasticity in Hokkaido than in Tofuken. We discuss the relationship between changes in dairy policy and changes in price elasticity.     

Evaluating the uncertainty in estimates of the economic impacts of Bovine-Leukosis virus in U.S. dairy cows

An examination of the economic impacts of Bovine‐Leukosis virus indicated that reduced milk production, attributed to the presence of Bovine‐Leukosis virus in dairy cows, reduced consumer surplus by 2.7 ± 2.3 billion US$ (bUS$), and resulted in a total partial equilibrium loss of 720 ± 560 million US$ (mUS$) to the U.S. economy in 1996. Most of the economic surplus lost by consumers was transferred to producers, whose economic surplus increased by 2.0 ± 1.8 bUS$ as a result of reduced milk production attributed to the presence of Bovine‐Leukosis virus in dairy cattle. Uncertainty analysis showed that an estimate of the milk‐production decline per percent increase in the prevalence of Bovine‐Leukosis virus in dairy cows accounted for most of the uncertainty in the economic‐impact estimates. If Bovine‐Leukosis virus had not been present in U.S. dairy cows, then milk production would have increased by 2.0 billion ± 1.5 billion kg, the price would have fallen by 3.8 ± 3.2 cents/kg, and the value of the milk produced would have decreased by 2.1 ± 1.9 bUS$. Guidelines delineated by the International Organization for Standardization, for evaluating and expressing uncertainty in measurement, are discussed and proposed for use in the context of broad national estimates, for which the economic impacts of Bovine‐Leukosis virus serve as an example. The principal advantages of the methodology are the clarity and transparency of results, and the ability clearly to identify major uncertainty contributors.     

Herd Growth,Farm Organisation and Subsidies in the Dairy Sector of Russia and Kazakhstan

Initially taken as a template for farm restructuring after the demise of collective agriculture, the ‘Western family farm model’ has taken root in the former Soviet countries only belatedly and incompletely. We examine dairy structures in Russia and Kazakhstan and analyse the drivers of recent herd growth. We are specifically interested in the role of farm management and organisation, vertical integration, and the role of policy. Regression analysis based on a sample of 180 randomly selected commercial dairy farms, using an innovative simultaneous equation framework, shows that better herd management and access to milk marketing contracts were more effective in stimulating herd growth than current subsidy payments. We do not find evidence that milking plants belonging to corporate entities or even supra‐regional agroholdings grow more substantially than medium‐sized individual farms. Twenty‐five years after the end of central planning, structural change among commercial dairy farms in Russia and Kazakhstan appears similar in many ways to the patterns observed in the West more recently: smaller farms catch up in terms of herd growth and classical family‐run operations coexist with or even emulate vertically integrated agribusinesses based on hired labour. In moving toward this ‘new normal’ of farming structures, commercial dairy farms in Russia may even be a few steps ahead of their Western counterparts. At the same time, the still sizeable but stagnating group of subsistence producers in rural households finds no equivalent in the West.     

Technology and efficiency in a panel of Italian dairy farms: an SGM restricted cost function approach

This article employs a short‐term specification of the symmetric generalised McFadden (SGM) cost function capable of accommodating quasi‐fixed factors and variable returns. Temporary equilibrium and scale economies are investigated while maintaining the consistency of the estimated model with microeconomic theory and approximation properties. It also makes use of a two‐step procedure to estimate first the technology parameters and then time‐varying efficiency at farm level. No distributional assumptions are required on efficiency as we consider a fixed effect model. A balanced panel of Italian dairy farms during the years from 1980 to 1992 serves as the case study. The results suggest a rigid productive structure during the pre‐ and post‐quota period. Moreover, Italian milk producers are found to exhibit considerable excess capacity and rather low input technical efficiency.     

Policy drivers of farm succession and inheritance

Farm succession and inheritance is increasingly considered a complex phenomenon which not only affects core dimensions of farm family life but also the agricultural sector more widely. Intergenerational farm transfer in particular is increasingly viewed as fundamental to the sustainability and development of global agriculture. In the majority of EU countries, the average age of farmers is increasing, while the number of farmers under 40 years of age is decreasing. There is growing concern that this demographic trend may have negative impacts on the agricultural industry because it is younger and not older farmers who are associated with more efficient and effective production practices. The question of what motivates decisions to transfer farms is a complex one, and research to date has not apparently enlightened agricultural policy to the extent that current trends towards an ageing farm population are being managed. This research aims to investigate economic and financial aspects of the policy drivers of farm succession and inheritance in Ireland to understand what it is about the policy environment that is failing to stimulate higher levels of farm transfer. It draws on the Teagasc National Farm Survey data which provides Irish data to the Farm Accountancy Data Network in the European Commission. A hypothetical microsimulation model is used to investigate economic factors of farm transfers, with scenarios created to test these factors and their impacts on the transfer process. The Net Present Value (NPV) of income streams for farmers and their successors are calculated to assess which scenarios have the highest/lowest financial effects. The findings illustrate a range of possible scenarios for farm succession/inheritance, with some results indicating that under current policy retaining a farm until death may be more economically beneficial to a farmer than transferring land before death.     

Quantifying the Economic Return to Participatory Extension Programmes in Ireland: an Endogenous Switching Regression Analysis

This article examines the effectiveness of a government funded extension programme. Farm‐level data are used to assess the economic impact of dairy discussion groups, a common participatory extension method. The evaluation focuses on whether discussion group participants have improved farm profits, which is estimated with an endogenous switching regression model. This method controls for self‐selection bias due to unobserved characteristics, such as the farmer’s ability, that may affect both participation and farm profitability. After controlling for this potential bias, we find that the economic returns to discussion group membership are positive, thus supporting government targets to enrol more farmers in discussion groups.     

A nonparametric analysis of the determinants of family farm efficiency dynamics in Lithuania

This article presents insights into the efficiency of Lithuanian family farms. The research covers the years 2004–2009 and is based on farm‐level Farm Accountancy Data Network data. Bootstrapped data envelopment analysis was employed to obtain efficiency scores, whereas stochastic kernels and multivariate methods, viz. fuzzy clustering and nonparametric regression, were utilized to assess the impact of selected determinants on efficiency. Clustering analysis indicated that the efficiency change paths specific for the analyzed sample differed in both their average levels and ranges. Furthermore, it was concluded that Lithuanian agricultural policy should focus on increasing the efficiency of crop farms. Cluster analysis suggested that production subsidies might be having a negative effect on efficiency.     

Technology choice and efficiency on Australian dairy farms*

Deregulation of the Australian dairy industry, specifically the removal of price subsidies to ‘market milk’, as well as ongoing drought in many dairy regions, has placed considerable pressure on farm cash income and a search for ways in which dairy farms can be made to operate more efficiently. Using traditional farm survey data and a unique biannual data set on farm technology use, this paper estimates a stochastic production frontier and technical efficiency model for dairy farms in New South Wales and Victoria, determining the relative importance of each input in dairy production, the effects of key technology variables on farm efficiency, and overall farm profiles based on the efficiency rankings of dairy producers. Results show that production exhibits constant returns to scale and although feed concentration and the number of cows milked at peak season matter, the key determinants of differences in dairy farm efficiency are the type of dairy shed used and the proportion of irrigated farm area. Overall farm profiles indicate that those in the ‘high efficiency group’ largely employ either rotary or swing‐over dairy shed technology and have almost three times the proportional amount of land under irrigation.     

Ranking farms with a composite indicator of sustainability

The assessment of sustainability at farm level has been growing in popularity over the last few years. This article contributes to this line of research by building up composite indicators for different facets—social, economic, environmental, and global—of farm sustainability using a methodological approach that combines data envelopment analysis (DEA) and multicriteria decision making (MCDM) methods, and assigns common weights to each individual sustainability indicator. This approach is applied to a database of 163 farms located in the Campos County, a region belonging to the dry lands of the Spanish Northern Plateau, using 12 individual indicators of sustainability. Our findings show that both economic and environmental composite sustainability indicators are positively correlated, but that this is not the case for the social indicator. We also check the influence of a set of variables on farm sustainability using bootstrapping statistical techniques, and showing that increasing farm size, membership in agricultural cooperatives and farmers’ medium and upper agricultural‐specific technical education, all exert a significant positive influence on sustainability. These results provide clues for policy makers that intend to design sustainability‐increasing structural agricultural policies.     

Structural Change and Policy Reform in the UK Dairy Sector

Estimation of a cost function for a representative sample of UK dairy producers allows future re‐structuring of the industry to be simulated using a model which incorporates producers' differential costs and milk prices. Consideration is also given to reductions in producer prices and to the introduction of an A/B quota system. The results indicate that, despite the history of quota trading in the UK, there is considerable scope for further restructuring in the industry to take advantage of differential incentives between producers. It is also projected that UK milk supply would increase if quota restrictions were removed.     

Measuring progress in agricultural sustainability to support policy-making

The concept of sustainability is one of the forefront issues in discussions of the challenges facing global agriculture, given the mounting pressure to increase food production in both socially responsible and environmentally friendly ways. From the perspective of Irish agriculture, sustainable intensification is of particular relevance, given ambitious targets to increase milk production in the context of European Union (EU) milk quota removal in 2015. A series of farm-level sustainability indicators are developed here using the Teagasc National Farm Survey FADN (Farm Accountancy Data Network) data for Ireland from 2012. Three dimensions, reflecting the multifaceted nature of sustainability (environmental, economic and social) are considered. Given the environmental challenges inherent in the sustainable intensification of agriculture, it is encouraging to observe that the more intensive, top performing farms (in an economic sense) emit relatively less greenhouse gases when compared to their less intensive counterparts. Conversely, the better performing farms in economic terms tend to have a higher nitrogen surplus per hectare on average. This is consistent with their higher rates of production intensity, but poses a challenge in terms of sustainable intensification and expansion. That said this analysis demonstrates that the nitrogen use efficiency of milk production is positively correlated with economic performance, with more intensive farms producing relatively more milk per kilogram of nitrogen surplus. From the perspective of social sustainability, demographic traits also tend to be positively correlated with economic performance. Given a growing recognition of the need for interconnected policy in the area of sustainability, this research should help inform policy debates and provides a guide for the undertaking of similar assessments elsewhere.     

The effect of decoupling on marginal agricultural systems: Implications for farm incomes,land use and upland ecology

In many parts of Europe, decades of production subsidies led to the steady intensification of agriculture in marginal areas. The recent decoupling of subsidies from production decisions means that the future of farming in these areas is uncertain. For example, in the uplands of the United Kingdom, an area important both for biodiversity conservation and ecosystem service provision, hill farmers steadily increased stocking densities in response to headage payments but must now reconfigure farm businesses to account for the shift to the Single Farm Payment scheme. We examined hill farming in the Peak District National Park as a case study into the future of marginal agriculture after decoupling. We surveyed 44 farm businesses and from this identified six representative farm types based on enterprise mix and land holdings. We developed linear programming models of production decisions for each farm type to examine the impacts of policy changes, comparing the effects of decoupling with and without agri-environment and hill farm support, and evaluating the effects of removal of the Single Farm Payment. The main effects of decoupling are to reduce stocking rates, and to change the mix of livestock activities. Agri-environmental schemes mediate the income losses from decoupling, and farmers are predicted to maximise take up of new Environmental Stewardship programmes, which have both positive and negative feedback effects on livestock numbers. Finally, removal of the Single Farm Payment leads to negative net farm incomes, and some land abandonment. These changes have important implications for ongoing debates about how ecological service flows can be maintained from upland areas, and how marginal upland farming communities can be sustained.