Scale Economies,Technical Efficiency,and the Sources of Total Factor Productivity Growth of Quebec Dairy Farms

Canada's average cost for milk production is among the highest in the world. This paper focuses on specific potential causes by estimating economies of scale and technical efficiency for a panel of Quebec dairy farms that spans the 2001–10 period. Additionally, this paper investigates the sources of total factor productivity growth. The stochastic frontier analysis, based on an input‐distance function, is used to estimate returns to scale relationships across dairy farms. The results show that there is significant economies scale to be exploited and that cost of production could also be reduced by improving technical efficiency. Accordingly, the paper indicates that input‐mix effect is the main source of total factor productivity growth. The results have important implications for Canada's supply management policy, and more specifically for the trading of production quota between dairy farmers, as well as for the delivery of targeted extension services.     

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.     

Specialization,diversification, and productivity: a panel data analysis of rice farms in Korea

This article examines the microeconomics of productivity associated with specialization/diversification in production activities, with an application to Korean rice farms. Korean rice farms tend to be very small and highly specialized. Our analysis examines the productivity effects associated with both farm size and farm specialization/diversification in Korean agriculture. Relying on farm‐level panel data, the analysis studies farm productivity in a multi‐input multi‐output context, accounting not only for changes in inputs and technical change in rice production, but also for the role of diversification in the production of other crops in current and previous periods. We find positive but small productivity gains from farm diversification. These gains come mostly from complementarity effects across farm outputs, with minimal effect of scale economies. The positive complementarity effects work against nonconvexity effects, which provide strong productivity incentives for rice farms to specialize.     

On the nature and magnitude of cost economies in hog production

In this article, we assess the impact of farm size on production cost and evaluate the marginal costs and margins by considering that input prices may change with the scale of production. By using French hog farm data, we estimate a system of equations including a feed price function, input demand functions, and an output supply function based on a technology approximated by a combined generalized Leontief‐Quadratic form. Our results suggest that the marginal costs are over‐estimated when the adjustment of the feed unit prices to a change in farm size is not controlled for. More specifically, the cost economies for large farms (enjoying the highest profits) arise primarily from lower feed prices, with technological scale economies having little impact. In contrast, farms with no hired labor exhibit technological scale economies and reach higher price‐cost margins compared to larger farms.     

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.     

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.     

Sources of productivity growth on Finnish dairy farms—application of an input distance function

The objective is to examine sources of productivity change on Finnish dairy farms in the 1990s. The decomposition of productivity change into technical and technical efficiency change is widely recognized but it neglects the scale effect. Generalized decompositions incorporating all three components are calculated for a sample of Finnish dairy farms from 1989-2000. This period is of interest because of the drastic change in agricultural policy when Finland joined the European Union (EU) in 1995. The results indicate that productivity growth was on average low, approximately 0.15% per year. Neutral technical change was identified as the most important source of productivity growth (1.1%). Technical efficiency decreased by almost 0.5% annually. The contribution of the scale effect in productivity change increased towards the end of study period.     

Off‐farm work and technical efficiency on U.S. dairies

In this study, we investigate the impact of an increase in farm households’ off‐farm work on technical efficiency (TE) of U.S. dairies. We present a theoretical framework that implies that an increase in farm household off‐farm work decreases TE. We use two nationally‐representative samples of U.S. dairies (2010 and 2005 Agricultural Resource Management Surveys) and a parametric approach (stochastic frontier analysis) to empirically test the hypothesis. Results are generally consistent with the hypothesis and show that an increase in off‐farm work by the farm household is associated with a significant decrease in TE. In addition, results show that there is a statistically significant difference in TE between small, medium, and large farms. Small farms are associated with significantly higher off‐farm work and have lower TE than large farms, which implies that less off‐farm work by households with larger farms is at least partially responsible for the evidence of economies of scale in the U.S. dairy industry.     

Small U.S. dairy farms: can they compete?

The U.S. dairy industry is undergoing rapid structural change, evolving from a structure including many small farmers in the Upper Midwest and Northeast to one that includes very large farms in new production regions. Small farms are struggling to retain competitiveness via improved management and low‐input systems. Using data from USDA's Agricultural Resource Management Survey, we determine the extent of U.S. conventional and pasture‐based milk production during 2003–2007, and estimate net returns, scale efficiency, and technical efficiency associated with the systems across different operation sizes. We compare the financial performance of small conventional and pasture‐based producers with one another and with large‐scale producers. A stochastic production frontier is used to analyze performance over the period for conventional and pasture technologies identified using a binomial logit model. Large conventional farms generally outperformed smaller farms using most economic measures—technical efficiency, various profitability measures, and returns to scale.     

Internal and contextual drivers of dairy restructuring: evidence from French mountainous areas and post‐quota prospects

The end of the milk quota system in Europe has resulted in substantial structural changes to the dairy industry, calling its future into question, especially in mountainous areas. This study analyzes the internal and contextual factors that influence dairy restructuring in French mountainous areas. Three complementary logit models are used to specify farmer decisions (e.g., dairy production exit, stability, and growth). Original and exhaustive geo‐located administrative datasets are combined to create a farm longitudinal dataset and characterize farm‐restructuring patterns on a fine geographical scale. Farm size, corporate legal status, and specialization are positively associated with farm growth. Viable diversification strategies through either farm processing or agro‐environmental scheme contracting are also highlighted. Farm sustainability is supported by the economic success of the local industry and the propensity to adopt extensive practices. With respect to public policy, dairy policy appears to have the strongest impact. Thus, the liberalization of dairy policy threatens the future of dairy farming, particularly in areas with low milk density and no production under labels. This work calls for a policy that promotes the collective dimension of dairy farm performance. The current rural development policy alone may be insufficient to support farms’ long‐term sustainability.     

Do the Largest Firms Grow and Diversify the Fastest? The Case of U.S. Dairies

We analyze growth and diversification of U.S. dairy farms by examining changes in ten size cohorts and new entrants through three successive censuses. We reject Gibrat's law and the mean reversion hypothesis of growth. Growth rates appear bimodal where the smallest and largest farm cohorts grow fastest. All cohorts diversify but the largest farms do not diversify as rapidly as medium-sized farms. New entrants are generally large, and they diversify more rapidly than comparably sized incumbents do. These data suggest that scale economies persist even for the largest cohort of U.S. dairy farms and scale economies dominate scope economies for large farms.     

Feed use intensification and technical efficiency of dairy farms in New Zealand

In recent years, the traditionally pasture‐based dairy farms in New Zealand have become more intensive by using higher proportions of supplementary feed. This trend has been attributed to a range of factors, such as productivity enhancement, overcoming pasture deficits and the improvement of body condition scores. However, there is a lack of knowledge as to how feed use intensification affects the technical efficiency of dairy farms in New Zealand. This paper addresses the research gap by estimating the impact of feed use intensification on the technical efficiency of New Zealand dairy farms, using a fixed effects stochastic production frontier model and a balanced panel of 257 farms from 2010 to 2013. The empirical results show that technical efficiency on New Zealand dairy farms is positively and significantly influenced by feed use intensification, herd size and milking frequency.     

Scale Economies and Inefficiency of U.S. Dairy Farms

This study employs data drawn from the 2000 Agricultural Resource Management Survey, a U.S. Department of Agriculture-sponsored farmers' survey. The article estimates returns to scale relationships across dairy farms of different sizes and across different regions, incorporating variables hypothesized to influence farm performance. Results point to significant scale economies in U.S. dairy farms and underscore the importance of taking account of inefficiency when estimating scale economies. Contrary to previous research, the preferred cost function specification does not show a region of decreasing returns to scale. This finding helps explain why the average size of dairy farms has been increasing.     

Economic Analysis of the Policy for Accreditation of Dairy Farms Free of Bovine Brucellosis and Tuberculosis: Challenges for Small and Large Producers in Brazil

One of the cornerstones of the National Program for Control and Eradication of Bovine Brucellosis and Tuberculosis in Brazil is the voluntary accreditation of free herds. We developed a stochastic cost–benefit analysis model for two types of dairy herds (high yield Holstein‐Zebu crossbred females and lower productivity smaller scale herds) to identify the technical and economic constraints of this process. The initial prevalence of infected animals and the impact of the disease in the structure and performance of the herd were derived from secondary data. Information on the costs and benefits of herd sanitation were compiled into a cost–benefit model at the herd level. The last step consisted of a scenario simulation to evaluate the impact of alternative policies to the certification process. For each scenario, we calculate the probability over time of a Benefit–Cost Ratio greater than 1 and of an Internal Rate of Return above 1% (the discount rate used in the model). Results show that larger and more intensive dairy farms, and also herds affected by brucellosis compared with tuberculosis‐positive herds, are more likely to achieve financial gains from the certification investment. The compensation for culled animals is important in the initial phase of herd sanitation and the premium payment on milk would help farmers to achieve a return on the investment over time. The model can be adapted to different and dynamic production, epidemiological and economic settings.     

An examination of economic efficiency of Russian crop production in the reform period

This article examines economic efficiency (EE) of crop production of Russian corporate farms for 1993–1998. EE declined over the period, due to declines in both technical and allocative efficiency. Technical efficiency (TE) results indicate that output levels could have been maintained while reducing overall input use by an average of 29–31% in 1998, depending on the method used, while the allocative efficiency (AE) results show that costs could have been reduced about 30%. The EE scores show that Russian corporate farms could have increased efficiency by reducing the use of all inputs, particularly fertilizer and fuel. Russian agriculture inherited machinery‐intensive technology from the Soviet era, which may be inappropriate given the relative abundance of labor in the post‐reform environment. Investment constraints have prevented the replacement of old machinery‐intensive technology with smaller scale machines that allow for a more labor‐using technology.     

Technical and scale efficiency of crop and livestock farms in Poland: does specialization matter?

The technical and scale efficiency of Polish farms is analyzed using data envelopment analysis. Efficiency differences are measured according to farm specialization, in crop or livestock, at two points in time during transition, 1996 and 2000. The efficiency results are reviewed in light of confidence intervals provided by bootstrapping. Livestock farms are found to be, on average, more technically and scale efficient than crop farms. Scale efficiency is high for both specializations. Technical inefficiency appears mostly to be due to “pure technical” rather than “scale” inefficiency, and thus attributable to inefficient management practices. The evidence suggests that the low‐educational attainment of people engaged in agriculture is one important reason for these inefficient practices. In 2000, 64% of livestock farms and 86% of crop farms were operating under increasing returns to scale. Improvements in the land lease legislation and changes to the policy support to farmers' pensions could stimulate the land market and remove the incentives to keep a fragmented operational structure.     

Droughts and farms’ financial performance: a farm‐level study in New Zealand

We quantify the impacts of droughts in New Zealand on the profitability of dairy, sheep and beef farms using a comprehensive administrative database of all farms in New Zealand. For dairy farms, we found that drought events have positive impacts on dairy farms’ revenue and profit in the year of the drought. This effect is most likely attributable to drought‐induced increases in the export price of milk solids, as New Zealand is the market maker in this global market and almost all domestic dairy production is exported. All of these quantified impacts, however, are not very large, suggesting that, at this point in time, droughts have a fairly moderate impact on New Zealand dairy and sheep–beef businesses.     

Economic analysis of the impact of adopting herd health control programs on smallholder dairy farms in Central Thailand

The economic impact of adopting herd health programs for mastitis and reproduction by small-scale dairy producers of Central Thailand was assessed using a policy analysis matrix (PAM). Following a reduction in the incidence of bovine disease on adopter farms, an increase in private net profits is observed. More importantly the social costs of supporting dairy farmers is reduced; the PAM effective protection coefficient was reduced by 35% for mastitis program adopters and by 44% for reproductive program adopters, indicating improved social efficiency of dairy policy. Other indicators of efficiency and policy implications are discussed.     

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.     

The costs and benefits of land fragmentation of rice farms in Japan*

Land fragmentation, in which a farm operates multiple, separate plots of land, is a common phenomenon in Japan and many other countries. Usually, land fragmentation is regarded as a harmful phenomenon as it increases production costs and reduces the advantages of scale economies. However, it is also known that fragmentation may have beneficial effects in reducing risk through spatial dispersion of plots. Thus, land fragmentation has both costs and benefits, and whether it is beneficial or harmful is determined by the magnitude of these costs and benefits. This article investigates the costs and benefits of land fragmentation empirically using panel data from Japanese rice farms. The empirical results reveal that fragmentation increases production costs and offsets economies of size, and these impacts strengthen as farm size increases. Moreover, although fragmentation does reduce production risk, its monetary value is far below the cost of land fragmentation. From these findings, we conclude that land fragmentation is an impediment to efficient rice production in Japan.