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.     

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.     

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.     

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.     

Gains and structural effects of exploiting scale-economies in Norwegian dairy production

In this paper, we present calculations of the economic gains in terms of reduced costs by exploiting scale‐economies in dairy production in Norway, and the effect this would have had on the number of farms. We also explore whether or not optimal scale and unexploited scale‐economies change over time due to scale‐augmenting technical change. The analysis is based on homothetic cost functions estimated by means of data for individual dairy farms for the period 1972–1996. For 1972, we find that, by full exploitation of scale‐economies, the costs could have been reduced by almost 40%, while the number of farms would have been reduced by more than 85%. The number of small farms has been substantially reduced in the period considered. This fact, combined with small scale‐augmenting technical change, implies that the gains and structural effects of exploiting scale‐economies have decreased over time. In 1996, costs could have been reduced by close to 30% by full exploitation of scale‐economies, while the number of farms would have been reduced by slightly more than 70%. Thus, both gains and structural effects are substantially less than in 1972. Nevertheless, the calculated gains for 1996 make almost 5 billion NOK. This corresponds almost exactly to the total public support to the dairy farms in 1996. The unexploited scale‐economies are largely due to the agricultural policy. Thus, a substantial share of the same can be considered as part of the‘price’ the Norwegian society has to pay for this policy. In addition, there are likely to be large hidden costs of this policy due in particular to the quota system and other direct production regulations. They imply that technical innovations and other efficiency‐improving investments requiring increased production to be profitable are not carried out. This is the more likely explanation for the extremely poor efficiency development in Norwegian dairy production in the period studied.     

The Adoption and Impact of Bovine Somatotropin on U.S. Dairy Farms

Data from a national survey representative of U.S. dairy operations were used to assess adoption and the production and financial impacts of recombinant bovine somatotropin (rbST). Adoption rates of rbST varied significantly across the nation, but were higher among larger diary operations in all regions. However, the scale bias of rbST adoption was substantially diminished when the influence of location and the use of related technologies were measured. An increase in milk production per cow was associated with rbST adoption, but estimated financial impacts were not statistically significant due to substantial variation in the net returns of rbST adopters.     

Estimating multiproduct and product‐specific scale economies for agricultural cooperatives

This article estimates multiproduct and product‐specific scale economies, scope economies, and cost efficiency with single and annual cost frontiers using a nonparametric approach. Multiproduct scale and scope economies are found that suggests increasing scale and product diversification can reduce cost for agricultural cooperatives. Many agricultural cooperatives experience economies of scale indicating that variable returns to scale as opposed to constant returns to scale is the appropriate technology for modeling agricultural cooperatives. Product‐specific scale economies for all outputs are close to one indicating that individual outputs are operating close to constant returns to scale. Annual frontier estimates show that cooperatives have become less cost efficient over time, but scale and scope economies remain relatively consistent across years. Further, results show that economic measures obtained from the single frontier are statistically different from those measures calculated from annual frontiers, suggesting that the cost frontier has shifted over time. The trade‐off between cost efficiency and multiproduct scale economies indicates that smaller cooperatives can reduce a higher percentage of cost by increasing the scale of operations rather than just becoming cost efficient. Because larger incentives exist for small cooperatives to increase scale, mergers will likely continue until economies of scale are exhausted in the industry.     

Productivity and farm size in Australian agriculture: reinvestigating the returns to scale

A positive relationship between farm size and farm productivity is often considered to be largely due to increasing returns to scale in farm production. However, using farm‐level data for the Australian broadacre industry, we found that constant or mildly decreasing returns to scale is the more typical scenario. In this study, the marginal returns to various farm inputs are compared across farms with different sizes. We found that large farms achieved higher productivity by changing production technology rather than increasing scale alone. The results highlight the disparity between ‘returns to scale’ and ‘returns to size’ in the industry, suggesting that productivity improvement among smaller farms can be made through increasing their ability to access advanced technologies, rather than simply expanding their scale.     

Technical efficiency,herd size,and exit intentions in U.S. dairy farms

The U.S. dairy industry has seen major restructuring in recent decades. A sharp decline in the number of U.S. dairy farms and an increase in average herd sizes have accompanied exits, which have been concentrated among smaller herds. Given that more productive farms are better positioned to increase operation size and to continue operation, we hypothesize that the more technically efficient farms are better able to expand and also have stronger incentives to continue production. Using data from the USDA's 2010 ARMS Phase III, Dairy Production Practices and Costs and Returns Report, we estimate technical efficiency using stochastic production frontier analysis with endogenous inputs. The efficiency estimate is then incorporated into the analysis of exit intention and herd size. The results confirm our hypotheses that smaller and less efficient farms are more likely to exit and that more efficient dairy farms tend to expand herd size. Moreover, farms without successors but with older and more educated operators are more likely to exit.     

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.     

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.     

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.     

Vertical Economies and the Structure of U.S. Hog Farms

Scale economies are often touted as the factor behind the trend in the structure of the U.S. hog industry toward fewer and larger hog farms. However, since hog production is multistage and farms either integrate or separate the stages, the appropriate measures are multistage economies. In theory, a smaller and, presumably, high‐cost operation, by the standards of single stage/output scale economies, may still be cost‐competitive if it enjoys multistage economies — that is if vertical scope economies more than offset stage‐specific scale diseconomies. Whether that holds in practice remains heretofore unexplored in the agricultural economics literature. Using a unique data set on hog farms in the U.S. Midwest, we estimate a multistage cost function and provide the first‐ever estimates of multistage economies, stage‐specific economies, and vertical scope economies in hog production. Les économies d'échelle sont souvent soupçonnées d'être le facteur qui influence la tendance observée dans la structure de l'industrie porcine aux États‐Unis, soit des porcheries moins nombreuses mais de plus grande taille. Cependant, comme la production porcine est une production à plusieurs stades et que les producteurs peuvent choisir d'intégrer ces stades ou d'exploiter un seul stade, les mesures appropriées sont les économies d'échelle liées aux stades multiples. En théorie, une petite porcherie, qui a probablement des coûts élevés selon les critères des économies d'échelle liées à un seul stade, peut tout de même être concurrentielle quant aux coûts si elle profite des économies d'échelle liées aux stades multiples, c'est‐à‐dire si les économies de gamme verticales font plus que compenser les déséconomies d'échelle liées à un seul stade. La vérification de cette théorie dans la pratique demeure, jusqu'ici, inexploitée dans la littérature agroéconomique. En utilisant un ensemble de données sur des porcheries situées dans le Midwest américain, nous avons estimé une fonction de coût lié aux stades multiples et nous présentons les premières estimations d'économies d'échelle liées aux stades multiples, d'économies d'échelle liées à un seul stade et d'économies de gamme verticales dans la production porcine.     

Traditional farm expansion versus joint venture remote partnerships

Traditionally, farms expand by buying out a neighbour. But might remote partnerships be a better way of expanding a farm business given projected climate change and price volatility? This question is addressed using farm business financial modelling. Representative farms at 27 locations in Western Australia are constructed to enable comparison of the value of buying out a neighbour versus expansion using geographically distant joint venture (JV) partners. The farm models consider economies of size, bulk purchase price discounts, the variability and correlation of returns associated with farm expansion, and impacts of climate change. Random selection of a remote partner generates little improvement in wealth; on average only 2.3 and 1.6 per cent, respectively, under current and projected future climate across all locations. However, there is large variation in wealth appreciation opportunities for each location and between locations. Preferred partnerships are a function of each farm's characteristics. Locations highly preferred as JV partners under current climate are similarly preferred partners under projected future climate. The main sources of additional wealth come from economies of size advantages, risk‐spreading benefits of combining geographically separated farms and bulk discounts. Farmers seeking business expansion will often benefit greatly from careful selection of a remote partner.     

Returns to smallholder dairying in the Kilimanjaro region,Tanzania

Tanzania is a net importer of dairy products despite its large cattle herd and successive government efforts to promote dairying. This paper draws on survey data to examine the financial attractiveness of dairying to smallholders in an area of high dairy potential on the slopes of Mount Kilimanjaro. On mixed farms in which coffee and bananas are the other main enterprises, producers keep small herds of mainly crossbred and grade cattle, mostly fed in stalls on cut forage and crop residues. Using a herd model, a benefit-cost analysis of dairying was carried out. This showed that at prevailing prices, returns to dairying were around 20%. There was, however, no difference in the returns gained by the larger scale farmers who had more of the grade cows and managed them intensively, compared to those using a less intensive system with lower potential stock. Moreover, the profitability of dairying for the former was underwritten by subsidies on inputs and fuel which are difficult to justify. Policy has apparently over-emphasised improving yields and the development of intensive dairying, and has not been sufficiently concerned with keeping down the costs of dairying.     

Technical Efficiency Estimates of Scottish Agriculture: A Note

Within the UK there has been a lack of studies of technical efficiency at the Scottish level. This note compares the results obtained using Scottish data with a recent study by Hadley [Journal of Agricultural Economics (2006) Vol. 57, pp. 81–100] for English and Welsh farms. Four major sectors are investigated, namely: (i) cereals, (ii) dairy, (iii) sheep and (iv) beef over the period 1989 to 2004. Some distinct differences in efficiencies, returns to scale and causes of efficiency are found.     

ALTERNATIVE PRODUCTION FRONTIER METHODOLOGIES AND DAIRY FARM EFFICIENCY

This paper estimates technical efficiency (TE) measures using four alternative production frontier models, and evaluates the sensitivity of the results to the choice of methodology. The Cobb-Douglas functional form along with data for 1982 and 1983 from 404 dairy farms located throughout six northeastern states in the US are used in the estimation. A general conclusion is that, broadly speaking, frontier function models are neutrally upwardly scaled versions of the OLS or average model. A second conclusion is that different models yield markedly different efficiency levels across firms. However, the correlation between the indexes from the various methods is high, which implies that the ordinal ranking of firms according to their measured level of technical efficiency appears to be independent of the method used for a given year. By comparison, the correlation between efficiency indexes for the same method across time, although positive, is much lower than the previous set of correlations. Correlation analysis of efficiency versus farm size and of efficiency versus returns over variable costs, based on the alternative models, yielded consistent results.     

Scale Efficiency in the New Zealand Dairy Industry: a Non-parametric Approach

The aim in this article is to measure the scale efficiency of the New Zealand dairy industry and to examine the relationship between farm size and technical efficiency. Data envelopment analysis (DEA) is applied to a sample of 264 dairy farms. The results suggest that 19 per cent of these farms are operating at optimal scale, 28 per cent at above optimal scale, and 53 per cent at below optimal scale. On average, the optimal size for New Zealand dairy farms is estimated at 83 hectares with a herd of 260 animals. Average technical efficiency is estimated at 89 per cent.     

Technological Change and Economies of Scale in U.S. Poultry Processing

This article uses a unique data set provided by the Census Bureau and a translog cost function to empirically examine technological change in the U.S. poultry industry. Results reveal substantial scale economies that show no evidence of diminishing with plant size and that are much greater than those realized in cattle and hog slaughter. Findings suggest that consolidation is likely to continue, particularly if demand growth diminishes, and that controlling for plant product mix is critical to accurate cost estimates.     

Farm-level determinants of product conversion: Organic milk production

We investigate the role of technology in the decision of dairy farmers to convert to organic production methods. We measure the characteristics of the production technology using data from the USDA Agricultural Resource Management Survey and a recently developed functional form that allows for a global approximation to the unknown distance function without compromising approximation at the data boundaries. Conventional dairies with lower technical efficiency, higher returns to scale, and the ability to easily substitute away from restricted inputs are more likely to convert to organic production. Findings suggest further consolidation in the conventional industry as low-performing farms exits for the organic industry.