Diversification Versus Specialization: Empirical Evidence On The Optimal Structure Of European Dairy Farms

This work aims to empirically evaluate economies of scale and scope in the Bavarian dairy sector, representing dairy farms in many other regions of the European Union. Against the background of structural change with the development towards fewer and larger farms, economies of scale and scope are of particular interest because they give an indication about the optimal farm structure. Increasing price volatility and an adverse development of the inputoutput price ratio have put economic pressure on the agricultural sector. Therefore, there is a strong need to improve farm competitiveness. In this study, a multiple-output quadratic cost function framework is applied to a sample of Bavarian dairy farms covering the years between 2006 and 2014. The results show that Bavarian farms experience overall economies of scale of 1.55, indicating that they are too small from a technological point of view. As expected, economies of scale decrease with farm size, but even the largest farms in the sample operate at increasing returns to scale. Furthermore, considerable economies of scope are evident. The average farm in the sample achieves cost savings of 77 per cent when milk, crop, and livestock are jointly produced compared to a separate production. Furthermore, economies of scope decrease with farm size, indicating that small farms benefit to a greater extent from diversification than large farms. If policy aims to slow down the structural change and to protect traditional family farms, it is recommended to promote farm diversification.