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Can the small dairy farm remain competitive in US agriculture?

  • Tauer, Loren W.
  • Mishra, Ashok K.

The cost of milk production by farm size was decomposed into frontier and efficiency components with a stochastic cost curve using data on 755 USA dairy farms from the year 2000. The estimated frontier function is much flatter than the composite cost curve, and although the frontier cost of production decreases with farm size, that cost reduction is not as pronounced as a cost curve that includes inefficiency. The higher cost of production of many smaller farms is caused by inefficiency. The 50-cow farm has a frontier cost of production of $10.05 and an inefficiency cost of $10.27 for a composite cost of $20.32. In contrast, the 1,000-cow herd has a frontier cost of production of $9.27 and an inefficiency cost of $2.82 for a composite cost of $12.09. The implication is that the efficient 50-cow farm is competitive with the average 1,000-cow farm, but not with the efficient 1,000-cow farm.

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Article provided by Elsevier in its journal Food Policy.

Volume (Year): 31 (2006)
Issue (Month): 5 (October)
Pages: 458-468

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Handle: RePEc:eee:jfpoli:v:31:y:2006:i:5:p:458-468
Contact details of provider: Web page: http://www.elsevier.com/locate/foodpol

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  1. Battese, George E. & Corra, Greg S., 1977. "Estimation Of A Production Frontier Model: With Application To The Pastoral Zone Of Eastern Australia," Australian Journal of Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 21(03), December.
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  3. Battese, G E & Coelli, T J, 1995. "A Model for Technical Inefficiency Effects in a Stochastic Frontier Production Function for Panel Data," Empirical Economics, Springer, vol. 20(2), pages 325-32.
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  5. Jondrow, James & Knox Lovell, C. A. & Materov, Ivan S. & Schmidt, Peter, 1982. "On the estimation of technical inefficiency in the stochastic frontier production function model," Journal of Econometrics, Elsevier, vol. 19(2-3), pages 233-238, August.
  6. George E. Battese & Greg S. Corra, 1977. "Estimation Of A Production Frontier Model: With Application To The Pastoral Zone Of Eastern Australia," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 21(3), pages 169-179, December.
  7. Christopher A. Wolf & Daniel A. Sumner, 2001. "Are Farm Size Distributions Bimodal? Evidence from Kernel Density Estimates of Dairy Farm Size Distributions," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(1), pages 77-88.
  8. Antonio Alvarez & Carlos Arias, 2003. "Diseconomies of Size with Fixed Managerial Ability," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 85(1), pages 134-142.
  9. Douglas Jackson-Smith & David Trechter & Nate Splett, 2004. "The Contribution of Financial Management Training and Knowledge to Dairy Farm Financial Performance," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 26(1), pages 132-147.
  10. Kumbhakar, Subal C & Ghosh, Soumendra & McGuckin, J Thomas, 1991. "A Generalized Production Frontier Approach for Estimating Determinants of Inefficiency in U.S. Dairy Farms," Journal of Business & Economic Statistics, American Statistical Association, vol. 9(3), pages 279-86, July.
  11. Meeusen, Wim & van den Broeck, Julien, 1977. "Efficiency Estimation from Cobb-Douglas Production Functions with Composed Error," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(2), pages 435-44, June.
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