Dairy farm efficiency and the analysis of milk production growth: Evidence from Vermont

The general objective of this dissertation was to analyze dairy farm efficiency and to evaluate the relationship between technical efficiency and non-farm factors for a sample of Vermont dairy farms covering the period 1971–1992. A meta-regression model was estimated to review various methodological issues that could affect the estimation of dairy farm technical efficiency. In addition, input-oriented technical, cost and allocative efficiency are calculated using two alternatives primal methodologies, a stochastic production frontier and a stochastic input distance function. The relationship between technical efficiency and non-farm factors, including government intervention and macroeconomics variables, is evaluated applying the inefficiency model developed by Battese and Coelli (1995). Using the results obtained from this model, milk production growth is decomposed into the size effect, technological progress and changes in technical efficiency. ^ Technical efficiency estimates from the production frontier are consistently higher than those obtained from the input distance function model. Allocative and cost efficiency show a similar behavior over time for the two methods but, in both cases, the efficiency levels are low. The correlation between allocative and technical efficiency was negative and significant for most of the models. The results suggest that there is no variation in technical, cost, and allocative efficiency across farms of different sizes when a production frontier model is estimated. However, the findings from the distance function reveal that small farms are more technical and cost efficient than larger farms. ^ The results of this dissertation support the notion that protectionism and efficiency are negatively related, which suggests that farmers are motivated to supply a lower level of managerial effort when government expenditures on the dairy support program increase. This finding supports the notion that sector profitability is an important factor in the level of management effort devoted by farmers to increase productivity. On the other hand, better general economic conditions increase the opportunity cost of farmers\u27 time devoted to management, thus motivating a shift in effort away from managerial activities towards non-farm occupations or more leisure. ^ The output decomposition revealed that the size effect was the major factor in the expansion of milk production observed during the 1970s and 1980s, accounting for more than 60% of total output growth. The remaining 40% is attributable to productivity growth, 38% to technological progress and 2% to technical efficiency growth.