COST-OUTPUT RELATIONSHIPS AND PRODUCTIVE EFFICIENCY IN FARM SUPPLY FIRMS

Retail farm supply firms produce a variety of products and services. Firm managers face a formidable task when attempting to determine the cost implications of changing the level and/or mix of outputs. In addition, monitoring firm efficiency is more difficult in this complex, multiproduct environment. Previous research on farm supply cost-output relationships and productive efficiency failed to adequately characterize the multiproduct nature of these firms. A flexible, multiproduct variable cost function framework was employed to determine the relationship between the level and mix of output and cost and to measure the productive efficiency of retail fertilizer plants. Both standard least-squares and frontier (one-sided disturbance) estimation procedures were employed. Measures developed from this more general procedure were compared and contrasted with traditional financial performance ratios. In addition, earlier cost-output and efficiency research on the relative performance of cooperative and proprietary farm supply firms was re-examined using this multiproduct framework. Results suggest that retail fertilizer plants enjoy substantial short-term economies of scale. In addition, plants will find that joint production of anhydrous ammonia with their other outputs results in lower total variable cost relative to separate production. Expanding the production of anhydrous ammonia will lower the average incremental cost of producing this output. Finally, sample retail fertilizer plants had overinvested in plant and equipment. The efficiency findings suggest the average retail fertilizer plant could lower total variable costs by 10 percent if it could operate as efficiently as the sample\u27s least cost producers. Little allocative inefficiency was measured, indicating plant manager\u27s should focus on improving technical efficiency. The overall efficiency index was only weakly related to traditional financial performance indicators. The previously reported result that cooperative farm supply firms are (slightly) more efficient than their proprietary counterparts was supported by the more general model. However, whereas earlier research found little evidence of scale economies for these firms, strong short-run scale economies were found when the flexible multiproduct model was employed. The discrepancy was traced to the aggregated measure of output and restrictive functional form used in the earlier work