Smaller dairy farms in the U.S. are observed to have higher costs than larger dairy farms, and whether those higher costs are due to technology or inefficiency has implications for policy to address the small farm. If high cost of production on smaller farms is due to a higher cost frontier, then to make small farms competitive would require research to devise and design technology that is suitable for small farms. If instead high cost is due to inefficiency, then educational approaches are needed to ensure small dairy farms use technology efficiently.
To determine the cause of higher costs on small farms, the cost of milk production by farm size was decomposed into frontier and efficiency components with a stochastic cost curve using data on U.S. dairy farms. 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 on many smaller farms is caused by inefficiency rather than technology. These results imply that for the small U.S. dairy farm to become competitive with the large U.S. dairy farm requires some new technology appropriate for smaller farms. However, a much larger cost reduction on smaller farms would be possible if those farms would learn how to use existing technology more efficiently. Although new technology for the small dairy farm would be useful, it appears that current technologies are in place which would make the small dairy farm more competitive if those farms used that technology efficiently.
There may be a number of social and political reasons to support the small farm. Whether high cost of production is due to inefficiency or a higher cost frontier has significant implications for policy. If high cost of production on smaller farms is due to a higher cost frontier, then to make small farms competitive would require research to devise and design technology that is suitable for small farms. If instead high cost is due to inefficiency, and not a high cost frontier, then current technology exists that would allow small farms to be competitive with larger farms. Educational programs would be necessary to ensure that small farms use more efficiently the technology currently available to them at their respective size. We found that educational efforts, if effective, may have a larger impact than new technology for small dairy farms.
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National Research Initiative of the Cooperative State Research, Education and Extension Service, USDA