An econometric approach to estimating the unit cost of procducing milk in the South African dairy industry

[摘要] ABSTRACT: Small dairy farms in South Africa are observed to have higher costs than larger farms, andwhether those higher costs are due to technology or inefficiency has implications for policy.This research focused on finding the curve that best represents the relationship betweenaverage cost and level of output. That was done by relating average cost to actual output.However, it was found to be more appropriate to relate average cost to planned output on thebasis that costs are more likely to reflect what the farmer expects output to be. As a result, apragmatic two-step procedure was adopted. In the first step, the farmer's planned output wasdetermined by estimating a production function based on the farmer's actual use of inputs,i.e., land, number of cows in the herd, labour, feed and veterinary costs. In the second step,the long-run average cost (LAC) curve was estimated where average cost is calculated astotal cost divided by planned output and this is then related to the level of planned output. Toidentify the determinants of production cost thus the drivers of higher costs on small farms,the cost of milk production by farm size was decomposed into frontier and efficiencycomponents with a stochastic cost curve and long run cost curve using data from dairy farmsin KwaZulu-Natal (South Africa). Financial data of 37 farms for the period 1999 to 2007were used in econometrics estimation of long run average cost curve (LAC) function fordifferent level of production (as a proxy of planned output). Results show that average costcurves exhibiting variation in unit cost with output thus suggesting the existence ofeconomies of size with larger farms being able to produce any given level of output at lowercosts compared to their smaller counterparts. The study found that long-run average costcurve (LAC) for the sample of dairy farms is L-shaped rather than U-shaped.

[发布机构] Stellenbosch University