Scale Economies, Technical Efficiency, and the Sources of Total Factor Productivity Growth of Quebec Dairy Farms

Abstract

Canada's average cost for milk production is among the highest in the world. This paper focuses on specific potential causes by estimating economies of scale and technical efficiency for a panel of Quebec dairy farms that spans the 2001-10 period. Additionally, this paper investigates the sources of total factor productivity growth. The stochastic frontier analysis, based on an input-distance function, is used to estimate returns to scale relationships across dairy farms. The results show that there is significant economies scale to be exploited and that cost of production could also be reduced by improving technical efficiency. Accordingly, the paper indicates that input-mix effect is the main source of total factor productivity growth. The results have important implications for Canada's supply management policy, and more specifically for the trading of production quota between dairy farmers, as well as for the delivery of targeted extension services.