The Contribution of Productivity and Price Change to Farm-level Profitability: A Dual Approach Analysis of Crop Production in Norway

Abstract

Previous studies estimating TFP and its components can be criticized for not considering unobserved heterogeneity in their model. Moreover, the studies focused on the technical evaluation of a sector. However, the technical evaluation alone reveals how well farmers use the physical production process. There is a need to closely examine the cost efficiency of the farmers. In this study, we used a cost function (dual) approach to facilitating the decomposition and estimation of TFP components. Using a translog stochastic cost function, we estimated the level and source of productivity and profitability change for crop producing family firms in Norway. We used the true random effect to account for farm heterogeneity. The analysis is based on 23 years unbalanced panel data (1991–2013) from 455 only crop-producing firms with a total of 3885 observations. The result indicates that average annual productivity growth rate in grain and forage production was – 0.11% per annum during the period 1991–2013. The profit change was −0.14% per annum.