Can the Small Dairy Farm Remain Competitive in U.S. Agriculture?

The cost of milk production by farm size was decomposed into frontier and efficiency components with a stochastic cost curve using data on 755 USA dairy farms from the year 2000. The estimated frontier function is much flatter than the composite cost curve, and 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 of many smaller farms is caused by inefficiency. The 50-cow farm has a frontier cost of production of $10.05 and an inefficiency cost of $10.27 for a composite cost of $20.32. In contrast, the 1,000-cow herd has a frontier cost of production of $9.27 and an inefficiency cost of $2.82 for a composite cost of $12.09. The implication is that the efficient 50-cow farm is competitive with the average 1,000-cow farm, but not with the efficient 1,000-cow farm. Introduction A common topic of conversation heard in rural coffee shops, agricultural colleges, and on Capitol Hill in Washington, DC, involves the future of the small dairy farm in the United States. A large number of small dairy farms have ceased operation in traditional dairy areas, and many wonder how many more small dairy farms will be lost. These discussions center on whether and how the small dairy farm can survive. Some believe there is no future for the small dairy farm in U.S. agriculture since its cost of production per hundredweight of milk produced is thought to be higher than the cost of production per hundredweight of milk on larger farms. Indeed, engineering cost studies of dairy * Tauer is a professor, Cornell University. Mishra is an economist, United States Department of Agriculture. Paper presented at the VIII European Workshop on Efficiency and Productivity, Oviedo, Spain, September 25-27, 2003. Funding for this research was provided by the USDA, National Research Initiative Competitive Program, Markets and Trade Project 2002-01488. The authors thank Spiro Stefanou for his comments.