Financial Exposure, Technical Change And Farm Efficiency: Evidence From The England And Wales Dairy Sector

This paper fits a translog stochastic production frontier with inefficiency effects to a panel of 693 UK dairy farms for the period from 1982 to 1997. The Cobb Douglas is rejected as inadequate relative to the less restrictive translog functional form and the frontier model is statistically superior to the mean response function, despite the fact that on average the farms were 87% efficient. Technological progress, at 1.7% per annum, is the dominant force, but efficiency declined at 0.8% per year, which reduced productivity growth to 0.9% per annum. The inefficiencies are explained in the second stage of the model, where the greatest cause is financial exposure, captured here by the ratio of debts to assets. Older farmers, those in less favoured areas and owner-occupiers were also less efficient, but large farms were more efficient, which suggests increasing returns to scale.