Efficiency Implications of the Dairy Farm Policy Reform in Israel

The Israeli dairy production reform process, which started in 1999, aimed at generating a more productive, efficient and environmentally oriented industry. Administrative yearly reductions in milk price at farm gate level combined with capital investment supports, were used to motivate less efficient producers to abandon production and left remaining producers with the choice of increasing their production, either by purchasing a retired producers’ quota or joining fellow farmers and form a partnership. The changes in ownership structure of dairy farms calls for an examination of their efficiency. The purpose of this research is to analyze farm efficiency during the reform period while comparing farms with different management structures and farms from different sectors ('Kibbutzim' and 'Moshavim'- family farms). Dairy farm profitability survey data from 2003, 2005, 2007 and 2009 along with administrative information from the Israeli Dairy Board, were used as a pooled data set including 506 farms for this study. Economic, allocative and technical efficiencies were estimated using both data envelopment analysis (DEA) and stochastic frontier analysis (SFA) approaches. Data envelopment analysis is also used to analyze farms’ scale efficiency and along with the Meta frontier approach examines technology gaps between sub populations in the sample. The average technical, allocative and economic efficiency results from the sample were 92.7, 78.3 and 72.6 respectively for the SFA model, and 85.9, 94.1 and 80.8 for the DEA model. Those results suggest that average economic and allocative efficiency are higher for the DEA model then for the SFA model, and the opposite for average technical efficiency. Those differences are found to be statistically significant at the 1% level. Rank correlation between the two models estimators were also computed and was found to be 0.622, 0.414 and 0.543 for technical, allocative and economic efficiency respectively, which are not as convincing as one would hope, suggesting that the results are somewhat sensitive to the choice of estimation method. Results show that partnerships in the Kibbutz sector are the most efficient farms by all standards examined, mostly due to exploiting economies of scale. Management structure in family farms is not unambiguously connected to efficiency due to conflicting results from the two models. Results also suggest that dairy production is characterized by increasing returns to scale, and the gradual increase found in scale efficiency over time for small farms, and mainly for family farms, can be used as evidence for the success of the reform. Farms at the north region of the country are found to be more efficient than their counterparts in the south and warmer region, which might suggest that efficiency is higher in cooler areas. This result is however not conclusive due to the inconsistency found in region rankings between the two models. Overall we find that the dairy industry in the post-reform era is composed of bigger, more efficient and environmentally friendly farms in comparison to its previous structure. Production methods, capital structure and size still differ substantially between farms, hence efficiency variability is profound and there is still significant place for improvement. Further use of production concentration in order to raise efficiency is found to be of limited potential by the results of this study, which leads us to the conclusion that efforts should be concentrated in helping and directing less efficient farmers to exploit the best productive methods and efficient technology existing.