Total factor productivity change in dairy farming: Empirical evidence from southern Chile

Despite the importance of productivity growth, many studies carried out at the farm level focus primarily on the technical efficiency (TE) component of farm productivity. Therefore, the general purpose of this paper is to measure total factor productivity change and then to decompose this change into several distinct elements. The data were an unbalanced panel for the period from 2005 to 2010 containing 477 farms and 1,426 observations obtained from TODOAGRO, a farm-management center created in 1996 in the southern part of Chile. The region where the data come from accounts for 20% of the total milk processed in the country. Stochastic production frontiers along with the translog functional form were used to analyze total factor productivity change. The econometric evidence indicates that farms exhibit decreasing returns to size implying that costs of production rise as farm size increases, which suggests that the motivation for farm growth stems from the search for income rather than from lowering costs. The main results indicated that productivity gains through TE improvements are limited, with an average TE for the whole sample of 91.0%, and average technical efficiency change of 0.05% per year. By contrast, average technological progress at the sample mean was rather high at 1.90%, which suggests that additional investments in research and subsequent adoption of improved technologies would have a positive effect on productivity growth. The findings also revealed that farm size is not associated with productivity growth for the dairy farms in the sample.