Factors influencing the economic performance of a panel of commerical milk producers from East Griqualand, KwaZulu-Natal and Alexandria, Eastern Cape, South Africa: 2007-2014.

Abstract

The South African dairy industry has been characterized, in recent years, by an observed movement towards fewer, larger producers, implying a more competitive milk market in which efficiency measures are likely to become increasingly important determinants of farm financial success and survival. Due to the imperfect nature of efficiency estimates, a more integrated approach is adopted in this study in which economic performance is defined as an unobservable variable for which there exist many imperfect indicators, including various measures of efficiency. This study presents a two-stage approach to analyse economic performance, and its key determinants, for a panel of commercial milk producers in East Griqualand (EG) and Alexandria, South Africa, over the period 2007-2014. Stochastic frontier analysis was used to estimate technical efficiency (TE) from a translogarithmic production function, selected ex-post from several specified models with different functional forms and distribution assumptions. Parametric scale efficiency (SE) was then estimated from the resulting scale elasticities and parameter estimates. Results indicate that sampled producers are, on average, highly technically efficient, generally operating close to the efficient frontier, and are relatively homogenous in production. The general decline of mean TE scores over the study period indicates that farms on the best practice frontier became more efficient over time, while the average farm has become less efficient in relation to the advancing frontier. High mean SE scores confirm that most farms do not experience a substantial loss in output due to scale efficiency problems, but rather to inefficiencies in production (TE). Analysis of SE scores reveals that most farms operated at suboptimal scale, with increasing returns to scale, and could improve output by expanding towards the optimal scale. Latent economic performance was modelled in a Multiple-Indicators, Multiple-Causes (MIMIC) model framework, with estimated TE and SE serving as imperfect indicators. Three latent indices were constructed to represent managerial quality regarding the breeding, feeding and labour programme, and were included in the structural equation, in conjunction with traditional explanatory variables, as latent causes of economic performance. Evaluation of model fit for several specified models led to the selection of the most simplistic specification, in which the latent managerial constructs were not included. Results suggest efficiency, milk yield per cow, and level of specialization in dairying all have a significant effect on the economic performance of the sampled farms. It should be noted that the sign of latent economic performance was not in line with expectations, and requires further research.