Economics of productivity and farm structure: A comparison of organic and conventional dairy farms in the United States

Carlos David Mayen Solorzano, Purdue University

Abstract

This dissertation broadens and deepens the understanding of the economics of organic dairy farming by applying economic theory of the firm, modern econometric methods, and the first large-scale, representative sample of organic dairy farms in the United States. With national standards for organic production only recently established in 2002, little is known about the productivity and economic viability of organic production methods. This dissertation provides new economic information on two aspects of the structure and performance of organic dairy farms. In the first study I compare the productivity and technical efficiency of organic dairy farms to that of conventional dairy farms. I address two important methodological issues: self-selection into organic farming and formal testing of the homogeneous technology assumption. I use propensity score matching to address potential self-selection. After rejecting the homogeneous technology hypothesis, I estimate separate technologies for organic and conventional farms and generate technology-appropriate measures of technical efficiency. A key finding is that the organic dairy technology is approximately 13 percent less productive than that used by conventional farms. However, I find little difference in technical efficiency across these two groups of farms. A secondary finding is that the organic dairy technology exhibits increasing returns to scale, suggesting that the organic dairy sector may, over time, follow the trend observed in conventional dairy towards larger farms. In the second study I model and measure the potential for dairy farms to reduce costs of production through vertical integration. I use a multi-stage, multi-output cost function framework to assess vertical economies of scope in organic and conventional dairy farms. I model the cost of producing grains and forages, which are then used as inputs in the production of milk. For conventional dairy production I find negligible vertical economies of scope. In contrast, I find significant vertical economies of scope in organic dairy production, suggesting that there is an economic incentive for vertical integration into feed production. The large vertical economies of scope for organic dairy farms are consistent with higher costs of obtaining organic feed through market transactions associated with an underdeveloped market for organic feeds.

Degree

Ph.D.

Advisors

Alexander, Purdue University.

Subject Area

Agricultural economics

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