Rural Economy Research Centre AESI Student Day 05/11/2009 Examining the relationship between production costs and managerial ability P. Smyth 1, 2, L

Rural Economy Research Centre

AESI Student Day 05/11/2009

Examining the relationship between production costs and

managerial ability

P. Smyth1, 2, L. Harte2 and T. Hennessy1

1Rural Economy Research Centre, Teagasc, Athenry, Co. Galway, 2UCD School of Agriculture, Food Science and Veterinary Medicine, University College Dublin



Overview

Previous WorkBackgroundMethodologyData ResultsConclusions



Previous Work

Policy reform led to an erosion in world stocks of dairy

products

This led to increased price volatility

2007 saw the benefits of market exposure and late 2008 and

2009 saw the disadvantages of it.

Cost Volatility

Oil and Grain Price fluctuations

Cost efficiency crucial to future viability



Methodology

Sectoral cost efficiency measured using cumulative cost curve

Individual farm cost efficiency explored Quintile analysis illustrates variability across farms Average cost curve Capacity to improve costs (Survival and Hazard

analysis)



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Cumulative Cost Curve



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Average Cost Curve

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Herd Size

Average Cost 2006

20 40 60 10080 220200180160140120

C.P.L

Economies of scale up until this point (99 cows)



Conclusions

Cost efficiency increased from 1998-2003 but declined marginally from 2003-2006

Large cost variability exists Persistence of very high cost producers Ability to cope with price risk?

Larger herds more efficient at a declining rate (optimal herd size 99 cows) Current average herd size is 50 (constrained by quota) Economies of scale exist and quota removal may be beneficial

Cost mobility is low and no obvious drivers.



Methodology

Seasonality of Milk production Comparison of Manufacturing and Liquid milk producers Determining cost differences according to calving date.

Calving date is used as a proxy to represent the seasonality of production.

Compare the costs of predominately spring calving herds to all others



Conclusions

The NFS data revealed that costs of production on average are higher on liquid milk farms.

The model demonstrated that when size, efficiency and unobserved individual effects were accounted for, calving date had no significant effect on production costs.

However low numbers in other calving season sample Time-invariant characteristics of an individual or farm,

known as the individual effect were controlled for in the model.

An example of these characteristics is managerial ability.



Background to Present Research

Most research looking at the costs of production look at scale and efficiency

But individual effect of farmer may be a factor Previous studies on managerial ability have looked at

looked farm management factors affecting profitability and costs of production Determined that financial, herd and forage management

important No such individual variable exists

Such studied haven’t been conducted on Irish dairy data.



Background

Research Objective

Explore the costs associated with milk production and

farmers different managerial ability



Material and Methods

National Farm Survey (NFS) data (Connolly et al 1994-2008)

Full sample of all 6572 dairy farms An unbalanced panel dataset for 15 years is used. All specialist and non-specialist dairy herds included.




Fixed Effects (FE) and random effects model (RE) are used.

FE model can control for all time-invariant characteristics of an individual or farm.

RE model can control for characteristics that may be time-invariant between farms and also characteristics that fixed between farms but vary over time.




The FE and RE model allows the panel data to examine the effect different variables on total costs of production per litre.

Scale factors such herd size and efficiency factors such as yield and forage acres per cow are accounted for in the regression.

Pasture and Forage ability ranks each farm on a weighted scale from zero to one on a farmers ability to grow fodder crops as well as forage crops.




Financial ability ranks each farm on a weighted scale from zero to one on a farmers ability to cope with the financial management of the farm.

Variables included in the financial index include Debt per cow Interest paid per cow Net Margin per cow Equity asset ratio Return on Equity Return on Investment




Herd management ranks each farm on a weighted scale from zero to one on a farmers ability manage herd welfare

Variables included in the herd management index include Milk sold per cow, Calves to cow ratio and Maiden heifers in calf Vet & Medicine per cow, butterfat and protein per cow

The model in full is Total cost of production per litre= f(Cows, Cows², Yield per cow,

Yield per cow², Stocking rate, Stocking rate², Concentrates per cow, Concentrates per cow², Pasture & Crops ability, Financial ability, Herd Management ability.)



FE ResultsCoefficient T-stat

Constant .4550757*** 54.28

Herd size -.0007672*** -9.49

Herd size² 2.71e-06*** 6.46

Yield -.0000425*** -13.43

Yield² 2.69e-09*** 8.47

Stocking rate -.0092314*** -7.81

Stocking rate ² .0037312** 2.54

Concentrates .0002232*** 18.46

Concentrates ² -8.03e-08*** -4.25

Pasture & Crops ability -.0021672* -1.77

Financial ability -.0750963*** -24.61

Herd Management ability -.066582*** -18.23



RE ResultsCoefficient T-stat

Constant .0069955*** 53.63 Herd size .0004443*** 8.05

Herd size² -7.77e-07** -2.45

Yield -.0000366*** -13.14

Yield² 2.79e-09*** 9.93

Stocking rate -.0079232*** -7.55

Stocking rate ² .0025369 ** 2.14

Concentrates .0002298** 20.52

Concentrates ² -1.09e-07 *** -5.91

Pasture & Crops ability -.0023613** -1.99

Financial ability -.0837127 *** -30

Herd Management ability 0.0733029*** -21.02



Results

The FE model showed that economies of scale were present, when herd size increased, the per unit cost of production decreased but at a declining rate.

However the RE model did not. The two models also demonstrated efficiencies

such yield and stocking rate are important in the reduction of costs



Results

Results show the three levels of managerial ability have a significant effect on the reduction of costs

Shows that higher the index the lower the production cost

Suggests that farms have reduced costs through better management



Conclusions

Better herd, financial and forage management

leads to the reduction of costs.

Update training in the three managerial pillars

Encouraging better management skills could be

key to survival in dairy industry



Further Work

Recent 2008 data from NFS Shows yield per cow increased with use of diet feeder,

milk recording and earlier release of cows to first grass. Discussion group has no significant effect.

However total cost per litre were significantly increased from use of diet feeder and milk recording

Discussion group participation and release of cows to grass had no significant effect on total costs per litre



And Finally

Questions

Comments

Suggestions

Thank you

Documents

Rural Economy Research Centre AESI Student Day 05/11/2009 Examining the relationship between production costs and managerial ability P. Smyth 1, 2, L