Labor-use efficiency and New York dairy farm financial performance

Abstract

PurposeDairy farms, along with livestock and specialty crop farms, face a tight labor supply and increasing labor costs. To overcome the challenging labor market, farm managers can increase labor-use efficiency through both human resource and capital investments. However, little is known about the relationship between such investments and farm profitability. The purpose of this paper is to examine the relationship between dairy farm financial performance and labor-use efficiency, as measured by labor productivity (milk sold per worker equivalent); labor costs (hired labor cost per unit of milk sold and hired labor cost per worker); and investment in labor-saving equipment.Design/methodology/approachCluster analysis is applied to partition dairy farms into three performance categories (high/middle/low), based on farms’ rate of return on equity, asset turnover ratios and net dairy income per hundredweight of milk. Next, the annual financial rank is fitted into both random- and farm-level fixed-effects ordered logit and linear models to estimate the relationship between dairy farms’ financial performance and labor-use efficiency. This study also investigates the implications of using a single financial indicator as a measure of financial performance, which is the dominant approach in literature.FindingsThe study finds that greater labor productivity and cost efficiency (as measured by hired labor cost per unit of milk sold) are associated with better farm financial performance. No statistically significant relationship is found between farm financial performance and both hired labor cost per worker and advance milking systems (a proxy of capital investment in labor-saving technology). Future studies would benefit from better measurements of labor-saving technology. This study also demonstrates inconsistency in regression results when individual financial variables are used as a measure of financial performance. The greater labor-use efficiency on high-performing farms may be a combination of hiring more-skilled workers and managerial strategies of reducing unnecessary labor activities. The results emphasize the importance of managerial strategies that improve overall labor-use efficiency, instead of simply minimizing total labor expenses or labor cost per worker.Originality/valueThis study examines the importance of labor productivity and labor cost efficiency for dairy farm management. It also develops a novel approach which brings a more comprehensive financial performance evaluation into regression models. Furthermore, this study explicitly demonstrates the potential for inconsistent results when using individual financial variable as a measure of financial performance, which is the dominant measurement of financial performance in farm management studies.