Abstract
The objective of this article is to assess the determinants of the technical efficiency of dairy processing firms in Southern Brazil while accounting for their different organizational forms, namely cooperatives and investor-owned firms. The data from 243 milk processors in southern Brazil, including firm structure, management capacity, and organizational choice of dairies, were analyzed. A production frontier is specified to estimate technical efficiency and identify its potential driving sources. Bayesian techniques are used to estimate the model. An average efficiency of 77% indicates that the actual output is 23% below its potential, which implies that output could, on average, be increased by approximately 31.6%, under ceteris paribus conditions. Economies of scale were also detected. The analysis reveals that the management capacity within companies is the main determinant of efficiency. Idle capacities of processing plants are an important source of inefficiencies and cooperatives are more efficient than investor-owned firms, despite their transaction costs potentially being higher and the five vaguely defined property rights inherent to the traditional cooperatives which they must overcome. Knowledge about the cooperatives’ objectives other than profit maximization would provide a more realistic comparison against investor-owned firms. This study assessed the determinants of the efficiency levels of dairy processing companies in an emerging economy using a unique own dataset with data collected at a plant level. Based on the results, manifold managerial and political implications have been derived that can benefit the dairy industry of developing and emerging economies.
Highlights
The dairy industry is a key agribusiness sector for rural value creation and important for food security in remote rural areas
Among the few empirical studies comparing the technical efficiency (TE) of dairy cooperatives and Investor-owned firm (IOF), we found different results showing that both cooperatives and IOFs can be more efficient depending on the context, the data used, and the objective of the performance measured
The positive output elasticities in respect of these inputs indicate that if labor and total capacity increase by 1%, output grows by 0.33% and 0.79% respectively, all other conditions being equal
Summary
The dairy industry is a key agribusiness sector for rural value creation and important for food security in remote rural areas. 5.8% of the total value share in national agricultural GDP and 15% of animal production (IBGE 2017). The rise of supermarkets and the deregulation of the dairy market that occurred in the early 1990s freed retail and farm prices, which brought a sharp increase in firm’s competition on price and cost cutting. This has led to the entrance of large multinational processors in the sector (Carvalho 2008; Chaddad and Jank 2006). The shutdown of dairy enterprises was inevitable, taking thousands of farmers along, causing irreparable damages to family farms
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