Technical Efficiency in the European Dairy Industry: Can We Observe Systematic Failures in the Efficiency of Input Use?

Abstract

The paper provides findings on the technical efficiency of the European dairy processing industry, which is one of the most important subsectors of the food processing industry in the European Union (EU). The ability to efficiently use inputs in the production of outputs is a prerequisite for the sustainability and competitiveness of the agri-food sector as well as for food security. Thus, the aim of this paper is to provide a robust estimate of technical efficiency by employing new advances in productivity and efficiency analysis, and to investigate the efficiency of input use in 10 selected European countries. The analysis is based on two-stage stochastic frontier modelling incorporating country-specific input distance function (IDF) estimates and a meta-frontier input distance function estimate, both in specification of the four-component model, which currently represents the most advanced approach to technical efficiency analysis. To provide a robust estimate of these models, the paper employs methods that control for the potential endogeneity of netputs in the multi-step estimation procedure. The results, based on the Amadeus dataset, reveal that companies manufacturing dairy products greatly exploited their production possibilities in 2006–2018. The dairy processing industry in the analysed countries cannot generally be characterized by a considerable waste of resources. The potential cost reduction is estimated at 4–8%, evaluated on the country samples mean. The overall technical inefficiency (OTE) is mainly a result of short-term shocks and unsystematic failures. However, the meta-frontier estimates also reveal a certain degree of systematic failure, e.g., permanent managerial failures and structural problems in European dairy processing industry.