Total factor productivity change in hog production and Quebec's revenue insurance program

Abstract

AbstractQuebec's hog industry is supported by a revenue insurance program that guarantees a minimum price, but it also faces strict environmental constraints. Under price volatility, risk‐averse farms may contract their output enough to produce under increasing returns. We show that the subsidy and downside risk reduction effects of the revenue insurance program tend to stimulate output and increase the likelihood of production under increasing returns. Environmental constraints that raise the cost of manure management and limit areas under cultivation also increase the likelihood of decreasing returns. Scale efficiency and technical efficiency measures are obtained through a parametric decomposition of total factor productivity (TFP) obtained from the estimation of an output distance function. As in hog studies pertaining to other countries, we found a TFP average annual growth of 5.2% between 2004 and 2012. Scale efficiency is much lower than in other countries, as per our prior about the program's distortions and environmental constraints. Integrating annual TFP gains into the setting of the minimum guaranteed price could reduce program costs by $12 million per year. About $70–80 million per year could be saved by investing in extension activities that would bring increase the level of technical efficiency of inefficient farms to the provincial average. A metatechnology frontier approach allowing for an endogenous input was also implemented to assess the robustness of the scale efficiency results.