Institutional Reform, Resource Reallocation and Dairy Productivity: A Case Study for Australia

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1 Institutional Reform, Resource Reallocation and Dairy Productivity: A Case Study for Australia Presentation for the 13 th OECD Farm-level Analysis Meeting Yu Sheng November 2014 ABARES

2 Background Dairy industry is Australia s third largest agricultural industry Gross output value is around A$ 3.7 billion in Only smaller than crop and livestock industries in size Productivity growth has significantly contributed to increase the performance of dairy farms Annual total factor productivity grows at 1.6 per cent a year Productivity growth did not slow down in recent years Technological progress and institutional reform have both played important role in driving the productivity growth

3 Background Deregulation of the industry (occurred in 2000) is believed to affect the industry structure. Reduce the farm-gate price of milk Lead to farm consolidation It is not known how this reform has affected the productivity performance of dairy farms This study use the farm survey data to examine dairy farms productivities and its change in Australia Estimate the productivity growth of dairy sector in Australia Decompose industry-level productivity in within-farm effects and resource reallocation effects

4 Australian Dairy Industry In , Australian dairy industry produced 9 billion litres of milk with 1.6 million cows. held around 7,500 farms and employed 43,000 workers. More than 40 per cent of products export to the international market. The industry is mainly pasture based with diverse milk production systems across regions 2/3 dairy farms pursue seasonal production (in Tasmania, Victoria and South Australia) vs. 1/3 pursue year round production. climatic conditions, market requirement and the cost of inputs are three most important factors affecting farm practices. Owner-operated farms dominate the industry In , there are 18 per cent of share farming and less than 3 per cent of corporate farms.

5 Where and how dairy farm produce in Australia

6 Deregulation Reforms in Australian Dairy Industry In 1980s and 1990s, the Australian states adopted policies that maintained their fresh milk supply The milk processing sector was regulated through export pooling arrangement backed up by underwriting of prices. Lower export prices were supported through industry levies, with an average return paid to dairy farmers. State legislation controlled the local price milk and domestic consumer paid higher prices. Reforms have been carried out over time The initiation was introduced in 1992 seeking to make the industry more efficient and responsive to world market price A framework for winding down dairy market support arrangement by 2000

7 Market support policies and their asymmetric effects across states

8 Deregulation reform in 2000 and its impact on milk price

9 Consequence of Reforms: Farm consolidations and industrial structural adjustment Milk Production ( m. its) Farm Number Dairy Cows ('000)

10 Methodology and Data Fisher index has been used to estimate farm-level and sectorlevel productivity The OP Decomposition (Olley and Pakes 1996) the productivity growth can thus be written as

11 Methodology and Data The Dynamic OP Decomposition (Melitz and Polanec 2009)

12 Methodology and Data Australian dairy industry survey (ADIS) Annual farm survey collecting physical and financial information Sample ranged from 300 to 400 observations Replacement strategy has been applied to ensure the sample representativeness Definition of primary variables Farm productivity Market share: output value share

13 Number of sample Number of population Number of farms in Australian dairy industry: Sample Population

14 Output, Input and TFP Indices TFP estimates in Australian Dairy Industry: input output TFP 1.62 % 1.66 % Year

15 The static OP decomposition: within-farm innovation vs. covariance effects Covariance Effects Average TFP

16 On-farm innovation and within-farm TFP growth Within-farm technology progress accounted for more than 90 per cent of productivity growth. Breakthrough in genetic progress: artificial insemination (AI) is widely used; Improved management skills on pasture production and scientific choice of feeding time Improved technology in calf breeding and providing better nutrition of cows in milking period; ABARES productivity research also find that Human capitals and public RD&E Climate conditions and farm risk management

17 Interpretation on the relative small covariance terms There might be misallocation of resources between farms, in particular before deregulation in Farms enter and exit can also affect withinfarm effects

18 Relative contribution of Continuing, Entering and Exiting Farms to Within-farm Effects Exiting Farms Entering Farms Continuing Farms

19 Relative contribution of Continuing, Entering and Exiting Farms to Covariance Effects Exiting Farms Entering Farms Continuing Farms

20 Concluding Remarks Farm productivity measure is a useful tool for monitoring the effects of policy reforms on farm performance In particular, when combining with decomposition analysis In Australian dairy industry, two findings are Deregulation reform helps to maintain the industry-level productivity growth Resource reallocation primarily come from farms enter and exit also contributes to this change. Agricultural productivity growth in Australian dairy industry depends more on the on-farm innovation system

21 OECD FLA Meeting 17 November 2014, Paris

22 Productivity & policy analysis: Problem identification Australia s agricultural productivity growth has slowed... Department of Agriculture Meeting of the G20 Agricultural Chief Scientists June, Brisbane 22