Technical efficiency, herd size, and exit intentions in US dairy

The U.S. dairy industry has seen major restructuring in recent decades. A sharp decline in the number of U.S. dairy farms and an increase in average herd sizes have accompanied exits, which have been concentrated among smaller herds. Given that more productive farms are better positioned to increase operation size and to continue operation, we hypothesize that the more technically efficient farms are better able to expand and also have stronger incentives to continue production. Using data from the USDA's 2010 ARMS Phase III, Dairy Production Practices and Costs and Returns Report, we estimate technical efficiency using stochastic production frontier analysis with endogenous inputs. The efficiency estimate is then incorporated into the analysis of exit intention and herd size. The results confirm our hypotheses that smaller and less efficient farms are more likely to exit and that more efficient dairy farms tend to expand herd size. Moreover, farms without successors but with older and more educated operators are more likely to exit.