MScAgric / ABSTRACT: Small dairy farms in South Africa are observed to have higher costs than larger farms, and
whether those higher costs are due to technology or inefficiency has implications for policy.
This research focused on finding the curve that best represents the relationship between
average cost and level of output. That was done by relating average cost to actual output.
However, it was found to be more appropriate to relate average cost to planned output on the
basis that costs are more likely to reflect what the farmer expects output to be. As a result, a
pragmatic two-step procedure was adopted. In the first step, the farmer’s planned output was
determined by estimating a production function based on the farmer’s actual use of inputs,
i.e., land, number of cows in the herd, labour, feed and veterinary costs. In the second step,
the long-run average cost (LAC) curve was estimated where average cost is calculated as
total cost divided by planned output and this is then related to the level of planned output. To
identify the determinants of production cost thus the drivers of higher costs on small farms,
the cost of milk production by farm size was decomposed into frontier and efficiency
components with a stochastic cost curve and long run cost curve using data from dairy farms
in KwaZulu-Natal (South Africa). Financial data of 37 farms for the period 1999 to 2007
were used in econometrics estimation of long run average cost curve (LAC) function for
different level of production (as a proxy of planned output). Results show that average cost
curves exhibiting variation in unit cost with output thus suggesting the existence of
economies of size with larger farms being able to produce any given level of output at lower
costs compared to their smaller counterparts. The study found that long-run average cost
curve (LAC) for the sample of dairy farms is L-shaped rather than U-shaped.
| Identifer | oai:union.ndltd.org:netd.ac.za/oai:union.ndltd.org:sun/oai:scholar.sun.ac.za:10019.1/2227 |
| Date | 12 1900 |
| Creators | Mndeme, Shafii Hussein |
| Contributors | Mkhabela, T.S., University of Stellenbosch. Faculty of Science. Dept. of Agricultural Economics. |
| Publisher | Stellenbosch : University of Stellenbosch |
| Source Sets | South African National ETD Portal |
| Language | English |
| Detected Language | English |
| Type | Thesis |
| Rights | University of Stellenbosch |
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