Technical efficiency in the New Zealand dairy industry: A frontier production function approach

The objective of this paper is to investigate farm‐specific technical efficiency levels and the relationship between technical efficiency and farm size in the New Zealand dairy industry. Two types of stochastic frontier production function, translog and Cobb‐Douglas, were estimated using 1991–1992 data on 264 dairy farmers derived from an economic survey conducted by the New Zealand Dairy Board. Three alternative possibilities regarding the distribution of the inefficiency term were considered: half‐normal, truncated normal and exponential. Based on the results of the half‐normal translog frontier model, dairy farm technical efficiency was found to range from 76 to 95 percent, with an average of 90 percent. There was no significant difference in the average technical efficiency levels between large, medium and small farms. The results also suggest that New Zealand dairy farming is characterised by constant returns to scale.