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Report, 2006

The input and output economic efficiency aspects of profit maximization: the case of Swedish dairy farms

Johansson, Helena


This paper provides empirical evidence of the profit maximizing process of multiple output dairy farms, in terms of input and output technical, allocative and economic efficiency. The application is made to dairy farms in Sweden. The data envelopment analysis is used to obtain point estimates of the efficiency scores and bootstrapping is used to assess the statistical properties of the point estimates. Economically efficient farms are distinguished from the inefficient ones according to average amounts of inputs and outputs, average shares of inputs and outputs and according to average scoring on critical success factors. According to the point estimates, only 18 farms out of 541 can be considered as fully input and output efficient. The average economic input and output efficiency point estimates were 0.619 and 0.726 respectively. The point estimates for technical input and output efficiency were 0.841 and 0.825 respectively, and the average allocative input and output efficiency point estimates were 0.742 and 0.877 respectively. If the bootstrapped confidence intervals are considered, the potential for increased profitability is even more striking. This paper suggests that the main reason for low profitability in dairy farms is low economic input efficiency, which consists mainly of allocative inefficiency. Furthermore, 3 profitable farms have, on average, a smaller share of total revenue coming from milk production, and a larger part of total revenue coming from other parts of the farm, for example from crop production, than other farms. This indicates that efficient farms are, on average, more diversified compared to the inefficient farms. On average, the economic efficient farms do not score better on common critical success factors such as milk quality and fertility. This suggests that these critical success factors may not be good indicators of economic efficiency


profit-maximization; efficiency; data envelopment analysis; bootstrapping; critical success factors; dairy farms

Published in

Working paper series / Swedish University of Agricultural Sciences, Department of Economics
2006, number: 2006:3
Publisher: SLU / Department of Economics

Authors' information

Swedish University of Agricultural Sciences, Department of Economics

UKÄ Subject classification

Social Sciences
Economics and Business

URI (permanent link to this page)