Spotlight on economics: Is there room for improved farm production efficiency?
Traditionally, farmers and other business managers use a measure of production, cost or profit to evaluate overall economic progress. Even though reducing cost and increasing profit are common measures of business success and economic growth, has the firm reached its maximum efficiency? Is the firm operating on its theoretical production frontier?
Generally, firms or farm maximize production/profit and minimize cost. However, assessing production, cost and profit efficiency helps realize economic growth by efficiently using natural resources for long-run sustainability. Hence, it is important to evaluate if the firms and farmers are on the theoretical production, cost and profit frontiers. Advancing computer models are offering new opportunities to analyze business performance.
In our study, “Bureau of Economic Analysis,” county-level data on labor, capital (repair and operation of machinery, depreciation, interest, rent and taxes), farm-produced inputs (feed, livestock and seed purchases) and manufactured inputs (fertilizer, and lime and petroleum products) are used to evaluate if counties in North Dakota are achieving production efficiency in producing crops and livestock. Even though some of the management, growing conditions and soil productivity variables are yet to be incorporated, the analysis is a first step in that direction.
If the firm or farm is on the theoretical production frontier, it will have a score of 1 (maximum efficient use of input resources to produce output). If the entities are not on the theoretical frontier, the score will be less than 1. In this study, the theoretical production frontier is defined each year by the several counties with the highest production efficiency that year. No county, through time, always is on the theoretical production frontier, so each county has an efficiency of less than 1.
Production efficiency was calculated for each of the 53 counties in North Dakota from 1969 to 2011. Average production efficiency was computed for six business cycles in the general economy:
• The first business cycle (BC1) covers the period from 1969 to 1975 and involves two recessions and a boom period.
• The second business cycle (BC2) involved a boom period from 1976 to 1979.
• The third business cycle (BC3) was from 1980 to 1982 and involved two recessions (January 1980 to July 1980 and July 1980 to November 1982) and a boom in between.
• The fourth business cycle (BC4) involved a boom from 1973 to 1989.
• The fifth business cycle (BC5) involved a boom and recession from 1990 to 2006.
• The sixth business cycle (BC6) involved a boom and recession from 2007 to 2011.
The average production efficiency for North Dakota counties came out highest (0.90) in the first and fifth business cycles. This is in spite two recessions during BC1 and one recession during BC5. What does 0.90 mean? This number indicates that agricultural producers employed their inputs with 90 percent efficiency relative to theoretical maximum production efficiency.
In BC2 and BC4, the average production efficiency was 1 percent lower at 0.89, even though the business cycles were “booms.” Similarly, BC3 saw a lower average production efficiency at 0.88.
The hardest hit was the most recent cycle, BC6. The average production efficiency dropped to 0.87. This suggests the agricultural producers achieved an 87 percent efficiency relative to a theoretical maximum production efficiency.
Even though the overall North Dakota agricultural production efficiency suggests a decline during the business cycles, comparisons across individual counties reveal a different story. This could be due to the wide difference and changes in the use of inputs and output mixes across individual counties during the six business cycles.
The estimated production efficiency data is available on state maps for the six business cycles at http://www.ag.ndsu.edu/production-efficiency/. The map displays average production efficiency for each North Dakota county for the six business cycles since 1969. Map users can compare the production efficiency number across the six business cycles by clicking on the county of their interest in each of the six maps.
Future research will study the input-specific production efficiency. For example, what efficiency are producers in Barnes County achieving in the use of their labor, capital and farm-produced or manufactured inputs? Likewise, future research will attempt to incorporate growing conditions into the analysis, as well as evaluate specific output production efficiencies. For example, is crop or livestock production realizing higher production efficiency?