Are larger farms more efficient? A farm level study of the relationships between efficiency and size on specialized dairy farms in Sweden

The study explored how economic, technical and allocative input efficiencies in specialized Swedish dairy farms are affected by differences in farm size. The efficiency analysis showed that costs could decrease by 30% if all farms were as efficient as the best farms in the sample. The effect of farm size was analysed in second-stage regressions. Two measures of farm size were considered: income from dairy and the number of hectares, together with squared measures of both size measures and variables to control for geographic location. The results showed that the relationships between farm size and efficiency can be described as non-linear, where efficiency first tends to decrease with size and then increase. The average scale efficiency was 94.7%, suggesting that, on average, the farms are close to their optimal scale. The paper concludes by suggesting that farm efficiency can be increased both by focusing on increasing the knowledge about how inputs can be more optimally combined and by growth of the farms. However, the latter suggestion requires farm growth aiming at the larger farm segments.