Explaining Cost Efficiency of Scottish Farms: A Stochastic Frontier Analysis

In this paper the cost efficiency of Scottish farms is determined, variables that explain the relative cost efficiency by farm type are identified and implications discussed. A cost efficiency approach was selected as it can deal with farms producing multiple outputs (in contrast to production frontiers), and second because it can accommodate output constraints imposed by the Common Agricultural Policy (CAP). To estimate the stochastic cost frontier, a generalised multi-product translog cost function was estimated for five farm types: dairy, cereals and general cropping, cattle and sheep, specialist sheep and mixed farms. Eight farm outputs and four inputs were considered. The data for the estimation were drawn from the Farm Accounts Scheme (FAS) survey for the period 1997-2004, which allowed the construction of an unbalanced panel dataset for 358 farms. Cost efficiency was measured as a fixed effect term and this was used to construct an indicator of relative cost efficiency by farm type. Further analysis, to explain the efficiency results, indicated the presence of important farm size and regional effects. However, other variables used in the analysis, whilst statistically significant, did not produce a consistent effect across the different farm types.