Efficiency of European Dairy Processing Firms

• The paper compares the technical efficiency and production frontier of dairy processing cooperatives and investor owned firms in six major dairy producing European countries.
• The paper uses accountancy data from the AMADEUS data base over the years 1995-2005.
• Dairy cooperatives use a more productive technology, but are slightly less efficient than investor owned firms during the sample period.
• Both cooperatives and investor owned firms are characterized by decreasing returns to scale.
• Results imply that the scale of operation of cooperatives is too large.

This paper compares the technical efficiency and production frontier of dairy processing cooperatives and investor owned firms in six major dairy producing European countries. Two parametric production frontiers are estimated, i.e. for cooperatives and investor owned firms separately, which are used to evaluate the intra- and inter-type technical efficiency of each firm. The models are estimated using accountancy data from the AMADEUS data base over the years 1995-2005. Results show that dairy cooperatives have a more productive technology, but are slightly less efficient than investor owned firms during this period. Differences in production technology and technical efficiency of the cooperatives across countries reflect differences in local market conditions and characteristics of the companies. Both cooperatives and investor owned firms are characterized by decreasing returns to scale. However, returns to scale are on average much smaller for cooperatives, implying that the scale of operation of cooperatives is too large.