A Fourier analysis of the US dairy industry

Abstract

Measurement of economies of scale and scope is particularly important for predicting growth and product diversification. However, estimates are useful only to the extent the underlying production technology is modelled accurately. This study measures economies of scale and scope in the rapidly changing US dairy industry with a Fourier flexible cost function, which provides a global approximation of the unknown function. We use the high quality national Agricultural and Resource Management Survey (ARMS) survey data. We find economies of scale at most firm sizes and persistent economies of scope across firm sizes in this industry, which is counter to estimates from two Diewert‐flexible functional forms.

Keywords:

• economies of scale
• economies of scope
• Fourier flexible form
• dairy

JEL Classification::

• D24
• L25

Acknowledgements

We express appreciation to Patricia Kuzyk, Jeffrey LaFrance, Almuhanad Melhim, and an anonymous reviewer for helpful comments on earlier drafts of this article. Also, we would like to thank Dennis Koong and the staff at the USDA NASS office in Olympia, WA for assisting us with the use of the 2005 ARMS data. This project was supported by the USDA Economic Research Service (Grant No. 109252‐001), the Washington Agricultural Research Center, and the USDA Cooperative State Research, Education and Extension Service (Hatch grant No. WPN000275).

Notes

¹ Our thanks go to the anonymous reviewer for recommending these additional robustness checks.

² We also conduct an abbreviated analysis using the 2005 ARMS Dairy Survey. It consists of 1756 observations, so the model is expanded. In addition to the terms in Equation 4, the model used to analyse the 2005 data includes an additional 36 terms, specifically .

³ Because the ERS state‐level output and input price series ended in 2004 and no other comparable series (including both market prices and pro rata government payments for outputs) have been developed, 2004 prices were used as proxies for 2005 prices.