Cost Efficiency Analysis using Operating Profit Margin for the New Zealand Dairy Industry

Cost efficiency analysis has not been widely applied in the dairy industry, despite its role in driving profitability, resilience and debt serviceability in low subsidy export-oriented farming systems. We analyse cost efficiency using operating profit margin (a reliable, well-supported and easily interpretable parameter from the DuPont framework) for the first time on New Zealand dairy farms. We utilise a 10-year panel dataset, developed using sample and population data, to get a representative picture of the industry. We begin by grouping farms into quartiles of their long-run cost efficiency (10-year average) and perform non-parametric Games-Howell hypothesis testing to investigate differences in the groups. We then estimate a fixed effects panel regression model for each quartile to examine the factors correlated with cost efficiency over time within low to high performing groups. We find cost-efficient farms use less supplement and nitrogen fertiliser over the long run, milk price fluctuations disproportionately impact lower quartile groups, and farms may be able to reduce GHG emissions whilst maintaining strong cost efficiency. Our exercise demonstrates that analysing cost efficiency using operating profit margin can produce valuable insights for low subsidy export-oriented agricultural industries.