Economies of scale and economic viability in dairy farming: a temporal analysis of the stabilization period in Minas Gerais, Brazil

What the paper says

Purpose This study investigates economies of scale and the minimum economically viable production scale within Brazilian dairy farming, focusing on the milk production stabilization period from 2014 to 2024. Design/methodology/approach Econometric models, specifically the Translog (TL) cost function, were applied to estimate cost elasticities of an unbalanced panel data from 1,213 participating dairy farms. Findings Findings indicate that all analyzed farms operated under economies of scale (increasing returns), with no observed trend towards convergence to the optimal production scale. A consistent increase in average production costs was identified over the period, raising the minimum break-even scale from 849 to 1,145 liters per day. While most farms in the sample exceeded this viability threshold, comparisons with official census data suggest that the average Brazilian dairy farm operates below the required scale. The analysis also revealed a moderate and statistically significant positive relationship between milk price and production volume. Research limitations/implications Despite limitations regarding sample representativeness, this study provides crucial insights for understanding the dynamics of economic sustainability in the dairy sector and for developing public policies and business strategies. Social implications The high proportion of dairy farms operating below the minimum viable scale, particularly those outside specialized programs, suggests potential threats to rural livelihoods and small-scale producers’ long-term survival. Public policies are crucial to mitigate the social and economic disparities resulting from increased production costs and the challenge of achieving scale economies, ensuring a more equitable and sustainable development of the dairy sector and preventing rural exodus. Originality/value This study offers novel insights by dynamically analyzing economies of scale in Brazilian dairy farming during a unique period of production stabilization, addressing research gaps often overlooked in studies focusing solely on expansion phases. The application of a flexible TL cost function with panel data from a large, diverse sample provides a nuanced understanding of scale elasticities and break-even points.