The role of location economics in organic grassland farming

What are the drivers of technical efficiency on organic farms in Germany? We analyze the efficiency of organic pasture farming in Germany using data from 1994/95 to 2005/06. Five inputs and one output are analyzed by means of a stochastic frontier production function, allowing for heteroscedasticity and technical effects. Our study contains a number of location factors, suggesting that the regional environment of a farm has a substantial influence on its efficiency.


Machinery is only one influencing factor of technical efficiency

Five sets of possible determinants of technical efficiency are considered in the model. These include: (1) farm structure and resources; (2) human capital and management capacities; (3) institutional choice; and (4) subsidies. To these factors that are commonly included in technical effects models, we add (5) a set of variables that capture localization and urbanization economies such as the share of organic farms in a region and the regional share of votes for the Green Party in recent elections.

These regional effects are found to have a significant impact on the technical efficiency of organic farms. We have identified 15 production clusters in Germany with different levels of efficiency. Interestingly, especially the southern clusters perform extremely well. In contrast to this, farms in northern and eastern Germany show lower efficiency level. There might be some shortcomings: Hessen, Mecklenburg-Vorpommern and Schleswig-Holstein are not represented in the data-set and in Eastern Germany has only few observations. In the context of Stochastic Frontier Analysis, we might also conclude, that the production frontier is mainly defined by rather small farms which can be found in Southern Germany. However, to our best knowledge, this is the first formal approach to investigate the relation of regional clusters and efficiency levels by a admittedly simple approach.

Durchschnittliche Technische Effizienz in 15 Produktionsclustern von ökologischen Futterbau-Betrieben in Deutschland (Quelle: eigene Berechnung)

Average technical efficiency in 15 production clusters of organic grassland farms in Germany (source: own calculations)

In our study we also investigate the evolution of efficiency on farms that are converting from conventional to organic farming. According to this result, the conversion period is longer than the usual 2 or 5 years, in which the federal states provide support for converting farms. After 6-11 years the average technical efficiency is substantially increasing almost reaching the average level of established farms. A conclusion might be, that farmers need to calculate with a longer adaptation period and from a political point of view, it might be appropriate to support 5 and not 2 years. But this has of course some trade-offs. And the literature also shows, that market-integration of converted farms is crucial for a successful conversion to organic farms.

Source: Technical efficiency of organic pasture farming in Germany: The role of location economics and of specific knowledge | Renewable Agriculture and Food Systems | Cambridge Core

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