The main purpose of this study was to gain insight into the household and farm economics of small-scale dairy farmers in Chiang Mai, and to obtain estimates of their costs per unit of output in milk production so as to gauge their potential for improvement and vulnerability to international competition. Cost of production are assessed using market prices and ‘social’ prices using a policy analysis matrix (PAM) approach.
The study applies a method of economic analysis developed by the International Farm Comparison Network (IFCN) which is based on the concept of ‘typical farms’. Four farms were selected to represent farm types in the province. A very small dairy farm with 5 crossbred cows, 0.8 ha land, family labour only and milking by hand; a small farm with 14 crossbreds, 2.1 ha land, family labour only and 1-bucket milking machine; an average size farm with 21 crossbreds, 0.6 ha land, family labour and a 2-bucket milking machine; and finally, a large farm with 117 crossbreds, 3.0 ha land, family and hired labour and a 3-bucket milking machine.
Applying market prices, the 21 cow farm has the lowest costs of milk production at 19 US$ per 100 kg ECM whereas the largest farm has the highest cost at 23.5 US$. The lower costs of the 21 cow farm are attributable to lower opportunity costs for family labour and land factors. These costs of milk production are marginally above those of the New Zealand milk price. Lowering these costs would mean that these farm types could compete with imports of dairy products and also to produce milk for export, provided international quality standards can be achieved and the dairy chain being internationally competitive.
Through the PAM analysis this study shows that the dairy farms greatly benefit from a farm gate milk price, which is over 1.5 times higher than the world market price and from policies that result in dairy farmers having to pay only about 70 percent of the cost of domestic factors of production. Both of these factors (protected milk price and subsidized domestic resources) seem to strongly discourage attempts to increase farm efficiency, particularly for small-scale producers. On the other hand, farms are taxed on their tradable inputs, which increases production costs. The PAM results suggest that significant gains in farm efficiency and competitiveness could be achieved through policy reform.
A four page executive summary is also available in addition to this paper.