Productivity, efficiency and structural problems in Chinese dairy farms

Purpose – The purpose of this paper is to identify the structural problem in the Chinese dairy sector. There exists a large number of low‐efficiency, small‐scale farms, and productivity inequality between small and large farms keeps increasing, which is a possible driving force behind the Melamine scandal in 2008. Design/methodology/approach – Using the stochastic frontier production function, this paper estimates and compares the changes in technology and technical efficiency between backyard, small‐scale, medium‐scale and large‐scale dairy farms in China over the period between 2004 and 2008. Findings – There are compensating effects between technology and technical efficiency. However, low yield for backyard farms is mainly caused by traditional low‐yield varieties, even though the technical efficiency is very high, which cannot compensate for the low technology. Research limitations/implications – The author put the assumption of constant return to scale mainly due to the data availability. Such an assumption implies that there are no scale‐effects between the different scales in productivity, and the productivity difference is explained by technology and technical efficiency. Practical implications – In order to solve the structural problems, Chinese governments should help small‐scale farmers to adopt new high‐yield varieties, to subsidize small‐scale farmers, and to train farmers to master the complicated skills for raising high‐yield varieties. Originality/value – The paper gives another possible explanation for the Melamine scandal of milk powder in 2008. If the structural problem cannot be solved, similar food safety scandals could happen once again.