Although the Australian dairy industry has performed well it has also faced considerable pressure over the past twenty years. A decline in the terms of trade and major structural change has provided added incentives for the industry to improve productivity. This paper constructs Tornqvist index values to measure and analyse movements in inputs, outputs, total factor productivity (TFP) and the terms of trade for the dairy industry as a whole and for each state over the years 1979 to 1999. Overall, there is clear evidence of a significant increase in the TFP index in the 1990s relative to the 1980s. However, in terms of fitted annual growth rates, there is also evidence of a productivity ‘slow down’ in the 1990s, with the principal exception of New South Wales. Average annual growth in dairy total factor productivity in Australia over the entire twenty-year period is 1.5 per cent, but decreases from 1.8 per cent in the first to 0.9 per cent in the second decade. In Victoria, the largest dairy producer, the growth in TFP in the second decade of the study is virtually zero, with poor weather conditions in the second half of the decade partly to blame. Much of the impressive growth in dairy output in the 1990s can thus be simply attributed to a growth in inputs. Index values for the terms of trade, the share of input costs in total costs and potential drives of productivity change are also examined.
