Efficiency of European Dairy Processing Firms

ContentslistsavailableatScienceDirect

NJAS

-

Wageningen

Journal

of

Life

Sciences

j ou rn a l h o m e p a g e :w w w . e l s e v i e r . c om / l o c a t e / n j a s

Efficiency

of

European

Dairy

Processing

Firms

Rafat

A.M.E.

Soboh

,

Alfons

Oude

Lansink

,

Gert

Van

Dijk

b_{BusinessEconomicsGroup,WageningenUniversity}

c_{ChairCooperativeEntrepreneurshipandBusinessAdministration,NyenrodeBusinessUniversity}

a

r

t

i

c

l

e

i

n

f

o

Articlehistory: Received1April2013

Receivedinrevisedform23April2014 Accepted2May2014

Availableonline17June2014 Keywords: Dairyprocessing Cooperatives Investorownedfirms Productionfrontier

a

b

s

t

r

a

c

t

Thispapercomparesthetechnicalefficiencyandproductionfrontierofdairyprocessingcooperatives andinvestorownedfirmsinsixmajordairyproducingEuropeancountries.Twoparametric produc-tionfrontiersareestimated,i.e.forcooperativesandinvestorownedfirmsseparately,whichareused toevaluatetheintra-andinter-typetechnicalefficiencyofeachfirm.Themodelsareestimatedusing accountancydatafromtheAMADEUSdatabaseovertheyears1995-2005.Resultsshowthatdairy coop-erativeshaveamoreproductivetechnology,butareslightlylessefficientthaninvestorownedfirms duringthisperiod.Differencesinproductiontechnologyandtechnicalefficiencyofthecooperatives acrosscountriesreflectdifferencesinlocalmarketconditionsandcharacteristicsofthecompanies.Both cooperativesandinvestorownedfirmsarecharacterizedbydecreasingreturnstoscale.However,returns toscaleareonaveragemuchsmallerforcooperatives,implyingthatthescaleofoperationofcooperatives istoolarge.

©2014RoyalNetherlandsSocietyforAgriculturalSciences.PublishedbyElsevierB.V.Allrights reserved.

1. Introduction

Evaluatingtheproductionefficiencyandperformanceof mar-ketingcooperatives(Coops)andinvestorownedfirms(IOFs)1_isof

interesttopolicymakersandfirmmanagers,whoareseekingto enhancecompetitivepoweroffirms.Thosewhoareinterestedin thistopicrecognizethatacomparisonbetweenIOFsandCoopshas toaccountforfundamentaldifferencesinobjectivesand organiza-tionalstructures[1].Underlyingthedifferences,betweenCoops andIOFs,is themore complexrelationshipbetweenCoopsand theirmemberscompared totherelationship betweenIOFsand theirshareholders[2].Membersofthecoopsareoftentheowners, controllers2_{,and themain(ifnottheonly)usersoftheservices}

∗_{Correspondingauthor.}

E-mailaddress:alfons.oudelansink@wur.nl(A.O.Lansink).

1_{Intheeconomicliterature,differentdefinitionsofcooperativesexistamong} whichisthedefinitionthatcooperativesareanextensionofthefarm-business (Sobohetal.,2009).Also,cooperativesaredefinedasuser-controlled,user-owned anduser-benefitorientedfirms(Sobohetal.,2009).ChaddadandCook(2004) pro-videdanownershiptypologyofcooperativeswhicharediverseintermsofthelevel ofcontrol,ownershipandbenefitsofthemembersinthecooperativefirms.IOFsare oftendefinedasentitiesthataimtomaximiseshareholdervalue.

2_{Members,asowners(residualclaimants),areentitledtothenetincome} gener-atedbythefirmandalsotheresidualriskbearersofthefirm’snetcashflows.While members,ascontrollers(havetheresidualrighttocontrol),havetherightstoany

of cooperatives[2].Literature hassuggesteda varietyof objec-tivesofCoopssuchasserviceatcost,maximizingtheaggregate members’profitand maximizingtheaggregatecooperativeand membersprofit[1].Hence,objectivesofmembersandCoopsare morealigned3 _{thantheobjectivesofIOFsandshareholders,who}

primarilyfocusonmaximizingreturntoequity.Thealignmentof objectiveswithinCoopsshapestheorganizationalstructureofthe cooperativeinthelong-run[3].Thedifferencesinobjectivesand organizationalstructurebetweenIOFsandCoopsimplythatIOFs and Coopsdiffer inthe waytheytrade offrevenues, costsand investments[4]).Moreover,Coopsaremainlyfinanced bytheir members,whoaremorereluctanttoengageinriskynewventures. Asaresult,Coopsfocuslessonthemoreriskyvalue-added seg-mentsofthemarketsthanIOFs[26].Anexceptionisinvestmentin theirabilitytoprocessthepotentialcapacitygrowthofits mem-bers.Thismeansthat Coops’successfactorsarerelatedtotheir competenciestosustain-ablyfulfillingthemembers’objectivesat thesametimebeingabletofunctioninthecompetitivemarket[26]. Thesesuccessfactorsarecomparabletothesuccessfactorofthe

assetsthatarenotassignedtootherpartiesnorattenuatedbylaw(Chaddadand Cook,2004).

3_{However,thereareexamplesintheliteraturewhichshowsthatthisalignmentis} notperfect.Forinstance,withaheterogeneousmembership,non-membersowners, distributionalissues(see[27]and[28]).

http://dx.doi.org/10.1016/j.njas.2014.05.003

IOFsinmeetingtheirshareholdersobjectives,yetitshouldbekept inmindthattheIOFsgoalsaremorecloselylinkedto profitabil-ity(Gentzoglanis,1997).TheCoopsprimaryconcernistoprocess allofitsmembers’productsandvalorisethisoptimally.Thislimits thecooperativeswiththeirchoicesofmarketsegments,whereas theIOFsdeterminetheirmarket(segments)basedon maximis-ingprofit(KlepandvanDijk,2005). Thesizeoftheiroperation dependsontheirmarketstrategyandtheyarenotobligedto pro-cessanypredeterminedquantity,contrarytotheexpectationfrom theCoops.

Differencesinobjectivesandorganizationalstructuresbetween IOFsand Coopsare assumedtoaffecttheirproduction technol-ogyandtechnicalefficiency.BontemsandFulton[3]arguedthat thestrongalignmentofCoopsandtheirmembers’objectivesputs CoopsataproductionefficiencyadvantagecomparedtoIOFs. Con-trarytotheargumentofBontemsandFulton[3]; Oustapassidis

etal.[5]arguedthatcooperativesendorseover-supplyofmembers’ inputsandthereforeoperateonaless efficientscale.Moreover, PorterandScully[6],FerrierandPorter[7],andGentzoglanis[8]

arguedthatcooperativesarelessscale-efficientduetohighercosts ofcontroltotacklethepresenceoffree-riders.

Thepresentstudyemploysa(parametric)stochasticproduction frontiertomeasure differences in technical efficiencyand pro-ductiontechnologybetweendairyprocessingCoopsandIOFs.The parametricapproachtoefficiencymeasurementhasbeen imple-mentedwidelyinseveralindustries(seee.g.Schmidt[9],Lovell andSchmidt(1988),andBauer[10]eachforanoverview,and Bat-tese[11]forareviewoftheliteratureofstochasticfrontieranalysis intheagriculturalsector).Applicationoftheparametricfrontier approachtocomparingefficiencyonCoopsandIOFshasbeen pre-viouslyundertakenbySextonetal.[12],DoucouliagosandHone

[13],Singhetal.[14],Mosheim[15]4_{.Existingstudiesonmeasuring}

andcomparingtechnicalefficiencyofCoopsandIOFsare,however, restrictedbytheassumptionthattheperformancesofIOF’sand cooperativeshavethesameproductionfrontier,i.e.thetechnology rulingthetransformationofinputsintooutputsisthesameforIOFs andCoops.

Thispaperestimatesproductionfrontiersfordairyprocessing CoopsandIOFsseparatelyandtestswhetherdifferencesintheir productionfrontiersarestatisticallysignificant.Firmtype-specific productionfrontiersandfirm-specificefficiencyparametersallow obtainingintra-andinter-typetechnicalefficiencymeasurements. Intra-typetechnicalefficiencyinvolvescomputingtheefficiencyof aparticularfirm’s(ofaparticulartype,eitherCooporIOF)relative toeithertheCoopsortheIOFsfrontier.Inter-firmtechnical effi-ciencyinvolvescomputingtheefficiencyofthatsamefirmrelative tothefrontierofthefirmtypethatrepresentsthebestpractice (i.e.thismayormaynotbethefrontierofthealternativetype). Inter-type(IE)efficiencyisdecomposedintointra-typeefficiency (IA) and inter-typecatch-up(CU) components.The CU compo-nentmeasuresdifferencesinproductiontechnologyacrossthetwo typesoffirms(CoopandIOF),whichmayarisefromdifferencesin investmentsinnewtechnologiesanddifferencesinthequalityand characteristicsoftheinputsused[16].Theempiricalapplication focusesondatafromCoopsandIOFsinthedairyprocessing indus-tryinBelgium,theNetherlands,Ireland,Denmark,Germanyand France.

2. EconometricsMethodology

Thestochasticfrontierproductionmodelwaspresented inde-pendentlybyAigneretal.[17]andMeeusenandvandenBroeck

4 _{SeeSobohetal.,(2009)foranextendedlistofliteratureusedsimilartechniques} whilecomparingtheperformanceofcooperativestoIOFs.

* IOF IOF Coop YI Y’ I Y” I Y X XI

Fig.1. AnIllustrationofanIOFProduces(YI)BelowBothFrontiers.

(1977)[25].Thestochasticfrontieranalysis(SFA)hasbeen theoret-icallyandempiricallyimplementedonfirmsofdifferentindustries andsectors(see[18]).Measuringproductionefficiencyallowsone totestcompetinghypotheses regardingsources ofefficiencyor differencesinproductivity[19,20].Moreover,suchmeasurement allowsforquantifyingthepotentialincreasesinoutputthatmight beassociatedwithanincreaseinefficiency[19].

Inthispaper,twoTranslogproductionfrontiers(i.e.forCoops and IOFs separately) are estimated using data onthree inputs and one output of dairy processing firms in the six European countriesmentionedabove.Thestochasticfrontiermodel, assum-inganexponentialdistributionofthenon-negativerandomterm

uiisexpressedas:

Yi=f(xi,ˇ)e(vi−ui),i=1,...,N (1)

whereYiistheoutputofthei-thdairyfirm;xiisak×1vectorof

theinputquantitiesofthei-thtypeoffirm;␤isaparameter vec-tor.Moreover,

v

assumedtobei.i.d.N(0,2

v).Thisrandomterm(

v

intothemodelandisindependentofui.Thenon-negative

ran-domterm(ui)representstechnicalinefficiencyinproductionand

isassumedtobei.i.d.andhasanexponentialdistribution.The rela-tionshipbetweenuiandtheoutputorientedtechnicalefficiency

(TE)is:TEi=exp(−ui).

Estimatingthetwotype–specificproductionfrontiers(Coops andIOFs)allowsformeasuringtechnicalefficiencyofthefirm rel-ativetothefrontierfor:(1)itsowntypeand(2)thebestpractice frontier.Usingthisapproachwecanmeasuretheinter-typecatch upcomponent,whichindicatestheratioofthefirm’sefficiency fromitsowntype’sfrontiertothefrontierrepresentingthebest practice.Measuringthetechnicalefficiency,inthisapproach, indi-catesthatthebestpracticefrontiercaneitherbethesametype ofthefirmortheothertype.Moreover,measuringthetechnical efficiencyofthefirmsrelativetotheothertype’sfrontier(ifitwas thebestpracticefrontier)indicatesapotentialimprovementinthe technicalefficiencyofanyfirmofaparticulartypewhenadapting theothertype’stechnology. Inthispaper,weuseterminologies usedbyOudeLansinketal.OudeLansinketal.(2000,2001),the firstmeasurementiscalledintra-typeefficiency(i.e.efficiencyof thefirmrelativetoitsowntypefrontier),whilethesecondiscalled inter-typeefficiency(i.e.efficiencyofthefirmrelativetothebest practicefrontier).Toillustratetheseconcepts,takethecaseofan IOF(Fig.1):

TheactualoutputproducedbytheIOFis YI,Y’Ireferstothe

maximumobtainableoutputfromthefrontieroftheIOF’stype:

Y

---: Coop; ______ : IOF * IOF1 * IOF2 * Coop1 * Coop2 X Y

Fig.2.CoopsandIOFsRepresentedbyTwoFrontiers.

WhileY

I referstothemaximumobtainableoutputfromthe

bestpracticefrontier:

Y

I =max_I,C [fI(XI),fc(XI)] (3)

Theintra-typeefficiency(IA)isdefinedas: IA= YI

Y I

;0<IA≤1 (4)

Theinter-typeefficiency(IE)isdefinedas: IE=_YYI

i

;0<IE≤1 (5)

Thecatch-up(CU)componentistheratioofoutputobtainedat theowntypefrontierandtheoutputobtainedatthebestpractice frontier:

CU= YI

Y I

;0<CU≤1 (6)

TherelationbetweenthesemeasuresisIE=CU×IA,hence

IE=YYI I × YI Y I = YI Y (7)

ThecriticalpointiswhenCUofanytype(i.e.CooporIOF)is equalto1.Firms,ofcertaintype,withCU=1performbetterwith theirowntypetechnologythanwiththeothertype’s.Whilefirms, ofcertaintype,withCU<1performworsewiththeirowntype’s technologyratherthanwiththeotherfirmtype’stechnologyand thereforehaveapotentialfortechnologicalimprovement.

Fig.2illustratesthefourpossiblesituations:aCoopabovethe IOF’sfrontier(Coop1),anIOFabovetheCoop’sfrontier(IOF2),a Coopbelowbothfrontiers(Coop2),andanIOFbelowboth fron-tiers(IOF1).InFig.2,theobservationCoop1islocatedinthepart ofthefrontierwheretheCoopsfrontierislocatedabovetheIOFs frontier.Hence,theCUofthecooperativewillbeequalto1.IOF1 isalsolocatedinthepartwheretheCoopsfrontierdominatesthe IOFfrontier.Hence,CUissmallerthan1forIOF1.

3. DataandEmpiricalModel

3.1. Data

Paneldataondairy processingfirms(ofbothtypes)fromsix Europeancountries(Belgium,Denmark,France,Germany,Ireland andtheNetherlands)wereusedinthisstudy.Thesecountriesare consideredtobetheEuropeanstatesthatproducethebulkofthe EUcow’smilk[22].Thepaneldatacoverstheperiod1995-2005 andisobtainedfromAMADEUS.AMADEUSisaEuropeanfinancial databasepreparedbyBureauvanDijkandcontainsmorethan5

millionprivate,cooperativeandpubliccompanies.Thedata-base iscollectedfromreportsproducedbythechamberofcommerce ofthedifferentEuropeancountries.AMADEUSstandardized the figuresofthefinancialstatementsofthedifferentcountries.Our sampleconsistsof1221observationsamongwhich861areIOFs and360arecooperatives.

The model distinguishes one output (total turnover), three inputs(materialcost,employmentcost,andfixedassets)andatime trendvariable(T).TheoutputsandinputsareexpressedinEurosof 1996(baseyear)bydeflatingthemonetaryvalueswiththeirprice indexes(providedbyEurostat).

Thedairyprocessingfirmsinthesecountriesaretypically pro-ducingmultipledairyoutputs,suchas:cheese,yoghurts,butter, freshmilk.However,theavailabledatareportsonlythetotal rev-enuesanddonotdistinguishbetweenrevenuesfromthedifferent sub-categoriesofthetotaloutput.Outputismeasuredastotal oper-atingrevenuefromsellingallproductsproducedbytheprocessing company,deflatedbythecountry-specificpriceindexofconsumer prices (a producer price off-factorywas not available) of milk, cheeseandeggs.

Fixedassetismeasuredasthevalueofphysicalland,buildings, machinery,andthenon-physicalfixedassets(suchasthe good-will,patents,brands,andmarketshares).Thevaluewasdeflated usingtheaveragevalueofthecountry-specificpricesindexofthe agriculturalgrossfixedcapitalformationandthepriceindexofthe agriculturalmachineryandequipmentpercountry.Thedatabase providesuswithaninputtitledasmaterialcost.Thisvariablerefers tothecostofpurchasingtheinputmaterialsbeforethestarting oftheprocessingoperation.Thisinputconsistsmainlyofthecost ofpurchasingrawmilkbythedairyprocessingfirm.Weusedthe deflatedEC-indexofproducerpricesofthecows’milkper coun-tryasthedeflatorforthematerialcost.Laborcostisdeflatedusing thecountry-specificnominalvalueofthelaborcostindexintotal industries(excludingpublicadministration).

Table1providesthemean,minimumandmaximumvaluesof turnover,fixedassets,rawmaterial,andlabor.Itshowsthat coop-erativeshave,onaverage,ahighervalueoftheoutputandthree inputsthanIOFs.

3.2. EmpiricalModel

Thetype-specificfrontierforeachtypeoffirmsinthesampleis assumedtofollowaTranslogspecification:

ln(Yit)=ˇ0+ 3

⎛

⎝

⎞

⎠

Wherexitareinputquantitiesattimet,withi=1(fixedassets),

2(rawmaterials),and3(Labour).Atimetrend(T)isincludedinthe empiricalmodeltoaccountforexogenoustechnologicalchangein theestimation.Thecoefficientsofthe3inputs(ˇi,i=1,2,3),the

quadraticpartofthemodel(ˇij,iandj=1,2,3),thetimetrend(1),

itsquadraticterm(2),andthecrosstermofthetimetrendwith

theinputs(i,i=1,2,3)aretobeestimated.

4. Results

Thelog-likelihood-testwhichteststhenullhypothesisofno dif-ferenceinproductiontechnologybetweenIOFsandcooperatives

Table1

DescriptiveStatistics(MillionEuros).

Cooperatives(n=360) Investor-ownedfirms(IOFs)(n=861)

Mean Minimum Maximum Mean Minimum Maximum

Output 429.26 2.91 5513.82 96.45 2.58 1605.03

Fixedassets 108.30 0.03 2243.13 19.59 0.01 406.47

RawMaterial 202.57 0.04 4604.08 7.25 0.03 222.31

Labor 24.85 0.01 742.61 1.12 0.01 24.09

Table2

ResultsofEstimationoftheTypeSpecificFrontiers(p-valuesinbrackets). Variable Cooperatives Investor-OwnedFirms(IOFs) Constant 12.138(0.000) 4.979(0.000) Ln(x1) −0.560(0.000) −0.105(0.403) Ln(x2) −0.536(0.018) −0.344(0.049) Ln(x3) 0.573(0.004) 0.810(0.000) T −0.007(0.959) 0.382(0.000) Ln(x1)Ln(x2) 0.011(0.550) 0.020(0.164) Ln(x1)Ln(x3) −0.020(0.162) −0.036(0.030) Ln(x1)T 0.004(0.621) −0.024(0.000) Ln(x2)Ln(x3) −0.052(0.000) 0.004(0.747) Ln(x2)T −0.001(0.915) 0.015(0.054) Ln(x3)T −0.009(0.435) −0.024(0.001) ½[Ln(x1)Ln(x1)] 0.124(0.000) 0.124(0.000) ½[Ln(x2)Ln(x2)] 0.086(0.000) −0.002(0.924) ½[Ln(x3)Ln(x3)] 0.032(0.248) −0.028(0.186) ½T2 _{−0.001(0.970) −0.010(0.052)} x1=fixedassets;x2=rawmaterial;x3=labourandT=timetrend.

yieldsavalueof685_{.Thisimpliesthatthenullhypothesisisrejected}

at5%.Inwhatfollows,wediscusstheparameterestimatesandthe estimationoftechnicalefficiencybasedontwoseparateproduction frontiersforIOFsandcooperatives.

Table2providestheestimationresultsofthetwoproduction frontiers.Thep-valuesindicatethatthesixcoefficientsofCoops’ productionfrontieraresignificantatthe5%criticalvalue.Allsingle termsaresignificantintheCoops’productionfrontier,exceptfor timetrend,whereasmostinteractionandquadratictermsarenot significantfortheCoopsfrontier.Ninecoefficientsweresignificant atcritical5%levelfortheIOFs’productionfrontier,suggestingthat theIOFsaremorehomogeneousthantheCoops.Onlythree param-eters(singletermsofmaterialcost,labor,andthequadratictermof fixedassets)aresignificantforbothfrontiers.Theparameter esti-matesofsixcoefficientshaveoppositesignsforthetwofrontiers (suchas:thetimetrend).

Table 3 provides the annual mean, maximum and mini-mumvalueofthethreedifferentefficiencymeasurementsacross countriesandoftheaverageoftheentiresample,(intra-firm(IA), Catch-Up(CU)andInter-firmefficiency(IE)).Additionally,these measurementsarepresentedbycountrytoinvestigateany differ-encesbetweencountries.

TheresultsinTable3 showthattheaverageintra-firm effi-ciencyscoreoftheCoops(IAC)islowerthanintra-firmefficiency

scoreoftheIOFs(IAI).ThisindicatesthattheCoopsare,onaverage,

lessefficientrelativetotheirowntechnologythanIOFstotheirs. TheresultsacrosscountriesshowthatCoopsinBelgium,Germany, IrelandandtheNetherlandshaveabetterintra-firmefficiencythan theIOFsinthesamecountry.Therefore,Coopsinthesecountries bettersucceedinexploitingtheirtechnologytoitsfullpotential thantheirIOFscounterparts.Theefficiencymeasurementsreflect,

5 _{Theresultofthelog-Likelihoodratiotestyieldsavalueof(68)intestingthe} hypothesisofdifferenceintheproductiontechnologyoftheIOFswiththe coopera-tiveswithcomparableturnoversize(i.e.excludingthecooperativesthatarelarger thantheIOFs).Thisimpliesthatthesizeoftheturnoverdoesnotalterthedifference betweentheproductiontechnologyofIOFsandcooperatives.

notonlytheefficiencyofthephysicaltransformationofinputsinto outputsbutalsoimplicitlyreflectthesuccessofotherintangible dif-ferencessuchasmarketingandmanagementstrategiesaimingto generatemorevalueaddedandoutputqualitydifferencesbetween companiesofthesametype(eitherCooporIOF).Itisimportant tonotethatitisimpossibletotestwhetherthedifferencesinIA (norCUandIE)betweencountriesandbetweenIOFsandCoops aresignificant.ThisisbecausethedifferencesinIA(CUand IE) havebeendeterminedusingtheresultsoftheestimationoftwo separateStochasticProductionfrontiers.

Theimplicationof theresultsonintra-firmefficiencyisthat Coopscan,onaverageincreasetheiroutputby24%whileusing thesamebundleofinputs,whereasIOFscanincreasetheir out-putby21%,usingthesamebundleofinputs.Theimprovement oftechnicalefficiencycanbeachievedbetterinternal organisa-tion,suchthatmaterials,andfixedassetsareusedmoreefficiently. Also,technicalefficiencycanbeimprovedbyimprovingthe qual-ityand/orpriceoftheiroutputs,e.g.byincreasingthemarketing effortsorbystrengtheningthemarketpositionvis-a-visretailers andwholesalers.

Additionally,theresultsinTable3showthat,onaverage,the catch-upcomponentoftheCoops(CUC)equalsonewhereasthe

catch-upcomponentofIOFs(CUI)isonaverageequalto0.8.The

differencebetweenthetwocatch-upcomponents(CUCandCUI)is

onaverageequalto0.1858.Thisresultindicatesthesuperiorityof theCoops’technologyovertheIOFs’technology,whichalsoresults onaverageinahigheroverallInter-firmefficiencyforCoops.These differencesinfavoroftheCoopsvis-a-vistheIOFsareattributedto afewaspects;differencesinthetechnologygoverningthephysical transformationofinputsintooutputs,qualitydifferencesand dif-ferencesinthesuccessofmarketingstrategies(betweenIOFsand Coops).However,thesizeofthedifferencebetweentheCoops’-and IOFs’-catch-upcomponents(CUCandCUI)differsalsoacrossthe

differentcountries.Forexample,Denmark,hasthelowestvalueof thedifferenceinthecatch-upcomponentsbetweenIOFsandCoops (0.1407).ThissuggeststhatthesuperiorityoftheCoops’ technol-ogyoverthatoftheIOFsislessapparentinDenmark.Irelandhas thehighestvalueofthedifferenceincatch-upcomponent(0.3128), suggestingthatthecooperatives’technologyisthemostsuperior totheIOFs’technologyinIreland.

Table3

EfficiencyScoresandCatch-UpComponents*

Cooperatives Investor-owned firms(IOFs) Difference IAC IEC CUC IAI IEI CUI CUC-CUI Belgium 0.81 0.81 1 0.78 0.65 0.8166 0.1834 Denmark 0.62 0.62 1 0.75 0.65 0.8593 0.1407 France 0.74 0.74 1 0.80 0.70 0.8580 0.1420 Germany 0.82 0.82 1 0.78 0.67 0.8547 0.1453 Ireland 0.83 0.83 1 0.81 0.58 0.6872 0.3128 Netherlands 0.78 0.78 1 0.72 0.62 0.8094 0.1906 Total(Mean) 0.76 0.76 1 0.79 0.68 0.8142 0.1858 *_{IA,IEandCUindicateintra-firm,Catch-UpandInter-firmefficiency,} respec-tively.ThesubscriptsCandIrefertoCooperativesandIOF,respectively.

Thedifferenceinthecatch-upcomponent betweenIOFsand Coopsacrosscountriesisexplainedbycross-countrydifferences inthe(i)characteristicsofcooperatives/IOFsandthe(ii)market conditionsforcooperatives/IOFs.Anexceptionaretheresultsof Denmark,whichrequiresanalyzingthecharacteristicsofthe Dan-ishfirms,dairymarketandthedegreeofproductionspecialtyof theDanishIOFs.TheCoopsdifferacrosscountriesintermsoftheir financialstructure(partiallytradedinthepublicmarketornot), marketorientationandmembership(targetinginternational mar-ketsornot and havingmembersfrom differentcountries).The differencesinthefinancialstructureofCoops,refer tothelevel of controland ownership of membershave of thecooperative. Forinstance,cooperativesinIrelandcantradeabouthalfoftheir equityinthestockexchange,whichimpliesmorediversityinthe sourcesofcapital[23].This,relativediversifiedsourceofcapital fortheIrishcooperatives6_{,inadditiontothecharacteristicsofthe}

Irishdairysector,mayexplain thelargedifferencein thecatch upcomponentsofIrishCoopsandIOFs.Thedifferencesin mar-ketorientationofcooperativesacrosscountriesrefertowhether thecooperativeistargetinginternationalmarketsornot. Coop-erativesinDenmark(whichexportsaround2/3ofthetotalmilk production),theNetherlands,andBelgiumaretotargeting inter-nationalmarketsmorethanFrenchandGermancooperatives[24]. TheIrishcooperativesaremainlyexportingtheirproductionto theUK,whichisencouragedbythegeographicallocationandthe strongUKpoundrelativetotheEuro.

ThelocalmarketconditionsforCoopsrefermainlytotheCoops’ marketsharewhichreflectsthedegreeofcompetitivenessinthe localmarketandtheopportunitytoexercisemarketpower.Asan example,onelargecooperativeinDenmarkproducesmorethan 90%ofDanishmilkproduction,whereastherearemorethan10 othersmallcooperativeswhichhandlearound6%ofDanishmilk production.ThisleavestheDanishIOFstoprocessless than3% of thetotal Danishmilk production (Danish dairy board7_).The

largeproportion of the processed milk bycooperative (around 97%-thelargestinEurope)reflectsthatthemajorityofthe Dan-ishfarmersarecooperative-orientedand thatDanishIOFsmust behighlyspecializedwithloyalcustomers.Thecharacteristicsof theDanishmarketsuggestthatthecountervailingpowerof coop-erativesiswellfunctioningandthatthedairymarketismainly exploitedbyCoops,whichleavesno(orlittle)marginforany fur-thercooperativeexploitation.Thesituationofthedairyprocessing industryinIreland,however,islargelyfragmentedanddominated by three relatively not so large Coops8_{. The Irish cooperatives}

haveweakincentivestoconsolidateandtheyachieveefficiencyby co-processingarrangementandmilk-sharingarrangementsrather thanbyexpandingrevenueareas.TheIrishdairysectorisnotfully exploitedandhaspotentialtoimprovecooperatives’shareofthe dairy processing sector [23]. In theNetherlands, there are two largecooperatives(presentlymergedintoasingleone),processing about85%ofthetotalmilkproductionintheNetherlands,whereas threesmallcooperativesaccountforanother6%oftotalDutchmilk production(ProductschapZuivel).TheGermanandFrench cooper-ativesaccountforlessthan60%and40%ofthelocaldairymarket, respectively(ProductschapZuivel)9_.

Tofurtheranalyzetheresults,wecomparethenumberandthe characteristicsofthefirmswithcatchupcomponentequaltoone tothosewithcatchupcomponentlowerthanoneinTable4.Only

6_{Termedaspubliclimitedcompanies(PLC).ThePLCisnotobligedtotakeinmore} milkofmembersornewmembership(Harte,1997).

7_{Thesefiguresareestimatedbasedondataavailableon(www.mejeri.dk).} 8_{WhencomparedtothelargecooperativesinDenmarkandtheNetherlands.} 9_{Thecooperatives’marketsharepercountryisorderedfromlargest:DK,NL,Ire,} B,D,Fr.(basedonestimationbasedondatafrom(www.prodzuivel.nl)

Table4

TheCharacteristicsoftheFirmswithDifferentValuesoftheCatch-Up. Item(average)MillionEuros Cooperatives InvestorsOwned

Firms CUC=1 CUC<1 CUI=1 CUI<1 Numberoffirms 359 1 7 854 Turnover 430.38 450.73 155.57 95.96 Fixedassets 108.43 100.09 9.75 19.67 RawMaterial 203.13 187.79 29.97 7.07 Labor 24.92 30.36 0.93 1.12 Intra-FirmEfficiency 0.76 0.86 0.87 0.79

onecooperative(ofthe360cooperatives)hasacatchupvalueless thanone,whereas,onlysevenIOFs(ofthe861IOFs)havea catch-upvalueequaltoone.ThesesevenIOFshave,onaverage,ahigher turnover,fixedassetsandrawmaterialsbutloweruseoflaborthan theotherIOFs.Also,thesesevenIOFshave,onaverageahigher effi-ciencyscore(0.87)thantheotherIOFs(0.79).Whereas,thesingle cooperative(withCUC<1)doesnotappeartohavedifferent char-acteristics(intermsofvalueofoutputandinputs)thantheaverage characteristicsoftheothercooperatives(withCUC=1).The intra-firmefficiencyscoreofCoops(IAC)oftheonlycooperativewith CUC<1isequalto0.86andishigherthantheaveragevalueofthe intra-cooperativesefficiencyscore(0.76),oftheothercooperatives (withCUC=1).

Almost100percentofthecooperativeshaveacatch-upvalueof one,whereasaround99percentoftheIOFshaveacatch-upvalue lessthanone.Theseresultsshowthatthetechnologyofrelatively smallIOFs(intermsofturnover)isdominatedbythetechnology ofthelargerCoops.TheIOFswithacatch-uptermsmallerthan onehavearelativelyhighvalueofbothfixedassetsandlabor com-paredtothesevenIOFswithacatch-uptermequaltoone.This relativelyhighvalueoffixedassetsandlaborofthesmallIOFmay beduetotheirhighcostsinproducingalimitedquantityof spe-cializedoutputfromarelativelysmallquantityofrawmaterials. ThebusinessimplicationsoftheseresultsarethatsmallIOFneed toimprovetheirtechnicalefficiencyinordertopreventlossesdue toinadequateorganization.Theymayadaptstrategieswhicheither reducetheuseofbothfixedassetsandlabor,orincreasethelevel ofoutput.

ThedifferencesinIntra-firmEfficiency(IA)ofCoopsandIOFs suggest that Coops have different internal incentives and are focusedonothermarketsegmentsthanIOFs.TheCoopsfirst inten-tionistocollectandprocessestheirmembers’entireproduction whileIOFsdrawtheirincentivesfromcollectingandprocessing thatmilkquantitythatmaximizestheshareholders’value.Asa result,IOFs’areinclinedtotargetdifferentmarketsegmentsthan thoseofthecooperatives.Thehighvalue-addedsegmentsofthe market requirehighquality production,packagingand market-ing, whilequantitieswill bemuch lower thanin Coops, which explainstherelativelyhighvalueoffixedassets tototal output ofthesmallIOFs.Second,targetingthevalueaddedsegmentsof themarketrequirehighlyskilledandspecializedlaborand man-agement,whichexplainstherelativelyhighvalueoflabortototal outputofthesmallandthelowerInter-firm(overall)efficiencyof IOFs.Thecooperativeisrequiredtomeetmembers’interestsby processingtheirentireproductionofrawmilkwhilepayingthem (forprovidingtherawmaterial)acompetitiveprice.

Table5providestheaveragevalueoftheoutputelasticitiesof cooperativesandIOFsandthep-value,testingwhetherthe elas-ticityis(statistically)significantlydifferentfromzero.Theoutput elasticity,ofthefirms(ofbothtypes)withcatch-upequaltoone, differsfromtheelasticityoffirmswithcatch-uplessthanunity.

Theresults,presentedinTable5,showthattheoutputelasticity offixedassets(whichincludesbrandvalue)hasthehighestvalue

Table5

OutputandScaleElasticities(p-valuesinbrackets).

Outputelasticityof(p-value) Cooperatives Investor-ownedfirms(IOFs)

CUC=1 CUC<1 CUI=1 CUI<1 N=359 n=1 n=7 n=854 Fixedassets 0.569(0.000) 0.135(0.000) 0.629(0.000) 0.593(0.000) RawMaterial −0.102(0.001) −0.114(0.001) 0.056(0.159) 0.034(0.133) Labor 0.071(0.013) 0.100(0.010) −0.017(0.301) 0.022(0.359) Time −0.037(0.005) −0.045(0.006) −0.021(0.234) −0.012(0.194) Elasticityofscale 0.623(0.020) 0.121(0.017) 0.668(0.034) 0.646(0.028)

amongtheinputs.Therefore,thisinput(fixedassets)isimportant forbothIOFsandCoops.However,fixedassetsismoreimportantto IOFs(withCUI=1andCUI<1)thancooperatives(withCUC=1and CUC<1).Theoutputelasticityoffixedassetsissignificantlydifferent fromzeroforCoopswithCUC=1andtheIOFswithCUI<1.

Theoutput elasticityof raw materials is negativefor Coops and is significantly different from zero at the critical 5% level for those Coops withcatch-up component equal to one, while it is insignificant and positive for IOFs. The negative value of theelasticityofrawmaterialssuggeststhatCoopsoveruseraw materials (raw milk), to such an extent that it decreases the producedoutputoftheCoops.Thisisexplainedbythe coopera-tive’sobligationtoprocesstheentireproductionofitsmembers. In addition,the commonagriculturalpolicy (CAP) allowsdairy processingcompaniestoprocesstheirsurplusmilkintolowvalue added commodities that can bestored (e.g. butter, milk pow-der).However,inordertoexplainthenegativeoutputelasticity ofmaterialsfor Coops,more information onquality differences of materialsand more details onthe composition of output is needed.

TheoutputelasticityoflaborispositiveandishigherforCoops thanforIOFs.IthasanegativevalueforIOFswithcatch-up com-ponentequaltoone.Moreover,theoutputelasticityoflaboris significantlydifferentfromzeroonlyforCoopswithcatch-up com-ponentequal toone. Thehighvalueof theoutput elasticityof CoopsindicatesthatlaborismoreimportanttoCoopsthantoIOFs inproducingoutput.TheimportanceoflabortoCoopsvis-a-vis IOFsmaysuggestthatCoopshavefewbuthighlyqualifiedlabor. Additionally,thevalueoftheoutputelasticityintermsoflaboris negativeforthesevenIOFswithcatch-upcomponentequaltoone, thisimpliesthataslaborincreases,theoutputdecreasesforthese IOFs.

Also,technicalchangeofCoopsandIOFsisnegative,which indi-catesthat, thetechnologyof dairyprocessing firmsonaverage getsworseover thetimeperiod underconsideration.However, theCoops’technologydecreasesmorequicklyovertimethanthe IOFstechnology.Also,IOFswithacatch-upcomponentlessthan one(CUI<1)havethelowesttechnicalregress,implyingthatthese IOFs(althoughnothighlyefficientandusinginferiortechnology) arerelativelybetteroff.Technologicalregressisunlikelytooccur duetoamoreinferiortechnologyovertime.Amorelikelyreasonfor technologicalregressisthetighteningofgovernmentregulations regardinge.g.foodsafetyandpackagingrequiringdairyprocessing firmstotakecostlyadditionalmeasures.

Finally,resultsinTable5showthatfirmsofbothtypeshave pro-ductiontechnologiesthatarecharacterizedbydecreasingreturns toscale.TheCoops’technologyisfacingamorepronounceddegree ofdecreasingreturnstoscalethanIOFs.Furthermore,resultsshow thatIOFswithcatch-upcomponentequaltounity(CUI=1)have

largerreturnstoscalethanfirmswithcatch-upcomponentsmaller thanunity.These findingsimply thatanincrease in thesize of operationhasamorepositive effectonIOFsratherthanCoops, and may be a direct consequence of the larger size of Coops

and theirobligation toprocessallmembers’ productionof raw milk.

5. Conclusions

Thisstudycontributestotheliteratureinusingtwodifferent frontierstocompareandmeasurethetechnicalefficiencyand pro-ductiontechnologyofdairyprocessingcooperativesandIOFsinsix Europeancountries.Themethodologicalapproachusesadifferent frontierforeach typeoffirms,allowingformeasuringtechnical efficiencyofthefirmwithrespecttoboth:itsowntypefrontier (Intra-typeefficiency)andthefrontieroftheothertype(Inter-type

efficiency),andthedifferencebetweenthetwofrontiers(Catch-up

component).Thecooperatives,onaveragehavealowerIntra-type

efficiencythanIOFs.However,thecooperatives,onaveragehave a higherCatch-up componentand a higher Inter-typeefficiency thanIOFs.ThesuperiorityofthecooperativesintheirInter-type

efficiencymeasurementreflects,inadditiontothephysical pro-ductivity,themarketingefficiencyasaresultofnormalizingthe outputsandinputs,ofcooperativesandIOFs,withthesameprice indices.

TheCatch-upterm differsacrosscountries. Thisis explained bydifferencesincooperativescharacteristicsandmarket condi-tionwhichimplydifferencesintheinternalincentives.InIreland thesuperiorityofthecooperatives’technologycomparedtoIOFsis thehighestwhichisexplainedbythreedifferentaspects;thefact thatIrishcooperativeshavealegalformtermedaspubliclimited company,thefragmentednatureoftheIrishprocessingsectorand theproximitytotheUKmarket.SevenIOFsareexceptionalwith

Catch-upcomponentequaltoone.Theyhavealargerturnoverand quantityofrawmaterials,whiletheyhavesmallerfixedassetsand laborthantheotherIOFs.Moreover,thesesevenIOFsarenotonly themostefficientwhencomparedtotheirowntechnology,they alsohavethehighestoutputelasticityintermsoffixedassetsand rawmaterial,andtheleastdecreasingreturningtoscaleproduction technology.OtherIOFswouldbenefitfromreviewingthe charac-teristicsof thesesevenIOFsandimprovingtheirowntechnical efficiencywithrespecttoboth;thetechnologyoftheIOFsandthe oneofthecooperatives.Thecooperatives’superiorityhasastrong impactonthefuturestructureofthedairymarketinthesesix Euro-peancountries,i.e.cooperativesmayincreasetheirmarketshare inthenearfutureattheexpenseoftheIOFs.InDenmark, cooper-ativesalreadyaccountfor97percentofthetotalmilkproduction, intheNetherlandsmorethan85%.

Futureresearchwouldbenefitfromdetaileddataonthe qual-ityandsizeofthecompositionofinputsandoutputsinthedairy processingfirmsanalyzedinthisstudy.Havingthisdetailed infor-mationwouldallowforabetterrepresentationoftheheterogeneity attributabletoinputandoutputcomposition.Atpresent,the cur-rentlyavailabledatadoesnotallowforfurtherinvestigatingthe potential impact of output heterogeneity or input qualities on performance.Also,futureresearchshouldfocusonanalyzingthe socio-economicandenvironmentalfactorsthatexplaindifferences

ininefficiencybetweendairyprocessingcompaniesacrossthe dif-ferentcountries.Finally,anextensionofthisanalysiswouldbeto includecountrieswithdifferentcooperatives’structureand busi-nessmodelsacrosscentralandeasternEurope.

AppendixA. Supplementarydata

Supplementarymaterialrelatedtothisarticlecanbefound,in theonlineversion,athttp://dx.doi.org/10.1016/j.njas.2014.05.003.

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