Alternative rates of structural change in Norwegian dairy farming: impacts on costs of production and rural employment

The economies of size in Norwegian dairy farming are far from exploited. There is increasing pressure on cost savings through faster farm restructuring. Such a structural transition could have severe effects on other concerns (rural employment and social well being, landscape preservation, biodiversity, heritage values, etc.) valued by the society. A simulation model is developed to study effects of alternative rates of structural change on the social costs of milk production, farm employment and farm subsidies. The model is based on economic conditions at the farm level for various size groups and regions. Changes in the model's farm structure depend on the exit rate of existing farms in various size groups and the size of newly established farms. When new farms are substituted for existing farms, a rapid change in farm structure and a new herd size of 60 cows (the largest evaluated) results in the lowest costs. Approximately 60% of the cost savings achieved by larger farms can be attributed to lower labour input, resulting in considerable losses of employment. Job losses will have the greatest negative family and community impacts in areas located far from urban centres, because a large share of the milk is produced is such areas, farms are smaller and there are fewer non-farm employment opportunities. Government support is necessary to preserve small farms’ provision of multiple benefits. The balance between cost-saving pressures and the rationales for retaining small farms under increasingly liberalized market regimes is bound to be a complex issue.