Technical efficiency and production risk in Scottish Agriculture: Impacts on the livestock sector.

As part of the ambition for reform of agricultural support in Scotland, farmers are expected to enhance their farm’s productivity and environmental impact. Farmers may be required to adopt management measures which imply changes to farm operations in addition to compliance with basic management standards. Adoption of these measures are affected by how farmers view risk, and by the perceived effect of changing inputs on the level of production risk. Understanding what is driving production risk and technical efficiency is essential to identify farm-specific measures required to improve resilience and productivity in the farming system. In particular, whether a subsidy affects technical efficiency, production risk or both deserves special attention.

Technical efficiency indicates the rate at which physical inputs are converted into physical outputs. Best practice farms operate at the highest levels of efficiency compared to their peers. Measuring technical efficiency entails defining a frontier, which represents the maximum potential output a given farm could produce with a given set of inputs. In other words, the frontier is a benchmark against which the actual level of production will be compared. Production risk is defined as the risk arising from, e.g weather, pests and disease, which causes variations in expected yield. We use the Farm Business Survey (FBS) data, for the period 2003-2022 to explore the efficiency of various livestock farm types, with and without accounting for production risk. Incorporating production risk allows us to accurately estimate the sources of variations in production from best practice.

We find that accounting for production risk improves the assessment of technical efficiency of all farm types, except for LFA (Less Favoured Area) dairy farms. While technical efficiency has been highly volatile over the past two decades, livestock farms are operating below their full potential implying the need for farm-specific interventions to increase farm performance. Farm subsidy is found to be negatively related to technical efficiency across all farm types; however, it does reduce production risk, serving as a risk management tool.

· Agricultural input use decisions affect output and production risk differently: it increases output and reduces production risk.

· Determinants of production risk and technical efficiency vary by farm type with consistent negative effects from farm subsidies, past CAP reform and market price shocks.

· The share of subsidies from total farm income and agricultural output price changes reduces efficiency but improves production risk for the post-2015 period.

The integration of production risk using our framework improves the overall understanding of defining best practice performance within the Scottish farm sector.