Does the Milk Income Loss Contract program improve the technical efficiency of US dairy farms?

Due to volatility in the income of dairy farmers, the 2002 farm bill introduced the Milk Income Loss Contract (MILC) payments that were extended in the 2008 farm bill. It has been argued that MILC payments would help large dairy farms and squeeze out small dairy operations. This paper contributes to this policy issue by empirically assessing the effect of MILC payments on the technical efficiency of US dairy farms. Using a large-scale dairy farm survey containing information from 2005, we apply a data envelopment analysis method to estimate technical efficiency of the dairy farms. A Tobit regression model was estimated to examine the roles of human capital of the farm operator, different farming practices, farm sizes, and MILC payments on technical efficiency of the dairy farms. Results indicate that the effects of the MILC payments were heterogeneous among farms of different sizes. Significant effects of MILC payments were only evident among large farms. In contrast, no significant effects were found for medium and small farms.