Journal of Rural Studies 18 (2002) 429–441 Alternative rates of structural change in Norwegian dairy farming: impacts on costs of production and rural employment Ola Flaten* Norwegian Agricultural Economics Research Institute, P.O. Box 8024 Dep., NO-0030 Oslo, Norway Abstract 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. r 2002 Elsevier Science Ltd. All rights reserved. Keywords: Small dairy farms; Structural change; Cost of production; Rural employment; Multifunctionality 1. Introduction In 1949, the number of farm holdings in Norway (with more than 0.5ha farmland in use) was nearly 215,000. Small-scale mixed farming was common and 90% of the farms had dairy cows, most of them less than five cows. Since then, the number of farms has decreased to 70,740 farms in 1999. At the same time, farms have specialised. In 1999, the remaining 22,659 dairy farms had an average herd size of 13.8 dairy cows (Statistics Norway, 2001a). Still, most other Western countries have much larger average dairy herds. From the mid-1970s, the rationalisation of the farm structure in Norway was not to be accelerated; instead, it was to be suppressed (Alm( as, 1994). Policy instruments like farm support programmes favouring small farms, non-transferable milk quotas, and investment grants aimed at equalising income and living conditions between different farm sizes and regions. Small farms (in dairying up to about 15 cows) were encouraged by an agricultural policy with extended focus on agriculture’s contribution to the Norwegian society, e.g., generating employment and contributing to rural viability, landscape preserva- tion, cultural heritage, and food security. For the past 25 years the rate of decline in the number of dairy farms has been lower in Norway than in other Nordic countries. An increase in dairy herd size, at least to some point, decreases the unit production cost (economies of size), e.g., Mukhtar and Dawson (1990), Hubbard (1993) and Bailey et al. (1997). Because small farms dominate, size economies are far from exploited in Norway (Flaten and Giæver, 1998; Lyland and Ringstad, 2001). The cost advantages of larger farms are due to lower input (per kg milk) of labour, machinery and buildings. In addition, climatic and topographical conditions con- tribute to high costs of agricultural production and high levels of farm support in Norway. The overall percen- tage producer support estimate (PSE) is close to 70 and around 75 for milk (OECD, 2001). *Tel.: +47-22-36-72-55; fax: +47-22-36-72-99. E-mail address: ola.flaten@nilf.no (O. Flaten). 0743-0167/02/$-see front matter r 2002 Elsevier Science Ltd. All rights reserved. PII:S0743-0167(02)00031-1