productivity, and low-production costs. Such complementarities found in ESEA help explain the low-cost status of California, in that labor productivity becomes a significant factor in reducing COP only in large herds with high milk yields.
At the bottom line, the best managers in each region will be able to produce milk for the lowest cost possible given the constraints of input prices and technology for that region. CCA makes the complementarity between such skill and herd size clear by demonstrating that COP is lower for the larger herds in part because the larger the herd, the greater the premium for managerial skill. By definition, the rate of total-factor productivity growth reflects the intangible, or unexplained, aspects of production that cause production costs to fall over time. Whether through the adoption of new technologies, superior genetics or investments in human capital, competitiveness now is often created rather than endowed. Many of the socioeconomic variables used in ESEA support this conclusion. Although technical efficiency does not imply allocative efficiency, the two appear to be correlated as better managers tend to achieve both higher yields and lower costs.
Many policy implications follow from these general conclusions. First, any constraints to herd expansion should be avoided in order to realize economies of scale. Better managers will further reduce costs through optimizing their input allocations and adopting new technologies at a faster rate. Second, incentives to improve technical efficiency should be promoted. Management clubs, dairy seminars, cooperative education projects and, most importantly, pricing schemes that promote market sensitive production practices are all avenues to the improvement of production efficiency. With greater production efficiency, increases in milk yield, labor productivity and efficient capitalization will be sure to follow. Many analysts propose exhaustive lists of policy recommendations designed to aid Canadian dairy farmers. However, the central conclusion of these three perspectives is that reformation of one or two key areas, for example, the restoration of incentives for the best managers to enter dairy, will generate the necessary changes throughout the system. In each area, improvements are complementary and should be recognized as such.