The cost of producing a unit of output is a critical management aspect in the dairy industry, particularly in South Africa. The ability of minimise unit costs of producing milk, while not curtailing output levels, is often a determining factor of the long-term survival of dairy farms in South Africa. In this study, average cost curves showing the variation of unit cost with output are estimated for dairy production in the KwaZulu-Natal Midlands of South Africa, using a panel of 37 farms for the period 1999 to 2007. The results show that economies of size exist, with larger farms able to produce any given level of output at lower costs compared to their smaller counterparts. The study found that the long-run average cost curve (LAC) for the sample of dairy farms is L-shaped rather than U-shaped. The best farmers, in terms of average costs of producing a litre of milk, are found between the 100 000 to about 170 000 litres of milk per year output range and these were found to spend less than R1 per litre.


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