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

Improving the efficiency and productivity of the agriculture sector is at the heart of supporting sustainable food supply stipulated in the Scottish government’s agricultural reform route map. Arable farming in Scotland accounts for a third of agricultural production. However, there is a substantial degree of production uncertainty related to, for example, adverse weather conditions and the outbreak of pests and weeds. Thus, farmers’ risk perceptions influence their input use decisions with potentially serious implications on production risk and technical efficiency. Understanding the key drivers of technical efficiency and production risk is essential to identify farm-specific measures necessary to achieve sustainable agricultural productivity change. Particularly, whether subsidies affect technical efficiency, production risk or both deserves special attention. Technical efficiency indicates the rate at which physical inputs are converted into physical outputs. 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. On the other hand, production risk is defined as risks arising from uncertain natural growth processes, such as weather, pests, weeds and disease, which cause variations in expected yield. We utilized data from the Farm Business Survey (FBS) covering the period 2003-2022 to analyse the efficiency of specialist cereals and general cropping arable farms. Our efficiency measure accounts for production risk. Incorporating production risk allows us to accurately estimate the sources of variations in production from its frontier level. We find that accounting for production risk reduces the technical efficiency of specialist cereal farms with no clear effect on general cropping farms. While technical efficiency has been highly volatile over the past two decades, arable farms are still operating below their full potential implying the need for farm-specific interventions to increase farm performance. Farm subsidies, the 2015 CAP reform and agricultural output price change negatively and significantly reduce efficiency across all farm types; however, they serve as an effective risk management tool. Moreover, the use of digital technologies like the internet and expenditure on various software improve efficiency. Generally, arable farming is less efficient as it only reaches 60% of its potential production capacity. This could be achieved by promoting widespread adoption of digital technologies, encouraging farmers' participation in various farming cooperatives' and facilitating specialized agricultural training.