Productivity and farm size in Australian agriculture: reinvestigating the returns to scale

A positive relationship between farm size and farm productivity is often considered to be largely due to increasing returns to scale in farm production. However, using farm level data for the Australian broad acre industry, we found that constant or mildly decreasing returns to scale is the more typical scenario. In this study, the marginal returns to various farm inputs are compared across farms with different sizes. We found that large farms achieved higher productivity by changing production technology rather than increasing scale alone. The results highlight the disparity between ‘returns to scale’ and ‘returns to size’ in the industry, suggesting that productivity improvement among smaller farms can be made through increasing their ability to access advanced technologies, rather than simply expanding their scale.