Economies of Size in Farming: Theory, Analytical Procedures, and a Review of Selected Studies

Excerpts from the report Highlights: Selected studies of the economies of size in crop production, specialized beef feedlots, and dairy farms were reviewed. The theoretical basis for analyzing economies of size was discussed, and several alternative analytical procedures were examined. The analytical procedure that provides the most reliable results in studying economies of size in farming is the synthetic-firm or economic-engineering approach. When the farm organization includes relatively few choices, this type of analysis may be done through manual budgeting. But when more complex farming operations are analyzed, linear programming is helpful. Choice of a residual claimant (the factors that absorb profit) strongly influences the height and shape of the average cost curve. For example, as more factors are included in the residual claimant, total cost is reduced, thus lowering average cost. A modified concept of the farm firm--viewing the farm as a goods-and-services firm--provides a realistic basis for explaining the persistence of a relatively large number of small farms and part-time farms. This concept also helps to account for the rising importance of custom-hired farm operations. A number of studies of crop-farming situations in various States were reviewed. In most of these situations, all of the economies of size could be achieved by modern and fully mechanized 1-man or 2-man farms.