Cost Efficiency and Scope Economies of Crop and Livestock Farms in Missouri

By Wu, Shunxiang; Prato, Tony | Journal of Agricultural and Applied Economics, December 2006 | Go to article overview
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Cost Efficiency and Scope Economies of Crop and Livestock Farms in Missouri

Wu, Shunxiang, Prato, Tony, Journal of Agricultural and Applied Economics

This study investigates productive efficiency for a sample of Missouri crop-only (specialized) and integrated crop-livestock (diversified) farms using a cost frontier approach. Results suggest that significant cost inefficiency exists among sample farms. Lower cost efficiency in both types of farms was attributed to improper scale of operations and misallocation of inputs. On average, diversified farms were as technically and scale efficient as specialized farms. Lower allocative efficiency diluted gains in technical efficiency and resulted in greater cost inefficiency for diversified farms than for specialized farms. Technical efficiency was independent of farm size, whereas allocative, scale, and scope efficiencies were not.

Key Words: cost efficiency, crop, livestock, Missouri farms, scope economies

JEL Classifications: Q12, R32

Structural transformation of agriculture has been going on for many years in Missouri. The number of farms has declined continuously and average farm size has increased over time. Many small farms have gone out of business or been consolidated. From 1980 to 2001, the number of farms decreased by 10% to 108,000, and average farm size increased by 6.1% to 277 acres (MASS 2003). The decreasing number of farms and increasing average farm size indicate that large, specialized farms are replacing traditional small, diversified farms because of efficiency advantages.

Many have attributed recent structural changes such as competitive pressure, price decline, and policy changes. Intense competition from other countries, such as Canada and the EU, has resulted in the decline in exports of Missouri agricultural products (MASS 2003). Recent declining trends in the global prices of agricultural commodities, especially food grains, have caused prices to fall well below cost of production in Missouri. Meanwhile, input costs for feed, labor, machinery, and supplies have continued to rise. Average production expenditures in Missouri reached $87,407 per farm in 2001 (MASS 2003). High production costs and lower commodity prices have reduced or eliminated farm profit margins. Net farm income in Missouri declined at an annual rate of 7.2% since 1997, a trend that has forced many farmers to explore alternative management strategies for remaining competitive. Changes in government farm policies also stimulate structural change. The latest two farm bills reduce payments to growers, but allow greater cropping flexibility and encourage farmers to respond to market price incentives.

Movement toward a more dynamic and competitive agricultural environment underscores the need for farmers to improve their productive efficiency to remain competitive and profitable. Given the tight farm economic conditions in recent years, it is important to understand the nature of production efficiencies, and identify the causes of inefficiencies. The latter would help farmers to make more informed production decisions. An analysis of efficiency would also provide useful information on how farm characteristics, such as size, land ownership, degree of specialization, and financial variables, influence farm efficiency. Improving efficiency could strengthen the competitive position of Missouri's agricultural industry.

This study evaluates the relative economic competitiveness and cost efficiency of crop-only (specialized) and integrated crop-livestock (diversified) farms in Missouri. A nonparametric technique is applied to cost frontier analysis to determine technical, allocative, and scale efficiencies as well as economies of scope. The relationships among cost efficiency measures, profit, and farm characteristics are examined using regression analysis. The second section of the paper reviews literature relevant to measuring farm efficiency. The third section describes the theoretical framework used to measure cost efficiency and its components, followed by a description of the data used in the regression analysis.

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Cost Efficiency and Scope Economies of Crop and Livestock Farms in Missouri


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