Economies of Scale in the Floriculture Industry

Article excerpt

This study investigated the cost structure of the floriculture industry in the United States. Economies of scale and input elasticities were estimated with a normalized quadratic cost function. Results suggest that economies of scale exist in the floriculture industry. As producers become large and more automated, they have a cost advantage relative to smaller producers who are producing the same output product mix. The existence of economies of scale suggests that average grower size can increase in the future as growers increase in size to take advantage of cost efficiencies.

Key Words: duality, economies of scale, floriculture, nonprice variables

JEL Classifications: Q12, C31, D20

Floriculture is a thriving and dynamic part of production agriculture in the United States. However, from 1996 to 2001 the number of small- and medium-size firms (growers) declined by 16.0 and 2.0%, respectively, and the number of large growers increased by 1.0% (USDA 2002). This trend suggests that there could be a cost advantage associated with firm size. However, there is limited information about cost and input demand relationships in the floriculture industry. A study of the production technology of floriculture producers can help determine the existence and the magnitude of economies of size and how floriculture producers fit in the changing structure of the industry. Knowledge of scale economies, as well as price and substitution elasticities, can be used to assist growers in planning better for the future and by policymakers in formulating policy or regulations for the floriculture industry. Growers can use information from this study as a comparison to their operations to assist in their decision of whether to expand and to determine optimal levels of inputs.

Prior literature relating to cost relationships for greenhouse ornamentals is sparse and inadequate and provides limited evidence of scale economies in floriculture production. Most research for the floricultural industry has been devoted to calculating a cost per square foot or a cost per pot using partial budget or historical information (Brumfield et al.; Christensen 1978a,b,c; Hodges, Satterhwaite, and Hay du). Other studies have reported a cost per square foot that varies by firm size, market channel, or both (Brumfield et al.; Hodges, Satterhwaite, and Haydu). No research has been uncovered that explicitly estimated a cost function or resulting scale economies for floriculture production, which is vital knowledge for this industry. Information on economies of scale and elasticities in floriculture production is vital in assisting with long-term planning to increase cost efficiency either through size or productivity improvements from use of labor and other inputs.

The objective of this study was to estimate cost relationships for floriculture producers, including the cost function, input demands, price elasticities, and scale economies. The cost analysis was conducted with an original data set obtained from a survey of greenhouse firms conducted in the fall of 2000. Tn the analysis, we first estimate a standard cost model of the floriculture industry and then reestimate it considering nonprice variables that are included to capture differences in the cost structure and output product mix among growers. Performance of the estimated models is compared out-of-sample, and results for the selected model are reported and discussed.

Theoretical Cost Model

For this study, we assume the cost function is weakly separable in inputs. Weak separability of inputs from an empirical perspective implies a two-stage cost minimization process. In the first stage, the cost of producing a single unit of an aggregate input with the prices of the inputs in the subgroups is estimated. In the second stage, the aggregate input prices obtained from stage 1 is used to estimate the final cost function. Despite the restrictions imposed on input elasticities, an assumption of weak separability is flexible enough to estimate the economies of scale, price, and substitution elasticities (Chambers). …