Academic journal article Journal of Agricultural and Applied Economics

What Does Initial Farm Size Imply about Growth and Diversification?

Academic journal article Journal of Agricultural and Applied Economics

What Does Initial Farm Size Imply about Growth and Diversification?

Article excerpt

Recent consolidation in agriculture has shifted production toward fewer but larger farms, reshaping business relationships between farmers, processors, input suppliers, and local communities. We analyze growth and diversification of U.S. corn, wheat, apple, and beef farms by examining longitudinal changes in 10 size cohorts through three successive censuses. We fail to reject Gibrat's law in apple and wheat industries and the mean reversion hypothesis in beef and corn industries. Apple and wheat farms diversify over time. The findings suggest that scale economies diminish for large farms across all four industries and scope economies dominate scale economies for large apple and wheat farms.

Key Words: diversification, firm growth, Gibrat's law, longitudinal data, scale economies, scope economies

JEL Classification: Q12

Scale and scope economies at the farm level are among the important driving forces behind the rapid structural change in U.S. agricultural in- dustries. Agricultural production is becoming dominated by large, highly integrated farms that adopt new technologies and business practices to exploit these economies (Hoppe et al.). One relevant public concern is just how far economies of scale and/or scope will push this sector. If the largest food production firms experience economies of scale and scope and if those economies do not dissipate, we would expect movement toward smaller and smaller numbers of firms. If that movement were to continue unabated, it is conceivable that the perfectly competitive nature of some agricultural production industries could eventually disappear, resulting in a potential threat to the long-term economic viability of the family farm. Under this setting, regulatory oversight may be required to ensure a competitive outcome with few farms. The agricultural production sector is currently so far from consolidating ownership under a small number of firms that competitive production is still regarded as dominant in agriculture for all but a few niche markets.

Four major agricultural industries are chosen for the purpose of studying scale and scope economies. Corn, wheat, apple, and beef industries represent major sources of U.S. agricultural production. Corn and wheat are the two largest U.S. grain crops, both in terms of value of production and planted acreage. Respectively, they accounted for 75% and 17% of total value of grain production and 54% and 36% of total area planted to grains in 2006. Apples rank second after grapes in total value of fruit production and planted fruit acreage, accounting for 21% of the value of total fruit production and 18% of total area planted to fruit in 2006. Beef represents the largest segment of the U.S. livestock sector. Sale of cattle and calves accounted for 73% of total value of production of meat animals in 2006 (USDA 2007).

Between 1987 and 2002, the total number of farms in each of these industries fell while the number of farms in the largest census farm category grew (see Figure 1). The relative growth in number of larger farms was much greater in the corn and wheat industries than in the apple and beef industries. Total production rose in the corn and beef industries while production dropped in the wheat and apple industries. However, the drop in wheat production was less than the relative decline in total number of farms in the wheat industry so this industry also became more concentrated. Production concentration was greater in the corn and beef industries than in the wheat industry, and the evidence of increased concentration in the apple industry was mixed.

The rapid changes in these industries suggest several important empirical research questions and testable hypotheses with regard to firm and industry growth that could have implications for public and private decisionmaking. For example, profit-maximizing, riskneutral, price-taking firms are expected to grow if they can exploit scale and/or scope economies. …

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