Scale Economies and Efficiency in U.S. Agriculture: Are Traditional Farms History?

Abstract

The structural transformation of agriculture in recent decades has raised serious concerns about the future of the family farm. This study examines the economic performance of U.S. farms, to explore the potential of smaller farms to compete with larger entities, and ultimately to survive in this rapidly changing environment. We use deterministic and stochastic frontier methods and survey data to measure and evaluate factors underlying scale economies (SEC) and efficiency (SEF) of corn-belt farms for 1996–2001. Our results suggest that family farms are both scale and technically inefficient. Potential for the exploitation of significant scale and scope economies, and some greater technical efficiency, seem to be driving trends toward increased farm size and dwindling competitiveness of the small family farm.

This is a preview of subscription content, log in to check access.

References

  1. Aigner, D. J., C. A. K. Lovell and P. Schmidt. (1977). "Formulation and Estimation of Stochastic Frontier Production Function Models." Journal of Econometrics 6, 21–37.

    Google Scholar 

  2. Battese, G. E. and T. J. Coelli. (1992). "Frontier Production Functions, Technical Efficiency and Panel Data: With Application to Paddy Farmers in India." Journal of Productivity Analysis 3, 153–169.

    Google Scholar 

  3. Baumol, W. J., J. C. Panzar and R. D. Willig. (1982). Contestable Markets and the Theory of Industry Structure. New York: Harcourt Brace Jovanovich.

    Google Scholar 

  4. Brooke, A., D. Kendrick and A. Meeraus. (1998). GAMS: A User's Guide. Scientific Press.

  5. Coelli, T., D. S. Rao, and G. Battese. (1998). An Introduction to Efficiency and Productivity Analysis. Norwell, Massachusetts: Kluwer Academic Publishers.

    Google Scholar 

  6. Deaton, A. (1985). "Panel Data from Time Series Cross-Sections." Journal of Econometrics 30, 109–126.

    Google Scholar 

  7. Denny, M. and C. Pinto. (1978). An Aggregate Model with Multi-Product Technologies. In Melvyn F and Daniel McFadden (eds.), Production Economics: A Dual Approach to Theory and Applications. Volume 2, North Holland.

  8. Dubman, R. W. (2000). Variance Estimation with USDA's Farm Costs and Returns Surveys and Agricultural Resource Management Study Surveys. USDA/ERS, AGES 00–01, April.

  9. Färe, R. and D. Primont. (1995). Multi-Output Production and Duality: Theory and Applications. Boston: Kluwer Academic Publishers.

    Google Scholar 

  10. Färe, R. S. and S. Grosskopf. (1990). "A Distance Function Approach to Price Efficiency." Journal of Public Economics 43, 123–126.

    Google Scholar 

  11. Forsund, F. R. and L. Hjalmarsson. (2002). "Calculating the Scale Elasticity in DEA Models." Working paper No. 28/02.

  12. Harl, N. E. (2000). "The Structural Transformation of the Agricultural Sector." Speech, USDA/ERS, March.

  13. Heshmati, A. and S. C. Kumbhakar. (1997). "Estimation of Technical Efficiency in Swedish Crop Farms:A Pseudo Panel Data Approach." Journal of Agricultural Economics 48(1), 22–37.

    Google Scholar 

  14. Hoppe, R. A., J. Perry and D. Banker. (1999). "ERS Farm Typology: Classifying a Diverse Ag Sector." Agricultural Outlook, AGO-266, ERS, USDA, November.

  15. Kumbhakar, S. C., B. Biswas and D. Von Bailey. (1989). "A Study of Economic Efficiency of Utah Farmer: A System Approach."Review of Economics and Statistics 71 (November), 595–604.

    Google Scholar 

  16. Lovell, C. A. K. (2003). The Decomposition of Malmquist Productivity Indexes. Journal of Productivity Analysis 20, 437–458.

    Google Scholar 

  17. Lovell, C. A. K., S. Richardson, P. Travers and L. L. Wood. (1994). Resources and Functionings: A New View of Inequality in Australia. In W. Eichhorn, (ed.), Models and Measurement of Welfare and Inequality. Springer-Verlag Press: Berlin.

    Google Scholar 

  18. Meeusen, W. and J. van den Broeck. (1977). "Efficiency Estimation from Cobb-Douglas Production Functions with Composed Error." International Economic Review 18, 435–444.

    Google Scholar 

  19. National Commission on Small Farms. (1998). A Time to Act. A Report of the USDA National Commission on Small Farms, January.

  20. Paul, C. J. M. and R. Nehring. (2003). "Product Diversification, Production Systems, and Economic Performance in U.S. Agricultural Production." Journal of Econometrics, forthcoming.

  21. Ray, S. C. (1998). "Measuring Scale Efficiency from a Translog Production Function." Journal of Productivity Analysis 11, 183–194.

    Google Scholar 

  22. Ray, S. C. (2003). Measuring Scale Efficiency from the Translog Multi-input, Multi-output Distance Function. Manuscript. University of Connecticut.

  23. Sharma, K. R., P. Leung and H. M. Zaleski. (1999). "Technical, Allocative and Economic Efficiencies in Swine Production in Hawaii: A Comparison of Parametric and Nonparametric Approaches." Agricultural Economics 20, 23–35

    Google Scholar 

  24. U.S. Dept. of Agriculture/Economic Research Service. (2001a). "Structural and Financial Characteristics of U.S. Farms." Agriculture Information Bulletin No. 768.

  25. U.S. Dept. of Agriculture/Economic Research Service. (2001b). Food and Agricultural Policy: Taking Stock for the New Century. Report. September.

  26. Verbeek, M. and Nijman, T. (1992). "Can Cohort Data be treated as Genuine Panel Data?" Empirical Economics 17, 9–23.

    Google Scholar 

  27. Westcott, P. C. and C. E. Young. (2000). "U.S. Farm Program Benefits: Links to Planting Decisions and Agricultural Markets." Agricultural Outlook. ERS/USDA. October: 10–13.

  28. Williams, S. P. and C. R. Shumway. (1998). "Testing for Behavioral Objective and Aggregation Opportunities in U.S. Agricultural Data." American Journal of Agricultural Economics 80, 195–207.

    Google Scholar 

Download references

Author information

Affiliations

Authors

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Paul, C., Nehring, R., Banker, D. et al. Scale Economies and Efficiency in U.S. Agriculture: Are Traditional Farms History?. Journal of Productivity Analysis 22, 185–205 (2004). https://doi.org/10.1007/s11123-004-7573-1

Download citation

Keywords

  • Economic Performance
  • Technical Efficiency
  • Structural Transformation
  • Small Farm
  • Small Family