Horizons #64: Is Big Best?

28 January, 2022

by Professor Ross Kingwell, AEGIC Chief Economist

The ability of large farms to extract advantages from economies of size still seems to be true.

When I was an undergraduate, the late Henry Schapper at my university gained a somewhat infamous reputation for his slogan that farmers needed to get big or get out. The idea was simple. Production of agricultural goods was underpinned by economies of size so spreading large fixed costs across more hectares helped lower unit costs of production and raised profit margins per hectare.

In the years since that slogan was first voiced, Henry’s adage has stayed relevant. The average size of grain farms in Australia has continued to increase with the associated crop area increasing and since the early-2010s the proportion of farm area being cropped has increased markedly on average across Australia (Figure 1).

Figure 1: The total cropped area per farm for farms in the ABARES wheat and other crops industry and the 5-year moving average of the proportion of farmland cropped: 1990 to 2020

The work-rate and capacity of farm machinery has continued to increase, hugely increasing labour productivity and allowing farmers to manage larger cropping programs. Bulk handling gear both on and off-farm has facilitated moving larger volumes of grain at harvest time. Crop breeders have developed higher yielding varieties that have helped boost the relative profitability of cropping. Agronomists and technologists have developed smarter, more reliable ways of achieving higher grain yields.

Most farmers have learned that in the business of grain production; size matters. Moreover farm survey data confirm that often being bigger is better. For example, the table below lists performance characteristics of Australian grain farms ranked by their decile contribution to grain output in 2019-20. The data come from ABARES farm surveys. In 2019-20, 30 percent of all grain farms surveyed delivered 73 per cent of the entire output of all grain farms in the survey. It is these fewer, larger farms that were both the most profitable businesses and the predominant source of the industry’s output. The 50 per cent of farms that contributed, in total, only 14 per cent of the grains industry’s output also only generated business losses in 2019-20. Here is evidence that bigger is better.

Performance characteristics of Australian grain farms ranked by their decile contribution to grain output in 2019-20. Source: Abstracted from https://www.awe.gov.au/abares/research-topics/surveys/disaggregating-farm-size

 

The ability of large farms to extract advantages from economies of size still seems to be true. Moreover, some of these large businesses can also enjoy the benefits of spatial diversification whereby having parcels of farmland in different geographical locations they spread their climate and market risk by selecting crops best suited to different soils and growing conditions.

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Horizons: the AEGIC Economics and Market Insights blog

Expert grains industry analysis and commentary from AEGIC’s Economics and Market Insight Team on a range of big-picture topics that affect Australia’s export grains sector.

 

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