How Big? Economies of Scale

April 2, 2013 09:18 PM
How Big? Economies of Scale

Profits, family and new technology will drive growth

Farms will continue their march toward the upper perimeter in size during the next 30 years. Is there no limit to economies of scale? In a word, no, but with a few caveats.

The desire to bring new family members into the operation, new technology allowing more acres to be farmed with less equipment and the new capacities discovered for computer technology will all play a role in creating larger farms.

"Growth happens," says Gary Schnitkey, a University of Illinois ag economist. As farmers earn profits, they expand. Always have, always will.

"Eventually, the average Illinois farm could be closer to 10,000 acres."

"Today’s average Illinois commercial crop farm is about 1,500 acres," Schnitkey says. "In 10 years, I expect that to be 2,500 acres. Eventually, the average Illinois farm could be closer to 10,000 acres."

The number of acres that can be efficiently farmed per person keeps increasing as equipment size increases; however, that places a real premium on farmers’ ability to ramp up management of technology and people.

"If you have 3,000 acres, you are too big for one combine but not big enough to fully utilize two," Schnitkey says. "We have 12-row combines and now they’re manufacturing 16-row combines." There’s no end in sight to development of new technologies that will allow farmers to more efficiently farm added acreage.

As a farm operation grows, Dale Nordquist, a University of Minnesota ag economist, points out some hurdles, such as employee management, that must be jumped. Farmers with the desire and ability to manage large numbers of employees will likely grow their operations to much larger sizes than those who prefer to do most of the farm work themselves, he says.

No Boundaries. Growth in future decades will not be limited by proximity. An increasing number of producers will operate in different states and countries. "That’s happening already," says Danny Klinefelter, Texas A&M ag economist. Part of this trend will be crunching numbers to determine locations where it’s cost effective to expand, and it might be 1,000 miles away.

There will be other drivers, too, Klinefelter says. Some end users will want to source local ingredients from quality farmers, with whom they already have relationships. Some grain operations might locate new farms closer to ports to take advantage of price incentives.

While Klinefelter sees continued growth, he also sees a time when end users could limit themselves to a group of qualified producer-suppliers. Another potential limiting factor to farm size growth, he adds, could be access to capital as farms get larger.

"Some farmers might need to pursue alternative arrangements from capital markets," he says, adding that at some point dis-economies of scale could be created when multiple layers of management are required.

While farm growth is a trend that has been in existence since humans stopped being hunters-gatherers, massive growth is not everywhere. Data from the Southern Minnesota Farm Management Association show that from 2002 to 2011, the average farm’s number of cropland acres increased scarcely, from 1,006 to 1,047 acres. "I’m a little surprised at this," Nordquist notes. "The general direction is towards larger farms."

Michael Langemeier, a Purdue University ag economist, says in the future, motivating farmers with less than $500,000 in earnings to increase in size will hinge on two factors: labor costs in relationship to income, which is typically reduced for larger operations, and lower machinery costs per acre for bigger farms.

Another factor to consider is the number of producers who are nearing retirement and will exit the business in future years. "This will create an opportunity to grow," Langemeier says.

In the near term, there could be one more boost to farm size. "A large number of crop farms have high liquidity," Langemeier says. "This gives them the cash to expand, as evidenced by the escalating land values."

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Spell Check

4/11/2013 10:26 AM

  I am surprised government-funded risk management was not mentioned. Regardless of what farmers say in the media, they do farm the subsidies - they would be economic martyrs if they did not. A couple of changes that could cap economies of scale. One is if farmers would have to manage their own risk and two, if farmers were accountable to natural resource management. Farmers get somewhat of a free-ride on negative externalities, - ie fall apply N, calculate 40% loss downstream; keep soil black to allow planting window to open up sooner and let silts flow downstream. In each of these cases, one can manage larger acreage because you get to skip management of natural resources. As for risk, farmers would dial down the risk of the corn-soy and add wheat or other crop in the rotation to manage seasonal and price risk. Farmers are independent, efficient producers within the concept of government subsidies and economic externalities. In this scenario you can double-down and let it rip as some government agency will be cover your risk up top and downstream people will have to accept whatever gets in your way to keep it ripping. And I'm not anti-farmer anymore than I expect a football player to play nice. They are players in a game of rules and the ones that exploit those rules often win. Reminds me of John Maddon's statement when his Raiders were accused of cheating - He said, " so what are you going to do about it?' I farm, I used public subsidies to cover my risk and leverage land purchases. I clean till and plant as much as a fast as I can. "What are you going to do about it?"

4/11/2013 10:37 AM

  Just more Stamp farms people running small farmers out of business!

4/11/2013 11:05 AM

  I recall in the early eighties when we started to farm. We couldn't compete with the bigboys and had no desire to as all we saw was red ink. Over time those bigboys couldn't afford to go on and most dropped out or sold their property in pieces. We were the beneficiary of that and grew our farm to one larger than theirs today. Now even bigger ones are around and are offering to buy someone like us out. I'm willing to sell and retain the original size where we started. If a grandchild of ours has a desire to farm they too will get the chance and bide their time while the bigboys fail. Such is the circle of life. How much does one have to suck to the equipt., chem. and fert. dealers to want to farm big anyway?


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