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Does farm size matter for productivity? 

Does farm size matter for productivity? 

At first, it might seem obvious that agricultural productivity increases as farm size increases.  However, it all depends on what we are talking about.

   By Dr. Joaquín Arias, Policy and Sectoral Analysis Specialist, IICA, joaquin.arias@iica.int 


IICA was recently invited to a conference “Farm Size and Productivity: A Global Look” sponsored by the USDA Economic Research Service and the Farm Foundation, NFP, to share new research findings on the relationship between agrarian structure and agricultural productivity.

At first, it might seem obvious that agricultural productivity increases as farm size increases.  However, it all depends on what we are talking about.  Is it about the productivity of land or yields? The productivity of labor? The productivity of capital? Or, are we talking about total factor productivity (TFP), which takes into consideration all inputs and factors of production? The advantage of using TFP is that this index captures not only yield increases, but also cost reducing technological changes, as well as changes in resource allocation and output mix.

In theory, productivity should increase with farm size because large farms are financially more capable of adopting new technologies, are more likely to benefit from increasing returns to scale (use of machinery, access to credit, etc.), and may face favorable input and output prices.

Small or medium farms that show higher land productivity might on the other hand display low levels of labor productivity. This is the reason why economists prefer more aggregate measures of productivity that take into account all factors and inputs of production such as the total factor productivity or TFP index. Farmers might be more productive in terms yields (single factor productivity) but not necessarily in terms of TFP. Furthermore, higher yields does not necessarily correspond with high efficiency which is a measure of the distance between observed and best practice output, in a given technological, economic and environmental context.

Some studies, however, especially in developing countries, show that small farmers are more productive per unit of area or that there is an inverse relationship between size and productivity. The conflicting results in research studies can be explained by the fact that productivity is linked to farmers’ resource capacity to invest in technology and innovation (see the study by Sheng y Chancellor 2017). Therefore, small farmers that have access to capital services might enjoy equal opportunities for productivity growth than large farmers. This is one of the reasons why the development of markets for mechanization services is so important in countries where the agrarian structure is dominated by small farms.

A study presented by Key (2017), about farm size and productivity growth in the United States’ Corn Belt finds that aggregate productivity (TFP growth) increases with farm consolidation.  However, a similar study for Brazil, presented by Helfand et al. 2015, finds that the smallest (<5 ha) and the largest (>500 ha) farms obtained the highest productivity gains, which confirms that there is not always a direct relationship between farm size and productivity growth. Even more radical results can be found in the study carried out by Kagin et al. (2017), which shows an inverse relationship between farm size and agricultural productivity in Mexico, where small farmers seem more efficient.

These findings, however, should be taken with caution given some research limitations (Fuglie 2017). The narrow range of farm sizes that exist in countries such as Mexico, China or countries in Africa, can be a limitation to demonstrate the relationship between farms size and productivity. Also, as evidenced by the studies of farm productivity in Vietnam and Bangladesh, the rapid economic and labor market growth in those countries is reducing the inverse size-productivity relationship.

It is worth nothing that when measuring the relationship between farm size and productivity, researchers must take into consideration that productivity growth is affected by other factors such as production type or crop mix, quality of factor endowments, especially soil quality, labor or capital intensity, management factors, the policy and the institutional environment (i.e. subsidies), structural changes, labor and capital constraints, level of investment on research and extension, technological changes, information and human capital, among others.

 A study by Sheng and Chancellor (2017) finds that contract services to replace owned capital (hiring machinery) help small grain producers in Australia increase farm productivity.

The study in Deininger et al. (2017) shows that productivity growth is actually not explained by farm consolidation but rather by exit of unproductive and entry of more efficient farms.

Given that small farms play such an important role, affecting agricultural production and food security in many countries in Latin America and the Caribbean, and that agriculture accounts for the bulk of income differences between developed and developing countries, a critical policy issue is how to increase productivity of small and mediums farms and the importance of understanding its relationship with the scale of production. An additional challenge for small farmers is that the growth of large scale food distribution outlets and the emergence of global value chains might favor larger farms.

Farm size after all might not matter as much as other factors do to increase productivity, such as the crop mix, quality of factor endowments, especially soil quality, management factors, farmers’ resource capacity to invest in technology and innovation, access to credit, technology and extension services, and information, among others.

Be aware that the conference papers will be available by the end of the year in a special issue of Food Policy (https://goo.gl/PVovX9).

For more information write to joaquin.arias@iica.int, and to download conference presentations visit the Farm Foundation Web Page or Research Gate: https://goo.gl/Qhu83Q

 

*The opinions expressed in this newsletter are those of the authors and they do not reflect the position of the Institute on the topics presented.

*This post appears in the IICA Delegation in the USA Newsletter - January - February 2017

 

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