of Size on Irrigated Cotton Farms of the Texas High Plains TEXAS A8cM UNIVERSITY TEXAS AGRICULTURAL EXPERIMENT STATION R. E. Patterson, Director, College Station, Texas In cooperation with the U. S. Department of Agriculture B4037 June 1965 ‘ SUMMARY The study analyzed the economies of size available to irrigated cotton farms in the Texas High Plains. The findings show that the one-man farm with adequate capital can be as efficient as any larger size of farm. In fact, a 440-acre farm (102 acres of cotton) operated by one man with a set of six-row machinery can achieve an average cost of less than 71 cents per dollar of gross income. The larger farm sizes analyzed in this study extended to the five-man farm operating more than 1,700 acres of farmland, including some 550 acres of cotton. None of the larger sizes are capable of achieving lower average costs than the one-man farm. The synthetic firm approach was used in this analysis. Farms of various sizes were constructed, assuming advanced technology and prices projected to 1968. Several different crop and live- stock enterprises and various cultural practices were included in the analysis. Gross income was used as the measure of output. Linear programming was used to determine the least-cost farm plan for each of several levels of output. Short-run average cost curves were calculated for different farm sizes, and the envelope curve was developed from these short-run curves. Recent trends indicate that cotton farms in the Texas High Plains are extending their acreage beyond the least-cost point at 440 acres of farmland. In moving to larger sizes, farms do not achieve lower average costs or greater efficiency. But they do achieve greater profit. A one-man operation with six-row ma- chinery can produce almost $60,000 gross income on a 440-acre farm. Net profit, or return to the operator's management, would be $17,400. This profit is over and above a return to the operator's labor ($2,569) and interest on his equity in the investment. By comparison, a five-man farm can earn more than $67,000, using 1,720 acres of farmland. Gross income on such a large farm would be $235,000. Thus, the five-man farm is at least $50,000 more profitable than the one-man farm. This possibility of greater profit is an attractive encouragement for a farm operator to expand the size of his farm business. During the 1954-59 period, the number of farms in the Texas High Plains with more than 1,000 acres increased by only 5 percent, compared with a l0 percent increase in the number of farms with 500 to 1,000 acres. Farms with less than 500 acres ac- tually decreased in numbers. Thus, the size range that is attractive and has been attained based on the changing size distribution of farms, is 500 to 1,000 acres. These sizes are attainable within the family type of business, where the management and most of the labor is supplied by the family rather than hired workers. The average sized farm family can supply most of the labor for an irrigated cotton farm with 1,040 acres of farmland, including some 331 acres of cotton. Investment required for this size of operation is $700,000 and the net return to the operator's man- agement is more than $30,000. CONTENTS Summary .................................... .. Introduction .............................. .. Concepts and Procedures U Assumptions and Definitio Dating of coefficients, -,_ prices and progra Farm practices consid " Gross income .............. .. "I Type of farm----..------ i‘ Land and irrigation - Tenure of operator... Labor .......................... .. Profit ....... .. Analytical Procedures .... .... Empirical Results .................... .. Short-run Average Cost C M l One-man farms.......... _ ' Farm sizes employing hired regular labor i- Envelope Curve ............... .. i: Profit ................................. .. Possibilities for Family F ‘A Suggestions for Further Resea J: conomies of Size on ated Cotton Farms of the A exus High Plains j. Patrick Madden and Bob Davis"" American agriculture is changing rapidly as a result of continuing shifts in demand and supply conditions and changes in institutions affecting the farm sector. Demand changes as population and income increase and as consumer tastes and preferences change. Supply con- ditions change with the emergence of new technology, change in prices of competing products and as resource costs change. Changes in the institutions related to agri- culture also have a marked effect. For instance, the farm price support program and credit policies modify As a result, agriculture is changing rapidly in several aspects. the opportunities and uncertainties of farmers. The number and size distribution of farms is chang- ing. Small commercial farms are dropping out in large numbers, yet in most areas and types of farming, agricul- ture continues to be composed mainly of family farms. Questions arise as to what will happen in the future under projected demand and supply conditions and proposed alternative farm programs. One of the first questions to be answered in such an inquiry is the relation between size of management unit and the efficiency and profitability of production. This involves derivation of the envelope curve, or long-run average cost curve. The primary objective of this study is to examine the efficiency and profitability of various sizes of cotton farms in the Texas High Plains. A secondary objective i-rfcludes determination of the extent of potential eco- nomies achievable within the limits of a family farm busi- ness—that is, one in which the operating family. provides the management, does most of the work, and is a financial risk-taker in the outcome of the operation. Several studies of this type are being conducted in ‘Agricultural economists, Farm Production Economics Division, Economic Research Service, U. S. Department of Agriculture, Washingon, D. C., and Texas A8cM University, College Station, Texas, respectively. HARDLAND SOILS AREA TEXAS an no m: w-"l- swamps-museum»- Figure 1. Hardland soils area of the Texas High Plains was the study area. various parts of the country by the Economic Re- search Service, USDA, in cooperation with State Agricultural Experiment Stations. Each study in- volves an intensive examination of a specific type of farming in a selected area. In this study the irrigate-d cotton farm in the finer textured or “hard- land” soils area of the Texas High Plains was examined. The area covers the major part of six counties in the Texas High Plains, Figure 1. These counties are Parmer, Castro, Swisher, Hale, Floyd and Crosby. Parts of Lamb, Briscoe, Lubbock and Dickens Counties are also included. Farm enter- prises and production requirements are similar throughout the study area. The principal soil units to which this study applies include Pullman, Lofton and Olton clay loams and Amarillo, Berthoud, Portales, Mansker and Zita loams. These soil units are considered to be comparable from the standpoint of yield potentials and production requirements. However, there are soil units within the area of applicability that are not classified as hardlands that have different production potentials and require different production practices than the hardland soils. The main farm enterprises are cotton, grain sorghum, wheat, soybeans and stocker steers raised on wheat and other small-grain pastures. Each of the counties in this study contains a high proportion of cropland, ranging in 1959 from 88 percent in Parmer County to 98 percent in Hale County. About 72 percent of the 2.4 million acres of cropland in the area was irrigated. The farm sample survey on which this study is based showed that in most cases farms are either completely irri- gated or not irrigated at all. Nonirrigated farms occur in dryland areas where water is not available in sufficient quantities to support irrigation. These 4 dryland sections were excluded from the 15 analysis. ‘a The number of farms in the six main c of the study area decreased from 5,932 in ‘_ 5,402 in 1959. The size distribution of fa 1' these 2 years is shown in Table 1. The pro of farms with 200 to 499 acres of cropland m, from 45.5 to 47.0 percent during the 1954-59 1Q The group of farms with 500 to 999 acres of cr increased even more—from 16.6 to 20 percent. ; with less than 200 acres of cropland decreased"? 34 to 29 percent of the total number of farms concerts AND PROCEDURES us Hypothetical firms were constructed as the; of the cost analysis. Linear programming and; geting were employed to determine the lei combination of enterprises for attaining selectedi of gross income. Advanced technology and pro prices were assumed. Details of the theoretical ‘i work are published separately} ' Assumptions anrlfgllefinitions Several assumptions and definitions a sential to the study of economies of farm si i are discussed in this section? - DATING 0F COEFFICIENTS, PRICES AND P1105 The ultimate research question toward this study is directed involves the average to »- of production that could be expected by cotton p of various sizes over the next few years. In att u; to answer this question, it is necessary to condu analysis using resource and product prices, output coefficients and farm programs refl ‘Bob Davis and J. Patrick Madden, “Theory and Proced Studying Economies of Size on Irrigated Cotton Farms i‘ Texas High Plains.” Texas Agri. Expt. Sta. MP it? ‘These concepts are discussed in greater detail in "A Guide for a Cooperative Project in Economies of Size, FPED, ERS, USDA, Washington, D. C., November l, l TABLE 1. SIZE DISTRIBUTION o1= FARMS IN THE s|x MAINIi 1112s or THE HARDLANDS AREA o|= THE TEXAS HIGH P Farms a...» Acres of Number Percentage nu Croplond _ Distribution of f0 1954 1959 1954 1959 1954 '°f' Number Number Percent Percent Number ~23 1-49 250 204 4.2 3.8 — 46 50-99 365 271 6.0 5.0 — 94 " 100-199 1430 1079 24.1 20.0 --351 200~499 2692 2541 45.5 47.0 ——151 500-999 981 1082 16.6 20.0 +101 1,000-or more 214 225 3.5 4.2 + 11 TOTAL 5932 5402 100.0 100.0 -5s0 1 ‘Source: U. S. Census of Agriculture. Texos County Tabla. 157-171, 1959. . . g that are likely to exist in the future. f, 1968 is used as a target date, and prices projected to 1968. Farm interviews reveal- l sizes of farms receive essentially the same their products and pay essentially the f, -..~ for their purchased inputs. Therefore, "ty discounts and no price negotiation by n were assumed in the present study. A -output coefficients were projected by using "vanced technology under the assumption l time most farmers will tend to adopt this I technonolgy. Such technology includes prac- * by the more progressive operators in the i, , or new practices whose workability and V’ feasibility has been tested either by farmers ltural experiment stations. a analysis was conducted using constraints fby the farm programs that were in effect tn of the analysis, namely the 1962-63 pro- e cotton acreage was limited to 35 per- the cropland; grain sorghum base to 39 and wheat to 15 percent before diversion. krghum and wheat were diverted by the allowable amounts, 20 percent and l0 base acreage, respectively. FARM PRACTICES CONSIDERED 5-, alternative farm practices involved in this i} lude variations in irrigation practice, ma- e and crop and livestock enterprises? alternative irrigation practices were con- All four practices involve a single pre- irrigation, but they differ in the number the crop is irrigated after it is planted. of the alternative practices involves only ting irrigation and no post-planting irri- 3 Other practices involve a pre-planting plus -planting irrigation, a pre-planting plus two ting irrigations, and a pre-planting plus three ting irrigations. ' alternative sizes of tractor and machinery, ,9 and six-row, were considered in this study. f 'fications of these tractors and their comple- '5 machinery are given elsewhere! main crop enterprises considered in this '" e cotton, wheat, grain sorghum and soy- Alternative practices included each of these i used in this study were modified from previous f‘ rrent studies. See Moore, Tefertiller, Hughes and { Production Requirements, Costs and Expected Re- Q Crop Enterprises — Hardland Soils — Texas High g3 Texas Agri. Eipt. Sta., MP-601, August 1962, and _ Meharg's unpublished master's thesis, “The Influence o tive Price and Allotment Programs on Farm Organ- Ind Income for Irrigated Fine Textured Soils on the of Texas." Department of Agricultural Economics, M University, 1964. A!» Madden, Ibid. Table 2. crops produced with different combinations of tractor size and number of irrigations. Several beef production enterprises also were considered. These enterprises differed with respect to the buying and selling weights of the steers, the rations used and the amount of grazing required. GROSS INCOME Gross income is defined as total revenue from the sale of farm products plus government price sup- port subsidy payments. TYPE OF FARM Type of farm‘ is based on the relative propor- tions of gross income coming from the various enter- prises. A cotton farm is defined as one on which not less than 60 percent of gross income comes from the sale of cotton; the remaining 4O percent is made up by the other farm enterprises. lAND AND IRRIGATION WEIIS Land was assumed to be available to the firm in unlimited contiguous quantities in increments of 40 acres. This farmland was considered to be 90.9 percent cropland and 9.1 percent waste, including ditches, roads, turn rows and playa lakes (low-lying areas usually submerged by winter rains). Each acre of cropland was assumed to provide 0.35 acre of cotton allotment, 0.39 acre of grain sorghum base and 0.15 acre of wheat allotment in accordance with the foregoing assumptions regarding supply control programs. All cropland was assumed to be under irriga- tion. The irrigation wells produce 650 gallons of water per minute on a 16-day irrigation schedule. Under these conditions, one well could adequately irrigate 114 acres of land if operated 21.6 hours each day during the irrigation period. This is a typical size of irrigation well in the study area. TENURE OE OPERATOR This study is primarily concerned with a long- run planning situation. Thus, it assumes the opera- tor is starting a new farm business for which he can gain control of the necessary production resources, and that he is interested in the specifications of alter- native farm plans that will produce specified levels of total output at the lowest total cost. The study in its present stage is not concerned with the problem of how operators obtain control over the use of resources, whether by ownership, rent- ing or hiring. However, some form of control must be assumed for accounting purposes. Under com- petitive conditions, rent theoretically approaches ownership costs over a period of yearsfi Where this ‘Heady, E. 0., “Economics of Agricultural Production and Re- source Use,” Prentice Hall Inc., New York, 1952. Ch. 2O and 21. 5 relationship holds, the resources needed for any specified level of gross income are approximately the same irrespective of whether operators are owners or tenants. Therefore, for simplicity of calculations, this study assumes full ownership of all resources. lABOR Two classes of labor are recognized in this study — regular and seasonal. Regular labor is committed to the farm for the entire production season, irrespec- tive of the extent to which it is actually used. The maximum number of man-hours available per man- year of regular labor is considered to be 2,500. No more than 300 hours per man are considered avail- able in any l month. The total amount of regular labor available is the amount hired plus the amount supplied by the operator, allowing for the time he spends supervising and coordinating the farm bus- iness. Labor supplied by the operator’s family is considered hired labor. Seasonal labor is hired on a short-term basis (by the day, week or month) during peak labor loads. Bracero labor is considered to be available in what- ever amounts are needed at 80 cents per hour.“ The cost of this unskilled labor is included in the activity costs. The only seasonal labor hired in this study was for hoeing cotton. PROFIT In this study, profit is defined as the net return to the business after all resources are paid for at going market rates. Interest on investment is charged at 5 percent on “sunk” investment and 6 percent on operating capital (or annual capital) used to meet cash operating costs. Even the portion of the operator’s time devoted to labor is accounted for at the going salary rate for regular hired laborers. All cash costs and depreciation charges also are de- ducted in calculating profit. The amount of this profit does not depend on the operator’s equity in the farm business or the amount of labor supplied by his family. For an actual farm operator, this profit figure would be less than other common mea- sures of net income, such as net cash income, net farm income and operator income. Net cash income is gross income minus cash costs. This quantity indicates the cash remaining after paying all cash expenses for the year. Unless this figure is positive, the operator will be forced to draw on savings or outside sources of funds to con- tinue in business, even in the short run. Net farm income is net cash income minus de- preciation. If this quantity is positive, the operator can stay in business indefinitely. He can replace his equipment, pay all cash costs and have cash left ‘The bracero labor program (Under Public Law 78) was terminated by an Act of Congress on December 31, 1964 after this analysis was completed. 6 over. However, the remaining amount of cash; be so low that retums to the operator’s labor, i agement and capital are below market rates. lfi happens year after year, the operator will ma] find some way to earn a higher return for n»? sources, such as reorganizing the farm or ch n”. his occupations. Net farm income as defined is approximately equal to taxable income as dei’ by the Bureau of Internal Revenue. 7 Operator Income is net farm income min A terest on investment. This quantity represents .1 is left for the operator’s labor and management T paying for all the other resources at market If the operator has full equity in his land and w; ment, as assumed in this study, the interest on ment is not a cash cost. Rather, it is an opport cost reflecting what the capital would earn if vested elsewhere at prevailing interest rates. actual operator owns less than 100 percent of} resources and therefore pays interest, both his] cash income and his net farm income will be lo by the amount of the interest paid; but o I income will remain unchanged. Profit or operator management income is ~§_ here as operator income minus the opportunity} A for the operator’s labor. This value is a ret 1 the operator for his managerial role of runnin . business and bearing the responsibility for a vi; or loss. Analytical Procedures Specific farm sizes were recognized in this lysis. Short-run economies were examined - creasing the utilization of a given plant to its capacity. Long-run economies occur as farm increases with all resources variable. This inv a comparison of the efficiency of various sizes of i A specific farm size is represented by a given of the fixed resources, regular labor and ma u? Various degrees of utilization for a given farm were represented by different levels of gross Thus, the plant size and level of gross income 3 specified in a cost-minimizing linear progr “i. problem; then the least-cost combination of p and variable resources was computed for that s plant and level of gross income. The cost-r ratio (total cost7 divided by gross income) was calculated to determine one point on the sho f‘ cost curve for the specific plant size being consi_ Additional points on the short-run cost curve determined by setting the level of gross inc; other levels representing different degrees of tion of the plant and computing additional programming solutions. When a short-run a cost curve is plotted for this specific plant s' , ‘Total cost is calculated for each programming solution sum of the level of cost in the objective function p lump sum of costs pertaining to the plant size being u. 1 I ' e rurlo Short-run averoqe cost curves Envelope curve Q Outputidollars of gross income) Theoretical illustration of short-run average cost [and envelope curve or long-run average cost curve. Qof gross income is on the horizontal axis and i t-revenue ratio is on the vertical axis as in 2. 'fting to the next short-run curve, the levels i fixed resouces were set at new levels reflecting _ of resources that define the next farm size to i‘ yzed. Then successive linear programming s were computed for each of several levels income, each reflecting a different degree of utilization. This process was repeated until t-run average cost curve was determined for rm size. Then the envelope curve was plotted tangency of the short-run curves. EMPIRICAl RESIIlTS e primary findings reported here deal with l’ 'ciency and profit of different sizes of cotton producing various levels of output. Short- gaverage cost curves are presented to indicate flfaverage cost changes as a given size of farm its output. The envelope curve drawn A, t to the short-run curves indicates how aver- ‘ t varies between sizes of fanns over a VildC of output levels. Short-run Average Cost Curves Short-run average cost curves were computed for 27 combinations of labor and machinery. It was found that six of these short-run curves lay below all the others. These six relevant curves contain the following sets of labor and machinery: one man and one four-row tractor, one man and one six-row tractor, two men and two six-row tractors, three men and three six-row tractors, four men and four six- row tractors, and five men and four six-row tractors. In each case, the tractor is accompanied by a comple- ment of implements compatable with the size of the tractor. Figure 3 contains a graphic representation of each of the above short-run cost curves. A general description of the more important characteristics of each curve is presented in Table 2. The least-cost farm plans derived in this analysis include only three enterprises: cotton, soybeans and grain sorghum. These enterprises occur with dif- ferent levels of irrigation. Wheat and beef cattle enterprises do not enter any of the farm plans under the assumed 1968 projected prices. The optimal farm plans primarily used the higher levels of irrigation. Virtually all the cotton is produced using three post-planting irrigations. Like- wise, nearly all the soybeans that occur in the farm plans use the highest level of irrigation, which in this case is four post-planting irrigations. All grain sor- ghums use either three or two post-planting irriga- tions. Details of 64 optimal farm plans at various levels of output are given elsewherefi ONE-MAN FARMS One-man farms are more efficient than larger farms up to an output of $75,000 annual gross sales, Figure 3. Four-row machinery provides the least- cost operation of farms up to the $33,000 output level (about 240 acres). Beyond this level of out- put, the six-row equipment is most efficient, Table 2. ‘Davis and Madden. Ibid. Table 23. TABLE 2. RANGE IN OUTPUT AND ACREAGE WITH LOWEST AVERAGE COST FOR EACH SIZE OF FARM l, Size of farm Range in output‘ and acreage M. . . < with lowest’ average cost mlmum pomls b“ of Complements of for given form size on ATC curves equipment a laborers row é-row Output‘ Farmland acres‘ Average cost, Output‘ dollars Farmland acres ratio“ Thousands . of dollars 1 1 0- 33 0- 240 .732 43,600 320 . 1 1 33- 75 240- 680 .707 59,500 440 l 2 2 75-119 560- 920 .730 118,800 920 »i_ 3 t 3 119-166 880-1 ,280 .709 152,700 1,120 i; 4 4 166-200 1,200-l,52O .711 197,400 1,480 53' 5 4 200-239 l,480-1,80O .712 234,600 1,720 is measured as gross income. cost-revenue ratio for given levels of output, with land variable. ‘_ e cost is the cost-revenue ratio, total cost divided by gross income. imounts of farmland are overlapping, as explained in the text. i} Cost per dollar of gross income .89.- 87»- .85- 83- Bl - 79- 77- 75- One-mon form 4-rov1 equipment Two-man farm 64°“ equipmu" Four-man form 6-rov1 equipment I on farm gumw" 5mm t Thno- Five-man farm "m" ‘qmpmw G-rov lquipmont 6-1ou equivment QIT 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 20 4O 6O 8O I00 I20 I40 I60 I80 ZOO 220 240 Gross income (thousands of dollars) Figure 3. Short-run average cost curves obtained from irrigated cotton farms, Texas High Plains. The short-run average cost curve representing the output levels attainable by a one-man farm using one set of four-row equipment has the shortest relevant output range and the steepest slope of the six curves presented in Figure 3. Average cost falls rapidly as output increases. This decline occurs primarily be- cause the costs of “lumpy” factors such as machinery, buildings and labor are spread over a greater volume of output. The lowest point on this curve occurs at an output of $43,600, Table 3. The organization of the farm at this point includes 320 acres of farmland, of which 102 acres is devoted to cotton, 50 acres to grain sorghum and 127 acres to soybeans. Invest- ment required for this farm plan is $216,300. This least-cost farm plan calls for the four-row tractor used at the unusually high rate of 1100 hours annually, despite an increased cost charged for the added wear and tear on the machinery. Also, the operator's labor supply for the critical months of July and August is used entirely at this level of production. Average cost at this point is $0.732 per dollar of gross income. The profit or return to operator management for such a farm plan would be $11,672 under the assumed prices. This is in addition to interest on the operator's equity in the investment and the $2,569 charged for the operator's labor. TABLE 3. LEAST-COST FARM PLANS FOR SELECTED SIZES OF IRRIGATED COTTON FARMS IN THE TEXAS HIGH PLAINS As higher levels of output are produced y this farm size (one-man with four-row machin’ profits continue to increase up to an outpu nearly $50,000 using 400 acres of farmland. p higher profit occurs even though average cost _ from $0.732 to $0.761 per dollar of gross sales. Moving to a farm size with one man and s equipment, an entirely differenticost structure em J As in the case of the four-row machinery, av cost drops sharply as output increases. Ho the minimum average cost achieved using "l machinery is much lower, reaching $0.707 cos dollar of gross income at an output of $59,500 l, 440 acres of farmland. As shown in Table 2,557: $0.707 average cost is slightly below that ac ' by any other size of farm considered in this a I Thus, all the economies of size available to irri cotton farms in the Texas High Plains can be eved by a one-man farm with six-row mac _‘ The farm plan at this point includes 440 a A farmland, with 140 acres of cotton, 121 acres of sorghum and 109 acres of soybeans. Investm nearly $300,000. Net profit (management i 1Q at this point is $17,400. As the output of this; man farm is increased from $59,500 to $66,000‘, income, average cost rise; but profits contin ’_ rise up to $18,300 with 520 acres of farmland. An apparent peculiarity of Table 2 sho 1 clarified. The cost-minimizing programming used in this analysis determined the least-cf to produce specified levels of gross income _‘ given supply of regular labor and a given and size of machinery. Land and other fo t: capital were treated as variable resources. if culating the least-cost organization for a given? size (labor-machinery combination) to produce-Pg of output beyond where the regular labor v-f fully utilized, the fann organization shifts from‘ intensive toward labor extensive enterprises. causes the amount of land in the farm to if rapidly as higher levels of output are cons‘; Moving to the next larger farm size, an ad _v regular laborer and set of machinery are add, ITEM Least-cost farm plans for farm size: Regular labor supply: One-man One-man Two-man Three-man Four-man Size of machinery: four-row six-row six-row six-row six-row Farmland acres 320 440 920 1120 1480 |nve51men1 dollars 216,300 294,300 610,400 748,1 O0 987,300 1 Cotton acres 102 140 293 356 471 ~ Grain ggrghum acres 50 121 261 306 408 Soybeans acres 127 109 217 279 365 Gross income dollars 43,600 59,500 118,800 152,700 197,400 Total costl dollars 32,000 42,100 86,700 108,200 140,300 Operator-management incomez dollars 1 1,600 17,400 32,100 44,500 57,100 Total cost-gross income ratio ratio .732 .707 .730 .709 .71 1 ‘Total cost includes $2569 opportunity cost for the operator's labor, plus depreciation, interest on investment, and cash costs. 1 zOperator management income is a return to the business over and above the market value of all inputs, including the opportuni .-;»_ the operator's labor. 8 Llonger necessary to employ the labor exten- " rises. In some cases, the amount of land for least-cost production of a given level of .- tually decreases when more labor becomes This causes the number of acres used by _ size to overlap the amount used by a larger Table 2. For example, a one-man farm set of six-row machinery requires 640 acres ' ce $72,800 of output, but a two-man farm j- sets of six-row machinery can produce this output on about 520 acres. grow equipment gives‘ rise to a lower average ~l four-row machinery primarily because of crences in operating cost and performance {i-The six-row machinery will cover an acre he time it takes four-row machinery to cover '» acre. But the hourly fuel, oil, lubrication costs for the four-row machinery are 90 of those incurred by the six-row machinery. f reason, four-row machinery has relatively operating costs for tillage operations. Thus, equipment becomes more efficient than four- ‘uipment as soon as ‘output becomes large to overcome the higher fixed cost of the six- ipment. addition to these considerations of operating “d performance rates, the six-row machinery has ed feature of requiring less of the farm oper- p' e per acre for each tillage operation. This in labor-use efficiency enables the operator fiwloy more of the labor intensive enterprises, such . on, which result in a lower total cost per dollar income. is not surprising, therefore, that the one-man ing four-row machinery would have a lower - total cost for the smaller levels of output, the six-row machinery would have lower aver- Jtal cost in the larger ranges of output. This _ isely what our analysis has shown. I M SIZES EMPIOYING HIRED REGlllAR IABOR Ycre are costs, both fixed and variable, associ- 'th using hired labor. These include the costs ‘ted with items such as an extra tractor and lnery, a used pickup, housing for hired labor, borer’s salary, a larger shop and barn and in- 11 expenses for insurance, electricity and tele- ' Some of these items also give rise to increased “ble costs, such as the operating cost of the pickup the machinery? ‘The least-cost organization of all the farms using A ar hired labor included only six-row, rather four-row machinery. Details of the farm plan e minimum point on the cost curves for two, , four and five-man farms are shown in Table 3. y, ge cost for the two-man farm sinks only to about and Madden. Ibid. Tables 7 to ll. 73 cents per dollar of gross sales. Larger farms em- ploying more regular laborers are able to achieve an average cost of about 71 cents, slightly above the cost attainable by the one-man farm with six-row machinery. Farmland involved in these least-cost farm plans ranges from 920 acres in the two-man farm to 1,720 in the five-man farm. Cotton acreage on these farms range from 294 to 547 acres. Grain sorghum and soybeans also enter these least-cost farm plans. Net returns attainable by these least- cost farm organizations range from $32,100 on the two-man farm to $67,500 on the five-man farm. In each size of farm, as output is extended beyond the least-cost point, total net returns increase even though average total cost rises. ‘ The enterprise combinations and levels of irri- gation fluctuate as output is increased while using a fixed supply of regular labor and machinery. These fluctuations occur primarily as additional resources become restrictive. The regular labor supply in July and August is one of the first restrictions encountered in all the farm sizes analyzed. The enterprises intro- duced at higher levels of output require less of the restrictive resource (for example, a cropping system that omits the July and August irrigations). In other cases, a variable resource such as land is substituted for the limiting fixed resource. A case in point occurs in the four-man farm. The July-August labor supply is fully employed when output reaches $185, 800. As output is increased to $197,400, the farm organization is altered to include more land and consequently more cotton allotment. Then some July-August labor is shifted from the third post- planting irrigation of grain sorghum to allow an increase in the acreage of cotton, using three post- planting irrigations. As output increases, a greater percentage of the grain sorghum gets only two post- planting irrigations. Envelope Curve When the envelope curve is drawn smoothly tangent to the short-run average cost curves, as in Figure 4, it is decidedly L-shaped. The left-hand portion falls rapidly over a relatively short range Costs par dollor of qros: incomo . 89 - .87 - .85 — . 83 - Short-run avoraqo cost curves . 81 — .79 — .77 — .75 — .73 - .7| — .6 9 I“ Envelope curve o I I I l I | I I I I I l I I I l I I I I l l_| 2O 4O 6O 8O I00 I20 I40 I50 I80 200 220 240 Gross income (thousands of dollars) Figure 4. Long-run average cost curve for irrigated cotton farms, Texas High Plains, 1962. 9 of output. The right-hand portion is nearly hori- zonal, rising very slowly over a wide range of output. Large farms employing two, three, four or even five-man-years of regular labor do not achieve lower average costs than this one-man farm. Thus, all of the technical economies of size available to irrigated cotton farms in the Texas High Plains are within the reach of the one-man operation, Table 4. Profit Profit is defined here as the return to the farm operator for the management function of making decisions, coordinating, supervising and bearing the responsibility for a profit or loss from the farm's operation. In calculating total cost, each resource is priced at market rates on an annual cost basis, in- cluding an opportunity cost for the operator's time available for labor. Highest profits attainable with a given farm size generally do not occur at the least-cost level of pro- duction. Table 5 illustrates this fact for two farm sizes. On the one-man farm, as output is increased beyond the least-cost level of $59,500 gross income, average cost rises from $0.707 to $0.723 per dollar of gross income. Even so, profit rises by nearly $1,000. A similar rise in profit is seen in the four- man farm, where profit increases by more than $100, even though average cost increases from $0.711 to $0.715. TABLE 4. OPTIMAL ORGANIZATION OF FARMS AT SELECTED POINTS OF THE ENVELOPE CURVE . ~1- .1 TABLE 5. COMPARISON OF OPTIMAL FARM PLANS WITH .1 AVERAGE COST AND HIGHEST TOTAL PROFIT FOR TWO 5| FARM 4 Four-man six-row mac ~_ One-man farm, six-row machinery ITEM Lowest H. Lowest rghest average refit average cost p cost Farmland acre 440 '; 1520 1,480 Cotton acre 140 165 471 Grain sorghum acre 121 148 408 Soybeans acre 109 123 365 . Gross income dollars 59,481 65,922 197,412 _ Average total v cost’ ratio .707 .723 .711 . Profit“ dollars 17,396 18,263 57,109 lSize of farm as defined in this study is indicated by the A of regular laborers and the size of machinery used. 2Tota| cost per dollar of gross income. “Return to operator management. I Total profit is presented graphically in 5. The short-run average cost curves are in if to facilitate comparison of average costs and; profits per farm. Total profit is indicated i‘ right vertical axis, while cost per dollar of ,1 is presented on the left vertical axis. The total? curve has an almost constant slope as it its low point of $1,850 profit at $16,700 of to more than $67,000 at an output level of $ When the two curves are considered simq ; ously, several facts become evident. The en ' curve is relatively flat over a wide range from , k, hem Unit Optimal farm organization Resources a. Regular labor (including operator) man-years I I 2 3 4 b Tractor and equipment, 4 row No. 1 c. Tractor and equipment, 6 row No. I 2 3 4 d. Farmland (90.9 percent cropland) acres 320 440 920 1120 1480 e Irrigation wells NO- 3 4 3 10 13 f Seasonal hired labor man-years 0.2 0.4 0.7 0.9 1.2 g. Investment (average value) dollars 216,285 294,347 610,114 748,087 987,256 Enterprise levels i. Cotton acres 102 140 293 356 471 k. Grain sorghum acres 50 121 261 306 408 l. Soybeans acres 127 I09 217 279 365 Costs p. Operator labor cost dollars 2,569 2,569 2,183 1,541 642 q. Interest on investment dollars 10,814 14,717 30,521 37,404 49,363 r. Interest on operating capital dollars 249 336 636 876 1,089 s. Depreciation dollars 3,481 4,449 8,862 1 1,370 14,771 Cash costs: Seasonal hired labor dollars 519 714 1,493 1,817 2,401 Hired regular labor dollars 0 0 2,569 5,138 7,707 Other cash costs dollars 14,322 19,300 40,418 50,091 64,330 t. Total cash costs dollars 14,841 20,014 44,480 57,046 74,438 u. Total cost dollars 31,954 42,085 86,682 108,237 140,303 Income v. Gross income dollars 43,626 59,481 118,781 152,684 197,412 w. Net cash income = v —- t dollars 28,785 39,467 74,301 95,638 122,974 x. Net farm income = w — s dollars 25,304 35,018 65,439 84,268 108,203 y. Operator labor and mgt. income = x —- q — r dollars 14,241 19,965 34,282 45,988 57,751 z. Operator mgt. income = y —- p dollars 11,672 17,396 32,099 44,447 57,109 Rafios Total cost/gross income ratio 0.732 0.707 0.730 0.709 0.711 Operator mgt. income per acre of land $lacre 36.48 39.54 34.89 39.68 38.59 l0 Net profit (thousands of dollars) ~70 6O Total net profit " 5O -40 ~30 -2O 1 IO Z-man Short-run average cast curves S-man 3-man 4-mon lllllllllllllllll I I I o 3 4o so so |oo 12o. mo |so I80 20o 22o 24o H: Grossincome (thousands of dollars) tlintrepreneurial income per farm compared with the A verage cost curve for irrigated cotton farms, Texas 1952, II of output, indicating approximately con- w ge cost within this range. Meanwhile, profit curve has a rather constant upward i: t; this range of output. The one-man farm -frow machinery achieves the lowest average i, but the larger sizes earn higher profits. f- incentive to expand farm production be- gross sales is higher profits, not greater lmes Ear Eumllg Farms 1 family farm is commonly defined as farm in which the operating family provides most P- ork and is to some degree an uncertainty the outcome of the farm business. In this was assumed that all labor provided for other than that furnished by the operator ' was hired labor. However, the average sized farm family provides 1.5 man-years of the farm business. Thus, an average sized w“ ‘ly can provide most of the labor for a t uses as much as 3 man-years of labor, in- l seasonal hired labor. . nal labor is hired by cotton farms in the ‘lains primarily for only one task, hoeing '_ Thus, the amount of seasonal labor re- per farm is directly related to the number l of cotton grown. .- one-man fann needs only 0.4 of a man-year W al hired labor to produce $59,500 of output i acres of farmland, including 140 acres of j This farm achieves a lower average cost than ;~ size of cotton farm in the Texas High Profit at this point totals more than $17,000. ,7 ~ man operation can handle 1,040 acres of d, including 331 acres of cotton, while em- -; less than 1 man-year of seasonal labor. Thus, i» ' two-man farm can qualify as a family farm. Investment required for this farm is nearly $700,000 and total net returns to operator management is more than $30,000. Clearly, the modern family farm is capable of achieving a highly efficient and profit- able cotton operation in the Texas High Plains. SUGGESTIONS EOR FURTHER RESEARCH It is widely recognized that agriculture is under- going rapid, continuous change. A clearer under- standing of the growth and restructuring of farms is urgently needed by policy makers, legislators, farm leaders, businesses serving farms and farm operators themselves. The study reported here has provided some useful information on the potential efficiency and profit of different sizes of farm, assuming ad- vanced technology and ignoring the problems of re- source acquisition. However, many important ques- tions remain unanswered. l. What are the possible routes of resource accumulation through which a farmer may reason- ably expect to shift from smaller to larger, from a less profitable to a more profitable size of farm bus- iness? For each of these alternative routes, several items need to be considered: (a) the extent to which financing is done by credit versus accumulated sav- ings, (b) other resources needed, including such crucial factors as land, irrigation water and hired labor, (c) the expected pattern of year to year growth in size of business and net income and (d) the chances of success or failure. 2. How do the growth patterns of actual farm businesses compare with these feasible routes? What considerations deter farmers from pursuing each of these routes? How is the farm's growth pattern affected by such factors as the operator's equity, net returns, initial farm size, education and farming experience? 3. Finally, in attempting to better understand the changing structure of agriculture, these factors affecting the growth of individual firms must be placed in the broader context of the changes going on simultaneously in all farms in the local area and region, and in the nation as a whole. The overall quantities of land and farm labor available in a given area are limited, as are the markets for farm products. Changes in the number, size distribution and structural organization of farms occur as farmers compete for these limited resources, and as regions compete for a larger share of national and inter- national markets. Synthetic analysis of the potential efficiency and profit of various sized farms is a valuable first step in this broader spectrum of inquiry, but it falls far short of providing all the answers. l1 Texan 56M University Toms Agricultural Expoximont Station Collogo Station. Toma 77841 fiflzw» Diroctor Publication-Annual Ropozt or Bullotin o: Report o! Pzoqrou Ponnil I105 OFFICIAL BUSINESS w‘ v‘ Ionclt-y {or - ~- pcymont o! v