B-1 125 October 1972 TEE-E m "Eilmsamznts A3 F»: NEW rtalcrrzc; w, t “W1 0m um vex; f4‘ ‘Am Unfiirvdable Duilticateq N M s u L 1 a R A R y LAS CRUCES ,» m I t; e ECONOMIES OF SIZE ON FARMS in the Blackland Area of Texas Texas AcStM University The Texas Agricultural Experiment Station I. E. Miller. Director. College Station, Texas Contents Summary Introduction.--.. Objectives Area of Study Concepts and Procedures .................... .. Analytical Techniques ---------------------- -- Plant sim “ Sources of Data Assumptions and Definitions ...... .. Level of Technology and M Enterprise Alternatives. .......... .. Land Resources ........................ .. Tenure of Operator ................ .. Labor Income and Costs .................... .. Empirical Results p; Short-Run Cost Curves ...................... . Four-Row Equipment....-.......... Six-Row Equipment ................ .. Least-Cost Farm Organizations Income and Investment Requ' Labor Requirements ............... .. Long-Run Average Cost ............... .. Comparison of Least-Cost O ;- ' With Maximum Net Income.... Implications for Farm Expansion"... if Limitations of the Analysis.................. Need for Additional Research ........ a if fThe potential efficiencies of one- and two-man s with four-row equipment and one-, two- and -man farms with six-row equipment for level 1. of the Central Texas Blackland are compared. 'ency is measured in terms of total cost per dollar pss farm sales. Short-run cost curves are developed ach of the five plant sizes, and an envelope o-r -run planning curve is fitted to the short-run s. Results of the analysis indicate that average per- costs of production decrease rapidly on all plant as output nears full employment of the regular fr force and full utilization of the field equipment. ‘the smallest of the five plant sizes considered—the l- unit with four-row equipment-the lowest income ratio that can be achieved is $0.908. This Iched when 479 acres are operated. Total capital tment required for the 479-acre farm is approxi- $187,500, with returns to management of about g0. Nearly 200 acres are required to recover all ‘ Of the five plant sizes analyzed, the lowest cost- » ratio that can be reached is $0.824 on the two- ? farm with six-row equipment. This two-man six- Jinit consists of 1,376 acres with $110,000 gross me and $19,325 returns to management and re- l a total initial capital investment of approxi- ly $530,000. a For the three-man unit with six-row equipment, lowest cost-income ratio that can be achieved is 64. Per-unit production costs are higher for the _ -man farm primarily because of incomplete utili- _n of some of the harvesting equipment and be- .- of higher costs associated with dispersion and a gement of the larger size unit. While farm plants Summary larger than the three-man, six-row unit are not in- cluded in the analysis, it appears that average per-unit costs would rise slowly for levels of output greater than those included in the study. Net income would con- tinue to increase with increasing size but at a decreas- ing proportionate rate because of decreasing efficiency. The least-cost farm organization is essentially the same for each of the five plant sizes. It consists of cotton and grain sorghum on row crop land and a spring calving cow-calf enterprise for grazing improved pasture. If the regular labor force is not fully utilized and additional land is not available, returns to man- agement can be increased by adding hogs. If land is available, however, expansion of land would be the preferable way to expand. Results of the analysis indicate that with units of less than 500 acres, four-row equipment likely would be most advantageous. With acreages of approxi- mately 500 and above, however, six-row equipment would be most advantageous. Not only are the poten- tial efficiencies greater, but significantly larger acre- ages can be handled with a given labor force. With the uncertainty and increasing cost of labor, this is a significant factor. A comparison of the results of this analysis with the size structure of farms in the Blackland area as given in the 1964 census indicates that a substantial proportion of farms in the area is below the size re- quired to attain maximum efficiency. More than 96 percent of the farms in the area were below 1,000 acres in size in 1964, while over 87 percent were below 500 acres. Operators of small farms with high cost-income ratios are likely to find increasing pressure to adjust to larger and more efficient units in the future. out!- 09G nu- “q \lll K Ill-LI Figure ‘l. Bluckland study area following county lines. ECONOMIES OF SIZE ON FARMS in the Blackland Area of Texas Carl G. Anderson and D. S. Moore* ; Y FARMS IN THE BLACKLAND AREA of Texas are ; undersized from the standpoint 0-f utilizing effi- tly the resources of a full-time operator and of inery and equipment. Per-unit costs of fixed or py" resources such as regular labor and durable uction items are minimized when these resources most completely utilized. Substitution of capital labor and the adoption of larger machinery com- ents suggest that the relationship of farm size to I 'ency of production is of increasing importance. ers with units too small to realize the economies ‘f e may be at an increasing disadvantage in today’s _\ etitive agriculture. More information is needed ‘the significance of size of unit to efficiency and g 'tability. t‘ OBIECTIVES 1 The general objective of this study is to examine efficiency and profitabilty of various sizes of farms evel soils of the Blackland area of Texas. Specific - tives are (1) to determine the relationship be- i‘ the degree of utilization of specified plant sizes per-unit average production costs; (2) to compare efficiency and profitability of specified plant sizes; o determine the resource requirements and enter- ‘organization associated with the least-cost utili- n of resources; and (4) to determine the implica- of size-efficiency relationships to the future struc- E of commercial farms in the Blackland area. Plant i is defined by size of the regular labor force and capacity and size of power and field machinery. ‘_-_ lar labor includes both the operator's labor and -time hired labor. 1 - ctively, former research assistant, and associate professor, Texas Agricultural Experiment Station (Department of 'cultural Economics and Rural Sociology). AREA OF STUDY The general geographic area for this study is the Blackland Prairie of Texas, which is a large, wedge- shaped area extending through Central Texas from near the Red River on the north to the vicinity of San Antonio on the south. The area is approxi- mately 300 miles long and up to 75 miles wide. The study area consists of all or parts of l9 counties as shown in Figure 1. The Blackland area is one of the major agricul- tural areas of Texas. Major upland soils are dark calcareous clays, moderately well supplied with or- ganic matter. Topography is quite varied. Although much of the area is rolling and characterized by many streams and ravines, there also are substantial acre- ages of relatively level land which can feasibly utilize large field machinery such as six-row crop equipment. This study is primarily applicable to the relatively level blackland soils of Houston, Houston Black, Bell and Austin clays. However, farms in the more level areas of the Blacklands generally have some rolling land utilized as pasture. Data compiled by the So-il Conservation Service indicate that land capability classes I and I11 comprise approximately two-thirds of the soils in the more level areas, while the remain- ing one-third consists mostly of land capability classes III and IV. The more level soils (capability classes I and II) generally are utilized in the production of row crops, while the utilization of the more rolling soils (capability classes III and IV) has been trending toward forage for livestock. ‘Land capability classes I and II are level to moderately sloping soils (slope of 3 percent or less) with negligible to moderate erosion. Land capability classes III and IV have slopes of 3 to 5 percent with moderately severe to severe erosion. 5 On the more productive soils, cotton and grain sorghum are the major cash crops. Beef cattle (cow- calf or stocker operations) and hogs are the primary livestock enterprises of the area and are usually pro- duced in conjunction with crops. Commercial poultry, beef feeding and dairy enterprises tend to be special- ized operations. Dallas, Fort Worth, Waco, Austin and San Antonio, the major cities located near or in the area, provide favorable markets for farm products. Farms in the Blackland area numbered more than 66,000 in 1945 and averaged 135 acres in size. By 1964 the number had declined by more than one-half to approximately 30,000, while the average size had almost doubled to 269 acres. The trend toward fewer and larger farms was general throughout the area (Table 1). The number of farms of 500 acres or more increased from about 3 percent of the total in 1945 to nearly 13 percent in 1964. Although composing only about 13 percent of the total number of farms in 1964, farms of 500 acres or more accounted for about 40 percent of the total farm acreage in the Blackland area. CONCEPTS AND PROCEDURES Economies associated with farm size may arise from two sources. One source is frequently referred to as market or pecuniary economies. It is the result of reduced acquisition costs of inputs or increased selling prices as the size of farm is increased. This source of economies was not included in the analysis because preliminary investigation indicated it was of minor importance in the Blacklands area. The second source of economies associated with size results from more complete utilization of the productive capacity of the resources and from the ability of larger farms to utilize larger, more efficient machines. This is the type of economies analyzed in this report. In the process of expansion, it is usually impos- sible to increase all resources in equal proportion. When major durable items of production such as tractors and associated field machinery and regular labor are committed to production, they become fixed in the short run. The degree of utilization of these durable items depends on the acreage operated and other resources used in production. The average TABLE 1. CHANGE IN THE NUMBERiAND SIZE OF FARMS, BLACKLAND AREA OF TEXAS, 1945-64 Number oi ictrms Percentage of fctrms Size of group, expanded to OB where the marginal r acres 1945 1964 1945 1964 Fewer than 10 6,244 917 9.4 3.0 10-69 20,505 6,991 30.9 22.9 70-139 20,570 7,217 31.0 23.6 140-219 10,249 4,970 15.5 16.3 220-259 2,273 1,623 3.4 5.3 260-499 4,401 4,934 6.6 16.1 500-999 1,489 2,765 2.2 9.0 1000 and more 645 1,148 1.0 3.8 All sizes 66,376 30,565 100.0 100.0 6 MC g SRAC 8 - E "6 AR . ~: D 96 Q. ‘r5 o u .1“ Minimum Average Cost Size Maximum T o ,. A B Output of Dollars of Gross Income Figure 2. Illustration of minimum average ca! total returns. ' total cost of production per unit of 0117 according to the degree of utilization of; plant. As fixed resources become more A utilized, the average cost of production _ reduced. If production is increased to r maximum net income, however, the av unit of production eventually increases on A short-run average cost curve (S A traces the average total cost per unit of as output is varied, is shown in Figure 2. tive is to minimize average cost of produ K should be OA. If profit maximization f ~ plant is the goal of the operator, output‘ equals the marginal cost (MC). Produ - be expanded profitably beyond OB witho’ tional fixed plant. When a farm businf by adding another fixed plant, it on a new short-run average cost curve. typically has the same “U” shape as the L7 curve shown in Figure 2. Increases in f‘ create a series or family of short-run a curves as illustrated in Figure 3. An formed as a tangency to these short-run f“ run average cost curve or LRAC) is d n cost planning curve. Theoretically, as the A tion expands from a relatively small size; result at first so that short-run cost curves‘, cessively lower levels until diseconomies v ~ if level of output. Analytical Techniques M Linear programing models were used short-run cost curves and least-cost farm r primary goals in the models were the 1 dollar of gross income, given specific sets and a gross income objective. ‘A The procedure involved establishing F plant sizes consisting of a specified n n time workers equipped with basic field All other resources were made available wi and minimum cost situations were g1 successively higher levels of gross income. _ atdm-aundnnmu‘ ....-.. _ a ._ » ..... .._.-..t._-tu..aommu-ia~,waem44n “ SRAC 1 SRAC 2 SRAC 3 sRAc ‘ 'AA4I"»‘AI, wudnfi a» - 1...“. a / ? f ’ w-nc-u-n-l" Long-run average cost Fig ure 3. Hypothetical short-run and long-run av- erage cost curves. Output 1 t of maximum net returns was reached. The lts produced an average cost curve for each size r, business considered. An envelope curve fitted ‘ e series of five short-run cost curves for succes- i. y larger plant sizes formed an approximization of ng-run cost curve.” Plant Sizes -, The five plant sizes considered in the analysis shown in Table 2. The machine sizes consisted our- and six-row tractors and associated comple- ts of field equipment. Maximum size of opera- considered was three six-row units, since prelimi- analysis indicated that no additional economies d be achieved by larger size operations.