B-1475
August 1984

L l B R A R Y
OCT 2 3 1984
Texas 531M University

   

Cost and Pecuniary
 Economies in Cotto
 Production

and Marketing:

A Study of Texas
Southern High Plains

 Cotton Producers

The Texas Agricultural Experiment Station, Neville P. Clarke, Director
The Texas A&M University System , College Station, Texas

CONTENTS

1 INTRODUCTION

1 Objectives

1 Cost of Production or Economies of Size
Studies

2 ECONOMIES OF SIZE
3 Methodology

4 Study Area

4 Procedure

5 INPUT ECONOMIES
5 General Input Pricing Policies
6 Variable Input Costs
6 Fuels

6 Seed

7 Fertilizer
7 Chemicals
7 Labor

8 Capital

9 Machinery

9 Ginning

0 Equipment Repair

O Total Production Cost

11 VERTICAL INTEGRATION
12 Cooperatives

13 Non-Cooperative Private Integration
14 Total Cost Adjustment for Integration
14 Implications for Farm Structure

15 MARKET ECONOMIES
16 Survey Results

16 Volume Marketed

16 Method of Marketing

16 Time of Marketing

16 Contracting-Futures

16 Implications of Marketing Economies

for Farm Structure
17 TOTAL BENEFITS BY FARM SIZE
17 CONCLUSIONS

19 REFERENCES

SUMMARY

In recent years, the ”family farm” and its
chances for survival has emerged as one of the major
agricultural policy issues. The decline in farm num-
bers and increase in farm size have led to renewed
interest in the efficiency of different-size farms. This
study isolates the degree of pecuniary economies
existing for input purchases and marketings on cot-
ton farms by size in the Texas Southern High Plains.
The results indicate that substantial cost and market-
ing economies are being realized by the largest farms
in the region.

KEYWORDS: Pecuniary economies/vertical integration/economies of size/large-scale farms/cotton farms.

Cost and Pecuniary Economies

in Cotton Production and Marketing:

A Study of Texas Southern
High Plains Cotton Producers

E. G. Smith, I. W. Richardson, and R. D. Knutson*

INTRODUCTION

In recent years, the ”family farm” and its chances
for survival has emerged as one of the major agricul-
tural policy issues. The decline in farm numbers and
increases in farm size have led to renewed interest in
the efficiency of different-size farms. Efficiency is
important to resolving the debate on this farm policy
issue. If, in fact, family farms are just as efficient as

“heir larger competitors, policies that enhance the

movement toward larger farms could have negative
impacts on the performance of U. S. agriculture.

If, on the other hand, larger-size farms are more
efficient, then policy which would limit growth
would mean that agricultural products would be pro-
duced at higher costs than necessary. Therefore,
comprehensive economies of size studies need to be
updated for major agricultural crops in different geo-
graphical regions so appropriate policy actions can be
taken.

Objectives

The principal objective of this study was to de-
velop cost of production and pecuniary economy data
by farm size on cotton farms in the Texas Southern
High Plains. Emphasis was placed on determining
the magnitude of pecuniary economies related to:

0 Input economies;
0 Marketing economies;
0 Economies of vertical integration.

Pecuniary economies are defined as lower costs of
purchased inputs and higher returns to marketings as
farm size increases. Previous studies generally have
treated pecuniary economies either as being insignifi-
cant or nonexistent.

‘Respectively, Extension economist, grain marketing; associate

- _ rofessor; and professor. All are members of the Department of

Agricultural Economics, Texas A&M University, and the Agricul-
tural and Food Policy Center, Texas Agricultural Experiment
Station and Extension Service.

Cost of Production or
Economies of Size Studies

The most frequently cited economies of size
study is Madden’s review of selected literature in the
area (1967). His review discussed the findings from 14
farm-size crop studies. He concluded that crop farms
requiring one or two man-years of labor can capture
most of the available economies due to size.

Madden and Davis conducted an economies of
size study in 1965 on the Texas High Plains. Although
limited to irrigated cotton farms, the study concluded
that large farms were no more efficient than smaller
one-man farms of approximately 440 acres.

Miller, Rodewald, and McElroy (1981) completed
an economies of size study that covered seven basic
regions of the United States, one of which was the
High Plains of Texas. Their study concluded that
long-run average cost curves suggest cost economies
of 18.9 cents per dollar of gross income as High Plains
farms grow from 115 to 974 acres. However, they
viewed such economies as not being large.

Most of the previous studies on economies of
size, including those of Miller et al. and Madden and
Davis, used the synthetic firm approach, an approach
that Madden (1967) recommended as providing reli-
able results. Like most economies of size studies,
these failed to analyze either pecuniary economies or
the advantages gained from vertical integration}

Krenz, Heid, and Sitler (1974) found evidence of
pecuniary economies in both input and output mar-
kets when studying large wheat farms in the North
Central Great Plains. In comparing farms up to 12,000
acres with those in the 1,500-acre range, they found
that as many as 40% of the larger farms were verti-
cally integrated to some extent.

Krause and Kyle (1971) found that the return on
investment was greater for larger farms due to techni-

lVertical integration means the control by a firm of two or more

stages of production or marketing, i.e., cotton producer owning a
cotton gin.

cal economies as well as pecuniary economies in
purchasing and selling. They found evidence that
farms in the 5,000-acre range could receive as much
as a 20% advantage over farms 0f approximately 500
acres when purchasing inputs. In addition, market-
ing advantages could result in as much as $5 per acre
for the larger farms. Midwestern corn farms were
analyzed in their study.

In summary, most economies of size research, on
crop farming units where pecuniary and marketing
economies have been assumed zero, concur with
Miller et al. (1981) that medium-size commercial
farms (gross incomes from $41,000 to $76,000) achieve
most technical cost efficiencies and any further in-
crease in size results in little benefit to society. Unfor-
tunately, little of the research on technical economies
has studied large-scale farms that produce a majority
of the agricultural production in the United States.

ECONOMIES OF SIZE

The theories of cost production and economies of
size are important to this study because of the impli-
cation they have for farm survival and thus the struc-
ture of agriculture. If the relationship between farm
size and cost of production can be adequately de-
veloped, the impacts of government policy on struc-
ture can be more accurately analyzed. Economies of
size occur when the cost of producing a unit of output
declines as farm size (measured in acres of land in
this study) increases. Conversely, if the cost of pro-
ducing a unit of output increases as farms become
larger then diseconomies of size have occurred, and if
they remain the same the farm is experiencing con-
stant returns to size. These relationships are depicted
in Figure 1 by use of the familiar short- and long-run
average cost curves. From the point on the long-run
average cost curve (LAC) labeled ql to quantity q2,
the farm is experiencing economies of size. In-
finitesimally about quantity q2 the firm has constant
returns to size, and as output increases to the right of
q2 diseconomies of size occur.

Although many factors contribute to economies
of size, Ferguson and Gould (1975) conclude that two

Cost
Per Unit
Of Output

LAC

     

SAC2 SAW

  

q2

I
I
I
I
I

Quantity of Output

Figure 1. Short- and long-run average cost of production.

broad forces are responsible. First, specialization and
division of labor can occur as farm size increases. This g

specialization can contribute considerably to lowering I

cost per unit of output. Second, some inputs, such a
heavy equipment, can be used in a more effective
manner on larger operations. In addition to speciali-
zation of labor and technological forces, there are
financial contributions to economies ._of size referred
to as pecuniary economies. These pecuniary econo-
mies occur when, due to volume or sheer market
power, a firm is able to obtain a lower price on
purchased inputs. Diseconomies usually occur due to
management and coordination problems. The point
at which such diseconomies begin is debated exten-
sively in agriculture (Knutson 1979).

It is important to distinguish between the short-
and long-run average cost curves. Ferguson and
Gould (1975) conclude that perhaps the best distinc-
tion is that firms plan in the long run and operate in
the short run. The long run is defined as the length of
time necessary for all inputs to be regarded as vari-
able. Therefore the LAC curve can be referred to as a
planning curve. Since the LAC curve reflects the
minimum cost of producing any level of output when
all inputs are variable it will always be below the
short-run average cost (SAC) curve except at the
point of tangency when the costs are identical. There-
fore, in theory, all farms would gravitate toward

quantity q2 in Figure 1 for it is at this point wherU

economies of size can be achieved and the SAC an
LAC curves are tangent.

Realistically, not all farms in agriculture will op-
erate at the optimum size. This is due to various
levels of producer knowledge, variation in manage-
ment skill, fixed resources, and lags in the adjust-
ment process. Therefore, when analyzing actual farm
data one observes a broad range of costs-many of
which are above the LAC curve. In reality there may
be a substantial range of sizes where the LAC curve is
flat or nearly so as illustrated in Figure 2.

Pecuniary economiesz exist when some farms are
able to achieve discounts or premiums on their inputs
and output because of volume and/or market power.
Such economies may arise from three sources:

0 Input economies;
0 Marketing economies;
0 Economies of vertical integration.

Regardless of how pecuniary discounts are achieved,
their effect is to lower the technical long-run average
cost curves for the farms able to achieve such econo-
mies. As pecuniary economies are gained, the LAC
curve is shifted downward and returns to manage-
ment increase, thus giving the incentive for expan-
sion (illustrated by dashed LAC’ in Figure 2). This
effect is reinforced if producers are able to gain an
additional advantage due to economies in marketing

zPecuniary economies are defined as lower costs of purchase”

inputs and higher returns for marketed production as a function
of farm size.

_ _ _ _ AR’
Cost or j

Revenue AR
Per

Unit

Of Output

~~_LAc'

Quantity of Output

Figure 2. Traditional long-run average cost and revenue curves ad-
justed for pecuniary economies.

resulting in higher prices for their output (illustrated
by dashed addition to horizontal average revenue
line in Figure 2). Such increases in profit would allow
larger firms distinct advantages in building equity
and servicing debt, thus leading to even further
growth in farm size.

Methodology
Madden (pp. 24-34) reviews several analytical

‘techniques that have been used in trying to measure

economies of size in various agricultural industries
and concludes that no single method is best for all
economies of size studies. However, Madden con-
cludes that the synthetic firm approach provides the
most reliable results in studying economies of size in
farming. Madden states that the:

synthetic-firm analysis is appropriate when
either of two research questions is asked: (1)
What is the average cost per unit of output or
profit that firms of various sizes could potentially
achieve using modern or advanced technologies,
or (2) What are the differences in average cost per
unit of output attributable strictly to differences
in size of firm, and not to differences in degree of
plant utilization, use of obsolete technologies, or
substandard management practices.

The synthetic firm approach is useful in analyzing the
normative concept of what potential economies exist.

The synthetic firm approach was rejected for use
in the present study because of its normative nature.
If policy makers want to analyze the impacts of farm
programs on the structure of agriculture, they need to
know what conditions actually exist in the industry,
not just what could exist under ideal circumstances.
The composite“ firm approach, on the other hand,
uses actual firm data to develop averages of the
various input costs that exist for different-size opera-
tions. This approach is used in the study to determine
existing average cost of production per unit of out-
put, since it is not the intent of this research to
develop a long-run average cost curve. Instead, it is

to determine points along the actual short-run aver-
age cost curves as they exist for various-size farms in
the Texas Southern High Plains in 1980. These costs
thus represent the actual costs that farms are ex-
periencing.

Madden (p. 28) lists several disadvantages of the
composite firm approach including the following:

1. Inaccurate cost data are utilized.

2. Composite farms do not accurately reflect the
actual average cost of firms within the size

category.

3. Several characteristics of individual farms are
averaged; thus, the resulting composite is an
inaccurate replica of the group it represents.

4. Composite farms do not accurately reflect po-
tential economies of size.

To respond to point one, inaccurate cost data is a
problem to all analytical procedures and cannot be
held specifically against the composite firm approach.
The utmost caution was utilized in gathering data for
this study; thus, this disadvantage is no greater in the
composite approach than in the synthetic firm ap-
proach. In fact, since a synthetic firm by definition
never operates in reality, the costs and economies
presented in this study could be argued as more
accurate.

As for the composite firm not accurately reflect-
ing average cost within the size category, procedures
were employed in this study to develop data as
accurately as resources allowed. Although the size
groups are determined subjectively, they are small
enough at the lower end of the size scale to allow true
cost differentials to be observed.

Differences in firm characteristics are particularly
troublesome in diversified agriculture where multiple
crop and livestock enterprises exist. However, the
region under analysis is largely one of specialized
cotton production. This disadvantage, therefore, is
minimized? Further, since the intent of the research
is to study actual cost differences, this disadvantage
does not weigh as heavily as it would in measuring
potential economies.

The last point is not relevant, since this study is
trying to determine not the potential long-run aver-
age cost curve, but the results as determined by
actual agricultural forces. It is important to this study
that all factors of cost are reflected by farm size. For
example, it is not a problem if small farms are behind
technologically or operate at less than full capacity,
since this represents reality in the region.

In summary, the composite firm approach was
selected because, in the study region, it is believed to
give a more accurate representation of the actual
average cost of production by farm size. Madden’s
disadvantages were developed in a context where the

3A trend toward specialization in the production of one or two
crops exists across much of agriculture. This trend makes the firm
characteristics more uniform than those that existed at the time of
Madden’s research.

intent of research was to develop the potential econo-
mies of size. That is not the intent of the present
study.

Pecuniary economies are measured directly from
information provided by producers, agribusiness
firms, and financial institutions. In addition,
pecuniary economies achieved through vertical inte-
gration were developed indirectly based on input
purchase discounts reported by integrated firms and
major input supply wholesalers. Marketing econo-
mies were developed from producer and first handler
supplied data.

Study Area

Three South Plains counties were randomly
selected for study because of the homogeneity of crop
production in the area. Gaines, Lynn, and Lubbock
counties were selected at random from 11 counties
illustrated in Figure 3. These counties produced over
220,000 bales of cotton each as reported by the Texas
Department of Agriculture. Cotton constituted 85%
of total crop acreage in Lubbock and more than 90%
of the total crop acreage in Lynn and Gaines counties.
Therefore, cotton was the only crop included in the
analysis.

Irrigated acreage varied from 20.3% of total crop-
land in Lynn County to 42.7% in Gaines, and 63.8%
in Lubbock (Texas Crop and Livestock Reporting
Service [b]). Although there would be significant
differences in cultural practices between dryland and
irrigated crops, this should not affect the analysis of
pecuniary economies of size. It could, however, im-
pact the cost of production per pound of lint. This
would be a problem if lower unit cost were observed
on farm sizes having a greater proportion of their
cultivated land under irrigation. This, however, was
not the case for the producers surveyed.

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MAIIYLU BOOM HUYCMN- ROBUIYS unawmu.
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sJ-ERRY m“ u... m. w» noun com: 
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10-DAWSON 5 6 7 8 

GAINES DAWSON aonozn {Quflflv nsncn 1on6 $M¢KEL
roan

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ECYOR MIDLAND GLASQ- SYUILING COIE RUNNELS COLKMAN
w WINKLER coca

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QLDNAN POTYER CARSON GRAY WHKILER

Puma CASYRO [swisuua amscoz NALL cmro
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6001i“ nocnuu Luaaocx cwosav DICIENS mac. "$;'\~ anwfl

Figure 3. Study area, Texas Southern High Plains. Random sample
included Lubbock, Lynn, and Gaines counties.

4

Table 1 indicates the size and number of farms in
the three-county study area. Only 1% of the farms in

the area have over 2,500 acres of cropland whileJ

40.1% have less than 320 acres. On the average, farms
are larger in Gaines and Lynn Counties than those in
Lubbock. The smaller farm size in Lubbock County is
at least partially explained by a larger number of part-
time farmers who work in Lubbock. t

Table 2 indicates the percent of total cotton pro-
duction by farm size in the sample area. While farms
in the 0-320 acre class represent 40% of farm num-
bers, they produce only 14% of the total crop. At the
other extreme, the 1% with over 2,500 acres produces
6% of the total crop. Sixty percent of the production is
on farms with over 640 acres of land.

Procedure

A stratified random sample of 35 farms was
selected from each of the three counties to obtain data
on production practices, machinery complements,
financial position, participation in commodity pro-
grams, input purchases, and marketing. The sample
was stratified into seven categories based on farm
size (acres). Five farms from each size category were
selected, where available, for interview in each coun-
ty, resulting in 105 possible survey farms.

A questionnaire was administered to the farmers
in the survey by personal interview. Of the 105 sur-

vey schedules, 98 were usable. Selected input and J

market-related agribusiness firms were also surveyed
to supplement the producer data on the cost of inputs
purchased and potential sources of marketing econo-
mies. Financial institutions were interviewed to ob-
tain data on the credit and leverage positions of each
farm size, as well as the machinery complements held
as security in obtaining credit.

Data obtained from the surveys were analyzed
and used two ways in developing the per unit cost by
farm size:

0 Actual prices and quantities of input purchases
were used in conjunction with average machinery,
interest, and associated opportunity costs on inter-
mediate and long-term assets to determine the av-
erage cost per unit of output, including any
pecuniary economies associated with input costs.

0 For comparative purposes, average input prices
were assumed in developing production cost, as-
suming an absence of pecuniary economies.

The difference between these two cost rela-
tionships indicate the magnitude of pecuniary econo-
mies for input purchases. To minimize the impact of
input inventories, the respondents were asked to list
purchase price of inputs as of June 15, 1980. Yield
data revealed no apparent difference in crop yield per
size category; thus, constant yields were assumed
across all farm sizes. Marketing economies were ana-

lyzed from sales data as reported by farm operators “

with supplementary information obtained from ag-
ribusiness questionnaires.

TABLE 1. FARM NUMBERS IN SELECTED SIZE CATEGORIES FOR GAINES, LYNN, AND LUBBOCK COUNTIES, 1980

# Farms # Farms % # Farms % # Farms % # Farms % # Farms % # Farms % # Farms %
With 0-120 of 121-320 of 321-640 of 641-1380 of 1281-2500 of 2501-4400 of 4400+ of
Cropland Acres Total Acres Total Acres Total Acres Total Acres Total Acres Total Acres Total
Gaines 592 62 10.5 132 22.3 142 24.0 177 29.9 66 11.1 9 1.5 4 .6
Lynn 553 42 7.6 163 29.5 177 32.0 126 22.8 4O 7.2 5 .9 0 O
Lubbock 842 113 13.4 286 34.0 237 28.1 153 18.1 51 6.1 2 .2 0 0
Total for
Area 1,987 217 10.9 581 29.2 556 28.0 456 22.9 257 7.9 16 .8 4 .2
Cum %
# Farms 10.9 40.1 68.1 91.0 98.9 99.7 99.9

TABLE 2. PERCENTAGE PRODUCTION AND FARM NUMBER BY
SELECTED FARM SIZE FOR COTTON FARMS OF THE TEXAS
SOUTHERN HIGH PLAINS

Percent of Percent of

Size Interval Total Cotton Number of
(acres) Production Farms
0-320 14 40.0
321-640 24 28.0
641-1,280 35 23.0
1,281-2,500 21 8.0
2,501-4,400 4 0.8
4,400+ 2 0.2

4*

INPUT ECONOMIES

Pecuniary economies in input purchases exist
when per unit input costs decline as farm size in-
creases. Three main sources of such economies in-
clude:

0 Volume discounts resulting in a lower price for
larger volume purchases;

o Vertical integration into an input supply function;
o Timing of input purchases.

Babb (1979, p. 53) indicates volume discounts could
be as important as technical efficiency in reducing
production cost on larger firms, thus providing incen-
tives for growth. He further contends that volume
discounts could affect not only the number and size
distribution of farms, but also the degree of speciali-
zation in production. Other economists such as Stig-
ler (1968) and Williamson (1975) have identified the
absence of volume discounts in the open market as
one of the factors giving rise to integration.

Volume discounts may result either from cost
savings associated with large volume purchases or
from the market power of the buyer. Market power
exists when a farmer purchases (or sells) a sufficiently
large proportion of a business's volume that the farm-
er can bargain for discounts (or premiums) regardless
of those justified by cost considerations. Market or

Nargaining power can be gained by a farmer either by
i1 chieving a sufficient size to vertically integrate into

input distribution, or by making the seller dependent
on the farmer's business for survival.

Vertical integration occurs when a firm combines
more than one level of the marketing, production, or
processing channel under its management. For exam-
ple, backward integration would occur if a farmer
acquired an input supply business. Forward integra-
tion would occur if a processing or marketing firm
was acquired. By integration a farmer potentially
could buy inputs at a lower price than is available in
the open market and/or capture added cost savings
frequently associated with integrated systems of pro-
duction. Integration may also be accomplished either
through cooperatives or through forming a separate
corporate entity.

Prices for inputs vary throughout a production
year depending on the supply-demand and structural
relationships in the supplying firm market at both the
wholesale and retail market levels. Therefore, pro-
ducers who purchase inputs during periods of de-
pressed prices, or before prices rise, lower their costs
of production relative to other producers? Thus, time
of purchase can play a major role in achieving
pecuniary economies for producers who can pur-
chase sufficient quantities at a low enough price to
offset capital and storage costs. In most instances,
larger farms are better able to take advantage of such
gains.

General Input Pricing Policies

Strong preferences existed among farm supply
businesses in the study area to price their goods to all
commercial farmers at the same price. While 38% of
the suppliers of fuel, seed, herbicide, fertilizer, and
machinery indicated they had some form of discount
program, the volume of purchases necessary to elicit
such discounts were obtainable by all commercial
farmers?

The clear consensus from input suppliers indi-
cated that they would rather deal with 100 middle-
size farmers (400-1,000 acres) than with a few large-
scale producers. If their business depended only on a
few large-scale farmers, risk of volume loss would

4Savings in price, of course, must be sufficiently lower to cover the
capital and storage costs.

5A commercial farm as defined in this study is a farm where
income from agriculture is important to the survival of the farm
operation. Products from the farm operation are produced for
their income-earning potential.

increase greatly. Input suppliers generally felt that if
they made better deals to the larger-volume buyers, it
would cause discontent among the smaller-scale
farmers who are the mainstay of their business.
Underlying the attitude against quantity dis-
counts may have been the concern that any discount
given to large-volume buyers would spread to all
producers. In addition, cooperative principles tradi-
tionally suggest that all producers pay the same price.
The reluctance to give volume discounts could be the
impetus for integration by larger-scale producers.

Variable Input Costs
Fuels

The major fuels used in cotton production are
diesel, gasoline, and propane. Diesel fuel is used in

. greater volume due to tractor requirements. Approxi-

mately 25% of the fuel suppliers indicated they of-
fered volume discounts in the 5% range. However,
the volume required for the discount was sufficiently
small as to be obtained by all commercial-size farms.
The only substantial discounts for commercial farms
occurred when a farm was able to buy and store bulk
purchases of approximately 8,000 gallons. Only farms
in the largest size group (4,400+ acres) indicated
purchases of fuel in quantities sufficient to gain such
discounts. Table 3 summarizes fuel use and prices
paid by farm size.

Diesel was the predominant farm fuel on all farm
sizes except the smallest, where gasoline use was
slightly more important. The survey reported diesel
prices ranging from a low of 92 cents per gallon for
the 4,400+ acre category to a high of 99 cents for the
1,601—2,560 acre farm size. It is of interest to note that
the next to the lowest diesel price was reported by the
smallest farm category (0-320 acre) at 94 cents per
gallon. In an attempt to explain the farm price differ-
ences among size categories, a major fuel distributor
in the region was consulted. He indicated that al-
though the survey asked for the price paid for diesel
around June 15, 1980, diesel prices within the month
of ]une varied from 90 cents a gallon to 101 cents with
prices shifting up every few days. Therefore, it is
hypothesized that the smaller-size and the two

largest-size farms may have reported lower prices
because storage capacity relative to farm re-
quirements were great enough to carry the farrr
operations over a week or so without repeat pun‘
chases, thus resulting in a lower price being reported.

No price discounts were reported by diesel fuel
suppliers for any farm size except the 4,400+ cat-
egory where farms were able to accept truckload
shipments. These producers received discounts ap-
proximately equal to the savings in hauling costs
associated with the volume purchases, about 5% of
the wholesale price. The largest farms thus paid 92
cents per gallon, 2 cents lower than any other size
group. 
Gasoline and propane use are highly variable
over all farm sizes because they are used primarily for
cars, pickups, and large trucks, and not, in most
cases, for crop cultivation. Therefore, quantities of
either gasoline or propane used do not necessarily
increase for larger farms. The average price paid for
gasoline was fairly constant across all farm sizes, as
was propane, with the exception of the 1,601-2,560
acre farms. The higher 55—cent-per-gallon propane
price reported by this group could not be explained
from available data. None of the farms surveyed
reported any discounts on either gasoline or propane.

Irrigation fuel costs, both electric and natural
gas, could not be determined from the producer
questionnaire. A fuel cost of $1.71 per acre-inch war
charged against all irrigated land on the assumptiorfl
that 10 acre-inches of water were applied. The cost
per acre-inch was derived from work done by Leon
New, extension irrigation specialist, for the study
area (1981).

Seed

Seventy-five percent of the cottonseed dealers
surveyed indicated they offered some volume dis-
counts, but all commercial farmers were large enough
to obtain the discount. The major distributors gave
volume discounts to their dealers amounting to from
4% to 10%. Thus, if a business organization (farmer,
gin, etc.) could meet the dealer qualifications estab-
lished by the suppliers (i.e., terms of volume and
trade practices), it could receive this discount. The

TABLE 3. AVERAGE ANNUAL VOLUME AND PRICE PAID FOR DIESEL, GASOLINE AND PROPANE BY FARM SIZE FOR COTTON FARMS OF

THE TEXAS SOUTHERN HIGH PLAINS

Diesel Gasoline Propane
Average
Farm Size Farm Size Volume Price Volume Price Volume Price
(acres) (acres) (1,000 gal) ¢/gal (1,000 gal) ¢/gal (1,000 gal) ¢/gal
0-320 189 2.3 94 2.6 108 1.0 52
321-640 511 4.1 98 2.6 109 2.9 52
641 -960 793 9.5 98 4.6 109 1.6 52
961-1,280 1,088 11.5 96 5.0 109 2.9 53
1,281-1,600 1,457 13.4 96 4.2 107 1.7 53
1,601-2,560 2,019 23.4 99 7.3 108 2.5 55
2,561-4,400 3,383 26.5 95 7.3 107 5.9 53 ‘
4,400+ 5,570 54.8 92 20.7 107 8.6 51

6

1"‘

' sium (K) used in the mix. The fertilizer dealers report-

TABLE 4. AVERAGE VOLUME AND PRICE FOR COTTONSEED BY
FARM SIZE FOR COTTON FARMS OF THE TEXAS SOUTHERN HIGH

TABLE 5. AVERAGE VOLUME PRICE PAID FOR 20-15-5” FERTILIZER
BY FARM SIZE FOR COTTON FARMS OF THE TEXAS SOUTHERN
HIGH PLAINS

pPLAlNS

Average Average
Farm Size Farm Size Average Volume Average Price Farm Size Farm Size Average Volume Average Price
(acres) (acres) (1,000 lb) (¢/ lb) (acres) (acres) (tons) (¢/ton)
0-320 189 5.5 .33 0-320 189 12.6 209
321-640 511 10.4 .32 321-640 511 31.7 231
641-960 793 21.0 .28 641-960 793 50.2 184
961-1,280 1,088 24.6 .30 961-1,280 1,088 59.5 175
1,281-1,600 1,457 33.0 .35 1,281-1,600 1,457 80.6 192
1,601-2,560 2,019 38.9 .32 1,601-2,560 2,019 107.7 179
2,561-4,400 3,383 58.1 .28 2,561-4,400 3,383 164.6 216
4,400+ 5,570 138.5 .32 4,400+ 5,570 345.4 221

price per pound of cottonseed as reported by the
producers shows no apparent economies to size in
cottonseed purchases (Table 4).

Fertilizer

Fertilizer use was not homogeneous from farm to
farm across the area either in terms of quantity used
or N-P-K analysis. The producer surveys reported 61
different fertilizer formulations with a variety of
usage rates, making it difficult to isolate prices for any
specific formulation. Major fertilizer suppliers for the
area were surveyed as to average formulation and
prices for nitrogen (N), phosphorus (P), and potas-

ed average prices of 25, 30, and 21 cents per pound
for N, P, and K, respectively. Nitrogen prices paid by
farmers were derived by subtracting the cost of phos-
phorus and potassium with the residual applied to
nitrogen cost. This method estimated an average
price for nitrogen at 22.3 cents per pound, slightly
lower than dealers’ average price quotation of 25
cents per pound. This method, when applied to
surveys within each farm size, was used to estimate
the cost per ton of an average 20-15-5 fertilizer mix
based on 200 pounds per irrigated cotton acre and 100
pounds per dryland cotton acre (Table 5). The aver-
age price per ton paid by farmers indicate that prices
are higher for the two smallest and two largest farm
sizes and lower for those in between.

Twenty-five percent of the fertilizer suppliers
surveyed indicated they gave volume discounts, but
most farmers would have the volume necessary to
receive the discount. The major fertilizer companies
did indicate that significant discounts (15% to 30%)
were available to those farmers or farmer groups who
had the facilities to handle bulk shipments. Of the
farms surveyed, only one was a fertilizer dealer.
However, several farmers had ownership in gins
which handled fertilizer. (The effect of vertical inte-
gration on input prices will be discussed later.) It was
concluded that a partial reason for the higher price
quoted by large producers resulted from these pro-

Qducers reporting their retail price without considering

any subsequent discounts they might receive through
integration, either in the form of profit distributions
or asset value appreciation.

320-15-5 refers to 20% nitrogen, 15% phosphorus, and 5% potassium.

TABLE 6. AVERAGE VOLUME AND PRICE PAID FOR HERBICIDE BY
ACRE, BY FARM SIZE FOR COTTON FARMS OF THE TEXAS SOUTH-
ERN HIGH PLAINS

Average Average Average Price Per
Farm Size Farm Size Volume Pint Applied
(acres) (acres) (pints) (EB/pint)
0-320 189 211.7 3.22
321-640 511 541.7 4.67
641-960 793 1,007.1 4.32
961-1,280 1,088 903.0 4.95
1,281-1,600 1,457 1,457.0 4.00
1,601-2,560 2,019 1,675.0 3.78
2,56l-4,4OO 3,383 2,199.0 3.47
4A)0+ 5,570 2,506.5 3.47
Chemicals

As with fertilizer, chemicals (herbicides, insec-
ticides, and nematicides) vary in formulation and
application to such extent that comparison of price as
related to volume was difficult. For cotton production
on the South Plains there is very little use of chemi-
cals other than herbicides. Herbicide prices were cal-
culated based on applied cost per unit of the most
frequently used herbicides (Table 6).

Herbicide prices vary from a high of $4.95 per
applied pint for farms in the 961-1,280 acre range to
$3.22 per applied pint on farms in the smallest size
group. However, it was evident from the surveys that
farmers in the mid-size range obtained substantial
application services. Due to this fact, it was impossi-
ble to separate cost per acre into a cost for the actual
chemical and a cost for application. As a result, no
economies of size for herbicide purchases could be
determined.

Chemical dealers denied offering any volume
discounts on chemical purchases. Chemicals were
carried largely as a service on which very little
markup was charged, therefore making any further
discount impossible.

Labor

Expenditures on full- and part-time labor were
obtained from the producer surveys (Table 7). Ex-
amination of the data revealed that, in general, as

7

TABLE 7. AVERAGE EXPENDITUREIN FULL- AND PART-TIME LABOR BY FARM SIZE ON THE TEXAS SOUTHERN HIGH PLAINS

Labor Cost ,_
lnputed Expenditure Per g
Average Full-Time Operator Expenditure On Part-Time Harvested ’

Farm Size Farm Size Labor Labor Per Worker Labor Acre
(acres) (acres) (man-year) (man-year) ($/year) (SQ/year) ($/acre)
0-320 189 0.00 0.50 10,592 1,111 40.68
321-640 511 0.47 0.70 10,592 2,499 -_ 35.98
641-960 793 0.57 1.00 12,501 3,559 l‘ 35.80
961-1,280 1,088 0.77 1.00 12,627 4,470 31.88
1,281-1,600 1,457 1.08 1.00 13,201 6,716 30.20
1,601-2,560 2,019 2.25 1.00 12,295 8,529 31.32
2,561-4,400 3,383 3.13 1.00 13,638 12,033 27.18
4,400+ 5,570 6.25 1.00 14,557 20,121 27.85

farm size increased so did the annual expenditure per
full-time laborer. This conclusion agrees with conven-
tional wisdom suggesting that as farms become larger
at least some higher-skilled labor must be employed
in their management. However, before drawing any
conclusions regarding economies of size, the problem
of how to account for operator labor must be dis-
cussed.

Miller et al. (1981, pp. 7-8) discuss the difficulties
of imputing opportunity cost for operator labor. They
conclude that since the opportunity cost of operator
labor probably varies by farm size and is nonobserv-
able, it would be difficult to measure empirically.
They point out further that since 60% of farm-family
income comes from off-farm sources, with the per-
centage being greater for the smaller farms, full-time
equivalent opportunity cost should not be charged
against the small farm.

The approach taken in this research was to
allocate operator labor based on the farm and
agribusiness interviews, in proportion to the time
devoted to the farm operation. Opportunity costs6
were allowed to vary depending on the rate paid for a
full-time laborer in the respective farm size category.
Operators of farms greater than 640 acres were as-
sumed to be fully employed and one man-year of
labor was imputed to the farm. Smaller farms were
assumed to warrant less than full-time employment
and the man-year requirements were set at 50% and
70% for the 189- and 511-acre farms, respectively.
This procedure acknowledges the problem and al-
leviates somewhat the criticism concerning the treat-
ment of operator labor;

Although annual expenditure per full-time farm
laborer increases with farm size, cost per harvested
acre declines from $40.68 on the 189-acre farm, to
$27.18 for the 3,383-acre farm before increasing slight-
ly for the largest farm. This 30-plus percent decline in
labor cost per acre suggests that although cost per
man-year of labor is greater for the larger farms, the
increased cost is more than offset by efficiencies re-
sulting from specialization and skill level.

°Opp0rtunity cost is the value of a resource in an alternative use.

8

Capital

Most financial institutions indicated there was no
differential in interest rates based on size of loan.
They contend that each farmer is judged on his
personal character, financial position, and past his-
tory before loan commitments are made.

The average interest rate for operating loans of
all farmers surveyed was 14.2%. Although relatively
few differences in interest rates could be ascertained,
larger farms were apparently in a better position to
get all the capital they needed. Of the farms sur-
veyed, 17% indicated they borrowed no money for

operating capital. Fifty-six percent of these response.‘ i E

were from farms having less than 640 acres, while th
remaining 44% of the farms were between 641 and
2,560 acres. None of the farms greater than 2,561
acres were financed solely by retained earnings or off-
farm income sources. The survey indicated 62% of
the farmers were financed through nongovernmental
sources and 21% were financed in some part through
government lending agencies including the Farmers
Home Administration and the Small Business Ad-
ministration. Of the 83% which obtained financing,
72% of those under 2,560 acres were financed
through commercial lending agencies while 92% of
the larger farms were commercially financed. These
percentages relate only to the farms in the survey,
and since the sample was stratified they may not
reflect the actual market shares for the population.

Table 8 indicates the financial characteristics of
farms in the study. These data were obtained from
major lending institutions in the area. Farm assets
increased from $107,084 on the smallest farm size to
over $2 million for the largest. The leverage ratios7
indicate farms in the 1,601-2,560 acre range are the
most highly leveraged with the least leverage occur-
ring on the smallest farms. Farm sizes greater than
641 acres show leverage ratios larger than 0.60 which
indicates that at least 60% of their equity is matched
by debt. These higher leverage ratios for farms in the
middle range of farm sizes suggest these farms may
have experienced the most recent growth.

J

7Leverage ratio is a financial term indicating the ratio between total
debts and total net worth.

P

t

Machinery

Cost of machinery could not be obtained from
the producer surveys; however, typical machinery
complements and their values were obtained from
financial institutions. Table 9 shows per acre invest-
ment in machinery, machinery size, and comple-
ments, as reported by financial sources. The data
indicate that investment per acre decreases as farm
size increases with the exception of the 2,019- and
5,570-acre farm sizes. This increase for the 2,019- and
5,570-acre farms is due to the decreasing proportion
of land irrigated over the entire spectrum until the
very largest size category and the lumpiness of
machinery purchases (i.e., full complements of eight-
row equipment). Producers in the area can handle up
to approximately 1,800 acres with two eight-row
machinery complements. Therefore, the 2,019-acre
average farm size required three machinery comple-
ments. The additional machinery was not fully uti-
lized, thus increasing the investment per acre. The
desire to expand and fully utilize this equipment may

have been one of the contributing factors to the
highest leverage ratio for this farm size.

Interviews with farmers did not reveal any
pecuniary economies as far as machinery purchases
were concerned. The same results were obtained
when suppliers of farm machinery were interviewed.
Machinery dealers indicated volume discounts are
available; however, as many as five tractors have to
be purchased at once to obtain a discount. Even the
largest farmers did not buy that many tractors at
once. Some dealers did indicate farmers who traded
equipment more often could obtain better deals on
trade-ins although the magnitude of such savings
could not be determined.

Ginning

Ginning includes costs for ginning, bagging, and
ties. These costs were developed from surveys of
both cooperative and independent gins in the study
area. The survey indicated average ginning costs of
$2 per hundredweight (cwt) of field weight cotton. It

TABLE 8. FARM SIZE, ASSETS, AND LIABILITIES FOR REPRESENTATIVE FARMS ON THE SOUTHERN TEXAS HIGH PLAINS

FARM SIZES
0-320 321-640 641-960 961-1,280 1,281-1,600 1,601-2,560 2,561-4,400 4,400+
Cultivated Acres 189 511 793 1,088 1,457 2,019 3,383 5,570
Acres Owned 110 261 357 381 539 646 1,048 3,453
ASSETS AND LIABILITIES
Total AssetS ($) 107,084 198,200 299,736 463,400 589,964 794,964 867,235 2,036,032
Long-Term Assets 38,819 108,310 173,596 307,548 406,229 521,080 542,132 1,391,301
Intermediate Assets
(used machinery) ($) 68,265 89,890 126,140 155,852 183,735 273,884 325,103 644,731
Total Liabilities ($) 27,309 67,854 132,397 191,903 237,842 374,479 369,452 766,679
Long-Term
Liabilities ($) 7,373 24,427 52,959 84,437 64,217 149,792 107,141 337,339
Intermediate
LiabilitieS ($) 19,936 43,427 79,438 107,466 173,625 244,687 262,311 429,340
Net Worth ($) 79,775 130,346 167,339 271,497 352,122 420,485 497,783 1,269,353
Debt/Asset .26 .34 .44 .41 .40 .47 .43 .38
Leverage Ratio .34 .52 .79 .70 .67 .89 .74 .60
Total Assets ($/acre) 566 388 378 426 405 394 256 366
Total Liabilities ($/acre) 144 133 167 176 163 185 109 138
Net Worth ($/acre) 422 255 211 250 242 208 147 228
TABLE 9. AVERAGE INVESTMENT AND MACHINERY COMPLEMENT BY FARM SIZE ON THE TEXAS SOUTHERN HIGH PLAINS
Average
Average Machinery Size of Number of Percent of
Farm Size Farm Size Investment Equipment Machinery Irrigated
(acres) (acres) ($/acre) (row) Complements Land
0-320 189 361 6 1 50
321-640 511 176 8 1 43
641-960 793 159 8 1 45
961-1,280 1,088 143 8 2 32
1,281-1,600 1,457 126 8 2 33
1,601—2,560 2,019 136 8 3 30
2,561-4,400 3,383 96 8 4 23
4,400+ 5,570 116 8 6 43

takes approximately 2,182 pounds of field weight
cotton to yield a 480-pound bale (a 22% turnout).
Thus, the ginning cost for a 480-pound bale of cotton
would be $43.64. This cost is assumed for all farm
sizes since no evidence of volume discounts were
found from interviewing farmers and ginners.

Equipment Repair

Equipment and irrigation repair costs were based
on the reported machinery complements and the
engineering coefficients for repair costs in Oklahoma
State University Budget Generator (Kletke 1975).

TABLE 10. COMPARISON OF ACTUAL TOTAL COST AND AVER-
AGE COST PER POUND OF COTTON LINT, BY FARM SIZE IN THE
TEXAS SOUTHERN HIGH PLAINS

Average Actual Average Average Cost
Farm Size Farm Size Total Cost Total Cost +

(acres) (acres) (gt/lb) (¢/Ib) Actual Cost
0-320 189 89.4 89.0 1.00
321-640 511 67.3 66.0 .98
641-960 793 66.6 67.0 1.01
961-1,280 1,088 63.7 64.6 1.01
1,281-1,600 1,457 59.7 59.3 .99
1,601-2,560 2,019 60.7 60.9 1.00
2,561-4,400 3,383 54.7 55.2 1.01
4,400+ 5,570 55.7 55.8 1.00

These coefficients were assumed to accurately reflect
repair costs for the Texas Southern High Plains.

Interest on operating capital was calculated 3

charging a 14.2% interest rate on all variable cost for
half a year. The 14.2% interest rate was the average
obtained from the financial data and producers
survey.

Total Production Cost

Based on survey results, it was concluded that
larger-scale farmers purchasing inputs from farm
input suppliers in the open market could not general-
ly obtain volume discounts. To verify this conclusion,
unit costs of production were computed for each farm
size based on:

0 the actual input prices paid by each farm size, and
0 the average input prices paid across all farm sizes.

The use of average input prices for all farm sizes is
typical of economies of size studies that do not con-
sider pecuniary economies. The results of comparing
actual production costs to average input costs are
summarized in Table 10. The clear conclusion is there
were no significant cost differences and thus there
were generally no pecuniary economies available to
farmers through quantity discounts in the open
market.

TABLE 11. ACTUAL PRODUCTION COST PER POUND OF COTTON LINT BY FARM SIZE IN THE TEXAS SOUTHERN HIGH PLAINS

Farm Size (Acres)

8

T e
i’)? 0-320 321-640 641-960 961-1,280 1,281-1,600 1,601-2,560 2,561-4,400 4,400+
Cost (189)a (511)a (793)a (1 ,O88)*‘ (1 ,457)a (2,019)'*‘ (3,383)a (5,570)"
(¢/Ib)

Variable

Cost

Cottonseed 3.2 2.3 2.6 2.7 3.1 2.5 2.0 2.8
Herbicide 1.2 1.8 1.9 1.6 1.7 1.3 1.0 .6
Fertilizer 4.7 5.1 4.1 3.7 4.1 3.8 4.5 4.9
Fuel 12.8 8.5 9.4 8.6 7.1 8.4 6.3 4.9
Labor 11.4 10.3 10.3 9.3 9.1 9.7 8.5 8.0
Ginning 9.1 9.1 9.1 9.1 9.1 9.1 9.1 9.1
Equipment

Repair 13.6 6.6 5.6 5.6 4.0 3.5 2.9 2.2
Irrigation

Repair 4.6 1.8 2.3 1 9 1 3 1.5 1 3 16
Interest

Operating

Capital 4.3 3.2 3.2 3.0 2.8 2.8 2.5 2.6
Total Variable 64.9 48.7 48.5 45.5 42.3 42.6 38.1 39.3
Fixed Cost

Opportunity

Cost Inter-

mediate Assets 12.2 6.3 5.6 5.6 4.9 5.4 4.1 4.1
Taxes-land .7 .8 .8 .8 .8 .9 .9 .8
Land 11.6 11.5 11.7 11.8 11.7 11.8 11.6 11.5
Total y
Fixed Cost 24.5 18.6 18.1 18.2 17.4 18.1 16.6 16.4 
Total Cost 89.4 67.3 66.6 63.7 59.7 60.7 54.7 55.7

“Average size farm within specified range.

10

Table 11 provides the breakdown of costs used to
prepare the data for Table 10 when actual input prices
paid were used. Since these costs will subsequently
be compared with those of farmers who were verti-
cally integrated into farm supply and marketing,
more detailed comments on their preparation is war-
ranted.

Opportunity costs for intermediate assets were
assumed at 10%. This assumption was based on the
cost of capital for intermediate purchases as reported
by the lending institutions adjusted for an annual 1%
appreciation in nominal equipment value. Machinery
market values for intermediate assets were developed
from data supplied by financial institutions.

Taxes on farmland were derived from financial
institutions and local tax offices. Income taxes were
not included in Tables 1O and 11.

The opportunity cost of land was based on the
typical crop-share lease used in the area. Traditional-
ly, cotton cropland is leased for a one-fourth share of
the product less the landlord's contribution of one-
fourth the value of fertilizer and ginning. Therefore,
the total cost in Table 11 represents actual as well as
imputed opportunity cost with the residual claimant
being a return to the owner-operator's management.

The total cost figures from Table 11 are presented
in Figure 4. Costs decline sharply from 89.4 cents per
pound on the smallest farm size (O-320 acres) to 59.7

\ cents per pound for the 1,281-1,600 acre farms. While
costs rise somewhat for the 1,601-2,560 acre farm,
largely due to the lumpiness of machinery purchases,
they subsequently decline another 5 cents per pound

96
94
92
9O O 189 acres
88
86
84
82
80
f5“ 7B
J
*5 76
1:
g 74
n. 72
t? 1o
£9
g 53 o 511 acres
0 66 o 793 acres
54 0 1,088 acres
62 O 2,019 acres
50 0 1,457 acres
58
56 g 0 5,570 acres
-' I 3,383 acres
54
52
5O

500 1.000 1,500 2,000 2,500 3.000 3,500 4,000 4,500 5,500 6,000

Acres

Figure 4. Cost of production by farm size for the Texas Southern High
Plains.

to 54.7 cents at the 2,561-4,400 acre level. Costs subse-
quently rise somewhat for farms having over 4,400
acres to 55.7 cents per pound.

It would be possible to fit a curve through the
points in Figure 4 that would closely resemble those
derived in earlier studies (Madden 1967; Miller et al.
1981). However, the points in Figure 4 are points on
individual short-run average cost curves that repre-
sent the average cost of cotton production for these
farm sizes in the Texas South Plains. It would, there-
fore, not be theoretically appropriate to draw an
envelope or planning curve through these points.

It is important, however, to note that this study
includes farm sizes much larger than the 974-acre
farm analyzed in the Miller et al. study. The Miller
et al. study concluded there were few, if any, poten-
tial economies beyond the 395-acre farm. The key
here is potential. Although potentially few economies
can be achieved beyond 395 acres, in reality, the
results of this study indicate that the 3,383- and 5,570-
acre farms have substantially lower costs than any of
the smaller-size farms.

VERTICAL INTEGRATION

As mentioned previously, producers could attain
additional benefits in lowering their costs of produc-
tion by integrating segments of the production-
marketing channel into a farm operation. Two basic
methods exist for integration by producers:

1. They could become a member of a supply or
marketing cooperative.

2. They could acquire ownership interest in a
supply or marketing firm.

Such a firm normally would be organized as a
regular corporation. The degree of integration by
producers using either of these methods was deter-
mined from the producer surveys. Potential benefits
were then imputed to farmers who were engaged in
various degrees of integration.

An example of the benefits a producer could gain
from integration is illustrated in Figure 5. Assume

Cost
Per Unit
Of Output
P3 E A
P2 C
P
1 D B
Quantity of Output Q2 Q1

Figure 5. Long-run average cost 0f production in an integrated seg-
ment 0f the marketing channel.

11

this is the long—run average cost curve for a cotton gin
and the gin has sufficient business to operate at its
most efficient level q1. However, due to the structure
of the industry, assume that the ginner is charging
the producer P3 for his services and collecting
economic rents equal to area P3ABP1. Further assume
that a single operator (or group) supplies q; amount
of the firm’s total business. Therefore the producer(s)
could purchase a cotton gin and the cost of ginning
would be reduced from P3 to P2. The total gain to the
producer from integration would be area P3ECP2 and
it is this savings in cost that accrues to the integrated
producers

Cooperatives

Sixty-six percent of the producers surveyed were
members of farm supply or marketing cooperatives.
Most cooperatives in the counties studied have cotton
gins as the core of their operations. For farms having
less than 2,560 acres, 72% of the producers belong to
a cooperative. For farms with over 2,561 acres only
31% had cooperative membership (Table 12).

A survey of 44% of the cooperative gins in the
area indicated cooperatives averaged 28% of their
gross sales as net income. Cooperatives normally
distribute their net income to members either in cash
or in allocated equity capital. Unallocated net income
would be taxed at the corporate rate. The coopera-
tives in the survey indicated they distributed net
margins by giving the producer-member 38% of the
net margin in cash and 62% in allocated equity.
However, the farmers must pay taxes on the total
patronage dividends. On the average, allocated equi-
ty was retained in the business for seven years. For a
farmer to realize year-to-year benefits from belonging
to a cooperative, the present value of cash and al-
located equity must exceed the farmer's marginal tax
rate. Otherwise, when paying identical prices for
inputs, the farmer would lose money on an annual
basis from doing business with a cooperative?

For example, the net present value of $1 paid
seven years from now discounted at 15% is worth 38
cents today. Producers who receive 38 cents in cash
and 62 cents in allocated equity with a net present

sSince benefits were determined based on what regional supply
firms suggested could be achieved through dealership integra-
tion, some argue that this method overcompensates the inte-
grator. The argument centers on the fact that integrated producers
seldom operate solely on their own business but sell services to
other firms. Therefore they are able to achieve further economies,
for example out to ql. The full economies obtained from integra-
tion are represented by the area P3EDP1. This study utilized only
the area P3ECP2; therefore, it does not overcompensate for the
benefits of integration.

9This statement does not rule out the possibility that there may be
longer-term benefits from cooperative memberships such as the
existence of additional competitors in the market; however, it
recognizes that farmers emphasize shorter-term price advantages
in their patronage decision. It also recognizes that such benefits
can be captured by both members and nonmembers.

12

TABLE 12. NUMBER OF FARM OPERATORS WITH COOPERATIVE
MEMBERSHIP BY FARM SIZE IN THE TEXAS SOUTHERN HIGH
PLAINS

Number with Percent of ‘
Farm Size Total Farms Cooperative Farms in Size

(acres) Surveyed Membership Category
0-320 16 12 75
321-640 15 9 .< 60
641-960 14 1O  71
961-1,280 13 9 69
1,281-1,600 12 8 67
1,601-2,560 15 13 87
2,561-4,400 8 3 38
4,400+ 5 1 20
Total 98 65 66

value of approximately 23 cents, pay taxes on the $1
but in essence, only receive 61 cents. Thus, a person
who has a marginal income tax rate greater than 38%
would pay more in taxes today than was received in
cash; however, it would take a marginal tax rate
greater than 61% for a farmer to actually lose money
by being a member of the cooperatives. This may be
one of the reasons operators of larger farms use
cooperatives less than their counterparts on smaller-
size farms. A second reason could be the likelihood
that direct ownership integration has the potential for

asset appreciation while cooperative allocated equity »_

does not appreciate in value.

A third possibility for large-scale farmer involve-
ment in corporate integration ventures is a wider net
profit margin. Profit incentives and management ca-
pabilities are frequently asserted to be stronger in a
corporation than in a cooperative. In addition, a
corporation can be more selective in the products
handled and the customers with whom they choose
to do business.

To reflect the benefits from cooperative integra-
tion, the costs reported in Table 10 and Figure 4 were
adjusted to account for patronage dividends returned
to the producer member. Cooperatives were sur-
veyed to determine what services, on the average,
were available to cooperative members. The results
indicate that in addition to ginning cotton, 35% han-
dled fuel; 58%, seed; 8%, fertilizer; 25%, chemicals;
and 29%, certain specialized machinery parts. The
reduction in costs due to patronage refunds were
computed by applying the dealer discount as report-
ed by the major suppliers of inputs. The following
discounts by input were used in computing cost
adjustments:

0 Ginning 28%

0 Fertilizer 22.5%
0 Equipment 20%
0 Cottonseed 7%
0 Fuel 6.5%

0 Chemical 5% “

0 Equipment Repair 20%

Since the average present value of each dollar of
patronage refund is 61 cents, the above values were
adjusted accordingly. This value was then used in
conjunction with the percentage of cooperative mem-
berships in each farm size, and the total services
offered by the area cooperatives in determining ad-
justed cost of production (Table 13). It is interesting,
and not totally unexpected, to note that the smaller
farm sizes benefit more from cooperative integration
than do farms larger than 1,600 acres. This occurs
because a larger proportion of smaller farmers do
business with cooperatives.

Non-Cooperative Private Integration

Fourteen percent of the producers surveyed had
a significant ownership interest in a farm-related pro-
prietary agribusiness supply or marketing firm (Table
14). Sixty-four percent of the integrated farms were
larger than 1,600 acres, with the heaviest concentra-
tion occurring in the 4,400+ acre group where 4 of the
5 farms surveyed had some ownership interest in at
least one farm production (input) related agribusiness

firm.
Integration into non-cooperative cotton gins was

predominant, with 11 of 13 producers having from
10% to 100% ownership in gins. One farmer had an
interest in a fertilizer and chemical business, one in a

TABLE 13. PRODUCTION COST PER POUND OF COTTON LINT
DUE TO COOPERATIVE INTEGRATION FOR FARMS OF THE TEXAS
SOUTHERN HIGH PLAINS ~

Production Reduction
Actual Cost Adjusted due to
Average Production for Cooperative Cooperative
Farm Size Farm Size Costa Integration Integration
(acres) (acres) (qt/lb) (¢/lb) (¢/Ib)
0-320 189 89.4 88.1 1.3
321-640 511 67.3 66.5 0.8
641-960 793 66.6 65.9 0.7
961-1,280 1,088 63.7 62.8 0.9
1,281-1,60O 1,457 59.7 58.9 0.8
1,601-2,560 2,019 60.7 59.8 0.9
2,561-4,400 3,383 54.7 54.1 0.6
4,400+ 5,570 55.7 55.3 0.4
aFrom Table 10.

farm implement business, and one had an interest in
a grain elevator as well as a gin.

Nineteen farmer-owned cotton gins, not or-
ganized as cooperatives, were surveyed to determine
the services provided the owners and their custom-
ers. In addition to ginning, the survey indicated 53%
handled seed; 32%, fertilizer; 47%, chemicals; 13%,
fuel; and 42%, certain specialized machinery parts.
Although the gins reported selling inputs to all cus-
tomers for the same price, it would be a fallacy not to
attribute at least the discounts reported by input
suppliers to the integrated farms production cost.
Such cost savings were imputed only on inputs and
services provided to the farm business. No allow-
ance was made for returns earned on sales to other
farmers.

Using the same procedures developed for
cooperative integration, imputations for returns on
investment for these integrated producers were ap-
plied to the cost of production figures from Table 10.
The resulting cost of production per pound of cotton
lint after adjustments for vertical integration are pro-
vided by farm size in Table 15. As expected, the
operators of farms larger than 2,560 acres received the
greatest average benefit from non-cooperative inte-
gration.

The cost reductions developed for corporate in-
tegrated farms using these procedures were conser-
vative. The adjustments based on the percentage
integration by farm size dilutes the impact on an
individual integrated producer. For example, a pro-
ducer in either of the largest two categories who has
ownership interests in a ginning facility that addition-
ally carries dealer status in the selected inputs previ-
ously discussed could lower his cost of production by
4.2 cents per pound of cotton lint, a 7.6% cost reduc-
tion. Such a reduction would mean a net benefit to
the largest farms of from $33,348 to $65,611. Unlike
cooperative ownership, an independent vertically in-
tegrated business can gain from appreciation in assets
as well as certain tax advantages (not included here
because of measurement difficulty). If measured, the
per unit cost reduction may be even greater.

TABLE 14. NUMBER OF FARM OPERATORS WITH SOME PROPRIETARY INTEREST IN AGRICULTURAL-RELATED BUSINESSES BY FARM SIZE,

TEXAS SOUTHERN HIGH PLAINS

Number by Type Agribusiness

Number with Percent of
Farm Size Total Farms Interest in Farms in Size Fertilizer Implement
(acres) Surveyed Ag. Business Categories Gins & Chemical Dealers Elevator
0-320 16 0 0
321-640 15 2 13 2
641-960 14 0 0
961-1 ,280 13 1 8 1 1
1,281-1,600 12 1 8 1
1,601-2,560 15 3 20 2 1
2,561-4,400 8 2 25 2
4,400+ 5 4 80 3 1
Total 98 14 14 1 1 1 1 1

13

TABLE 15. PRODUCTION COST PER POUND OF COTTON LINT DUE TO PRIVATE FARMER INTEGRATION, TEXAS SOUTHERN HIGH PLAINS

Reduction
due to
Average Farm Actual Production Cost Adjusted Non-Cooperative
Farm Size Size Costa for Integration Integration

(acres) (acres) (gt/lb) (¢/lb) (¢/Ib)
0-320 189 89.4 89.4 0.0
321-640 511 67.3 66.9 g 0.4
641-960 793 66.6 66.6 9* 0.0
961-1,280 1,088 63.7 63.5 0.2
1,281-1,600 1,457 59.7 59.5 0.2
1,601-2,560 2,019 60.7 60.2 0.5
2,561-4,400 3,383 54.7 53.9 0.8
4,400+ 5,570 55.7 53.6 2.1

W

4

“Totals from Table 10.

TABLE 16. ACTUAL PRODUCTION COST PER POUND OF COTTON LINT BEFORE AND AFTER REDUCTIONS DUE TO COOPERATIVE AND
NON-COOPERATIVE INTEGRATION FOR FARMS OF THE TEXAS SOUTHERN HIGH PLAINS

Average Farm Actual Production Cost Adjusted Reduction due
Farm Size Size Costa for Integration to Integration
(acres) (acres) (¢/Ib) (¢/lb) (¢/lb)

0-320 189 89.4 88.1 1.3
321-640 511 67.3 66.1 1.2
641-960 793 66.6 65.9 0.7
961-1,280 1,088 63.7 62.6 1.1
1,281-1,600 1,457 59.7 58.7 1.0
1,601-2,560 2,019 60.7 59.3 1.4
2,561-4,400 3,383 54.7 53.3 1.4
4,400+ 5,570 55.7 53.2 2.5

“Totals from Table 10.

Total Cost Adjustment for Integration

When the actual production cost as reported in
the surveys was adjusted for both cooperative and
non-cooperative integration, total production costs
were reduced to the levels reported in Table 16.
Actual integration amounts to approximately a 1.2
cent reduction in cost per pound of lint in all farm
sizes except the largest, where a 2.5 cents per pound
cost reduction is achieved. Interestingly, the lowest
level of integration benefits of 0.7 cents per pound
accrue to the 641-960 acre farm, which is frequently
considered to be a typical High Plains family farm.
The farmers apparently shop around, but there is no
evidence they receive a lower input price as a result of
this search process.

Implications for Farm Structure

Evidence indicates that, in general, no pecuniary
economies are available to farms who purchase sup-
plies in the open market. There is evidence that large
farms are able to take advantage of discounts on
selected inputs but that in general, input suppliers
fail to give warranted volume discounts for fear of the
repercussions they might cause among their smaller
volume customers and the potential overall reduction
in market prices for inputs. This form of market
failure may account for the fact that a signifcant
number of farmers have integrated into either
cooperative or privately owned farm-related ag-
ribusinesses, in an effort to reduce costs through the

14

pecuniary advantages of volume buying.

Other studies have suggested that as farm opera-
tions become larger they might tend to bypass the
locally owned suppliers and negatively impact rural
communities (Carter et al. 1980; Krenz et al. 1974).
However, in most instances, those farms which have
integrated tend to compete for the business of all
producers in the area. Therefore, total competition in
the area might actually be enhanced in the inter-
mediate term as new firms are added. In the longer
run, however, the Carter and Krenz implications may
still hold.

Cost of production per pound of cotton lint de-
clines by 34.9 cents from the smallest to the largest
farm, when considering adjustments for integration.
This conclusion indicated that substantial economies
exist up to at least the 2,560-acre farm size. The
largest category of farms, 4,400+ acres, do not appear
to gain additional economies but also do not have
higher costs as suggested by the cost of production
analysis alone. Pecuniary economies are, however,
available up to 4,400 acres but are not realized unless
a firm integrates. Cooperative integration is more
likely to occur by the smallest farms while the largest
farms are more likely to invest in an agribusiness over
which they have more direct control. Corporate in-

tegration advantages were conservatively stated. An " 

individual farm that is corporate integrated may easi-
ly realize advantages of at least 2 cents per pound
more than indicated in these averages.

MARKET ECONOMIES

As with pecuniary economies from input pur-
chases, product prices received by farm size were
examined. Before explaining the results of the sur-
vey, it is desirable to describe cotton marketing chan-
nels.

Figure 6 shows the flow of cotton as it moves
from the producer to the final consumer. Producers
in general have the following five major alternatives
for selling their cotton:

1. F .O.B. buyers. A majority of the cotton is sold
to or through f.o.b. buyers. These buyers
normally serve a procurement function for the
shippers although some sell directly to do-
mestic mills.

2. Cooperatives. Some cooperatives function in a
similar manner as the f.o.b. buyers in that
they directly purchase the cotton in competi-
tion with other buyers at the going market
price.

3. American Cotton Growers. The ACG owns a
cotton mill and directly processes some of its
members’ cotton and sells the rest. The mem-
ber producers are paid a pooled price based
on profits on sales from both sources.

4. Commodity Credit Corporation. In times of sur-
pluses the Commodity Credit Corporation
(CCC) nonrecourse loan is an alternative mar-
ket available to producers. During the 1960's
the CCC acquired large quantities of South
Plains cotton through producers forfeiting
commodities under loan. However, in the
1970's, it was used more as a tool to hold
cotton until a more favorable price could be
obtained. Cooperatives also use the Form G
CCC loan program extensively to hold pooled
cotton in storage until it can be favorably
marketed or forfeited to the CCC.

5. Direct Sale. Some producers bypass the f.o.b.
buyers and sell directly to the major shippers.
The larger shipping firms indicate most of
their cotton is purchased from f.o.b. buyers
but that they do purchase some cotton direct-
ly from producers. A majority of the South

Producer

CCC
F.O.B. Buyers Cooperative
l
l Shippers l
Domestic Foreign
Mills Mills
i

Figure 6. Marketing flow for Texas Southern High Plains cotton.

Plains cotton crop ultimately is purchased by
8 or 1O shippers.

Producers sell cotton to f.o.b. buyers by means of
direct negotiation, brokers, agents, or over the Telcot
system. The first three are self-explanatory while the
fourth warrants discussion.

The Telcot system is a computer-operated tele-
communication network by which farmers may sell
their cotton. The Plains Cotton Cooperative Associa-
tion (PCCA) initiated the Telcot system for marketing
members’ cotton (Boggs and Davis 1980). However,
since Telcot became operative in 1975, members have
entered into a joint venture agreement with a private
non-cooperative corporation known as Commodity
Exchange Services (CXS). Thus, both cooperative and
non-cooperative farm operators have access to the
Telcot system. Table 17 shows the share of Texas and
Texas High Plains upland cotton traded over the
Telcot system since 1975. In 1980, over 40% of the
Texas High Plains cotton crop was marketed via the
Telcot system. These figures are somewhat biased on
the high side since separate data for Telcot market-
ings in Southwest Oklahoma could not be deter-
mined. Such an adjustment would likely lower the
Telcot market share by no more than two percentage
points. In any event the Telcot system has captured a
significant share of High Plains cotton marketing.

TABLE 17. TEXAS AND HIGH PLAINS UPLAND COTTON PRODUCTION AS WELL AS MARKETINCS OVER THE TELCOT SYSTEM, 1975-1980

Percentage of Percentage of

Total High Texas Crop High Plains
Total Texas Plains Telcot Marketed over Crop Marketed
Production Production Marketing Telcot over Telcot
Year (1,000 bales) (1,000 bales) (1,000 bales) (%) (%)
1975 112,382 1,947 230 9.7 11.8
1976 3,307 2,568 361 10.9 14.1
1977 5,465 4,210 844 15.4 20.0
1978 3,792 2,737 863 22.8 31.5
1979 5,515 4,034 1,600 29.0 39.7
1980 3,320 2,419 976 29.4 40.3

Source: Telcot data reported by PCCA Lubbock, Texas.

‘Total Crop Production for Texas and High Plains (Regions 1N, 2N, 1S, 2S) as reported by Texas Crop and Livestock Reporting Service.

15

Survey Results

Data obtained from the producer survey indi-
cates 1,601-acre or larger farms received 1.7 to 3.4
cents per pound more for their 1979-1980 cotton crop
than smaller farms (Table 18). Possible explanations
for this higher price included the volume marketed,
the method of marketing, the time of marketing, and
the use of contracting. Data on quality differences
were not available and may account for higher prices.
However, there is no reason to suggest that larger
farms would be expected to produce a better-quality
cotton. These pecuniary marketing economies yield-
ed increased revenue which ranged from $7,800 for
the 1,601-2,560 acre farm to $17,800 for the largest
farm size categories (Table 18).

Volume Marketed

One might initially assume that a larger volume
of cotton marketed would command a premium
price. A 1980 study by Ling on the Telcot system,
however, concluded that the size of the cotton lot
offered for sale was not important in influencing price
received by farmers. Interviews with major buyers in
the area indicated volume will sometimes command a
premium, but on the average it is in the range of from
only 25 to 50 points for even running lots of 100 or
more bales.”

Method 0f Marketing

Thirty-five percent of the cotton sold by produc-
ers in the survey was marketed over the Telcot sys-
tem, 6% was sold through the American Cotton
Growers cotton pool, and the remaining 59% was
sold to buyers directly. There is a general feeling
among people familiar with cotton marketing that
producers could receive a higher price for their cotton
if they sold it directly to the buyers instead of over the
Telcot system. Most shippers who were interviewed
indicated they did pay a premium due to the fact they
had to protect the f.o.b. buyers on whom they could
depend for delivery. These shippers would normally

TABLE 18. AVERAGE PRICE RECEIVED FOR COTTON BY FARM SIZE
ON THE TEXAS SOUTHERN HIGH PLAINS, 1979-1980

Average Average Pecuniary Extra
Farm Price Marketing Average Revenues
Farm Size Size Received Economies Volume Obtained

(acres) (acres) (¢/lb) (1,000 lbs) ($)
0-320 189 50.2 0 53.9 0
321-640 511 50.2 0 111.9 0
641-960 793 50.6 .4 229.4 918
961-1,280 1,088 50.5 .3 181.9 546
1,281-1,600 1,457 50.3 .1 254.1 254
1,601-2,560 2,019 52.2 2.0 391.2 7,824
2,561-4,400 3,383 53.6 3.4 515.9 17,541
4,400+ 5,570 51.9 1.7 1,047.2 17,802

mAn even running lot is one that is of uniform quality and a point
is 1/l00th of a cent per pound of cotton. Therefore, 100 points
equals 1 cent.

Z6

negotiate with producers over approximately 50
points that they would have to pay as commission for

cotton purchased on the Telcot system. The major“

shippers indicate they sometimes have commitments
for cotton to buyers. To meet these commitments
they would sometimes pay a premium over the Telcot
price.

Some feel a better price can be: obtained for
cotton sold directly because of the buyers’ aversion to
the Telcot system. Survey data indicate cotton over
the Telcot system sold for from 1 to 2 cents per pound
over other cotton for the two smallest size categories
and the 2,561-to-4,400—acre size category. Cotton sold
over the system brought the same price in the 1,601-
to—2,560—acre category and was from 2 to 3 cents per
pound less than the non-Telcot cotton in the four
remaining categories. Therefore, no evidence could
be obtained from the producer data which would
indicate conclusively that cotton sold over the Telcot
system brought any different price.

Time 0f Marketing

Since prices fluctuate through a marketing year,
time of marketing could have an effect on the price
received by different-size producers. Large producers
might be better at picking the right time to market
since they generally received a 1 to 2 cent premium.
However, Table 19 does not give evidence of any one
farm size receiving a better price due to time of sale. »

Contracting-Futures

Contracting and use of the futures market could
have an effect on the price received by producers.
The producer survey indicated virtually no use of the
futures market and only 14.7% of the 1979-80 crop
was marketed under contract. No perceptible effect
on the average price received by farm size could be
determined, even though the largest farms in the size
category contracted 40.5% of their volume. Histori-
cally, contracting has led to higher producer returns
in some years. In other years, producers who did not
contract received higher returns.

Implications of Marketing
Economies for Farm Structure

Although the previously discussed possibilities
likely had some effect on the price received by farm-
ers and could have contributed to the higher price
received by the larger-scale farmers, no definite de-
termination can be made on the precise reason for
higher returns. A possible explanation is that larger-
scale farmers, due to labor specialization, are able to
free themselves from the physical aspects of the farm
operations, analyze their marketing options, and
shop around for the best price for their crop. They are
able to spend more time in marketing and thus gain
greater premiums. Although the market may operate
in a narrow range for any specific quality of cotton, a
1 or 2 cent premium will justify the time spent on
marketing for these larger-scale producers. For a

F

TABLE 19. TIME OF SALE FOR COTTON FARMS OF THE TEXAS SOUTHERN HIGH PLAINS BY FARM SIZE, 1979-1980

Percentage Marketed

Percentage Marketed

Prior to After Average Price
Farm Size Average Farm Size January 1, 1980 January 1,1980 Received

(acres) (acres) % % (¢/Ib)
0-320 189 22 78 50.2
321--640 511 40 6O 50.2
641-960 793 31 69 50.6
961-1,280 1,088 59 41 50.5
1,281-1,600 1,457 54 46 50.3
1,601-2,560 2,019 54 46 52.2
2,561-4,400 3,383 44 56 53.6
4,400+ 5,570 45 55 51.9

farmer marketing over 1,000 bales of cotton, the extra
revenue from effective marketing could be over
$6,000.

TOTAL BENEFITS BY FARM SIZE

This section provides insight into the combined
effect of technical, pecuniary input, and marketing
economies, on total revenue and cost by farm size.
Table 2O and Figure 7 indicate the total benefit accru-
ing to a farm due to vertical integration (cooperative
and non-cooperative) and marketing economies in
both cents per pound of lint and before-tax net reve-
nue. Although a few cents per pound of cotton may

'5' ‘seem insignificant, it translates into substantial in-

creased earnings when multiplied by total farm pro-
duction on the larger-size farms (Figure 7). Benefits
increase from $728 on the smallest farm to $65,605 for
the largest farm (Table 20). These increased earnings
provide substantial economic incentives for larger-
scale farmers to find methods of obtaining them.
Figure 8 shows net revenue per pound of cotton,
by farm size, after adjustments for vertical integra-
tion, and marketing, and the price of cottonseed (9.2
cents per pound of lint). Notice that revenue after
these adjustments increases from -28.7 cents per
pound to 9.5 cents per pound as average farm size
increases from the 189-acre to the 2,561-to-4,400-acre
category before leveling off for the largest-size farms.
These data suggest that increasing net revenue
per unit of marketing, as well as reduction in costs
per unit of output, may be causal factors for farm
growth through the largest farm sizes. The conclu-
sion contradicts much of the conventional wisdom
regarding the factors influencing structure.

CONCLUSIONS

Characteristics and costs of production were de-
veloped for the following eight farm sizes typical of
the Texas Southern High Plains: 189, 511, 793, 1,088,
1,457, 2,019, 3,383, and 5,570 acres. Results of the
analysis suggest that cost of production declined by
34.9 cents per pound of cotton lint as farms increased

nxin size from the 189-acre to the 5,570-acre category.

[his decline was a function of both technical and
pecuniary economies generated through backward
integration in the input supply chain.

TABLE 20. AVERAGE REVENUE OBTAINED FROM VERTICAL IN-
TEGRATION AND MARKETING ECONOMIES BY FARM SIZE FOR
FARMS OF THE TEXAS SOUTHERN HIGH PLAINS

Average Vertical Total
Farm Integration Marketing Extra
Farm Size Size Economies Economies Revenue
(acres) (acres) ¢/Ib total $ ¢/Ib total$ ($)

0-320 189 1.3 728 O 0 728
321-640 511 1.2 1,720 0 0 1,720
641-960 793 0.7 1,582 0.4 904 2,486
961-1,280 1,088 1.1 3,056 0.3 833 3,889
1,281-1,600 1,457 1.0 3,754 0.1 375 4,129
1,601-2,560 2,019 1.4 7,089 2.0 10,127 17,216
2,561-4,400 3,383 1.4 11,116 3.4 26,996 38,112
4,400+ 5,570 2.5 39,054 1.7 26,551 65,605

In general it was determined that no pecuniary
economies were available to the farms that purchase
inputs from suppliers in the open market. The appar-
ent reason input suppliers fail to give warranted
volume discounts was the fear of repercussions that
may occur from their smaller-volume customers.
Smaller-volume customers make up the majority of
an input supplier's total business. If word got out that
a larger volume buyer was getting a better deal (al-
though warranted), the average farmer might de-
mand equal treatment, thus creating a potential re-
duction in overall income to the business. The failure
of the market to provide cost-justified discounts
could account for the significant integration into the
input supply industry observed both cooperatively
and privately.

Cost adjustments due to integration revealed
that most farms achieved approximately a 1.2 cents
per pound of cotton lint advantage from being verti-
cally integrated. However, the largest farm size (5,570
acres) achieved a 2.5 cents or 5% reduction in its total
cost due to the vertical integration. Eighty percent of
the farms having over 4,400 acres owned some pro-
prietary interest in an input supply firm.

Marketing economies of approximately 4.2%
were achieved when farms reach the 2,000-acre
range. That is, large farms received an average 2.4

17

7.5 —1 — 75.0
7.0 — -— 70.0

65 " Cents Per Pound of Lint _ 65°

Net Revenue In 1.000 Dollars

   

6.0 — — 60.0

5.5 - — 55.0
5.0 — — 50.0
4.5 - — 45.0
4.0 — — 40.0
3.5 — — 35.0

3.0 ~ — 30.0

Cents Per Pound o1 Lint
SJB||OQ 090'; up anus/tag taN

2.5 _. r 25.0

2.0 — - 20.0
- 15.0

—10.0

\Q99S

793 1.088 1.457 2.019 3.383 5.570

Figure 7. Net benefit due to vertical integration and marketing econo-
mies by farm size for farms of the Texas Southern High Plains.

cents per pound more for their cotton than smaller
farms. Although volume, method, and time of mar-
keting were examined as contributing factors, no
conclusive evidence could support the reason for the
higher returns. It was concluded that larger-scale
farmers, due to labor specialization, are able to free
themselves from the physical aspects of the farm
operation, analyze their marketing options, and shop
around for the best price for their crop.

It was therefore concluded that economies of size

18

NAOIQ

0 +2.1
o +03

O

0-2.9
-4

'6 ¢-e.7°-64‘
-a
-1o
-12
-14
-1e
-1a
-20
-22
-24
-2e
-2a
-30

Cents Per Pound o1 Lint

o - 28.7

189 511 793 1.088 1.457 2.019 3.383 5.570
Acres

Figure 8. Net revenue per pound 0f cotton lint by farm size for farms
of the Texas Southern High Plains after imputation for vertical inte-
gration and marketing economies.

exist for farms up to the 3,383—acre level. At that point
unit costs are relatively constant. Pecuniary econo-
mies through integration contribute to this conclu-
sion. When the economies derived from integration
are combined with the marketing economies ob-
served at the 2,000+ acre level the result is additional
net revenue to the three largest farm size groups of
$17,216, $38,112, and $65,611, respectively. This extra
income provides a substantial economic growth and
survival advantage for large farms.

10 . +95 -.
0 +7.9

w

REFERENCES

Babb, E. M. 1979. ”Some Causes of Structural Change in U.S.
Agriculture." In Structure Issues of American Agriculture, pp. 51-
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Boggs, C. L. and D. Davis. 1980. ”Computerized Marketing of
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Marketing of Agricultural Commodities. Texas Agri. Exp. Sta.
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Carter, H. O., W. E. Johnston, and C. F. Nackron. 1980. ”Farm
Size Relationships, With an Emphasis on California.” Califor-
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Ferguson, C. E. and I. P. Gould. 1975. Microeconomic Theory.
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Kletke, D. 1975. Operators Manual for the Oklahoma State University
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Knutson, R. D. 1979. ”The Structure of Agriculture: An Evaluation
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Krause, K. R. and L. R. Kyle. 1971. Midwestern Corn Farms: Econom-
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Krenz, R. D., W. G. Heid, Ir., and Harry Sitler. 1974. Economies of
Large Wheat Farms in the Great Plains. Washington D.C.: USDA
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Ling, K. C. 1980. Pricing Impact of a Cooperative Electronic Cotton
Marketing System: The Price Discovery Function of Telcot.
Washington, D.C.: USDA ESCS.

Madden, I. Patrick. 1967. Economies of Size in Farming. Washington,
D.C.: USDA ERS Agr. Econ. Rep. 107. I

Madden, I. P. and B. Davis. 1965. Economies of Size on Irrigated
Cotton Farms of the Texas High Plains. Texas Agr. Exp. Sta. Bul.
1037.

Miller, T. A. G. E. Rodewald, and R. G. McElroy. 1981. Economies of
Size in United States Field Crop Farming. Washington, D.C.:
USDA ERS Agr. Econ. Rep. 472.

New, L. ”Irrigation Field Test 1979-81." Unpublished, College
Station: Texas Agricultural Extension Service. 1981.

Stigler, G. I. The Organization of Industry. Homewood, Ill: Richard
D. Irwin, Inc., 1968.

Texas Crop and Livestock Reporting Service [a]. 1980 Texas Agricul-

tural Cash Receipts, Prices Received and Paid by Farmers. Austin,
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Texas Crop and Livestock Reporting Service [b]. 1980 Texas County
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Williamson, O. E. 1975. Markets and Hierarchies: Analysis and Anti-
trust Implications, pp. 1-56. New York: The Free Press.

19

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'

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imply its approval to the exclusion of other products that also may be suitable.

All programs and information of The Texas Agricultural Experiment Station are
available to everyone without regard to race, color, religion, sex, age, or national origin.

2M-8-84