May 31, 2003
SIZE ECONOMIES ON ILLINOIS GRAIN FARMS
An often-asked question is whether larger grain farms have lower
per acre costs than smaller grain farms. In this paper, data from
the Illinois Farm Business Farm Management (FBFM) Association are
used to address this question. We find that per acre costs for farm
sizes in size categories less than 800 to 1,200 acres are higher
than for larger farm size categories. Total costs are relatively
constant across categories for categories above 1,200 acres.
Data Used in this Analysis
Data are for 2002 and come from Economic Management Analysis reports
that FBFM produces for farmer members. These reports gives yields,
revenues, and costs on a per operator acre basis. To be included
in the analysis presented here, farms have to pass screening procedures
designed to insure that the data are correct. Farms also have to
receive the majority of their farm income from grain operations.
All farms in Illinois that passed these two tests are included in
A total of 1,955 farms are used. Yields, costs, and management
returns for these farms are divided into nine size categories based
on tillable acres farmed. The smallest category is farms with less
than 400 acres and the largest size category is for farms with greater
than 3,201 acres. Within the above 3,201 acre category, the average
farm size is 4,065 tillable acres.
Yields, Economic Costs, and Management Returns
Table 1 shows yields; percent of acres owned, share-rented, and
cash-rented; economic costs divided into crop, power, building,
labor, overhead, and land categories; and management returns which
equal revenue minus economic costs. Economic costs include both
accounting costs and opportunity charges. Opportunity charges are
included for capital invested in the operation and unpaid labor.
Inclusion of these opportunity charges cause the economic costs
shown in Table 1 normally to be higher than costs that would be
shown on an income statement.
Two points are evident from Table 1. First, total costs decline
as farm size increases up to 1,200 acres. Total costs are $449 per
acre for farms less than 400 acres, $401 per acre for farms between
401 and 800 acres, $373 per acre for farms between 801 and 1,200
acre. Declines in labor and power costs cause most of the reductions
in total costs. Declines in building, overhead, and land costs also
contributed to declining total costs. Crop costs, however, do not
decrease for larger farm size categories.
Second, yields, economic costs, and management returns are relatively
constant for farm sizes greater than 1,200 acres. Statistical tests
were conducted to see if differences existed in yields and economic
costs across size categories. These tests indicate that yield and
costs are statistically the same for categories greater than 1,201
acres. The 2,801 to 3,200 size class has lower costs than other
size categories: $349 per acre compared to costs in the $364 to
$376 per acre range for the other categories above 1,200 acres.
This difference is not statistically significant and is likely caused
by the small number of farms within the category.
Results in Table 1 suggest that farms in size categories less than
801 to 1,200 acres face cost disadvantages. Not reported in Table
1, however, is the tremendous range of economic costs within a size
category. Some farms in smaller farm sizes have lower costs than
larger farms. Future newsletters in this series will address this
range in costs.
1. Average total costs are the same for farm sizes over 1,200.
Once farms reach 1,200 acres, we find no evidence that per acre
costs decreases with increases in farm sizes. We have few observations
for farms greater than 6,000 acres. Additional observations may
suggest that larger farms have cost advantages. However, in our
opinion, it is unlikely that farms between 4,000 and 10,000 acres
have significant per acre cost advantages over farms between 1,200
and 4,000 acres.
2. Some individuals might have expected larger farms to have purchasing
power that smaller farms do not have. Given this purchasing power,
costs would decline as farm size increases. The data presented here
do not support this contention because costs are relatively constant
across farm sizes. In particular, crop costs remain constant across
larger farm sizes suggesting that farmers do not have purchasing
power with fertilizer, seed or pesticide inputs (See Table 2 for
a more detailed breakdown of costs.) A reason for the lack of evidence
for purchasing power may be the competitiveness of the input supply
3. Farms have incentives to expand; however, these incentives are
not due to cost advantages. Rather the incentives are due to volume
considerations. As long as revenue is above total costs and per
acre costs do not increase, farms have an incentive to expand. The
only way expansion will stop is if costs increase as farm size increases.
Issued by: Gary Schnitkey
Lattz, Department of Agricultural and Consumer Economics