While conventional wisdom says that expansion allows many businesses to exploit economies of scale and maximise profits, an award winning thesis has suggested bigger is not necessarily better when it comes to improving efficiencies.
While conventional wisdom says that expansion allows many businesses to exploit economies of scale and maximise profits, an award winning thesis has suggested bigger is not necessarily better when it comes to improving efficiencies.
Influenced by the decline in the rural population and increases in the average farm size, UWA agriculture graduate Nathan Cattle studied whether farmers’ desire to achieve greater economies of scale and technical efficiencies had driven the trend towards increased farm size.
His thesis, Productivity of WA Wheatbelt Farms: Efficiency, Scale Economics and their Determinants, found that while farmers have benefited from economies of scale, farm growth had been accompanied by a declining average technical efficiency.
Mr Cattle said that while most Wheatbelt farmers were operating at a high level of technical efficiency, there was a significantly negative relationship between farm area and technical efficiency.
This pointed to significant inefficiencies associated with larger farms, which was in contrast to many studies that found larger farms to be more technically efficient than smaller farms.
The key drivers cited included labour or managerial inefficiencies, or the difficulty in finding skilful workers due to the seasonality of labour demand.
“The data suggested that farmers who started out less efficient became even less efficient as they expanded,” Mr Cattle told WA Business News.
The number of broadacre farmers in Western Australia has dropped almost 27 per cent since 1990.
Rural areas have also experienced sharp declines in population, leading to significant social impacts on regional communities and calling into question the future of the family farm.
BankWest WA agribusiness market analyst Dan Fels said the commodity price squeeze and increasing farm costs were forcing farmers off the land at a rate of between 1.5 and 2.5 per cent per year.
At the same time, yields have been increasing at the rate of between 1 and 3 per cent per year.
“For the past 30, 50, 100 years, prices paid to farmers have decreased in real terms while farm inputs have gone up,” Mr Fels told WA Business News.
“This is causing, or helping, more efficient farmers to stay in and pursue economies of scale.”
Mr Fels said bigger farms were better placed to be more price competitive, particularly as more markets were deregulated and farmers became more susceptible to market forces.
And it’s the growers with more market nous, combined with economies of scale, who will be in a strong position to manage the inherent risks associated with the agricultural sector.
But while small farms struggle to achieve strong production efficiencies and generate consistently positive returns, analysts suggest that size increases don’t always equate to greater efficiency.
Research by NAB Agribusiness has found that while larger asset bases do lead to greater returns, the better mid-sized farms generated returns of 5.7 per cent, greater than the average of their larger peers at 1.2 per cent.
Managing director of commodity market analysts ProFarmer, Richard Koch, believes growers who are able to embrace new technologies and adapt to change will be more likely to handle industry volatility.
He said those who undertake further education, or engage the services of farm consultants or financial planners, would also be well placed.
“It’s difficult for single owner/operators to handle the complexity of the industry these days,” he said.
“And I don’t think age is a factor is this – I’ve known guys at 50 and 60 years of age who are just as adaptable to change than some of the younger guys.”
