Farm size-productivity relationship

06 August 2019

The relationship between farm size and productivity has been a hot topic among agricultural economists over the last decades due to its relevance for the design and implementation of agricultural policies worldwide. Largescaleagriculture.com presents a collection of recent research results on the topic, including the results published in the last year’s special issue of Food Policy, to summarize up-to-date knowledge of the linkages that exist between farm size and productivity as well as of the factors that affect these linkages in different countries’ contexts.

The productivity level of farms of all sizes can be influenced by numerous endogenous factors, e.g. commodity specialization, labor quality, level of mechanization etc., as well as exogenous drivers, e.g. public policies, land tenure policies, access to credit etc. Most of the earlier studies on farm size-productivity relationship failed to deliver a complete overview of the effects of these factors as these studies mostly focused on single factor productivities, e.g. labor or land productivity, making it hard to compare and evaluate their findings. Nowadays, researchers generally tend to use total factor productivity (TFP) to analyze farm size-productivity relationship.

In this context, one of the most notable findings shows that the size-productivity relation among agricultural enterprises evolves with the level of economic development of the country they operate in. In particular, the small farms operating up to five hectares in low-income or developing countries tend to get more output per hectare than larger ones (an inverse farm size-productivity relationship), while the large farms with thousands of hectares under operation in the developed countriestend to be more productive than the small farms. 

In low-income countries with a prevailing labor-intensive farming system and low wage rate, small farms operated mostly by family members are more efficient than larger farms operated by hired workers. Economic growth stimulates the creation of non-farm jobs in rural areas and the growth of both farm and non-farm wages, which leads to the outflow of labor from small farms. In response, farm family labor is substituted by machinery, triggering further farm expansion. As mechanization is believed to foster increasing returns to scale, TFP of larger farms keeps increasing, as observed in fast developing Asian countries over the past decades. Under such circumstances, small family farms gradually lose their productivity advantages, not being able to compete with technologically equipped larger enterprises.

Due to the development of modern technologies and wage growth, an attenuation of the inverse farm-size productivity relationship and a significant reduction of productivity gap between small and large farms have been also observed in recent decades in countries like Bangladesh.

In high-income countries like USA and Australia, increasing returns to scale favoring large agricultural enterprises, particularly grain and livestock producers, are also associated with implementation of modern technologies and mechanization. The development of machinery outsourcing services in these countries could help smaller farms to increase efficiency and reduce the productivity gap with larger farms. High productivity levels of large livestock farms in the United States can be also explained by their closer cooperation with vertically integrated agro-processors.

Alongside technologies and labor costs, public policies are considered to be a TFP driver. Governments, international donor organizations like the World Bank or FAO, as well as private investors, can support a certain size category of farms with loans, extension services, access to input markets, equipment and machinery, thus contributing to an increase of their efficiency. For instance, in the period from mid-1990s to 2006, Brazil introduced a large number of support programs to small, labor-intensive farms of up to 100 hectares in size, providing them with credit and new technologies. Separate policies were designed for large, land-intensive farms of over 500 hectares in size, enabling a combination of state and private investment. As a result, in the recent years Brazil has experienced a significant productivity increase particularly among small and large farms, a phenomenon referred to as a U-shaped pattern of farm size-productivity relationship. Meanwhile, the medium-sized farms operating 100-500 hectares remain the least performing farm category in Brazil.

Finally, inefficient land market, a typically common feature of most developing countries, also affects TFP a lot. Land tenure policies, manifested in farm size restrictions or land market regulations, constrain the growth of successful farms, preventing the farmland from being consolidated by more productive market players. One of the examples of ineffective land policy is a program implemented in India, Nepal and the Philippines, aiming to transfer farmland from large landowners to landless tenants. Instead of stimulating the development of small farms and increasing their efficiency, the reform prevented small landowners from the opportunity to rent out their farmland to larger farms. At the same time, land policies can give a significant support to small family farms. For instance, the development of land rental arrangements in African countries could enable poor households and newly created farms to get access to land.

Overall, despite the variety of approaches toward analysis of the farm size-productivity relationship, the above described factors and case studies give important insights into the relationships between farm size and productivity in the countries with different levels of economic development worldwide. In addition, they facilitate further debate on the most optimal agricultural structures internationally.