Productivity and Consolidation
Consolidation in production agriculture is evidenced by the growth of average farm size in Nebraska. According to the USDA Census of Agriculture, the average farm size in Nebraska increased 130 acres between 1997-2017, from 841 acres to 971 acres.
In other words, the average farm in Nebraska has grown by one center pivot over the past 20 years, assuming a center pivot typically irrigates 130 acres. The trend can also be seen in the number of farms greater than 2,000 acres versus those less than 500 acres. The number of farms with 2,000 acres or more grew by 892 farms between 1997-2017. On the other hand, the number of farms with less than 500 acres shrunk by 3,825 farms.
The consolidation has been driven by productivity advantages enjoyed by larger farms. In economics this phenomenon is known as “economies of scale.” Economies of scale means the cost of producing an additional unit of output decreases as the scale of production increases. The productivity advantages enjoyed by larger farms lead to lower per unit costs compared to smaller farms, and in turn, greater returns. Thus, the incentive to grow larger.
Researchers at the USDA Economic Research Service examined how productivity varies by farm size on crop farms in nine agricultural states including Nebraska. Figure 1 shows how the percentage of total farm sales grew over time for farms of greater than 1,000 acres and declined for farms with less than 1,000 acres. The research showed that productivity increased with farm size and the per unit cost of production declined. USDA researchers also found the productivity gap has widened over time. In other words, the pace of productivity gains on larger farms outpaced that on smaller farms. This widening gap helped contribute to growth of larger operations.
The trends in productivity growth across farm size suggest farm consolidation is likely to continue. However, the productivity gains for larger farms are not unlimited and will slow at some size level. When that size level is reached, consolidation will likely slow as well. When that happens, though, is anyone’s guess.
Figure 1. Share of Farm Sales by Farm Size in Corn Belt
Source: Productivity Increases with Farm Size in the Heartland Region, Nigel Key, USDA Economic Research Service, December 3, 2018.