Economies of Size and Scale in Agriculture: An Interpretive Review of Empirical Measurement

Empirical studies of economies ofsize in agriculture have g nerally found the cost curve to be L-shaped. Changes in the structure of ag ¡ over time ate not necessarily eonsistent with this cost structure. These differences can be reconciled by appeal to external, non-size factors, and to difficulties in correctly measuring size economies. In addition to size economies, important factors affecting the size structure of agriculture include pecuniary economies at the tima and industry level, technical change, management and information, values and goals, and opportunity costs outside the agricultural sector. Size economies may be incorrectly measured due to poor data, misspecified technologies, unrealistic assumptions, and aggregation error. The existence of economies of size and/or scale in a particular industry may have broad implications for industry structure, per-formance, growth, and change. Significant increasing returns to scale or size in the production of a particular output, or in the procurement or marketing of a specific pro-duct, may lead to consolidation of firms in the associated industry with potentially harmful effects on competition and societal welfare. Production agriculture in the Uniled States is often characterized asa competitive industry with many firms and few barriers to entry (Cochrane 1979). While the number of farms in the United States has declined dramatically since World War II (Bureau of the Census), the absolute number of farms is still very large when compared to most other major industries. Agricultural processing and input supply industries have consolidated significantly in the last four decades; absolute numbers of firms in many of these industries are very small with the top four firms often controlling over 50 percent of the market