Size isn't everything
Daniel Gilmour, DEPI Warrnambool
"Get big or get out." Sound familiar? Farm size and the question of whether bigger is always better continues to be hotly debated by farmers, agricultural economists and farm management consultants worldwide.
Generally the arguments for increasing size stem from the belief that by increasing the size of businesses farmers will be able to take advantage of economies of size. That is, they'll be able to produce more with lower input costs per unit of production. The reduction in costs comes predominantly from spreading total overhead costs over a greater level of production.
Following the release of the 2010-11 Dairy Industry Farm Monitor Project annual report, additional analysis was performed on the data set examining the influence of farm size on income, costs and profitability.
Participant farmers were asked their opinion on the influence of farm size on profitability. Of the responses received, more people didn't think farm size influenced profitability compared to those who thought it did.
Of those who didn't think farm size influenced profitability, the most common response was that profitability is more dependent on farm management than the size of the operation. Close behind was the opinion that as farms get larger they become less technically efficient and therefore profitability remains proportionally the same as that generated by smaller farms.
The most common answer of the farmers who said farm size did influence profitability was that farm size influenced profitability up to a point, after which greater size only yielded proportional increases in profit. The second most common response was that larger farms are able to decrease their overhead costs proportionally compared to small farms, thereby taking advantage of economies of size.
There was also an analysis of the influence of farm size on farm profitability from 2006-07 to 2010-11 based on the project data set. Farm size was classified by the number of cows milked.
|Farm Size||Cows milked|
|Small||Less than 150|
|Extra Large||Greater than 500|
Whole farm performance of differing farm sizes over the five-year project period was examined in terms of return on assets and return on equity. Return on assets is the earnings before interest and tax expressed as a proportion of the total assets under management. This performance measure indicates how efficiently the assets managed by the business have been used to generate profit.
In Figure 1 you can see that in general larger farms have generated higher returns on asset over the past five years.
Figure 1: Average annual return on assets (%) by farm size, 2006-07 to 2010-11
While this data indicates that the larger the farm the higher the annual return on assets, when the distribution of returns over the total period is examined, as shown in the 'box and whisker' plots in Figure 2, we see slightly different results.
In Figure 2, the middle horizontal bar indicates the median or middle value for the data set, while the top and bottom horizontal bars of the 'box' represent the first (25th percentile) and third (75th percentile) quartile ranges respectively. The middle 50 per cent of farms sit within this range.
Finally the long vertical 'whiskers' at each end of the boxes represent the total range for all data. While extra large farms achieve the highest average and median return on assets, medium and large farms performed similarly and had a greater range of returns than extra large farms. Large farms recorded a similar minimum return on assets, while the minimum recorded by medium size farms was much lower. These results indicate that while, on average, extra large farms recorded a higher return on assets, well managed medium and large farms can perform equally as well as extra large farms.
Figure 2: Distribution of return on assets (%) by farm size, 2006-07 to 2010-11
Despite these higher average returns reported by the extra large farms, individual farms across all categories have performed strongly across the years. This was reflected in the number of farms from all categories ranked in the top 25 per cent on an annual basis.
These results indicate that as opposed to 'get big', the axiom to which dairy farmers should adhere in the 21st century is 'get smart'. While farm size has an influence over income, costs and profitability, farms of all sizes have the ability to generate strong business returns. Smart farm mangers are already making this happen.
Electronic copies of the Dairy Industry Farm Monitor Project 2010-11 feature article are now available by emailing Farm.Monitor.Project@depi.vic.gov.au or from www.dairyaustralia.com.au/dairyfarmmonitor
For more information, contact Daniel Gilmour on (03) 5561 9911 at DEPI Warrnambool.