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The importance of farm size and economies of scale

Smaller farms achieve lower rates of return than larger farms. Thus, for the purpose of assessing the likely income and rate of return on investment in large commercial farms, data averaging the performance of all farms within a particular sector can be misleading. This is particularly true of the grains industry where larger farms with economies of scale are able to earn a higher return on capital.

As such, there has been a trend towards consolidation in Australian agriculture as farmers buy out their neighbours to create larger individual land holdings. Over the last five years (2005-06 to 2009-10) the total number of agricultural enterprises in Australia has decreased by 13% from 154,000 to 134,000 as 20,000 smaller farms have been absorbed by their larger brethren.

Consolidation trend within the Australian agricultural sector, 2005-06 to 2009-10

Consolidation trend within the Australian agricultural sector, 2005-06 to 2009-10

Despite the area sown to grains having increased, the number of farms in the Australian grains industry has fallen by over 40 % since 1975. This has resulted in a near doubling of the average area cropped per farm and an increase of approximately 140% in wheat production on a typical grain farm over that period. Larger broadacre farms generally also crop a higher proportion of their land area on an annual basis, with farms turning over in excess of AU$1 million cropping on average 27% of their land annually compared to only 10% for farms turning over AU$100,000.

Relationship between farm size and cropping intensity in broadacre farming, 1990 to 2010 (average over period)

Relationship between farm size and cropping intensity in broadacre farming, 1990 to 2010

Advances in modern commercial farming machinery in recent years, particularly with respect to power and size, now allow a single owner operator family to successfully manage a cropping enterprise of thousands of hectares, thus increasing the value of scale. Larger farms that can afford to invest in large machinery are able to respond to soil moisture opportunities better by undertaking tillage and planting operations in a timelier manner.

Particularly in rainfed agriculture, this ability to more fully capitalise on (often fleeting) planting or weed control opportunities is a distinct agronomic and economic advantage. As a result, larger farms are able to achieve significantly higher grain yields, with farms in the AU$1 million annual turnover category having averaged annual wheat yields of 1.8 tonnes per hectare over the last twenty years (1990 to 2010) compared to only 1.0 tonnes per hectare for farms in the AU$100,000 annual turnover category. These larger farms also generate more than double the revenue per unit of land area, having averaged AU$217 per hectare compared to AU$91 per hectare over the period.

Relationship between farm size, yields and revenues in broadacre farming, 1990 to 2010 (average over period)

Relationship between farm size, yields and revenues in broadacre farming, 1990 to 2010

Due to the fact that scale allows arable farmers to increase income at a faster rate than costs, historical data very clearly shows that the investment performance of grain farms increases markedly with cropping intensity (degree of focus on cropping) and size (total area cropped). Over the past 20 years (1991-92 to 2010-11) the largest 20% of grain farms (measured in terms of cropped area) have consistently earned over twice the cash income of the smallest 20% of grain farms.

Alongside rainfall and yield reliability farm size is one of the most important determinants of investment returns. For a more detailed analysis on the relationship between farm sizes and investment returns, download our free report, Comparative Analysis of the Australian Wheatbelt. The document also addresses the key question: which region of Australia has delivered superior returns to agricultural investors in the past and is most likely to offer superior risk adjusted returns in the future?

References and data sources:

  • Australian Bureau of Statistics, Crops and Pastures Data Series, 2012
  • Australian Bureau of Statistics, Agricultural Land Use and Selected Inputs Data Series, 2012
  • O’Donnell, C 2010, ‘Measuring and decomposing agricultural productivity and profitability change’, Australian Journal of Agricultural and Resource Economics, vol. 54. pp. 527–560.
  • Liao, B and Martin, P 2009, Farm innovation in the broadacre and dairy industries, 2006-07 to 2007-08, ABARE research report 09.16, Canberra, November.
  • Zhao, S, Sheng, Y and Gray, E 2010, ‘Productivity in the Australian grains broadacre and dairy industries’, conference on the Causes and Consequences of Global Agricultural Productivity Growth, Washington DC, 11–12 May 2010.