Economic importance of parcel structure on Finnish farms

S. MYYRÄ,K. PIETOLA

doi:10.23986/afsci.5722

Abstract

This study estimates shadow prices for land parcel characteristics in Finland, such as size and distance from the compound, by adding these characteristics to the conditional profit maximisation model. The profit functions are production line-specific, and the endogenous choice of production line is controlled for by a switching-type Probit-model. The results suggest that the small parcel size and their long distances from the compound significantly affect the farmer choice of allocating most land either to grass or to grain. The endogenous choice of line of production also has significant statistical implications in relation to profits, output supplies and input demand. Small parcel size was found to increase costs significantly by hindering farmers from adopting the most efficient production technologies and practices. The ongoing rapid structural development in Finnish agriculture implies that the constraints imposed by small parcels of land are becoming more and more costly. Grassland farming is predicted to loose its comparative advantage in the most fragmented agricultural areas, as farm sizes increase further. Operations to re-structure parcels of land amongst a group of neighbouring farms, although often costly and time consuming, will generate high returns.

Highlights

Introduction away from the compoundThe average parcel size is only 2.65 hectares and their area-weighted average distance from the farm compound is approximately 2000 metres.Since the average farm has only 27.97 hectares of arable land, increasing of the farm size is one of the most important means in cutting down production costs and making Finnish agriculture more competitive on the European market
Even if we estimate the profit and demandsupply system separately for grassland farms and grain farms, it is likely that the self-selection problem, driven by the endogenous choice of production line, will cause a bias in the parameter estimates (Heckman 1979)
Where φ refers to the standard normal distribution function and Φ is the standard normal cumulative distribution function. These expressions are known as Inverses of Mill’s Ratios (IMR) and are computed for each farm conditional on the estimated parameter vector β and the farm-specific entries in Z. These IMRs measure the probability of a farm belonging to regime q, i.e. the probability that the farmer has chosen production line q

Summary

Sami Myyrä and Kyösti Pietola

This study estimates shadow prices for land parcel characteristics in Finland, such as size and distance from the compound, by adding these characteristics to the conditional profit maximisation model. The disadvantageous parcel structure is expected to have important economic implications, increasing the current costs of farming and hindering the expanding farms from taking full advantage of new technologies and economies of size, few estimates of these implications exist. These are largely restricted to the work of Singh and Ahn (1995) on the relationship between farm land structure and machinery efficiency, and of Sairanen (1998) and Aaltonen et al (1999), who adopted normative approaches, such as enterprise budgets and the examination of representative farms, to estimate the additional costs driven up by a disadvantageous parcel structure. The results can be expected to make an important contribution to the literature, and to have significant policy implications, in that they contain new information on the potential of Finnish

The profit maximization problem

Empirical specification

Results

Choice of line of production

Parcel size

Capital per cent

Concluding remarks

Sami Myyrä ja Kyösti Pietola

Input demand