Will Transaction Costs and Economies of Scale Tip the Balance in Farm Size in Industrial Agriculture? An Illustration for Non-Food Biomass Production in Germany

Lanjiao Wen,Lioudmila Chatalova

doi:10.3390/su13020733

Abstract

The study investigates how the agricultural sector can respond to a growing non-food biomass demand. Taking Germany as an example, a stylized case of biomass production under conditions of technological advance and constantly growing demand is modelled. It is argued that biomass producers might seek to adjust their farm size by simultaneously optimizing benefits from the production scale and transaction cost savings, where transaction costs are measured using Data Envelopment Analysis. The results extend the debate on transaction costs and structural change in agriculture by revealing a possible synergy and trade-off between transaction cost savings and benefits from (dis)economies of scale. They show that if larger farms cannot economize on transaction costs, then investments in land and labor, needed to adjust to higher biomass demand, partly compromise the returns to scale, which decelerates the farm size growth. A higher degree of asset specificity gives rise to transaction costs and reduces the rate at which the farm size decreases. Smaller producers may disproportionally benefit from their higher potential of transaction cost savings, if advanced technologies can offset the scale advantage of larger farms. The findings inform policymakers to consider this complex effect when comparing the opportunities of smaller and larger agricultural producers in the bioeconomy.

Highlights

The positive effect of new technologies on the farm number may seem trivial under the given assumptions, it reveals that a scale-induced decline in transaction costs observed for real data (2005–2016), may, if supported by technological advance, continue even under diseconomies of scale
The conducted analysis extends the findings of the existing studies, which focusses on the relationship between economies of scale and asset specificity [45,70] or just measure the level of transaction costs in agriculture [34], by accounting for the sector-specific characteristics that are relevant for transaction cost savings and production scale optimization [74]
In the initiated transition to an innovation-driven and bio-based economy, high expectations are attached to agriculture as a biomass supplier, one of the largest contributors to greenhouse gas savings and job creation in rural areas [98,105,106]

Summary

Introduction

Since the industrial and agricultural revolutions, the rise in productivity and competition have kept the agricultural sectors moving towards fewer but bigger farms [1,2,3]. Large-scale farming, with its relatively high cost-saving potential, is still tantamount to an efficient form of industrial agriculture [6]. The recent spate of instances of diseconomies of scale in large farms in a number of developed countries indicate an increasingly exhausted cost reduction potential in competitive industrial agriculture [7,8]. The ever-thinner profit margins of agricultural producers due to price and cost competition may force producers in the near future to develop new optimization strategies, in which transaction cost reduction can become increasingly relevant. In the context of the current transition to the bioeconomy, which relies on a sufficient supply of plant biomass, and on smaller producers as important promoters of sustainability and innovations [9], the optimization of agricultural transaction costs may be challenged by the question of the optimal production scale

Methods

Results

Discussion

Conclusion