Farm Size and Productivity

It is not possible to properly understand development without considering

the agricultural sector. The contribution of this sector is quite important.
It
1. Provides labour to non-agricultural sector.
2. Provides food and raw materials.
3. Export of this sector’s products brings in much needed foreign
currency.
4. Expanding this sector can expand the size of the home market and
provide demand for other sectors’ output.
5. Capital formation in this sector may increase output and therefore
growth.

One of the most important aspects of the agricultural sector is the structure
of land ownership which has both equity and efficiency implications. We
can look at the distribution of land across:
a) Ownership units. There is not much data available in this case.
b) Operational units (farms), more than one person may own a piece of
land.
c) Enterprise types (What they do, plantation or traditional farm).

On the equity side we are concerned with the distribution of assets and the
inequality of that distribution. In the case of (b) there seems to be a high
degree of inequality – 59% of Latin American farms are large but
inequality for (a) seems to be larger because some people may own more
than one farm. The Gini coefficient for land ownership in Guatemala was
0.77 in 1964, 0.85 in Paraguay in 1991, 0.81 in Peru in 1994, 0.5 in Japan

1
in 1995, 0.5 in Germany in 1971, 0.49 in Sweden in 1961 (Data for all
countries, and for every year is not available). This is given by the shaded
area in the graph as a proportion the triangle ABC. The smaller this area,
or the closer the Lorenz curve to the line of perfect equality, AB, the more
equitable is the distribution of land.
B
% land

%farm C

In terms of efficiency it has been widely observed that in many countries

there is an inverse relationship between farm size and productivity. This
relationship has often been interpreted as evidence for “superiority” of
small farms and returns to scale.

Value of output
per acre
x

x
x
x x
x
x

Farm size

2
This finding has very important implications for policy with respect to land
redistribution and reorganisation and particularly the maximum size of
land holding (land ceiling).

Popular explanations for this relationship are as follows:

1. Increase in farm size (FS) tends to decrease the % of total land area
cultivated.
2. Increase in farm size tends to decrease land area under multiple
cropping (more than one crop per year).
3. Increase in farm size tends to increase the % of products with low
value per acre (for example animal grazing).

There is a strong evidence for all the above, but

4. Increase in farm size tends to decrease physical crop yield.

This is the most controversial finding and we shall analyse this further.

Researchers generally use a Cobb-Douglas production function and

linearise it so that they look at a model of the following form:
æ output ö
logç ÷ = a + b log FS + µ
è acre ø

A variation of this model has been used by adding other variables, by using
different production functions (CES for example which doesn’t assume
that elasticity of substitution between inputs is 1. The claim is larger farms
can more easily substitute factors compared to smaller farms). When data
is pooled b < 0 in many studies and this is taken to be evidence for
decreasing returns to scale. However, when production functions are
applied to individual farms or to single products, in many cases b > 0 or
not significantly different from zero.

3
Bardhan found that in the Indian case wheat shows evidence of constant
returns to scale (CRS), paddy shows evidence of decreasing returns to scale
(DRS), but in both cases b < 0. He argues that it is not the scale that we are
looking at but rather the possibly of the relationship between FS and other
inputs. [Even if there is evidence for DRS large farms tend to have more
profit hence more savings and therefore investment and are keener to adopt
innovations \ may be preferable anyway.]

The other reasons are typically grouped into 2 arguments.

(I) Small farms use factors inputs more intensively. They irrigate more,
use more manure and more labour. The use of better irrigation can be
explained as follows. Land transfers generally occurs when (a) hard-
up farmers sell some land – they tend to sell the poorer irrigated plots,
(b) inheritance results in subdivision of land and this is weighted by
availability of irrigation – the best irrigated plot is the smallest and so
on.
Hence it is likely that as land becomes smaller irrigation per acre improves.
Better use of manure is related to the finding that smaller farms have higher
animal per acre ratio and therefore more access to natural fertilisers.

There is also a greater capital input per acre in SF (but this may be due to
indivisibilities and cannot be taken as an advantage).

Smaller farms also use more labour per acre. However, here we must
distinguish between peasant farms and farms that hire labour. In the case
of peasant farm as size decreases, worker per land ratio rises and workload
per worker falls hence cost of labour falls \ as FS falls farms become more
labour intensive. In farms with hired labour the smaller the size the smaller

4
the supervision costs, so again as FS falls farms become more labour
intensive.

Using a dualist formulation we can say that MPLSF < APLSF = W = MPL LF .
Hence, MPLSF < MPL LF , i.e. family cultivators get income-sharing shares
and large farms pay MPL. The small farms would pay a higher wage than
MPLSF either to cover transport costs or for efficiency reasons already
discussed (say nutrition).

Berry & Clive argue that technical efficiency seems to be scale neutral, so
it is the factor utilisation that results in the b < 0. The reasons put forward
are:

1. Dualism across farm size

More effective use of labour because the SF use mostly family labour
and therefore more incentive for workers to work, less supervision
costs, less indivisibility of labour (e.g. hired out female labour might
go to work only with a male member of the family), hence lower
labour cost which implies more utilisation of marginal land.

2. Land and capital market imperfections

Large farms have better access to capital markets (higher collateral).
This means that large farms have a low labour use and small farms a
labour
high labour use. If ratio is high, then output per acre (land
land
productivity) is high.
3. Land holding as an asset or prestige purpose especially when inflation
is high, or capital markets are poorly developed (store of value
objective). This may imply that large farm owners may not be
prepared to risk using their land in a highly productive way to keep its
value.

5
The following reasons have also been put forward as explanations for this
relationship:
1. Small farms may be more efficient technically, i.e. produce more output
per acre
Bardhan – supports this finding, Barnum & Squire (Oxford Economics
Papers 1978) find that large and small farms have the same technical and
allocative efficiency.
2. Carter finds that large farms would produce 15% more output than small
farms given the same inputs (e.g. better access to green revolution
technology) but still b < 0 so other reasons must exist.

(II) The second argument is that small holdings tend to be prevalent where
land quality is high so high yield is a result of better quality. Bhalla and
Roy (1988) offer evidence for this hypothesis. They use a sample of 21500
farm households in India, collected as part of Fertiliser Demand Survey.
The analysis concerns the exogenous quality differences, i.e. soil quality,
colour, etc, rather than endogenous quality differences (i.e. those affected
by choice of farmer such as Tubewell irrigation).

Y
Conventionally the estimated equation is ln( ) = a + b ln( H ) + e
H

where Y = output, H = farm size and e is the error term. However, this
assumes homogenous land quality. If land is heterogeneous then we should
Y
estimate ln a( ) = a¢ + b¢ ln( H ) + c ln(Q) + e¢
H

where Q = land quality.

Because it is important to consider exogenous land quality variables they

only look at large irrigation work such as canals, tanks, village wells, etc,

6
and ignore hand-pumps or tubewells, which can be part of farmers’
investment decision.

Their quality measure are:

sand
loam
1. Soil texture light clay
heavy clay

2. Soil Colour – red, black, grey, yellow

3. Depth of soil – less than 1 foot, 1-3 feet, more than 3.

The number of fragments of land was included to take account of possible

bad quality due to distress sales.

A further problem is the misspecification due to omitting soil moisture.

There is no soil moisture information in the data. To overcome this, they
estimate the relationship for different regions, zones, sub-zones and
districts.

Empirical Results

(1) Quality differences are important determinants of farm productivity.

(2) Without such inclusion b < 0 for all parts of India. After such inclusion
only 30% of Indian districts have b < 0 and the effect is much weaker.

The above argument has often been used for land reform policy as a
legitimate reason for land redistribution for both equity reasons (i.e. asset
redistribution) and efficiency reasons.

7
 Before Reform
Centralised Decentralised
1979 Tenants ®
Distributive China owners
After Iran, Egypt
Reform China? Pre 1940
Collective USSR China,
(Coop Other communist Kibbutz
Collective countries
State)

However (a) one should take care because introduction of green revolution
technology (chemical fertilisers, modern irrigation, tractors) may easily
erode the superiority of small farms which are less likely to adopt such
techniques.
(b) a fruitful land reform must also consider:
1. Degree of concentration in land operations
2. Relative abundance of the country’s land endowment
3. Imperfections in capital and labour markets
4. Identification of the proper land size by looking at total factor
productivity rather than (partial) yield per acre.
5. The idea that although landowners may own a large quantity of land
(latifundia, haciendas), not all this land may be of productive use

The Egyptian land reform, which is an example of a relatively successful

redistribution in terms of raising productivity, set 15 feddans as the
optimal land size, depending on whether the tenant had capital or not.
Capital was defined as the number of bullocks the peasant owned, and
therefore could use to plough the land.

8
 TFP

= ­
optimal
size 15 feddans in Egypt

References:

Savastano, S. and Scandizzo, P. L., (2017) Farm Size and Productivity: A

"Direct-Inverse-Direct" Relationship, Policy Research Working Paper
8127, World Bank.

Bardhan P.B. (1973), “Size, Productivity, and Returns to Scale: An

Analysis of Farm-Level Data in Indian Agriculture”, Journal of Political
Economy, 81:1370-1386.

Bhalla, S.S. and P. Roy (1988), “Mis-Specification in Farm Productivity

Analysis: the Role of Land Quality”, Oxford Economic Papers, 40: 55-
73.

Barrett, C. B., Bellemare, M. F., & Hou, J. Y. (2010). Reconsidering

conventional explanations of the inverse productivity-size relationship.
World Development, 38(1), 88-97.

Benjamin, D. (1995). Can unobserved land quality explain the inverse

productivity relationship? Journal of Development Economics, 46(1), 51-
84.

9
Helfand, S.M. and Taylor, M.P.H., (2017) The Inverse Relationship
between Farm Size and Productivity: Refocusing the Debate

https://economics.ucr.edu/pacdev/pacdev-
papers/the_inverse_relationship.pdf

Assunção, J., Ghatak, M., (2003) On the Inverse Relationship between

Farm Size and Productivity. Economics Letters, Volume 80, No. 2,
pp.189-194.

10