Many people assume smaller farms are significantly less efficient than larger farms, and attribute this to economies of scale.
Not so. Much research demonstrates that many farm activities do not exhibit true economies of scale. And economies of scale are least likely to arise in settings—as in much of the developing world—where there are many workers available to work in farming and not much capital to invest in labor-saving machinery.
In fact, most studies find that larger farms produce less per unit area than small farms. Other studies conclude that farms of all sizes produce about the same yields per unit area. (The few exceptions where large farms have a natural advantage involve highly specialized machinery, livestock production and certain plantation crops.)
The advantage of family farms lies in their reliance on family labor. While hired workers require a lot of supervision, family members have a strong incentive to work hard for their own family’s benefit. So any potential economies of scale that a farmer might have from operating a larger farm tend to be offset by higher costs arising from the need to monitor how well the hired workers are working. The larger the farm, the more costly it is to supervise each worker since the work is spread out over a larger area.
But this doesn’t mean that farms will remain small. As an economy develops, farm size tends to grow because better paying non-farm jobs will gradually attract workers from agriculture to the non-farm sector. As farm workers leave agriculture, farm wages naturally rise and it then makes business sense to replace labor with farm machinery.
Thus, bigger farms result from economic development, but do not cause economic development.
Policies that encourage small farms to become more productive—for example, by helping farmers gain secure rights to the land they cultivate, and providing access to new farming techniques—should not only cause yields to increase, but will naturally ensure that economic gains and opportunities are distributed more evenly. And a broader distribution of gains will strengthen the social fabric by broadening the number of people who have a stake in their society.
Returning to the question we began with: where labor is abundant and relatively inexpensive, the family farm model is sound economics and sound social policy. Governments and organizations that care about rural development would do well to support family farmers.
Further reading – Download Landesa’s 2-page issue brief on this topic: Is Bigger Better?