An Analysis On Farm Size And Grain Production Cost

China has experienced yearly consecutive growth in grain output for the last 12 years,and the total production of rice increased from 161 million tons in 2003 to 206 million tons in 2014 with an annual growth rate of 2.3%.However,the increasing total production has recently been accompanied by an unusual increase in imports and stocks.China’s rice imports are always less than 0.5 million tons before 2012,but the imports soared to 2.37 million tons in 2012 and keep this high level in the coming years.In addition,the rice stocks increase significantly from 2008 and get a record level in recent years.Consequently China imports a large amount of grains for consumption,while domestic grains become government stocks.The stocks incur huge financial burdens to the government budget and cause much uncertainty in the world market,which fears a drastic policy change in China to cure the disequilibrium.Lack of competitiveness in China’s rice production contributes to this complicated phenomenon.More specifically,continuously increasing material,labor and land costs,rising minimum purchase price and downward pressure of world markets’ grain prices could explain and the declining agricultural competitiveness(Chen 2015).Domestic prices of most grain products are currently higher than world market prices because of high production costs and the incentive of a high minimum purchase price.The production theory documents that the average production cost always shows as U-shaped or L-shaped.The average production cost will decrease first and then increase or keep in the low level as farm size increase.Fortunately,in company with the rapidly development of industrialization and urbanization,rural labors immigrated to urban area and engaged in non-agricultural works in cities and towns,and it poses great opportunities for agricultural operators to expand their farm sizes.To mitigate the market disequilibrium and increase the international competitiveness of agricultural products,the Chinese government has taken various policy measures to encourage transferring of cropland from smallholders into larger farms to achieve economies of size.Although the average size of a grain farm decreased from 10 mu(15 mu=1 ha)in 19971 to 7 mu in 2014(Han 2014),polarized structural change has taken place with croplands shifting to much larger farms in China.More specifically,the number of large farms greater than 50 mu increased from 1.21 million in 1997 to 1.56 million in 2013,and large farms operating 315 million mu of cropland account for 20.7%of the total arable land in China(Zhang 2015).Thus,as structural changes take place on Chinese grain farms,research issues raised:Can large-scale farms alleviate cost disadvantage better than small-scale farms?If yes,the cost advantage achieved by larger scale farms mainly reflected in which terms,the seed costs,fertilizer cost,labor cost or land cost.In practice,actual costs could exceed frontier costs if a farm is inefficient in using best practice techniques or allocating input factors.A few studies have revealed that inefficiency cost is an important component of production cost Thus,what roles do technical inefficiency and allocative inefficiency play in the production cost for farms of different sizes?In addition,inefficiency level is an import aspect of farm management ability.However,due to the inadequate development in farmer training,agricultural technology extension and market-oriented reform for input factor,large scale farmers,which are grown from small scale farmers rapidly,may operate their farms by using their past and less efficient methods and experiences.Thus,small scale farms with lower efficiency level expanding their farm size in a short time would result in an mismatch statue between their farm size and inefficiency level and fail to decrease the cost and achieve the goal of improving the competitiveness.In this context,based on the micro-level data of rice farms collected in Jiangsu province,this paper mainly focuses on the following three contents:Content 1:the relationship between farm size and rice production cost and its components.This section uses the farms cost-benefit data collected in Jiangsu province to analysis the trends of the average unit production cost,fertilizer cost,pesticide cost,seed cost,labor cost(including hired labor and home labor)and land cost vary with farm size.The empirical results show that rice unit cost of production and farm size have exhibited U-shaped relationship after using hired labor price and rent land price instead of home labor price and own land price,viz.,rice unit cost of production decreasing with farm size increasing,however,the unit cost of production will increase and equal to the cost of farms in 30-50 mu,when farm size is more than 200 mu.It indicates that large-scale farms can alleviate cost disadvantage better than small-scale farms and consequently improve the competitiveness.Content 2:the relationship between farm size and farms’ frontier cost,technical inefficiency cost,allocative inefficiency cost.This section also uses the the farms cost-benefit data collected in Jiangsu province and adopts the primal system approach proposed by Kumbhakar and Wang(2006)to decompose rice cost into frontier cost and technical and allocative inefficiency cost and link them to farm size and analyze the relationship between them.The empirical results show that average unit production cost decreases with increasing farm size.This indicates that large-scale farms can alleviate cost disadvantage relative to small-scale farms.When inefficiency cost is not considered,the frontier cost first decreases and then increases as farm size increases.Both economies of size and diseconomies of size are found in rice production.The higher land rent for larger farms may contribute to the diseconomies of size.On average,the total inefficiency cost accounts for 45%of production,and it decreases with increasing farm size.Allocative inefficiency cost dominates in the rice production cost and contributes 92.7%of the total inefficiency cost.Allocative inefficiency cost decreases rapidly and compensates for the increases in both frontier cost and technical inefficiency cost as farm size increases.Content 3:The impact of farm size mismatching with efficiency on rice production costs.Inefficiency level is an import aspect of farm management ability.Based on the microdata collected in 2013 and 2014 in Jiangsu Province,this section mainly investigates the impact of farm size mismatching with efficiency on rice production costs from the perspective of technical,allocative and cost inefficiency.A two-stage instrument estimator indicates that a small scale farmer with lower allocative efficiency and cost efficiency operates a larger farm will lead to a more slightly reduction in production cost as farm size increasing.Based on these conclusions,the policy implications are as follows.Our results imply that the ongoing structural change can improve China’s rice competitiveness.This competitiveness can be further enhanced if economies of size exist in rice production and larger farms become more technically efficient.Currently,however,the minimum purchase price policy set by the government for rice is much higher than its production costs and allows all farms to survive in the market.The minimum price should be adjusted according to the structural change in rice farming to permit competitiveness.More specifically,the average production cost per kilogram ranges from 2.287 yuan per kilogram for the smallest size class to 2.043 yuan per kilogram for the largest class,and the mean value is 2.246 for the total sample.This price effect will be more significant for large-scale farmers because of their higher total production and lower unit production cost relative to small-scale farmers.In addition,enhancing the programs of vocational training for farmers,improving the agricultural infrastructure and implicating market-oriented reform in inputs will contribute to improving the competitiveness.