Notesale: Turn your study into money

Document Preview

Extracts from the notes are below, to see the PDF you'll receive please use the links above

---

Organisation and Strategy 2016-2017

Economies of scale in the wheat production:
Exploring the farm size-cost-price relationship
for farms in the U
...

Aysel Jabrayilova 454308
Adrian Cuiperca 456893
Skills and Guidance; Organisation and Strategy 2016-2017
Group: IB05B
Teaching-assistant: Jurian van der Bijl
Word count: 3724

Abstract
It is generally accepted that agricultural production is characterized by increasing returns to
scale
...
S between 2011 and 2016
...
The linear regression models along with the correlation
matrixes have been established in order to check the relationships between the two tested
hypotheses
...
Nevertheless, the findings proved a positive correlation
between cost and price
...
S should find
other ways to achieve economies of scale
...


Table of Contents
Introduction & Research question
...
4
Data
...
7

...
8
Conclusion
...

Appendixes
...
16













1




Introduction & Research question

Wheat agriculture is one of those industries that did not lose its popularity in the United States
over the past years
...
Wheat
is harvested in almost every state and ranks third among the U
...
field crops according to both
planted acreage and volume of production, leaving behind corn and soybeans (Brester, 2012)
...
S
...
Even though policy changes have influenced the U
...

American agriculture and rural life had an enormous transformation during the 20th century
...
Nowadays, the production is concentrated on
a small number of very large-scale, technology-based farms, specialized in rural areas
...
In the 20th century,
farms in areas were more than half of the U
...
population lived, now in the farming areas live
less than ¼ of the population
...
S
...
Apart from its popularity, the U
...
In addition, the availability of marketing loans, direct payments
and average crop revenue election would affect farmers' decisions in marketing and production
decisions (Westcott, & Price, 2001)
...
More and more companies are trying to acquire
new technologies and methods in order to extract higher profits from their farms
...
Due to this phenomenon, a question can be posed on the extent to which the
plantation size of wheat impacts its total average cost
...
Therefore, producers and farmers in the wheat industry have to constantly deal with
problems and questions associated with large-scale production
...
Technically it is
possible to achieve economies of scale as fixed costs are involved, where fixed costs in wheat
industry are insurance, taxes and equipment depreciation
...
Nevertheless, there is still a wide debate on whether or not
economies of scale indeed decrease total average cost (Duffy, 2009)
...
Furthermore, direct relationship between cost and price has been
derived
...
S farmers cannot make use of economies of scale as a competitive advantage;
therefore the new sources of achieving economies of scale has to be examined
...
To answer the research question, previous literature on
economies of scale and the relationship between farm size and productivity will be discussed
in the Theoretical Framework
...
Section three
introduces the data and uses them to describe changes over time in productivity, farm size
structure and profits
...
Methodology section follows
...
Results part contains the values obtained from the statistical
tests that are explained in the Methodology section
...
A conclusion follows – the answer of the research question and its influence
on science and society
...





3

Theoretical Framework

The question about the existence of economies of scale often comes up in the discussion of the
agricultural production (Chavas, 2001)
...
To be more precise, economies of scale refer to the
reduction of cost per unit of output when the size of production rises, due to the fact that fixed
costs are spread over a large number of products
...
According to Kisilev and Peterson (1996) there is no clear
evidence of economies of scale in U
...
The research conducted by Hayami and Ruttan
(1985) supports the idea that the larger plantation size is comparatively more efficient and less
costly, hence confirming the fact that economies of scale exist in the farm management and
agricultural industry
...
(2004) found that the agriculture industry
in the U
...

One of the reasons why farms trying to grow in size is to make more economical use of the
equipment that is capable of covering more ground with less labor
...
Another interesting point is about gaining significant bargaining power as a supplier, as
prices will be lower in comparison with those of the competitors in the market
...
In order to implement these objectives, one of the
of the widely debated topics, the relationship between the plantation size and the total average
cost in the wheat industry, has to be analyzed
...
This
leads to the first hypothesis of the research:
Hypothesis 1: An increase in farm size in the United States leads to the decrease in the total
average cost of wheat per acre
...
Since the cost sets
floor for price, the interrelationship between cost and price are important for production
planning (Dicks-Mireaux, 1961)
...

For many households the bread remains a base good
...

Therefore, wheat becomes a necessity mean to satisfy the U
...
Thus it is worthwhile to question whether or not
the cost has a significant influence on the price
...

The same hypothesis which has been tested in China concluded that the average cost reduction
positively correlated with the price decrease, thus leading to the fact that economies of scale
exist in wheat industry (Jin, Rozelle, Alston, & Huang, 2005)
...

Overall, the research question along with two supporting hypotheses will be discussed and
tested in the following sections
...
To
investigate the existence of economies of scale in the wheat industry in the U
...
S), and both costs and prices in U
...
dollars per acre
...
This database is updated monthly and gives
reliable information about these three variables
...
In addition, some transformations were



5

applied to the dataset
...
1)
...
Descriptive statistics, are mathematical variables such as minimum, maximum, mean
and standard deviation that interpret some of the properties of data
...
The values of cost, price per
acre and planted area are used to see how these three numbers have changed between 2011 and
2016 in the USA
...

Table 2- Descriptive statistics of three variables in the U
...

Descriptive Statistics
Minimum

Maximum

Mean

Std
...
60

215
...
02

45
...
15

63
...
37

3
...
14

358
...
71

62
...
As there is a strong
relationship between cost and price of the wheat, there is the same reason for the high values,
which can be explained by naturally occurring disasters and climate changes the that affect the
agricultural industry
...
14$ and 358
...
6$ to 215
...
All this is not enough to answer the research
question; hence further examination of the data will be assessed
...
The corrections
of the received dataset will be performed in the methodology section of the research paper
...
The descriptive statistics is
examined in the data section to make the data clearer, thus granting a better view on the central
question
...
An outcome that is expected to change is called a dependent/response variable, while
a manipulated event is an independent/explanatory variable
...
For the first hypothesis on whether or not increase in the farm size affects the
cost, the plantation size was indicated as the independent variable, whereas the cost of wheat
per acre is the response variable
...
There is a space for economies of
scale if β1 is less than 0 and diseconomies of scale in the case if β1 greater than 0
...
Furthermore, the
correlation analyses will be applied for a better statistical analysis; thus two main characteristics
of the correlation analysis will be used: direction and strength
...
In addition, the correlation will be used in order to determine whether or not
the plantation size and the cost move in the same direction
...
It is a crucial criterion while testing the null hypothesis
...

Furthermore, according to the sign and the significance of the coefficient, the relevant null
hypotheses will be rejected or not rejected
...

Due to the fact that the hypotheses are identical and imply a check of interrelationship between
variables, the above described methodology will be applied to the second hypothesis as well
...
As it can be seen, the first hypothesis is related to the
economies of scale and checks whether the increase in the wheat farm size really decreases the
total average cost of wheat per acre
...

Table 3- Correlation matrix presenting correlation coefficients between cost per acre and
planted area in million acres
...
(2-tailed)

per

Planted
area/million acres

...
00

*Correlation is significant at the 0
...
98 between the cost per acre and
planted area
...
This means that if the plantation size of wheat increases,
the cost will also rise
...
01
...
As can be observed from the Figure 1, there is
a R-squared statistical measure that defines how close the data are to the fitted regression line,
thus explaining the percentage response of the dependent variable caused by the explanatory
one
...
S
...
978
...
8% of the variability around the cost mean can
be interpreted by the planted area
...
76E2+12
...
32
dollars (The modified equation would look as follows: y= -5
...
32*x)
...
32 dollars
...
One logical explanation for this result is an increase of the fixed overhead
cost due to the new machineries and equipment, improved irrigation system, developed seeding
and harvesting methods along with the climate change
...
(All
detailed tables with relevant coefficients are posted in Appendix 1
...
Similar steps will
be taken in order to examine the second hypothesis
...
96
...

Table 4- Correlation matrix presenting correlation coefficients between cost per acre price per
acre
...
96

Sig
...
002

*Correlation is significant at the 0
...
R2 which represents an estimation of the strength of the
relationship between the model and the dependent variable, is 0
...
As it was mentioned before,
this number explains how accurate observed outcomes are replicated by the explanatory
variable and predicts future outcomes on the basis of related information
...
1, there is an upward sloping fit line in the
scatterplot which proves the assumption that the higher cost, the higher the price of the wheat
is (see appendix 2
...

In addition, the linear graph confirming the direct relationship between cost and price is
attached in the appendix 3
...
Based on the obtained outcome, the second hypothesis cannot be
rejected
...
In spite of
the fact that reliable and trustworthy data were used in exploring the research question, the
possibility of measurement errors in this report is never error free
...




10

Conclusion
This study was set out to research the applicability of the theory of economies of scale in the
U
...
Particularly interesting is costs and prices
change as the size farm grows
...
The empirical findings show that there is a positive correlation
between plantation size and cost, and it is statistically significant
...
It has to be noted that the cost sets
floor for the price, consequently when cost drops, the price drops also even it includes mark-up
pricing
...
Contrary to what was expected, it is concluded from the
regression and correlation outputs that the U
...
As a matter of fact, the U
...
The implication of these findings means that increasing plantation size does not
make the wheat production more effective due to the various facts such as increasing labor cost,
more expensive equipment and natural disasters
...
Thus, economies of scale as a source of cost advantage in wheat industry might
fail
...
Therefore, from an economical interpretation, increasing size of
farms positively affects the average cost, and cost also positively influences price
...
S over indicated years
...
Firstly, the used data is not adequate
enough to provide more evidence on the research question due to the limited period of time
observed, mainly 2011 to 2016; in addition, changing climate conditions, the exchange rate and
fixed cost were not taken into the account and could be a reason for cost and price fluctuations
...
In addition, the methods applied in this reports causes the number of limitation, which has


11

to be taken into the account
...
It has to be
considered that the found correlation is not of a highly significant strength, hence this fact must
be taken in forming final conclusions
...

Some suggestions are recommended to help farmers to reduce total average cost of wheat and
increase consumer’s willingness to pay; for instance, the U
...
Also, further researches
maybe conducted in Asian countries, where wheat is considered as a stable food with wellestablished traditions to check whether or not economies of scale exist in this industry
...









12

Appendixes
Appendix 1
...
S from 2011 to 2016
...
2
Planted area in million acres and cost per acre in the U
...


Model Summary
Model

R Square


...
Error of the

Square
1

R

Estimate


...
089

47
...
Predictors: (Constant), planted area

Coefficients
Model

Unstandardized Coefficients

a

Standardized

t

Sig
...
Error

-231
...
017

6
...
907

Beta
-
...
359


...
769


...
Dependent Variable: cost per acre

Appendix 2
...
S
...
2
Cost and price per acre in the U
...


Model Summary
Model


...
929

Std
...
911

18
...
Predictors: (Constant),cost per acre

Coefficients
Model

Unstandardized Coefficients

a

Standardized

t

Sig
...
Error

Beta

14

1

(Constant)

88
...
557

Price/acre

1
...
185

3
...
964


...
225


...
Dependent Variable: price per acre

Appendix 3
...
S wheat
industry between 2011-2016
...
K
...
(2016)
...
USDA, Agriculture
Economic
...

Brester, G
...
Wheat, Department of Agricultural Economics
...
AgMRC
...
P
...
Structural change in agricultural production: Economics, technology and
policy
...

Dicks-Mireaux, L
...
(1961)
...
A Study of Inflation in Post-War Britain
...

Duffy, M
...
Economies of size in production agriculture
...

Goesaert, H
...
, Veraverbeke, W
...
, Courtin, C
...
, Gebruers, K
...
A
...
Wheat flour constituents: how they impact bread quality, and how to impact their
functionality
...

Hayami, Yujiro and Vernon W
...
Agricultural Development
...
Baltimore and London: Johns Hopkins University Press, 1985, 2nd edition
...
, Rozelle, S
...
, & Huang, J
...
Economies of scale and scope and the
economic efficiency of China's agricultural research system
...

Kislev Y, Peterson W (1996)
...
In: Papers in Honour of D
...

Leigh, J
...
, McCurdy, S
...
, & Schenker, M
...
(2001)
...
Public Health Reports, 116(3), 235
Morrison Paul C, Nehring R, Banker D, Somwaru A (2004)
...
S
...

Price Elasticity Of Demand
...
Retrieved May 12, 2017, from
http://www
...
com/terms/p/priceelasticity
...
G
...
A strategic look at global wheat production, productivity and R&D
developments
...
Genet
...
Breed, 47, 6-19
...
W
...
Increasing Productivity and Efficiency in Agriculture
...

The Modern Financial DataResearch Platform
...
d
...
ycharts
...
(n
...
Retrieved
May 13, 2017, from https://www
...
usda
...
C
...
M
...
Analysis of the US commodity loan program with
marketing loan provisions (No
...
United States Department of Agriculture, Economic
Research Service

---