An econometric analysis of economies of scale and optimum size of independent sugarcane farms on the Hilo coast

Abstract

The number of independent non-plantation farms in the State of Hawaii significantly following the expiration of the 1948 Sugar Act on December 31, 1974, from 510 farms in 1974 to 141 in 1985. Because of concern regarding the decline in the number of sugarcane growers and the substantial variation in costs of production among them, a research project on estimating economies of scale and optimum size of independent sugarcane farms on the Hilo Coast was undertaken. It was assumed that a study comparing the performance of farming operations among growers might enhance the decision making process, lead to an improvement in overall efficiency and increase opportunities for viable farming operations. The objectives of the study are to estimate, analyze and evaluate various aspects of economies of scale and optimum farm size of the independent sugarcane growers. Several econometric models are used in the study. The translog cost function measures scale economies as a relationship between total cost, output and prices. This function under its restrictive form and various assumptions of homotheticity and unitary price substitution effects identifies both economies and diseconomies of scale. The Cobb-Douglas production function with variable technologies explains economies of scale as it relates output to labor, land and capital inputs. By investigating the effects of capital on output and selected factors of production, it was found that capital expansion could benefit larger producers through economies of scale. As anticipated, smaller producers are less responsive to capital expansion and diseconomies of scale occur at lower levels of production. The quadratic function shows increasing and decreasing economies of scale between average cost and increasing output and identifies the optimum level of output and farm size at which independent sugarcane growers could operate their farms efficiently. This function shows that average costs decrease as farm size increases, thus also indicating economies of scale. It also provides a basis for estimating optimum farm size by means of differentiating the equation. The results of the quadratic function indicate that shifts in minimum cost and optimum production levels make it difficult for larger producers to remain in business. Many smaller sugarcane growers, on the other hand, can continue production even though marginal losses occur through the utilization of unpaid family labor and subsidies from off-farm employment. The results of the empirical analyses indicate that economic efficiency can be attained by expanding farms to higher levels o£ production up to specified sizes, depending on the econometric £unction utilized. In recommending ranges of economic efficiency as defined by economies of scale, the translog cost £unction was found to be more acceptable than the quadratic function in the analyses. Since the translog cost £unction shows that economies o£ scale are present for £arms of up to 50 acres in size, independent sugarcane growers producing less than 50 acres could consider expansion to increase efficiency. The research findings indicate, on the other hand, that expansion o£ farms of 50 acres or greater would probably not result in greater efficiency. Since no one method provides conclusive information on all possible explanations of economies of scale and optimum £arm size, it is recommended that further research be carried out on comparative studies o£ these and other types of econometric models. Objectives for further research should focus on determining which methodologies and types of data are best suited for estimating economies of scale and optimum farm size.