Theories
Economies of Scale and Commercial Farming
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As firms become larger and their scale of operations increase they are able to experience reductions in their average costs of production. The firm is said to be experiencing increasing returns to scale. Increasing returns to scale results in the firm's output increasing at a greater proportion than its inputs and hence its total costs. As a consequence its average costs fall.
Thus initially the firm's long run average cost curve slopes downward as the scale of the enterprise expands. The firm enjoys benefits called internal economies of scale. These are cost reductions accruing to the firm as a result of the growth of the firm itself. (An external economy of scale is a benefit that the firms experience as a result of the growth of the industry.)
After the firm has reached its optimum scale of output, where the long run average cost curves are at their lowest point, continued expansion means that its average costs may start to rise as the firm now experiences decreasing returns to scale. The long run average cost curve therefore starts to curve upwards. This occurs because the firm is now experiencing internal diseconomies of scale.
There are a number of internal economies of scale enjoyed by the Terranova Estate that many of the small-scale farms that we have visited on Farming Tour are unable to take advantage of. The Terranova Estate is considerably larger that many of the smaller cash crop producing farms in Zambia. It has over 1000 hectares compared with a smaller farm that might have less than 10 hectares.
| Types of internal economies of scale | |
|---|---|
| Financial | The farm has been able to gain loans and assistance at preferential interest rates from the EIB, World Bank and the EU |
| Marketing | It has managed to dedicate resources to its strategy of niche marketing |
| Technical | The access to finance has allowed it to invest in sophisticated Israeli irrigation technology |
| Managerial | It large size enables it to employ specialised personnel such as estate managers |
| Risk bearing | The farm has used some of its land to diversify into producing fresh vegetables for export as well as continue producing maize. |
Size is therefore of considerable importance in determining the long-term commercial success of the farm. The vulnerability that many small farms face is a function of their scale, as well as the external influences that affect them such as droughts and volatile commodity markets.
These large scale farms are attracting a considerable amount of overseas development aid funding from organisations such as the World Bank and the European Union as they are seen as being an integral part of the export earning capacity of the country.
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