This paper examines the impact of specialization on the cost efficiency of a sample of crop and beef farms in Kansas. The economic total expense ratio was used to measure cost efficiency. The relationship between the economic total expense ratio and specialization was not significant.Farm Management,

Jones, Rodney D.

Langemeier, Michael R.

English

Research Papers in Economics

Cost Efficiency Estimates for a Sample of Crop and Beef Farms  
 
 
 
 
 
 
 
 
Michael Langemeier 
346 Waters Hall 
Department of Agricultural Economics 
Kansas State University 
Manhattan, Kansas  66506 
mlange@agecon.ksu.edu 
 
 
Rodney Jones 
304C Waters Hall 
Department of Agricultural Economics 
Kansas State University 
Manhattan, Kansas  66506 
jonesrd@agecon.ksu.edu 
 
 
 
 
 
 
 
Paper presented at the 2005 SAEA Meeting, Little Rock, Arkansas, February 6-9, 2005 
 
 
 
 
 
 
 
 
 
 
 
Copyright 2004 by Michael Langemeier and Rodney Jones.  All rights reserved.  Readers 
may make verbatim copies of this document for non-commercial purposes by any means, 
provided that this copyright notice appears on all such copies. 
  1Cost Efficiency Estimates for a Sample of Crop and Beef Farms 
 
 
Abstract 
 
This paper examines the impact of specialization on the cost efficiency of a 
sample of crop and beef farms in Kansas.  The economic total expense ratio was used to 
measure cost efficiency.  The relationship between the economic total expense ratio and 
specialization was not significant. 
  2Introduction 
The percent of income from livestock and the percent of farms with livestock 
income in Kansas have declined over the last 30 years.  Though this decline has occurred 
for beef, swine, and dairy, the percentage decline is not near as large for beef as it is for 
swine and dairy.  Research that examines the relative efficiency of crop and crop/beef 
farms would help explore the relative importance of beef production to farm 
performance.      
The objective of this paper was to examine the cost efficiency of jointly 
producing crops and beef cows.  The paper also explores the relationship between cost 
efficiency and farm size.  
Methods 
 
Economies of scope exist when the total cost of producing two enterprises 
together is less than the total cost of producing the enterprises separately (Baumol, 
Panzar, and Willig, 1982).  This study explores economies of scope associated with 
producing crop and beef enterprises together.  There are three potential sources of 
economies of scope for crop and beef enterprises.  First, a farm may be able to more 
efficiently utilize labor in winter months if they produce both crop and livestock 
enterprises.  Second, a farm may be able to more effectively utilize machinery and 
equipment if they produce both crop and livestock enterprises.  Third, beef enterprises 
can often utilize wheat pasture or crop aftermath with little or no loss in crop revenue.  
The use of these items would lower the total cost of producing both enterprises.   
In this study, cost efficiency is examined using the economic total expense ratio.  
Under perfect competition, the economic total expense ratio would be equivalent to 
  3overall efficiency computed using Data Envelope Analysis (DEA).  The economic total 
expense ratio was computed by dividing economic cost by gross farm income.   
The relationship between cost efficiency and specialization is explored using 
Ordinary Least Squares regression.  Specifically, the following relationships are 
explored: 
(1) ETEXPR = f(GFI, HI) 
(2) ETEXPR = f(GFI, LIVE) 
where ETEXPR is the economic total expense ratio, GFI is gross farm income, HI is the 
Herfindahl index (Greer, 1984), and LIVE is the percent of gross farm income derived 
from livestock production.  The first equation focuses on the relationship between cost 
efficiency and whole-farm specialization.  The second equation focuses on the 
relationship between cost efficiency and livestock production specialization. 
  Due to the importance of economies of size, the relationship between the 
economic total expense ratio and gross farm income is expected to be negative.  The 
relationship between the economic total expense ratio and the Herfindahl index will be 
negative if specialization improves cost efficiency.  Similarly, if specializing in livestock 
production improves cost efficiency, the relationship between the economic total expense 
ratio and the percent of income derived from livestock production will also be negative.  
Economies of scope would be evident if the relationship between the economic total 
expense ratio and the Herfindahl index is positive.    
Data 
 
Table 1 contains summary information for 720 Kansas Farms.  All of the sample 
farms were members of the Kansas Farm Management Association and had continuous 
  4whole-farm data for the 1999-2003 period.  Farms participating in the KFMA program 
are typed using labor standards.  To be included in this study farms had to be typed as 
dryland crop farms, as irrigated crop farms, as beef cow farms, or as farms with both 
crops and beef cows. 
The economic total expense ratio for each farm was computed using total 
economic cost and gross farm income information.  Economic cost was computed by 
summing labor costs, purchased input costs, and capital costs.  Labor costs included 
unpaid operator and family labor, and hired labor.  Average family living expenses were 
multiplied by the number of operators on the farm to obtain an opportunity charge for 
unpaid operator and family labor.  Purchased input costs included purchased feed, seed, 
fertilizer, organization fees, veterinarian expenses, marketing expenses, herbicide and 
insecticide, and crop insurance.  Capital costs included depreciation, repairs, fuel and 
utilities, machine hire, taxes, general insurance, and an opportunity charge on assets.  The 
opportunity charge on assets included opportunity charges for purchased inputs, current 
crop and livestock inventories, breeding livestock, machinery and equipment, buildings, 
and land. 
The Herfindahl index was computed to examine the extent to which the 720 farms 
were diversified or specialized.  Using average crop and livestock income information for 
each farm, the Herfindahl index summed the squares of the percentage of income from 
crops and beef production.  The Herfindahl index for a specific farm depended on the 
percentage of income derived from each source.  For example, a farm with 50% of its 
income from crops and 50% of its income from beef production would have a Herfindahl 
  5index of 0.50.  As specialization into crops or beef production increases, the Herfindahl 
index approaches 1.00.  
The average gross farm income for the sample of farms was $205,400.  
Approximately one-half of total economic cost was comprised of capital costs.  The 
average economic total expense ratio was 1.2984 indicating that on average the farms 
were not covering all of their economic costs.  Approximately 80% of gross farm income 
was derived from crop production.  The average Herfindahl index was 0.7940.  On 
average, the farms had 56 beef cows.  Approximately 60% of the farms had beef cows.    
Results 
 
The regression results are reported in table 2.  The top half of the table presents 
the results for equation (1).  The bottom half of the table presents the results for equation 
(2).  The coefficients on gross farm income in both equations are negative and significant.  
This result reveals the importance of economies of size and is consistent with other 
studies (Hallam, 1993; Purdy, Langemeier, and Featherstone, 1997).   
The Herfindahl index and the percent of gross farm income derived from 
livestock production variables are not significantly different from zero.  Thus, the 
economic total expense ratio is not significantly different for farms that are diversified 
and farms that are specialized.  The results with respect to the Herfindahl index and 
percent of gross income derived from livestock production are consistent with Purdy, 
Langemeier, and Featherstone (1997).  The results of this study have implications 
regarding economies of scope.  On average, economies of scope involving the joint 
production of crops and beef cows are not large enough to significantly impact cost 
efficiency for the sample farms. 
  6Summary 
The objective of this paper was to examine the cost efficiency of jointly 
producing crops and beef cows.  Jointly producing these products may improve the 
utilization of labor and machinery, and could potentially make use of underutilized 
resources such as wheat pasture and crop aftermath.     
Cost efficiency was measured using the economic total expense ratio.  
Relationships between the economic total expense ratio, and whole-farm and livestock 
production specialization were explored.  A positive relationship between the total 
expense ratio and whole-farm specialization would indicate the presence of economies of 
scope.  The relationship between the economic total expense ratio and whole-farm 
specialization was not significant.  Thus, on average, there was not a significant 
advantage associated with producing both crops and beef cows together. 
Further research could explore the measurement of economies of scope for 
individual farms.  These scope economies could then be related to farm size and other 
farm characteristics.   
  7References 
Baumol, W.J., J.C. Panzar, and R.D. Willig.  Contestable Markets and the Theory of 
Industry Structure.  New York: Harcourt, Brace, and Javanovich, 1982. 
 
Greer, D.F.  Industrial Organization and Public Policy, Second Edition.  New York: 
Macmillan Publishing, 1984. 
 
Hallam, A.  “Economies of Size: Theory, Measurement, and Related Issues.”  In Size, 
Structure, and the Changing Face of American Agriculture, edited by A. Hallam.  
Boulder: Westview Press, 1993. 
 
Purdy, B.M., M.R. Langemeier, and A.M. Featherstone.  “Financial Performance, Risk, 
and Specialization.”  Journal of Agricultural and Applied Economics.  29(July 
1997):149-161. 
 
 
 
  8 
Table 1.  Financial and Production Characteristics of a Sample of 720 Kansas Farms. 
    
Variable Average Std.  Dev.
    
Gross Farm Income (GFI)  205,400 157,504
    
Labor Cost    42,979 20,456
    
Purchased Input Cost  67,193 56,885
    
Capital Cost    124,724 83,942
    
Economic Total Expense Ratio  1.2984 0.5005
    
Percent of GFI from Crop Production  0.7990 0.2402
    
Percent of GFI from Livestock Production  0.2010 0.2402
    
Herfindahl Index  0.7940 0.1927
    
Number of Beef Cows  56.22 77.70
        
  9 
Table 2.  Relationship Between Efficiency, Gross Farm Income, and Specialization. 
         
     Parameter   Significance
Variable       Estimate t-value  Level
      
Efficiency and Herfindahl Index  
         
Intercept     1.5778 21.34  <  0.0001
         
Gross Farm Income    -1.28E-06 -11.72  < 0.0001
         
Herfindahl Index    -0.0207 -0.23  0.8166
         
R-Square     0.1631  
         
         
Efficiency and Livestock Production      
         
Intercept     1.5363 46.31  <  0.0001
       
Gross Farm Income    -1.26E-06 -11.50  < 0.0001
         
Percent of GFI from Livestock Production  0.1040 1.45  0.1482
         
R-Square     0.1655    
                
 
 
  10

Cost Efficiency Estimates for a Sample of Crop and Beef Farms

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