Technical and allocative efficiency in determining organizational forms in agriculture : a case study of corporate farming

Dobrowsky, David W. (2013-12)

Thesis (MScAgric)--Stellenbosch University, 2013.

Thesis

ENGLISH ABSTRACT: The optimal farm size and organizational form of agriculture is a widely discussed topic with little consensus as to which organizational form would be optimal under certain circumstances. There is often confusion as to what constitutes a corporate farm as well as a family farm, with the size of the farm often used as a distinguishing factor. This should however not be the case as there are many extremely large farms that are owner-operated within South Africa. The distinguishing factor should rather revolve around the management structures of these farms. It is these management structures that would seem to limit the metamorphosis of owner-operated farms into large corporate structures. This thesis uses an analysis of both technical and allocative efficiency in determining the organizational form chosen within agriculture. It is shown in the thesis that farm size determines or improves the technical efficiency and this is brought about by the farms ability to stay abreast with the technological times by having “economies of size” to their advantage. The evolution of farm size would therefore seem to be driven by this need to obtain “economies of size” so as to be able to earn comparable wages to off-farm activities. The attainment of this technical efficiency however does not seem to be linked to the organizational structure of the farm; it is rather dependant of the size of the farm. While the size of the farm is an important factor in achieving technical efficiency it is not as important in determining allocative efficiency, with various studies arguing that larger farms are less allocatively efficient than smaller farms. This reduced allocative efficiency seems to stem from various transaction costs and principle agent issues within the corporate setting that are not prevalent in the owner-operated farms. This is because in the owner-operated settings the family are the residual claimants to profit, which suggests that they do not have the incentive to shirk. The opposite is true for the corporate setting where the model is fraught with moral hazard and other issues of the principle-agent nature, which would seem to raise the transaction costs of this organizational form, and this has negative implications for the allocative efficiency with which these farms operate at. This thesis therefore uses data obtained from such a corporate farm, where the owners of the farms are kept on as farm managers and the company makes all the production decisions. This thesis argues that it is these agency issues and transaction costs that hamper this organizational form while it is shown that the technical efficiency for these farms are high suggesting that economies of size are important in determining the technical efficiency of these farms.

AFRIKAANSE OPSOMMING: Die optimale plaasgrootte en organisasievorm in die landbou is ’n onderwerp wat al baie aandag in die literatuur ontvang het, maar waar daar min ooreenstemming is oor watter organisasievorm optimaal sal wees onder spesifieke omstandighede. Met die grootte van die plaas wat dikwels as 'n onderskeidende faktor gebruik word, is daar dikwels verwarring oor wat ‘n korporatiewe plaas sowel as ʼn familie plaas uitmaak. Dit hoort egter nie die geval te wees nie, want daar is baie groot plase wat as alleen-eienaar bedryf word in Suid-Afrika (m.a.w. familie-plase met gehuurde arbeid). Die onderskeidende faktor moet eerder die bestuur strukture van hierdie plase wees. Dit is hierdie bestuur strukture wat die metamorfose vanaf eienaar-bedryfde plase na (groot) korporatiewe strukture beperk. In hierdie tesis word 'n ontleding van beide tegniese en allokatiewe doeltreffendheid gebruik in die ontleding van die optimale organisasievorm in die landbou. Die tesis bewys dat die plaas se grootte die tegniese doeltreffendheid bepaal of verhoog, vanweë die groter plase se beter vermoë om op hoogte te bly met tegnologiese ontwikkeling deur die "ekonomieë van grootte" tot hul voordeel te gebruik. Plaasgroottes pas aan by die geleentheidskoste van die eienaar-bestuurder en tegniese doeltreffendheid is nie afhanklik van die organisasiestruktuur van die plaas nie, maar is eerder afhanklik van die grootte van die plaas. Terwyl die grootte van die plaas 'n belangrike faktor in die bereiking van tegniese doeltreffendheid is, is dit nie so belangrik in die bepaling van allokatiewe doeltreffendheid nie. Verskeie studies wys daarop dat groter plase minder allokatief doeltreffend is as kleiner plase, hoofsaaklik as gevolg van verskeie transaksiekoste voordele van klein plase. Maar daar is ook prinsipaal-agent kwessies in die korporatiewe omgewing wat nie algemeen by eienaarbedryfde plase voorkom nie. Dit is omdat in die geval van die eienaar-bedryfde instellings die familie aanspraak het op die residuele wins, en dus ʼn aansporing het om opdragte uit te voer. By korporatiewe plase is daar egter prinsipaal-agent probleme wat gepaard gaan met morele risiko (‘moral hazard’). Dus het familieplase ʼn koste voordeel oor korporatiewe plase. Hierdie tesis gebruik dan data wat verkry is uit 'n korporatiewe boerdery onderneming, waar die eienaars van die plase die plaasbestuurders is en die maatskappy al die produksie besluite maak. Die tesis wys dat dit hierdie agentskap kwessies en transaksie koste is wat die organisasievorme belemmer terwyl dit blyk dat die tegniese doeltreffendheid vir dié plase hoog is wat daarop dui dat die ekonomie van grootte belangrik is in die bepaling van die tegniese doeltreffendheid van hierdie plase.

Please refer to this item in SUNScholar by using the following persistent URL: http://hdl.handle.net/10019.1/85793
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