Growth and diversification in U.S. agriculture: Farm level analysis of cost structure under risk and uncertainty

Initially, we analyze growth and diversification of U.S. dairy, corn, wheat, apple, and beef farms by examining longitudinal changes in ten size cohorts through three successive censuses. In dairy, we reject Gibrat's law and the mean reversion hypothesis of growth. Growth rates appear bimodal where the smallest and largest farm cohorts grow fastest. All cohorts diversify but the largest farms do not diversify as rapidly as medium-sized farms. These data suggest that scale economies persist even for the largest cohort of US dairy farms and scale economies dominate scope economies for large farms. For the other industries, we fail to reject Gibrat's law in apple and wheat industries and the mean reversion hypothesis in beef and corn industries. Apple and wheat farms diversify over time. Findings suggest that scale economies diminish for large farms across all four industries and scope economies dominate scale economies for large apple and wheat farms.;Then, we examine scope economies and risk aversion, two forces that simultaneously determine diversification. We jointly estimate scope economies and determine risk preferences under price uncertainty. We reject risk neutrality in favor of IARA and IRRA. Scope economies are significant but diminish with farm size. Increasing returns to scale exist in the production of multiple enterprises and diminish with size. Large farms operate under decreasing returns to scale. Ignoring risk preferences, a common practice in empirical work, results in an underestimate of the effect of scope economies for large farms.;Finally, we examine the impact of marketing contracts on farm cost structure and implied scale and scope economies for samples of dairy corn and wheat industries. We use the Modern Portfolio Theory to explain the increase in returns from diversifying marketing schemes. Assuming risk preferences and price uncertainty, we estimate the contract adoption decision, risk preferences, and structural parameters simultaneously. We derive measures of economies for both contracting and non-contracting farms. We find that marketing contracts improved the returns for corn and wheat farms, but not for dairy farm. Finally, having diversified marketing schemes is found to benefit only corn farms.