The potential of reducing prices of wheat and maize products by exploiting economies of scale: A case study of Fars province

There is a general belief among agricultural expertise and planers that smallness of the farms causes inefficiency, and increases cost of production in production units. In fact, they assume that production technology of agricultural products is characterized by increasing returns to scale which can be exploited to reduce prices. The main object of this study is testing this hypothesis for two major agricultural crops in Fars province, namely; wheat and maize crops. To this end, a dual approach using the cost function is utilized to specify this structural characteristic in three distinct traditional, commercial, and mixed farms, applying production data of the crop years 1388-87. The Generalized Leontief, Normalized Quadratic and Translog functional forms were examined to specify the most appropriate form for representing the production technology of these two products. Results indicate that the Translog functional form most appropriately represents production technology of the selected crops in the Fars province. The calculated scale economies parameter for these two crops in the three different farms revealed the presence of increasing returns to scale in their production technologies. Consequently, there is a good potential for reducing the unit cost of production, and thus, prices of these two crops by increasing the size of the farms above their present average farm size. In addition, the magnitude of the scale economies parameter in the wheat crop is larger than that of the maize implying, that wheat farms have more potential of exploiting economies of scale to reduce the cost of producing this product.