Three-Dimensional Efficient Portfolio Frontier: Mean, Variance, and Farm Size

With continuing trends in increasing farm size and declining number, the impact of size of operation on risk may have significant policy implications. Diversification indexes for 288 Kansas farms from 1984 to 2003 indicated that sample farms had become slightly more diversified over time. Previous findings on the impact of farm size on diversification of farms have been controversial. To capture observed size impacts on enterprise-specific risks, a mean-variance model that allows for variance of enterprise returns to be decreasing in assets allocated is conceptualized. Efficient farm enterprise mixes are estimated using farm level data, showing that the optimal levels of diversification differ for farms of different sizes. For example, small farms should diversify more than large farms to achieve the same level of return. Results from a panel regression analysis showed that the relationship between farm size and diversification depended on how farm size was measured, reconciling the past findings.