Masters Theses

Date of Award

8-1982

Degree Type

Thesis

Degree Name

Master of Science

Major

Agricultural Economics

Major Professor

Dan L. McLemore

Committee Members

Glen Whipple, Emmit Rawls

Abstract

This study incorporated 101 accounting cost records from 1978 and 1980 to explore economies of size in Tennessee Livestock Auction Markets. Specific objectives of the thesis were: (1) To describe existing LAM operations in Tennessee; (2) To determine the typical cost structure of various size categories of auctions to identify major factors of firm efficiency; (3) To determine the current rates of return to market operators; (4) To identify the relationship between specific costs of operation and market size as indicated by animal marketing units handled; and (5) To estimate a long run average cost function for the industry to determine whether economies of size exist in Tennessee auctions.

Results of the cost analysis indicated that average total cost (ATC) generally declined up to the intermediate sizes of auctions, where they rose again. Following these increases, costs again declined through the largest volume levels. The two-year average total cost for all markets was $5.12. The largest component of average total cost was salaries, comprising 50 percent of ATC. The group of auctions with the lowest salaries expense puring both years also incurred the lowest ATC. Insurance comprised 7 percent of ATC, the second-largest component, while utilities represented the third-largest expense, 6 percent of ATC.

Land value and total fixed assets were the only asset values which were related to market volume. The smallest markets reported the lowest values for both categories during 1978 and 1980, but the largest values were not consistent with market size. No relationship existed between size of market and any category of liabilities or net worth.

Selling commissions, which are collected on each head of livestock sold, were the main source of revenue for auctions in both years. A distinct cost-size relationship existed for both total gross returns and total net returns. In both years, total gross returns and total net returns were lowest for the smallest markets and highest for the largest firms.

A long run average total cost (LRATC) function for the Tennessee livestock auction market industry was estimated by the Ordinary Least Squares (OLS) approach and the Minimum Absolute Deviations (MAD) method. The OLS method estimated the LRATC function by a regression of ATC against volume, indicating expected short run average cost conditions. The MAD approach fitted a frontier function, or envelope curve, to the bottom of the point scatter of ATC plotted against volume. This method thus provided a more appealing theoretical estimate of the LRATC function.

The OLS function indicated that 80 percent of the economies of size were exhausted at a volume of 30,000 A.M.U.'s, while the frontier function exhibited 80 percent of cost economies achieved at 15,000 A.M.U.'s. Thus, the theoretically correct frontier function indicated that smaller auction markets may capture a significant portion of the available economies of size. The OLS estimate indicates that markets must expand output to a larger size, 30,000 A.M.U.'s, to achieve most of the available cost economies. During 1980, 50 percent of the LAM's operating in Tennessee handled volumes less than 18,000 A.M.U.'s. The frontier function estimate thus appears to more accurately describe the Tennessee LAM industry, and may be the more appropriate LRATC esti-mate for Tennessee auction markets.

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