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Regional differences in agricultural profitability, government payments, and farmland values

Author

Listed:
  • Ashok K. Mishra
  • Charles B. Moss
  • Kenneth W. Erickson

Abstract

Purpose - The purpose of this paper is to use the DuPont expansion to examine those factors underlying differences in (rates of) return on different crop portfolios over space (ten regions) and time (1960‐2004). The paper also estimates the impact of government payments on farmland values through its impact on farm profitability. Design/methodology/approach - Businesses use the DuPont model to analyze the profitability of a business. This model includes three components: net profit margin, asset turnover, and financial leverage (or assets to equity). It is based on the relationships among these three components and is expressed as a product of ratios. For the purposes of the current study, accrued capital gains from (total) returns are excluded to focus on cash returns “cash flow”. Returns from current income are a “cash flow” available in the short run to pay financial obligations. Furthermore, returns from capital gains are not liquid; they are gains in wealth fully captured as capital gains/losses only in the longer term. Following the DuPont approach, the effect of government payments on farm asset values is equal to the sum of the effect of government payments on profit margins plus the effect of government payments on the asset turnover ratio. Findings - The analysis focuses on agricultural profitability in the ten Economic Research Service (ERS) regions. By comparing the components of the DuPont expansion, profitability differences over time are analyzed. The results indicate that one cause of low profitability in the Corn Belt and Mountain regions is a perpetually low profit margin while the evidence for other regions supports lower asset efficiency. Results show that government payments impact the profit margin and affect value of farm assets in particular farmland values but not asset turnover ratio. Originality/value - The use of DuPont expansion factor in agriculture is original and really helps us to understand the factors driving profitability in agriculture. Another innovation (originality) in this paper is the theoretical model that connects the DuPont expansion factor, government payments and its impact on farmland values.

Suggested Citation

  • Ashok K. Mishra & Charles B. Moss & Kenneth W. Erickson, 2009. "Regional differences in agricultural profitability, government payments, and farmland values," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 69(1), pages 49-66, May.
    • Handle: RePEc:eme:afrpps:v:69:y:2009:i:1:p:49-66
    DOI: 10.1108/00021460910960462
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    Citations

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    Cited by:

    1. Nehring, Richard & Gillespie, Jeffrey & Katchova, Ani L. & Hallahan, Charlie & Harris, J. Michael & Erickson, Ken, 2015. "What’s Driving U.S. Broiler Farm Profitability?," International Food and Agribusiness Management Review, International Food and Agribusiness Management Association, vol. 18(A), pages 1-20, July.
    2. Leonardo Casini & Fabio Boncinelli & Caterina Contini & Francesca Gerini & Gabriele Scozzafava, 2019. "A Multicriteria Approach for Well-Being Assessment in Rural Areas," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 143(1), pages 411-432, May.
    3. Williams, John & McSweeney, Peter & Salmon, Robert, 2014. "Australian Farm Investment: Domestic and Overseas Issues," Papers 234408, University of Melbourne, Melbourne School of Land and Environment.
    4. Nehring, Richard F. & Badau, Flavius & Harris, Michael & Erickson, Kenneth W., 2017. "Relative Competitiveness of Crop/Livestock Farms: A current perspective," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258234, Agricultural and Applied Economics Association.
    5. Li, Ziran & Jacobs, Keri L. & Artz, Georgeanne M., 2012. "The Relative Capital Structure of U.S. Agricultural Grain and Supply Cooperatives and Investor Owned Firms," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124755, Agricultural and Applied Economics Association.
    6. Eva HYBLOVA & Roman SKALICKY, 2018. "Return on sales and wheat yields per hectare of European agricultural entities," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 64(10), pages 436-444.
    7. Radosław Pastusiak & Michał Soliwoda & Magdalena Jasiniak & Joanna Stawska & Joanna Pawłowska-Tyszko, 2021. "Are Farms Located in Less-Favoured Areas Financially Sustainable? Empirical Evidence from Polish Farm Households," Sustainability, MDPI, vol. 13(3), pages 1-26, January.
    8. Rünzel, Max Allan Siegfried & Han, Doo Bong, 2018. "To What Extent Does Trade Liberalisation Affect The Financial Performance of Korean Co-operatives?," 2018 Annual Meeting, February 2-6, 2018, Jacksonville, Florida 266571, Southern Agricultural Economics Association.
    9. Rusiana, Hofner D. & Escalante, Cesar L. & Brewer, Brady E. & Dodson, Charles B., 2018. "Macroeconomic and Farm-Level Drivers of Profitability among Smaller and Beginning Farm Businesses," 2018 Annual Meeting, August 5-7, Washington, D.C. 273782, Agricultural and Applied Economics Association.

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