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Drivers of agricultural profitability in the USA: An application of the Du Pont expansion method

Author

Listed:
  • Ashok K. Mishra
  • J. Michael Harris
  • Kenneth W. Erickson
  • Charlie Hallahan
  • Joshua D. Detre

Abstract

Purpose - The aim of this study is to use a financial approach based on the Du Pont expansion to investigate the impact of demographics, specialization, tenure, vertical integration, farm type, and regional location on the three levers of performance (ROE) – namely, net profit margins, asset turnover ratio, and asset-to-equity ratio. Design/methodology/approach - This research uses a system of equations in conjunction with 1996-2009 farm-level data from the US Department of Agriculture's Agricultural Resource Management Survey (ARMS) to evaluate the factors driving farm-level profitability, namely, net profit margins, asset turnover ratio, and asset-to-equity ratio. The methodology employed in this study corrects heterogeneity and uses repeated cross-section estimation procedure to estimate the empirical models. Findings - The study finds that key drivers of net profit margins are operator education, farm size and typology, specialization, and level of government payments. Key factors affecting the asset turnover ratio component of the Du Pont model include asset turnover ratio is driven by operator age, contracting, specialization, and receiving government payments. Finally, key factors affecting asset-to-equity ratio component of the Du Pont model are farm size, farm typology, contracting, and specialization drive asset-to-equity ratio. Originality/value - Existing research does not examine the factors affecting returns to equity in faring at the farm-level. Specifically, a micro-level analysis of American farm's future structure and financial performance that accounts for the spatial and inter-temporal dimensions of profitability has never been conducted.

Suggested Citation

  • Ashok K. Mishra & J. Michael Harris & Kenneth W. Erickson & Charlie Hallahan & Joshua D. Detre, 2012. "Drivers of agricultural profitability in the USA: An application of the Du Pont expansion method," Agricultural Finance Review, Emerald Group Publishing, vol. 72(3), pages 325-340, November.
  • Handle: RePEc:eme:afrpps:v:72:y:2012:i:3:p:325-340
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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 (IFAMA), vol. 18(A).
    2. Ani L. Katchova & Sierra J. Enlow, 2013. "Financial performance of publicly-traded agribusinesses," Agricultural Finance Review, Emerald Group Publishing, vol. 73(1), pages 58-73, May.

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