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What Drives Agricultural Profitability in the U.S.: Application of the DuPont Expansion Model

Listed author(s):
  • Mishra, Ashok K.
  • Harris, James Michael
  • Erickson, Kenneth W.
  • Hallahan, Charles B.

This study uses a financial approach based on the DuPont expansion to examine the significance of specialization and vertical integration on domestic agriculture. The traditional DuPont Expansion decomposes the rate of return to equity into asset efficiency, gross margins, and solvency. We hypothesize that agricultural specialization directly affects the asset efficiency and gross margin of the farm. Specifically, specialization would tend to decrease asset efficiency while increasing the gross margin. On the other hand, vertical integration may affect the gross margin and solvency directly. The effect on solvency would result from the integrator’s use of credit as an incentive. However, the general type of agricultural enterprise integrated may also have implications for asset efficiency. Specifically, livestock operations may tend to have greater asset efficiency than crops. We estimate a system of equations in log space using annual farm-level data from the USDA’s ARMS data, 1996-2006. We include all production regions in the contiguous 48 states, and all farms. We find that specialization and vertical integration are among the key factors driving farm profitability in the U.S.

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Paper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida with number 6413.

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Date of creation: 2008
Handle: RePEc:ags:aaea08:6413
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  1. Luca Anderlini & Leonardo Felli, 2006. "Transaction Costs and the Robustness of the Coase Theorem," Economic Journal, Royal Economic Society, vol. 116(508), pages 223-245, 01.
  2. Allen M. Featherstone & Charles B. Moss & Timothy G. Baker & Paul V. Preckel, 1988. "The Theoretical Effects of Farm Policies on Optimal Leverage and the Probability of Equity Losses," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 70(3), pages 572-579.
  3. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
  4. Melvin, Jon & Boehlje, Michael & Dobbins, Craig L. & Gray, Allan W., 2003. "The DuPont Profitability Analysis Model: An E-Learning Application and Evaluation," Proceedings: 2003 Regional Committee NCT-194, October 6-7, 2003; Kansas City, Missouri 132522, Regional Research Committee NC-1014: Agricultural and Rural Finance Markets in Transition.
  5. Kislev, Yoav & Peterson, Willis, 1982. "Prices, Technology, and Farm Size," Journal of Political Economy, University of Chicago Press, vol. 90(3), pages 578-595, June.
  6. Hirschberg, J.G. & Slottje, D.J., 1999. "The Reparametrization of Linear Models Subject to Exact Linear Restrictions," Department of Economics - Working Papers Series 702, The University of Melbourne.
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