Do Profit Rates Converge? Evidence on the Persistence of Farm Profit in the Long-run

Pennings, J. M. E. (Contributor), A. Tamirat (Speaker), A.A. Trujillo Barrera (Contributor)

Activity: Talk or presentationOral presentationOther

Description

Abstract
Ensuring farm survival and competitiveness requires a better understanding of why some farms consistently perform better (worse) than others. This article investigates the drivers of farm profitability, the degree of abnormal profit persistence, and its determinants based on a unique longitudinal data set collected from a panel of 2000 Dutch farms between 2001 and 2015. We apply a quantile regression approach to examine the drivers of farm profitability, and a dynamic panel System- GMM estimation to estimate the persistence of abnormal farm profit. The results of the quantile regression show that working capital, labor productivity, leverage, capital intensity, and investment are important determinants of profitability. The findings suggest that working capital is important for farms’ flexibility and their capacity of adapting to changing circumstances in environments where they don’t receive regular income from agricultural products. Estimates using the dynamic panel model provide evidence on abnormal profit persistence. Profit persistence is responsive to farm risk exposure, investment, capital intensity, leverage, working capital and diversification. Thus, long-run farm profit can be achieved and sustained by reducing costs through economies of scale, ensuring adequate working capital to cope with the cash flow mismatch, enhancing labor productivity, and minimizing the farm’s capital intensity levels
Period5 Aug 20187 Aug 2018
Event titleAgricultural & Applied Economics Association 2018 AAEA Annual Meeting
Event typeConference
LocationWashington, D.C., United States

Keywords

  • Profit persistence
  • System-GMM estimation
  • quantile regression
  • dynamic panel model