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

Aderajew Tamirat, A.A. Trujillo Barrera, J.M.E. Pennings

Research output: Contribution to conferenceConference paperAcademicpeer-review

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.
Original languageEnglish
Number of pages37
Publication statusPublished - Aug 2018
EventAgricultural & Applied Economics Association 2018 AAEA Annual Meeting, Washington, D.C. August 5-7, 2018 - Washington, D.C., United States
Duration: 5 Aug 20187 Aug 2018

Conference

ConferenceAgricultural & Applied Economics Association 2018 AAEA Annual Meeting, Washington, D.C. August 5-7, 2018
CountryUnited States
CityWashington, D.C.
Period5/08/187/08/18

Keywords

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

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    Tamirat, A., Trujillo Barrera, A. A., & Pennings, J. M. E. (2018). Do Profit Rates Converge? Evidence on the Persistence of Farm Profit in the Long-run. Paper presented at Agricultural & Applied Economics Association 2018 AAEA Annual Meeting, Washington, D.C. August 5-7, 2018, Washington, D.C., United States. https://ageconsearch.umn.edu/record/273791/files/Abstracts_18_05_14_04_52_38_76__137_120_34_244_0.pdf