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

Drivers of agricultural profitability in the USA An application of the Du Pont expansion method 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Agricultural Finance Review Emerald Publishing

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

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Publisher
Emerald Publishing
Copyright
Copyright © 2012 Emerald Group Publishing Limited. All rights reserved.
ISSN
0002-1466
DOI
10.1108/00021461211277213
Publisher site
See Article on Publisher Site

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.

Journal

Agricultural Finance ReviewEmerald Publishing

Published: Nov 2, 2012

Keywords: Du Pont analysis; Profit margin; Asset turnover; Asset‐to‐equity; Agriculture; United States of America; Profit

References

  • Transaction costs and the robustness of the Coase theorem
    Anderlini, L.; Felli, L.
  • The nature of the firm
    Coase, R.
  • Alcohol abuse and economic conditions: evidence from repeated cross‐sections of individual‐level data
    Dee, T.S.
  • Farm business decisions and the sustainable growth challenge paradigm
    Escalante, C.L.; Turvey, C.G.; Barry, P.J.
  • Regional differences in agricultural profitability, government payments, and farmland values: implications of DuPont expansion
    Mishra, A.; Moss, C.B.; Erickson, K.W.
  • One size fits all? Heckscher‐Ohlin specialization in global production
    Schott, P.K.
  • Estimating dynamic models from repeated cross‐sections
    Verbeek, M.; Vella, F.

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