Kenneth W. Erickson

Agricultural Profits and Farm Household Wealth: A Farm-level Analysis Using Repeated Cross Sections

This study examines the relationship between agricultural profits and farm household wealth across locations and farm sizes in U.S. agriculture. A multiperiod household model is used to develop hypotheses for testing. Results indicate that farmland has out-performed nonfarm investments over the past decade. Thus, households may want to keep their farmland to build wealth, even if it requires them to earn off-farm income. The analysis implies that decision will be made based on farm household wealth factors having little to do with agriculture.

Valuing farmland with multiple quasi-fixed inputs

This study examines the impact of multiple quasi-fixed assets on the imputed returns to farmland. The results indicate that the presence of additional quasi-fixed assets causes the true shadow value of farmland to deviate from its imputed value. The results also indicate that when the potential existence of multiple quasi-fixed assets is explicitly modelled, the shadow value of farmland approaches reported cash rental values.

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 Agricultures 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 farms future structure and financial performance that accounts for the spatial and inter-temporal dimensions of profitability has never been conducted.

Regional differences in agricultural profitability, government payments, and farmland values: Implications of DuPont expansion

Purpose - The purpose of this paper is to use the DuPont expansion to examine those factors underlying differences in (rates of) return on different crop portfolios over space (ten regions) and time (1960-2004). The paper also estimates the impact of government payments on farmland values through its impact on farm profitability. Design/methodology/approach - Businesses use the DuPont model to analyze the profitability of a business. This model includes three components: net profit margin, asset turnover, and financial leverage (or assets to equity). It is based on the relationships among these three components and is expressed as a product of ratios. For the purposes of the current study, accrued capital gains from (total) returns are excluded to focus on cash returns “cash flow”. Returns from current income are a “cash flow” available in the short run to pay financial obligations. Furthermore, returns from capital gains are not liquid; they are gains in wealth fully captured as capital gains/losses only in the longer term. Following the DuPont approach, the effect of government payments on farm asset values is equal to the sum of the effect of government payments on profit margins plus the effect of government payments on the asset turnover ratio. Findings - The analysis focuses on agricultural profitability in the ten Economic Research Service (ERS) regions. By comparing the components of the DuPont expansion, profitability differences over time are analyzed. The results indicate that one cause of low profitability in the Corn Belt and Mountain regions is a perpetually low profit margin while the evidence for other regions supports lower asset efficiency. Results show that government payments impact the profit margin and affect value of farm assets in particular farmland values but not asset turnover ratio. Originality/value - The use of DuPont expansion factor in agriculture is original and really helps us to understand the factors driving profitability in agriculture. Another innovation (originality) in this paper is the theoretical model that connects the DuPont expansion factor, government payments and its impact on farmland values.

Next year on the US farmland market: an informational approach

This study formulates an information measure for changes in asset values and applies the formulation to farmland values in the United States for 1960 to 1999. The results indicate that changes in asset values contained significant information following the Russian wheat sale in the early 1970s and the financial crisis in agriculture in the mid 1980s. Further, information about preceding years asset values largely explains the regional distribution of current years farmland values.

Rates of Return in the Farm and Nonfarm Sectors: How Do They Compare?

This study examines the return on agricultural assets relative to nonfinancial corporate assets in the general economy using aggregate bureau of Economic Analysis data. Our results indicate that the rate of return on nonfarm assets dominates the rate of return on agricultural assets. The average rate of return on nonfarm assets is higher than the average rate of return on farm assets, and the variance of the rate of return on nonfarm assets is lower than the variance of the rate of return on farm assets. Furthermore, the rate of return on agricultural assets only exceeds the rate of return in the nonfarm sector in 1992.

Farm Wealth Inequality Within and Across States in the United States

This paper uses Theils (1979) entropy-based measure of inequality and farm-level data to examine changes in farm business wealth (farm equity) of farm households. The farms associated with farm households are grouped by state into ten regions of the United States. The Theil entropy measure is then calculated and used to decompose total inequality of farm wealth into within-state and across-states (between states) inequalities for each region. Results show that since the enactment of the 1996 Federal Agricultural Improvement and Reform (FAIR) Act, inequality in farm wealth among farms within a state has decreased relative to the number of farms per state, across all regions. Further, most of the reduction in farm wealth inequality is attributed to increased equality in the distribution of real estate assets of the farm households, a major component of farm wealth.

Rates of return on U.S. farm investments, 1940-2003: a comparison of imputed returns versus residual income approaches

The rate of return on farm assets is a key indicator of the profitability of farm sector investments. The residual income approach is most commonly used to estimate the returns to farm assets, farmland, and labor and management. However this approach may be sensitive to the underlying assumptions. This study examines the implications of the residual return assumption by using alternative formulations for computing the rate of return to farm assets. Specifically, we develop the rate of return on agricultural assets using an alternative imputation method. We demonstrate that the presence of multiple quasi-fixed factors implies the rate of return to farm assets may be understated by the residual income approach.

Changes in the distribution of farm wealth in the United States

This paper examines the changes in farm sector wealth from 1949 through 2002. The study uses Theil’s entropy‐based measure of inequality of farm wealth for 10 regions of the United States. The entropy measure is then used to decompose U.S. inequality into within‐region and between‐region differences. Results show that for the period 1949 to 1993, relative to the number of farms per state, farm wealth in the United States became more equally distributed. However, beginning in 1994, findings suggest inequality in wealth may be increasing.