Dairy farm financial performance: firm, year, and size effects

Abstract

Purpose The purpose of this paper is to evaluate dairy farm financial performance over time utilizing farm financial ratios from three university business analysis programs. The evaluation includes measures of profitability, solvency, and liquidity by herd size. Design/methodology/approach Financial ratios to reflect profitability (rate of return on assets), solvency (debt to asset ratio), and liquidity (current ratio) were collected from Cornell University, Michigan State University, and the University of Wisconsin for dairy farms from 2000 to 2012. The distribution of farm financial performance using these ratios was examined over time and by herd size. Variance component methods are used to examine the percent of variation due to individual firm and industry aspects. A simple credit risk score is calculated to examine relative farm risk. Findings Dairy farm profitability performance is similar across herd sizes in poor years but larger herds realized significantly more profitability in good years. Findings were similar with respect to liquidity. Large herds consistently carried relatively more debt. Large herds’ financial performance was more uniform than across smaller herds. Larger herds had more financial risk as measured by credit risk scoring but recovered quickly to industry averages in profitable years. Originality/value The variation of dairy farm financial performance in an era of volatile milk and feed price is assessed. The results have important implications for farm financial management and benchmarking farm financial performance. In addition to helping to evaluate the efficacy of various price and income risk management tools, these results have important implications for understanding the benefits of the new federal Margin Protection Program for Dairy that is available to all US dairy farmers.

The Financial Performance Implications of Differential Marketing Strategies: Exploring Farms that Pursue Local Markets as a Core Competitive Advantage

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Evaluating scale and technical efficiency among farms and ranches with a local market orientation

“…It measures how efficiently a firm can create profit using their invested assets in a given year, accounting for the opportunity cost of money. Although not commonly used in profit frontier estimation, the use of a ‘standardized’ measure like ROA may allow some expected and interesting cases (such as lean management farms with few owned assets that compete through aggressively pursuing high end produce and product markets) to emerge more clearly (e.g., Ho et al , 2013; Wolf et al , 2016). In contrast, gross measures, such as operating profit, may mask some interesting aspects of farms participating in direct markets.…”

“…From the standpoint of the USDA and private foundations that provide funding in this area, understanding the factors that influence efficiency will enable them to better target their resources and support local and regional food system development. As one example, the Farm Service Agency is striving to provide more capital to farms participating in these markets, but needs to understand the underlying factors that allow farms to be viable (and repay their loans) (USDA FSA, 2016). Additionally, in 2015, the USDA Risk Management Agency began piloting Whole-Farm Revenue Protection, a program that provides an insurance plan for diversified producers selling through local and regional food markets (USDA RMA, 2017).…”

Decomposing Dynamics in the Farm Profitability: An Application of Index Decomposition Analysis to Lithuanian FADN Sample

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