Determinants of Financial Security of European Union Farms—A Factor Analysis Model Approach

Abstract

The objective of this study was to assess the level of financial security of farms and identify its determinants based on factor analysis. The data used in this research were obtained from the European FADN (Farm Accountancy Data Network). Factor analysis (FA) was employed to reduce the number of variables that potentially determine the financial security of farms. The results indicate that the surveyed entities maintained financial security between 2014 and 2021. This study suggests that it is necessary to examine these factors separately for farms engaged in crop farming and animal production. The results obtained for all farms were less satisfactory than those that took into account the specifics of agricultural production. This study addresses a gap in the literature by including highly correlated variables in the analysis of the determinants of financial security. Factor analysis is used to reduce the number of variables without losing important information. Firstly, seventeen variables related to the financial security of all farms were assigned to six factors. These were income and self-financing of operations; area and subsidies; long-term investments and financial decisions consequences; economic size, taxes, and non-breeding livestocks; investment activity; and inputs, stock, short-term loans, and labor. Then, the determinants of the financial security of farms were examined, taking into account the specialization of activities. For crop-producing farms, six factors were identified, including three that were identical to those for all farms: income and self-financing of operations; long-term investment and financial decisions consequences; and investment activity. In addition, the following items were specified: area, subsidies, non-breeding livestocks, and taxes; economic size, inputs, and labor; and stock and short-term loans. The correlated variables in the case of livestock production combined into factors in a different way. In this case, four factors were distinguished: economic size, non-breeding livestocks, income, and self-financing of operations; operational activities of animal production; long-term investment and financial decisions consequences; and investment activity. Financial security is a complex matter that can be affected by a range of factors related to agricultural activities.