Impact of debt structure on production efficiency and financial performance of Broadacre farms in Western Australia

Abstract

Farming activities are often financed using debt, yet empirical studies investigating the relationship between farm debt structure and performance are still rare. Using a 10 year unbalanced panel of Broadacre farms in Western Australia, we relate the impact of long-term debt, short-term debt and tax liability on farm performance measured by input-oriented technical efficiency and return on assets. We find farm technical efficiency is positively related to short-term debt, tax liability and capital investment, but negatively related to off-farm income generating activities. Long-term debt has no effect on production efficiency and return on assets. These results are robust to both parametric and nonparametric methods of estimation.

Determinants of Broadacre Farming Efficiency in Western Australia: A Stochastic Frontier Analysis

“…The RTS appear to be evenly distributed around a mean level of 1.05: most farms are operating below the optimal scale. This is consistent with previous studies of the RTS of broadacre farms in WA (Cattle & White, ; Mugera & Nyambane, ), and is also consistent with observed farm expansion (Hooper et al ., ; Nossal & Gooday, ; Lefroy et al ., ).…”

“…The relatively high estimate of Cattle and White (2007) could be explained by a potential selection bias: the authors employed a panel dataset of farms seeking BankWest finance and farms looking to expand their operations are usually more technically efficient than those not wanting to expand. This is supported by Mugera and Nyambane (2014), who established a positive relationship between TE and short-term debt for broadacre farmers in WA. The left-skewed distribution of TE, as expected, indicates a small proportion of farms demonstrated very low levels of efficiency.…”

Exploring the Road to Agricultural Sustainability by Assessing the EU Debt Influencing Factors

“…In fact, by understanding the factors that affect short term obligation, the relationship between financing institutions and agricultural units is more stable, and thus, can be a way of boosting efficiency. Other results are found by Mugera and Nyambane [80] who reveal that technical efficiency is positively related with short term debt, while production efficiency has no impact on long term debt. Regarding research studies conducted in the literature, United Nations Development Programme (2012) [81] emphasized several cases in which loan contracting positively impacts the sustainable agriculture (in Peru loans were granted for purchasing, processing, and exporting goods for no more than 9 months, and the increase in revenues of the entities that contracted loans was six time higher; in Tanzania a long term lending relationship between bank and smallholders farms created guaranteed income from premium-priced organic cotton; in Kenya, framer's insurance was enabled and the program is looking to cover harvest and livestock loss with the purpose of ensuring financial sustainability).…”

Firm Size and Financial Performance: Intermediate Effects of Indebtedness

“…The aim of this paper is to provide a better understanding of the effects of organizational size by exploring how capital structure (measured as indebtedness) influences the relationship between firm size and financial performance. Capital structure is of particular interest for the livestock sector due to the specific production and market characteristics of this sector (Rathbone & Davidson, ; Mugera & Nyambane, ). Two hypotheses were tested: (1) firm size exerts an indirect effect on financial performance through indebtedness and (2) indebtedness exerts a moderator effect on the relationship between size and financial performance.…”

“…Therefore, managers should strategically pursue an appropriate balance that better fits the organizational strategy. As in many other agribusiness sectors (Forster, ), indebtedness and organizational size are particularly relevant for the livestock industry (Chavas & Aliber, ; Kalogeras et al., ; Mugera & Nyambane, ).…”