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Characteristics of High Profit Farms

Kent Olson

Summary

A long history of farm management literature seeks to explain differences in farm performance. Most of these studies have tried to explain financial success by using financial and physical data. However, farmers usually use nonfinancial factors to explain success anecdotally. Also, using nonfinancial factors avoids endogeneity problems associated with using financial variables to explain financial variables. The objective of this study is to explain farm success on the basis of nonfinancial variables. These variables include data on formal education, farmers´ attitudes towards management, their situation, and other potential reasons mentioned by farmers. The farmer-members of the Southwestern Minnesota Farm Business Management Association were surveyed about these variables. Financial performance and physical and financial information was available in the database gathered each year. The farmers were ranked on the basis of net farm income per operator (NFIperOp) and on the basis of rate of return to assets (ROA) and divided into the top 25% and the remaining 75% groups for each measure. When only financial variables (such as gross cash income, total assets, crop acres, debt/asset percent, land tenure) were used as explanatory variables for the ROA equation, the adjusted R2 was only 0.03. When nonfinancial variables were included, the adjusted R2 increased to 0.69. And when only the non-financial variables were included the adjusted R2 was at least 0.70. The adjusted R2 was affected similarly in the NFIperOp equations. The correlation between NFIperOp and ROA was only 0.098, and the two equations had different significant explanatory variables.

Details

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