Factors affecting financial performance of new and beginning farmers

Abstract

PurposeThe purpose of this paper is to investigate the factors (farm, operator and household characteristics, along with farm type and regional location of the farm) affecting financial performance of new and beginning farmers and ranchers.Design/methodology/approachReturns on assets (ROA), a measure of financial performance widely used in the farm management literature, is the ratio of net farm income plus interest payment to total assets. This measure has been used by Gloy and LaDue and Gloy et al. to measure financial performance of farmers in New York. ROA is hypothesized to be a function of operator/farm characteristics and management strategies used to manage the farm. The independent variables hypothesized to affect the farm's financial performance encompass the following three areas: farm operator characteristics, farm characteristics such as production and marketing efficiency measures, and management strategies. All standard errors were adjusted for heteroscedasticity using the Huber–White sandwich robust variance estimator based on algorithms contained in STATA.FindingsResults from this study show that although there is an inverted U‐shaped relationship between age of the operator and financial performance, management strategies such as increasing the number of decision makers, engaging in value‐added farming, and having a written business plan can lead to higher financial performance.Originality/valueMore than 50 percent of current farmers are likely to retire in the next five years. US farmers over age 55 control more than half the farmland, while the number of new farmers replacing them has fallen since the Farm Crisis period, 1982‐1987. Paralleling this shift in production, agriculture is in a decline in overall farm numbers. Concern in many states arises because the loss adversely affects the future of family farms, the farm economy and healthy rural communities. Additionally, the rapid decline in the entry of new and young farmers is an indication of rising barriers to entry, resulting in calls from within the farming community for public policy measures designed to aid new and beginning farmers.