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

Abstract

The changes in farm structure have been observed in Lithuania as well as in other Central and Eastern European countries. These changes, to a high extent, have been driven by decreasing profitability of the small farms. In this paper, we look into the changes in the profitability of Lithuanian family farms across different farm size groups. Farm size is measured in terms of the standard output. The period covered is 2005–2016. The index decomposition analysis model and Shapley value are adapted for the analysis. The proposed framework ensures complete decomposition among other desirable properties. The decomposition of the changes in profitability was carried out following the DuPont identity. The results suggest that for small (respectively large) farms the asset turnover (respectively profit margin) component appear more important, whereas the leverage effect remained minimal irrespectively of the farm size group.