Farm-Level Data Use in Individual and Group Extension Settings

2005 AAEA Organized Symposium Michael Langemeier

Professor Kansas State University

Presentation Focus

This presentation will focus on the use of farm management association panel data for extension, teaching, and research purposes.

Farm management association data is used by farm management association members, farm management association economists, and in extension, teaching, and research programs.

Outline of Presentation

Individual Farm Level Use Financial Performance Benchmarks Applied Analysis

Competitive Advantage Productivity

Individual Farm Level Use

Summary of annual data Trend analysis

Three year summary of key production and financial variables

Five year summary of key financial performance benchmarks

Financial Performance Benchmarks

Key Measures Profit Margin Asset Turnover Ratio Economic Total Expense Ratio

Labor and Asset Utilization

Kansas Farm Management Association (KFMA) Data

Farms with continuous data (924 farms) 1995 to 2004 10-Year Averages:

VFP: 211,355 NFI: 43,496 Total Assets: 733,429

Profitability

Operating Profit Margin Ratio (Net Farm Income + Interest – Unpaid

Labor) / (Value of Farm Production) Average:

(43,496 + 14,874 – 35,321 / (211,355) = 0.1091

Top quartile: OPMR = 0.2160

Profit Margin Ratio, KFMA(1995-2004 Average)

0.1091

-0.1795

0.08560.1583 0.1822

-0.400

-0.200

0.000

0.200

0.400

All < 100 100-250 250-500 > 500

Value of Farm Production

Ratio

Financial Efficiency Asset Turnover Ratio

(Value of Farm Production) / (Average Total Assets)

Measures the effectiveness of the farm in utilizing assets.

Average: (211,355) / (733,429) = 0.288

Top quartile: ATR = 0.383

Asset Turnover Ratio, KFMA(1995-2004 Average)

0.288

0.167

0.266

0.3300.374

0.000

0.100

0.200

0.300

0.400

0.500

All < 100 100-250 250-500 > 500

Value of Farm Production

Ratio

Financial Efficiency

Total Expense Ratio Includes cash expenses and depreciation.

Economic Total Expense Ratio Includes cash expenses, depreciation, and

opportunity charges on unpaid labor and owned assets.

Average = 1.114 Top Quartile = 0.955

Farm Size and Economic Total Expense Ratio

1.114

1.528

1.1521.043 1.005

0.00

0.50

1.00

1.50

2.00

All < 100 100-250 250-500 > 500

Value of Farm Production

ETER

Farm Size and Economic Total Expense Ratio

Economies of Size

0.0000.5001.0001.5002.0002.5003.0003.5004.0004.500

0 250 500 750 1,000 1,250 1,500

Value of Farm Production ($1,000)

ET

ER

Applied Analysis

Competitive Advantage Productivity Technical and Cost Efficiency Financial Stress Credit Rating Crop Insurance

Applied Analysis: Competitive Advantage

Paper presented at the 2003 SAEA Meetings Jeffery Morgan

Agricultural Loan Officer, Clyde, Kansas Michael Langemeier

Professor, Kansas State University

Introduction Neoclassical Theory

Profit opportunities are short-lived because it is easy to imitate other firms.

Firms are homogeneous except for scale. Resource-Based Theory

Heterogeneity of resources. Imperfect mobility of resources. Some firms consistently earn above

average profits.

Objective of Study Examine sustained competitive

advantage for a sample of Kansas farms.

Variability in per unit cost: Weather Managerial Ability

Methods

Nonparametric Efficiency Approach Farm’s efficiency in each year is measured

relative to the efficiency of other farms in that particular year.

Overall Efficiency Technical Efficiency Allocative Efficiency Scale Efficiency

Methods Overall Efficiency Categories

Above Average Insignificant Below Average

Farm Characteristics Farm Size Farm Type Expense Ratios and Profitability

Methods If uncontrollable factors such as weather are

the primary factors that explain differences in the cost of production between farms, there will be very few farms with above average overall efficiency levels.

Resource based theory suggests that it is possible for a relatively large proportion of the farms to have a competitive advantage or disadvantage.

Kansas Farm Management Data

224 Farms Continuous data from 1982 to 2001 Average gross farm income = $252,626 43 farms had a gross farm income below

$100,000 16 farms had a gross farm income above

$500,000

Kansas Farm Management Data Inputs

Labor Purchased Inputs Capital

Outputs Beef Milk Swine Crops Hay and Forage Miscellaneous Income

Kansas Farm Management Data

Farm Characteristics Gross Farm Income Farm Type Economic Total Expense Ratio Profit Margin Ratio

Results

Overall Efficiency Above Average: 0.7800 Below Average: 0.4752

Farm Type Farms in top category had significantly

higher proportions of income coming from dairy and swine production.

Results

Gross Farm Income Above Average: $395,650 Below Average: $147,103 Only 2 of the 43 farms with GFI less than

$100,000 were in the top category. 10 of the 16 farms with GFI greater than

$500,000 were in the top category.

Results

Economic Total Expense Ratio Above Average: 1.0206 Below Average: 1.2964

Profit Margin Ratio Above Average: 0.1864 Below Average: -0.0260

Summary

27% of the farms had a sustained competitive advantage

34% of the farms had a sustained competitive disadvantage

Applied Analysis: Productivity

Work in Progress Paul Clark

Graduate Student, Kansas State University Michael Langemeier

Professor, Kansas State University

Introduction

Productivity measures are used to monitor individual firm and industry performance over time.

Panel data is needed to examine productivity differences among firms.

Objectives of Study

Examine productivity of individual Kansas farms.

Relate individual farm productivity to farm size.

Examine output and input bias.

Methods

Malmquist Productivity Indices Productivity can be decomposed into

technical change and efficiency change. Technical change can be further

decomposed into output bias, input bias, and the magnitude component.

Kansas Farm Management Data

195 Farms Continuous data from 1984-2003 Focus on crop, beef, and crop/beef farms Average gross farm income = $232,236 30 farms had a gross farm income below

$100,000 10 farms had a gross farm income above

$500,000

Kansas Farm Management Data Inputs

Labor Purchased Inputs Capital

Outputs Wheat Feed Grains Oilseeds All Hay and Forage Beef Other Income

Results

0.9764 1.0675 1.0216

0.00

0.50

1.00

1.50

2.00

Bottom 10% Top 10% All Farms

Productivity Category

Index

Results On average, most of the productivity

change was due to technical change rather than efficiency change.

Inefficient firms often do not “catch up” to efficient firms.

Productivity and Farm Size Small Farms 1.0213 Large Farms 1.0328

Results

Technical Change and Output Mix Technical change was positively related to

feed grain production. Technical Change and Input Mix

Technical change was negatively related to labor use.

Technical change was positively related to purchased input and capital use.

Contact Information

Departmental Publications: www.agmanager.info

E-mail: mlange@agecon.ksu.edu

Current Ratio, KFMA(1995-2004 Average)

2.50

3.88

2.57 2.392.00

0.000.501.001.502.002.503.003.504.004.50

All < 100 100-250 250-500 > 500

Value of Farm Production

Ratio

Debt to Asset Ratio, KFMA(1995-2004 Average)

0.2850.183

0.282 0.310 0.339

0.000

0.200

0.400

0.600

0.800

1.000

All < 100 100-250 250-500 > 500

Value of Farm Production

Ratio

Financial Stress

Definition of Financial Stress Negative Return on Equity

Net farm income minus unpaid labor is negative.

High Debt to Asset Ratio Debt to asset ratio greater than 0.70.

Financial Stress, KFMA(1995 to 2004)

Percentage of Farms (10-Year Averages) Negative Return on Equity = 52.90% High Debt = 10.85% Financially Stressed = 7.40%

Percent of Farms with Negative Return on Equity

0

10

20

30

40

50

60

70

80

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Year

Perc

ent

Percent of Farms with High Debt

0

2

4

6

8

10

12

14

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Year

Perc

ent

Percent of Farms Financially Stressed

0

2

4

6

8

10

12

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Year

Perc

ent

Financial Stress, KFMA(1995 to 2004)

Percentage of Farms No Financial Stress = 78.90% Financially Stressed over 50% of Time =

4.44% Financially Stressed every Year = 0.43%

No Debt = 3.25%

Labor Use and Efficiency

KFMA Data Farms with continuous data (924 farms) 1995 to 2004 10-Year Averages:

Number of Workers = 1.46 Total Acres = 1,739 VFP = 211,355 VFP per Worker = 144,964

Change in Number of Workers per Farm Over Time

1.35

1.45

1.55

1.65

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Year

Num

ber

Change in Total Acres per Farm Over Time

1550

1650

1750

1850

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Year

Num

ber

Change in Total Acres per Worker Over Time

1000

1050

1100

1150

1200

1250

1300

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Year

Num

ber