Risk-adjusted farm returns and farm size

• Published in: Agricultural finance review Vol. 83; no. 3; pp. 528 - 547
• Main Authors: Noumir, Ashraf M., Langemeier, Michael R., Mallory, Mindy L.
• Format: Journal Article
• Language: English
• Published: Bingley Emerald Publishing Limited 06-06-2023; Emerald Group Publishing Limited
• Subjects: Agricultural economics; Agricultural production; Agriculture; Consolidation; Diversification; Equity; Farm income; Farm management; Farms; Land use; Liquidity; Multivariate analysis; Productivity; Regression analysis; Return on assets; Risk analysis; Risk premiums; Variables; United States > US; Kansas; Return on equity; Fama–MacBeth regression; Farm size; Risk-adjusted return on equity
• ISSN: 0002-1466; 2041-6326
• DOI: 10.1108/AFR-06-2022-0070

PurposeThe average U.S. farm size has risen dramatically over the last three decades. Motives for this trend are the subject of a large body of literature. This study incorporates farm size risk and return analysis into this research stream. In this paper, cross-sectional and temporal relations between farm size and returns are examined and characterized.Design/methodology/approachRelying on farm level panel data from Kansas Farm Management Association (KFMA) for 140 farms from 1996 to 2018, this article examines the relationship between farm size and returns and investigates whether farm size is related to risk. Two measures of farm returns are used: excess return on equity and risk-adjusted return on equity. Value of farm production and total farm acres are used as measures of farm size.FindingsFindings suggest a significant and positive relationship between farm size and excess return on equity as well as farm size and risk-adjusted return on equity. However, this return premium associated with farm size is not associated with additional risk. Stated differently, farm size can be viewed as a farm characteristic that is associated with higher return without additional risk.Practical implicationsThese findings provide further support for ongoing farm consolidation.Originality/valueThe results suggest the trend towards consolidation in production agriculture is likely to continue. Larger farms bear less risk.