PR - Are The Most Profitable Farms Consistently The Most Profitable

Every year, some farmers will do better than other farmers. Whether by luck, better management, more rainfall, a different enterprise mix, etc., a subset of farmers will be more profitable than another subset of farmers. However, over a period of years, is there consistency among the population of farmers for who is the most profitable. That is, are the most profitable farms in any given year also the most profitable farms over a long-term time horizon? This paper investigates a 15-year panel data set of similar farm from Kansas to determine if the most profitable farms are consistent across time. We accomplish this by ranking farms by decile each year and then averaging these yearly rankings. If luck and weather are the main drivers of differences in yearly net farm income, then over time a farm’s yearly ranking would vary and the overall average ranking for that farm should approach 5.5. Conversely, if management is more of a factor determining differences in net farm income, then a farm should consistently place in the same decile ranking year in and year out. Thus the overall 15-year average rankings of farms should be very widely distributed. That is there would be no more farms ranked at the mean (5.5) than at the extremes. We find that both management and weather/luck contribute to overall profitability. Even though the bottom decile of farmers consistently have negative net farm income each year, the 15-year average of net farm income only has 4 percent of farms with a negative average.

Keywords: profitability, ranking, consistency