Academic journal article Journal of Agricultural and Applied Economics

Rates of Return in the Farm and Nonfarm Sectors: How Do They Compare?

Academic journal article Journal of Agricultural and Applied Economics

Rates of Return in the Farm and Nonfarm Sectors: How Do They Compare?

Article excerpt

This study examines the return on agricultural assets relative to nonfinancial corporate assets in the general economy using aggregate Bureau of Economic Analysis data. Our results indicate that the rate of return on nonfarm assets dominates the rate of return on agricultural assets. The average rate of return on nonfarm assets is higher than the average rate of return on farm assets, and the variance of the rate of return on nonfarm assets is lower than the variance of the rate of return on farm assets. Furthermore, the rate of return on agricultural assets only exceeds the rate of return in the nonfarm sector in 1992.

Key Words: Farm sector accounting, nonfarm income, nonfarm sector, rate of return, returns to farm assets

JEL Classifications: Q14, Q18

This study examines whether the rate of return on agricultural assets is comparable to the rate of return on assets in the nonfarm sector using newly released Bureau of Economic Analysis (BEA) aggregate sector rate of return measures. The empirical results show that nonfarm rates of return dominate rates of return on agricultural assets from 1960 through 2001 producing both a higher expected rate of return and lower risk (where risk is measured by the variance). The analysis departs from previous work (i.e., Moss, Featherstone, and Baker) that compared the rate of return on agricultural assets with the rate of return on aggregate or individual stocks. Our comparison is possible because newly released BEA data provide a more consistent accounting for tangible assets and depreciation than was previously available. These revisions of the BEA data (as described in detail by Fraumeni and by Katz and Herman) generate new estimates for current and constant dollar stocks of reproducible physical capital in the nonfarm, nonfinancial corporate sector, which are more comparable with asset valuation in the farm sector. The nonfinancial corporate sector was chosen for comparison because it is the largest nonfarm sector in the BEA data series, accounting for some 70% of total nonfarm business product.

Literature Review

Economists have suggested that agriculture in the United States suffers from persistently low and variable factor returns (Tweeten 1969; Tweeten and Brinkman). This speculation usually defines low factor returns as returns to agricultural assets below their opportunity cost in other sectors. Persistent disequilibrium has been explained by a variety of factors including asset fixity and the technology treadmill (Herdt and Cochrane; Tweeten 1969, 1989; Barry and Robison). Such explanations have long been used as justifications for agricultural programs (Gardner 1992, 2001; Moss, Shonkwiler, and Reynolds).

There are a variety of reasons why rate of return estimates in the farm and nonfarm sectors may not be directly comparable in previous studies. These include: 1) use of book value versus current cost accounting; 2) differences in depreciation methods; 3) use of accounting versus nominal economic rates of return; 4) whether capital gains are included in total returns; 5) the specific structural characteristics of the farms; 6) risk characteristics of farm and nonfarm investments; 7) the time period chosen for comparison (short versus long-term returns); 8) the need to properly differentiate between income returns to farm operators, landlords, contractors, and others; and 9) problems associated with estimating the residual return to farm business assets in the presence of one or more quasi fixed factors of production (Mishra, Moss, and Erickson). These issues given, the literature has extensively addressed the relative profitability of farm versus nonfarm investments.

Agricultural finance literature has typically focused on the effect of relative risk. Barry, Bjornson, Bjornson and Innes, and Irwin, Forster, and Sherrick examined the risk-rate of return performance of agriculture relative to other assets using the capital asset pricing model (CAPM). …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.