Risk-adjusted farm returns and farm size

Abstract

Purpose

The 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/approach

Relying 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.

Findings

Findings 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 implications

These findings provide further support for ongoing farm consolidation.

Originality/value

The results suggest the trend towards consolidation in production agriculture is likely to continue. Larger farms bear less risk.

Citation

Noumir, A.M., Langemeier, M.R. and Mallory, M.L. (2023), "Risk-adjusted farm returns and farm size", Agricultural Finance Review, Vol. 83 No. 3, pp. 528-547. https://doi.org/10.1108/AFR-06-2022-0070