Agricultural Profits and Farm Household Wealth

Abstract

Recent decades (especially since 1973) have been an era of decreasing production profits that threaten the survival of many midand small-sized American farms (Blank 2003). Normally, the survival of a firm depends on its profitability, both in absolute and relative terms. To remain viable, a firm must offer returns that are both sufficient to cover the owner’s financial obligations and competitive with returns from alternative investments. If a firm is profitable, the wealth of its owners can increase over time. An unprofitable firm, on the other hand, reduces owners’ wealth. Yet, American agriculture is full of firms that routinely earn low or negative returns on equity from production operations (Blank 2002), thus complicating the evaluation of the industry’s economic health and prospects. This suggests that macro-level forecasts of American agriculture’s future structure and performance require a micro-level understanding of the relationship between farm profits and owner wealth. This paper addresses that relationship.