Contributions of Productivity and Relative Price Changes to Farm‐level Profitability Change

Abstract

AbstractThis article investigates the sources of profitability change at the farm level, by farm size and specialization, with an application to a sample of 256 farms in Kansas from 1993 to 2010. Using the Lowe index method, profitability change is decomposed into changes in total factor productivity and terms of trade. The nonparametric data envelopment analysis method is used to further decompose total factor productivity into technical change and different measures of output‐oriented efficiency change. Finally, the system‐Generalized Methods of Moments approach is employed to investigate the dynamic relationship between different components of productivity on farm profitability. Results indicate that profitability change is mainly driven by total factor productivity change. The main source of total factor productivity change is technical change. The upward‐shifting frontier results in declining technical efficiency. Results point towards the need to support research and development without ignoring efforts to encourage the uptake of existing technologies.