Efficiency and Capital Structure in the Italian Cereal Sector

Abstract

Farm capital structure may have contrasting effects on farm efficiency as a strand of the farm efficiency literature as pointed out ( for a review see for example Davidova and Latruffe 2007). Farmers often use external funding both to cover productions costs and to finance investments (machinery, equipment, buildings) to enhance farm economic performance. The debt is necessary to maintain or improve farm productivity and competitiveness by adopting technological innovation needed to increase farm efficiency. At the same time leverage may affects farm efficiency by influencing farm production decision constrained by lower farm expenditure capacity. In this case, farms response may rely on reducing the necessary expenditures to maintain the production assets with negative consequences on farm productivity, growth and efficiency. Finally, farm leverage may affects the farms capacity to react to market shocks adopting the needed strategic adjustments to maintain productivity, efficiency and competitiveness. A relevant case study for assessing this last effect would be the recent surge in price volatility that affected European and world cereal markets starting from 2008. The objective of this paper is to provide new empirical evidence on the relationship between farm capital structure and farm efficiency. In particular we will try to answer the following research question: does higher leverage lead to better performance? The food price volatility that has affected the cereal market from 2008 onwards is a possible stress for cereal farms that must adapt to the rapid drop in prices such as the one observed in 2010. Our research provide a first insight on the evolution of the cereal farms debt-technical efficiency relationship in times of high price volatility.