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Do Profitable Farms Remain Profitable? Transition Probabilities Using Markov Switching Models Applied to Kansas Farm Data

Jayce S. Stabel, Terry Griffin and Gregory Ibendahl

Journal of Applied Farm Economics, 2018, vol. 2, issue 1

Abstract: Financial vulnerability has been observed across agricultural production regions; how-ever, uncertainty regarding farms’ persistence within specific profitability categories exists. This study compared farm characteristics that persist in most and least profitable categories and then evaluated the probability that farms transitioned among profitability categories. Using 425 Kansas Farm Management Association (KFMA) farms that were present for the 20-year period 1994–2013, the persistence of remaining or transitioning to another profitability category was tested. Specifically, Markov transition probabilities were estimated for Kansas and the six regional KFMA regions. Comparisons of farms that persist in the highest and lowest profitability categories revealed no dramatic differ-ences in acreage or other physical characteristics. Kansas farms tend to persist in their current profitability category, suggesting that operator skill and/or quality of farmland dominate random factors. In general, transition probabilities were greater for the highest and lowest profitability categories than for the middle categories. Farms were observed switching from highest to lowest profitability categories between 5% and 20% of the time within one year. Farmers were likely to stay in the highest profitability group more than half the time. By contrast, farmers were likely to stay in the lowest profitability group 42% of the time. Just like with the most profitable group, the least profitable group has a greater likelihood of remaining at the bottom, indicating that random events do not cause persistence.

Keywords: Farm Management; Agricultural Finance (search for similar items in EconPapers)
Date: 2018
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DOI: 10.22004/ag.econ.302998

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