Profit and viability persistence: Evidence from the Spanish agricultural sector

Abstract

he literature focused on analyzing profit persistence in the agricultural sector is scarce. This paper contributes to reducing this gap by carrying out an empirical study of 10 types of farming in Spain based on a dynamic panel model with microeconomic data from a large sample of farms provided by the Spanish Farm Accountancy Data Network. The generalized method of moments system estimator is used to assess profit persistence, including all significant lagged profit rates explaining the adjustment of abnormal profits over time. Moreover, the dynamic of farms' economic performance is analyzed considering the return on assets as a dependent variable (i.e., measuring farms' profitability), as well as an alternative indicator that also accounts for opportunity costs (i.e., measuring farms' viability). The results show that profit and viability persistence in the farming sector are complex dynamic processes that depend on several lags of the aforementioned dependent variables (between 2 and 5 years), with high abnormal profit and viability persistence being widespread. In any case, heterogeneous persistence results are achieved depending on the type of farming. The differences found can be explained by disparities in several explanatory variables contributing to above- or below-average performance. The conclusions reached could lead to sounder decision-making regarding agricultural policy (i.e., farm subsidies) and competition policy (i.e., exceptions to competition law).