Price and Profit: Investigating a Conundrum

Although few in number, studies consistently find that price explains little, if any, of the variation in profit across farms. This contrasts with farmers' opinions regarding the importance of price, as well as the use of price supports as a primary policy instrument. Using farm level data from the Illinois Farm Business Farm Management program for calendar years 1996 through 2004, a potential explanation for this conundrum is identified. Price is significantly more correlated with a farmer's variation in management return from year to year (approximately, +0.45) than with the variation in management return across farmers (approximately, +0.10). Thus, the conundrum arises out of different perspectives: farmers focus on the performance of their own farm over time while studies have focused on the variation among farms.

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2006 NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management

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