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Abstract

This study uses a financial approach based on the DuPont expansion to examine the significance of specialization and vertical integration on domestic agriculture. The traditional DuPont Expansion decomposes the rate of return to equity into asset efficiency, gross margins, and solvency. We hypothesize that agricultural specialization directly affects the asset efficiency and gross margin of the farm. Specifically, specialization would tend to decrease asset efficiency while increasing the gross margin. On the other hand, vertical integration may affect the gross margin and solvency directly. The effect on solvency would result from the integrator’s use of credit as an incentive. However, the general type of agricultural enterprise integrated may also have implications for asset efficiency. Specifically, livestock operations may tend to have greater asset efficiency than crops. We estimate a system of equations in log space using annual farm-level data from the USDA’s ARMS data, 1996-2006. We include all production regions in the contiguous 48 states, and all farms. We find that specialization and vertical integration are among the key factors driving farm profitability in the U.S.

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