Productivity and Farm Profit – A Microeconomic Analysis of the Cereal Sector in England and Wales

Abstract

This paper implements the profit change decomposition methodology developed by Grifell-Tatjé & Lovell (1999). Profit change over time is first decomposed into a price effect and a quantity effect; the quantity effect is then decomposed into a productivity effect and an activity effect; in turn, the productivity effect is subdivided into a technical efficiency effect and a technical change effect, while the activity effect is divided into a scale effect, resource mix effect and product mix effect. The end result is therefore a measure of six distinct components of profit change.

The methodology is used to investigate profit changes for a sample of cereal farms drawn from the Farm Business Survey in England and Wales for the period 1982 to 2000. The results of the analysis show an overall decline in profit levels for the period at the average speed of £4,400 annually, with the major part of this decline attributable to a negative price effect amounting to £7,000 annually on average. However, this was to some degree offset by a positive quantity effect largely driven by the positive contribution of technical change to profit growth, worth £4,000 annually on average. .