Natural Resources Research Articles

The impact of repayment obligations arising as a by-product of input use on partial inefficiency: Evidence from Western Australian farm businesses

Document Type

Article

Publication Date

5-10-2024

Journal Title

The Australian Journal of Agricultural and Resource Economics (AJARE)

ISSN

ISSN 1364-985X eISSN 1467-8489

Keywords

By-production, Farm debt, Partial inefficiency, Repayment obligation, Farm businesses, Farm economics

Disciplines

Agribusiness | Agricultural and Resource Economics | Agricultural Economics | Agricultural Science | Agronomy and Crop Sciences | Finance and Financial Management | Natural Resource Economics | Natural Resources Management and Policy | Operations and Supply Chain Management | Risk Analysis | Statistical Models

Abstract

Farm businesses often use debt to finance the purchase inputs and meet operational costs. Selected studies have investigated the impact of debt use on farm performance as measured using technical efficiency. However, no prior studies in agriculture have considered treating the debt repayment obligation created as a by-product of production when benchmarking farm performance. This study employs nonparametric directional distance function models to quantify the impact of debt repayment as a by-product of input use purchased on credit on farm-level partial inefficiency using a panel data of 54 mixed enterprise broadacre farms in Western Australia from 2002 to 2011. The study finds that omitting repayment obligations created in the production process in analysis results in underestimating partial inefficiency scores. Farm size, production diversification and rainfall zone are significant drivers of partial inefficiency. The implication of the study's findings is that failure to account for repayment obligations created in the production process may result in erroneous policy suggestions that undermine the efforts of farm businesses to minimise or avoid financial stress.

Share

COinS