Do Profitable Farms Remain Profitable? Markov Switching Models Applied to Transition Probabilities

Financial vulnerability has been observed across agricultural production regions, however uncertainty regarding farms’ persistence within specific profitability category exists. This study compared farm characteristics that persist in most and least profitable categories then evaluated the probability that farms transitioned among profitability categories. Using 425 Kansas Farm Management Association (KFMA) farms that were present for the 20 year period from 1994 to 2013, persistence of remaining or transitioning to another profitability category were tested. Specifically, Markov transition probabilities were estimated for Kansas and the six regional KFMA associations. Comparisons of farms that persist in the highest and lowest profitability categories revealed no dramatic differences in acreage or other physical characteristics. Kansas farms tend to persist in their current profitability category, suggesting that operator skill and/or quality of farmland dominates random factors. In general, transition probabilities were greater for the highest and lowest profitability categories than the middle categories. Farms were observed switching from highest to lowest profitability categories between 5% and 20% of the time within one year. Farmers were likely to stay in the highest profitability group more than half the time. By contrast, farmers were likely to stay in the lowest profitability group 42% of the time. Just like with the most profitable group, the least profitable group has a greater likelihood of remaining at the bottom indicating random events do not cause persistence.