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Insolvency in agriculture: bad managers or the Common Agricultural Policy?

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Bad management is often blamed for the failure of firms. Yet an empirical investigation of the annual rate of insolvency in agriculture and horticulture in England and Wales revealed a relationship with the price of land. The rate of insolvency was negatively related to the current price of land but the lag structure estimated suggests that the rate of insolvency could be positively related to the land price two years previously. This result is in accordance with a theoretical model which shows that the optimal gearing strategy under rising land prices induces farmers to increase their indebtedness. Since Common Agricultural Policy price support has become capitalized into land prices this suggests that some of the insolvency in agriculture and horticulture was the result of previous agricultural policy. The results do however underline farm management advice that farmers should beware of relying on capital gains to remain in business.
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Document Type: Research Article

Publication date: 1996-02-01

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