The Economics of Soil: Does Higher Productivity Guarantee Greater Farm Profitability?

Abstract

Agriculture plays a crucial role in Serbia’s economy, with small and medium-sized farms forming the backbone of rural livelihoods. This study examines the nexus between productivity and farm profitability in Serbia. The sample consists of, on average, around 500 crop farms per year that have been actively operating over a period between 2018 and 2022, resulting in a total of 2,696 observations. Using financial data from the Farm Accountancy Data Network (FADN) and employing panel data analysis, this study will examine the impact of ten key variables on farm profitability, measured by Return on Assets (ROA), with a particular focus on three core determinants: land productivity, labor productivity, and total factor productivity (TFP). Based on previous research, we hypothesize that total, land and labor productivity have a positive and statistically significant effect on the farm profitability in the Republic of Serbia. The results indicate that land productivity has a positive and statistically significant effect on profitability, as higher land efficiency leads to increased revenue and lower per-unit production costs. Contributing factors include modern farming techniques, government support, and economies of scale. However, TFP does not exhibit a significant impact on profitability, likely due to rising input costs and the fragmented nature of Serbian farms, which limits the benefits of efficiency gains. Similarly, labor productivity does not significantly affect profitability, as small farms rely predominantly on low-cost family labor with limited mechanization. The findings emphasize the importance of improving land productivity as a key driver of farm profitability, suggesting that government policies should focus on expanding access to modern agricultural technologies, financial resources, and sustainable farming practices. Additionally, effective financial management strategies, such as optimizing external capital use and subsidies, could further enhance profitability. Despite these insights, the study acknowledges limitations, including potential data inaccuracies, the exclusion of other external profitability factors, and the relatively short timeframe analyzed. These findings hold significant implications for These findings are important for policymakers, agricultural experts, and farmers because they highlight that improving land productivity can boost farm income. Our study highlights the need for adaptive strategies and robust risk management frameworks to navigate through such turbulent times. Policymakers and industry stakeholders must work together to bolster the resilience and sustainability of the food sector in the face of ongoing and future uncertainties.