For a variety of reasons, dairy sector indebtedness has increased in recent years. However, it is not clear whether increased debt boosts or damages the economic performance of dairy farms. This paper provides empirical evidence by exploring the effects of farm debt measured by debt-to-asset ratio on dairy productivity and profitability, using the New Zealand DairyBase data of 2,637 dairy farms for a 10-yr period 2005 to 2014. A fixed-effects panel data model is utilized for the empirical analysis. The findings show that farm debt is significantly and negatively associated with both dairy productivity and profitability. We find that dairy productivity is positively determined by production intensification, irrigation intensity, milking frequency, cattle breeds and stocking rate, whereas dairy profitability is positively affected by milk price, business type, milking frequency, and stocking rate. Further analyses reveal that the debt ratio significantly decreases both the technical efficiency of dairy farms and return on assets; a high debt ratio increased dairy productivity between 2005 and 2009, whereas it decreased dairy productivity between 2011 and 2014; the effects of the debt ratio on dairy profitability vary over time. The analysis for a 10-yr balanced panel data (250 farms) shows that debt ratio does not significantly affect both dairy productivity and profitability, which suggests that the presence of farm-specific attributes such as farm life cycle and managerial ability of dairy farmers may also affect the debt ratio and through this farm performance.
Keywords: New Zealand; dairy farming; debt ratio; productivity; profitability.
The Authors. Published by Elsevier Inc. and Fass Inc. on behalf of the American Dairy Science Association®. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).