Drivers of agricultural capital productivity in selected EU member states. Factor Markets Working Paper No. 30, September 2012

The aim of this Working Paper is to provide an empirical analysis of the marginal return on working capital and fixed capital in agriculture, based on data gathered by the Farm Accountancy Data Network from seven EU member states. Particular emphasis is placed on the detection of credit market imperfections. The key idea is to provide farm group-specific estimates of the shadow price of capital, and to use these to analyse the drivers of on-farm capital use in European agriculture. Based on Cobb Douglas estimates of farm-type specific production functions, we find that working capital is typically used in more than economically optimal quantities and often displays negative marginal returns across countries and farm types. This is less often the case with regard to fixed capital, but it is only in a small set of sectors where access to fixed capital appears severely constrained. These sectors include field crop and mixed farms in Denmark, dairy farms in East Germany, as well as mixed farms in Italy and the UK. The relationship between farm financial indicators and the estimated shadow prices of capital varies considerably across countries and sectors. Among the farms with a high shadow price for fixed capital in Denmark, high debt levels and little owned land tended to induce more intensive capital use, which may reflect the liberal Danish banking system. In East Germany, Italy and the UK, high debt levels made farmers more tightly capital constrained. Hence, in the latter group of countries, more traditional mechanisms of capital allocation based on debt capacity seemed to be at work. As a general conclusion, EU agriculture appears to be characterised by overcapitalisation rather than by credit constraints.