The Impact of Size and Specialization on the Financial Performance of Agricultural Cooperatives

Abstract

Agricultural cooperatives in the United States are increasing in size while decreasing in number due to consolidation. This study examines the impact of size and specialization on the mean and variance of financial performance of agricultural cooperatives using a system of equations (3SLS) approach. Return on equity is a measure of financial performance and the variance of return on equity is a measure of risk. Risk had a positive impact on the mean financial performance of the cooperatives. The impact of risk is estimated to vary based on the diversity of products handled by the cooperatives as most cooperatives received the majority of incomes from grain and farm-input sales. In addition, profitability, the debt to asset ratio, and size had positive impacts on mean financial performance. Size had a positive impact on financial performance indicating that larger agricultural cooperatives benefit from economies of scale. Diversified cooperatives, particularly small-sized cooperatives, tended to have less variability in financial performance over the 2005-2014 period.