Trade-off between investment and private withdrawals: assessing the return on investment for farms in France

Purpose The wealth generated on a farm can be allocated either to the immediate remuneration of the self-employed workers or to the financing of investments, which can be considered as a deferred remuneration to be realized in the future. We contribute to the study of the profitability of capital invested in agriculture by estimating an internal rate of return (IRR) for a sample of French commercial farms and proposing five strategies reflecting how the generated wealth is allocated to either investment or private withdrawals. Design/methodology/approach The adopted approach relies on the net present value theory and the estimation of an IRR. Based on the analysis of annual cash flows and balance sheet assets, we study the profitability of having invested in agriculture and document how the trade-off between investment and private withdrawals was implemented by a balanced sample of 1,254 French commercial farms over the period 2002–2018. Findings Estimated IRRs are positive in most cases, with an average of 1.8%, which is of the same order of magnitude as the assumed weighted average cost of capital. We further propose five strategies named “balanced”, “spender”, “well-paid”, “accumulator” and “prudent”, based on the respective shares of the total operating cash flow dedicated to either investments or private withdrawals. Originality/value Our analysis provides original insights into measuring farm performance and farmers' investment behaviour in the long term, which should help agricultural advisers to better target their decision support towards farmers' investment and financing decisions.