Relative importance of functional areas of management: evidence from Illinois

Purpose The purpose of this paper is to explore the returns to different functions of farm management. Various external factors influence farm incomes including volatile commodity prices, variable production costs, interest rates, and geopolitical factors, which can affect access to and prices in both input and output markets. To meet performance goals and ensure the financial health of their business, farmers need to decide how best to develop and deploy appropriate human capital across a range of management functions. Design/methodology/approach We use farm level data from cooperator members of Illinois Farm Business Farm Management association to estimate measures of latent (unobserved) financial, production, and marketing management functions. A structural equation modeling approach is used to examine how the different managerial functions contribute to farm performance. Findings Our results show that returns to financial management are positive and consistent across all time periods. Returns to production management are also positive, but always lower than returns to financial management. Returns to marketing management are positive and large relative to financial and production management but also highly variable across time and economic conditions. Originality/value These findings show that functional diversity within the farm business is important, and that the returns to different functions may change given changes in the environment. These findings have value in helping farmers to decide how best to invest in their human capital to develop skills in the different areas of functional management.