Report on Determinants of Capital Structure in the Swedish Dairy Farm Industry

The Swedish agricultural sector has witnessed vast structural changes in recent years (Djurfeldt & Gooch, 2002, pp. 75-77). The trend is fewer and bigger farms that can utilize economy of scale. This trend has been going on in Sweden for a very long time. 

Swedish agriculture development

This is illustrated by the fact that during the period 2005-2013, the total number of Swedish full-time farms dropped by 20% to 16 296, where dairy farms stood for the biggest decline with 46%, while the total cultivated area remained virtually unchanged (Statens Jordbruksverk [SJV], 2015a, p. 1). This trend has been going on in Sweden for a very long time. According to Statistics Sweden there were about 352 000 Swedish full-time farms in 1949 with an average of 13,3 ha farmland (SCB, 1950. pp. 2-3) compared to an average in 2013 of 112 ha per farm (SJV, 2015a, p. 1).

Even though the Swedish agricultural sector has declined steadily for a long time it still constitute an important function in the society and contribute significantly to the national economy. The sector accounted for 0,4% (13,4 BSEK) of total Gross Domestic Product (GDP) (SJV, 2014, p. 185) which might not seem like much but the sector had a total gross investment of 6,26 Billion SEK during 2013 (SJV, 2015b, p. 30). This investment rate has a big financial impact on the rural areas, and provides many job opportunities. When investing, the agricultural sector makes big (relative to size) investments, meaning that they invest a high degree of their turnover annually. This means that the sector is relatively sensitive to changes in interest rates. That is an important socioeconomic attribute since when a recession hits, interest rates will drop and the agricultural investments will increase and when the economy is overheated the interest rates will rise, causing an investment restraint in the agricultural sector. Thus the agricultural sector has a smoothing effect on the economy as a whole by investing and generating work opportunities in recessions and focusing on debt repayment in an overheated economic market situation.

Another socio-economic benefit from the agricultural sector is that it keeps the rural areas open. Without agriculture the farmland in these areas would be overgrown by brushwood, destroying the view from most rural houses, causing the house prices to drop (SJV, 2010, p. 11). This would diminish the real estate market and reduce the government tax income from the sales of these houses. Domestic food production also reduces the need for importing food, increasing the national balance of trade. The last socio-economic benefit is the security offered from having domestic food production (SLC, 2014). This means that in the case of a national emergency or a global food shortage, the availability of food is secured.

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These social and socio-economic benefits have during the recent years caused an increase in media coverage and debate about the survival of the industry in general and the dairy farm industry in particularly due to low profitability. The problem of low profitability is caused by an increased international market effect on prices combined with high production costs. One reason that the Swedish agricultural industry has higher production costs is because of what is considered the world’s most extensive animal protection regulations (Svenska djurhälsovården, n.d.). These rules are implemented in order to improve the development of animal protection regulation internationally and the Swedish government is leading by example (SJV, 2012, pp. 1-2). These rules increase the quality of the Swedish agricultural production but also mean a lower competitiveness internationally. This changes the market environment of the agricultural sector and the farms have to change with it. These changes can be seen in the recent drop in the number of active farms and the increase in average area of cultivated farmland.

The change towards fewer but bigger farms has been going on for a very long time but since the beginning of the 1990th the agricultural sector has also witnessed a huge leap in technology and automation (Stafford, 2000, p. 267), similar to the development in the heavy industry during the 1990th (Magnusson & Ottosson, 2003, pp. 57-59). This change has been titled precision agriculture or precision farming and has, due to high implementation costs (Tozer, 2009, pp. 80-87), added a higher financial aspect on the agricultural business. The base of precision farming is to maximize production and minimize consumption on an individual level, through the use of technology. This is applicable in all types of agriculture but it is in dairy farming that precision farming has had the highest impact and reached the highest refinement. Today, automated milking is a central part of modern dairy farming (Douphrate, et.al., 2013, p.199) and that has created a foundation for further development.

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