*Article* **Are Farms Located in Less-Favoured Areas Financially Sustainable? Empirical Evidence from Polish Farm Households**

**Radosław Pastusiak 1,\* , Michał Soliwoda <sup>1</sup> , Magdalena Jasiniak <sup>1</sup> , Joanna Stawska <sup>2</sup> and Joanna Pawłowska-Tyszko <sup>3</sup>**


**Abstract:** The topic of farms that deal with environmental constraints is an ongoing agricultural policy issue, including within the Common Agricultural Policy. We propose empirical evidence based on a sample of Farm Accountancy Data Network (FADN) farm households, evaluate the influence of chosen factors on financially sustainable farm development and verify less-favoured area (LFA) farms' growth compared with non-LFA households. To specify farm households, we use the Sustainable Growth Challenge (SGC) model and DuPont decomposition based on financial measures and indicators that were adopted from corporate finance. It is concluded that the differences in SGC and revenue growth values between LFA and non-LFA farms mainly results from the system of subsidising LFA farms that receive compensation for farming in areas with adverse environmental conditions. Generally, the impact of agricultural policies on LFA and non-LFA farms is significant and may weaken the effect on LFA. With the exception of education, other sociodemographic factors do not highly influence farm efficiency. Along with improvements in the quality of human capital (e.g., higher education level), awareness of subsidies, and debt and innovative solutions increases. The interest in precision agriculture and agriculture 4.0 is also growing, which directly translates into better technological and financial efficiency of farms.

**Keywords:** less-favoured areas; sustainable agriculture; agricultural policy; farm profitability

### **1. Introduction**

EU Member States are required to provide a special subsidy to certain farmers to compensate for the disadvantages associated with the management of less-favoured areas (LFAs). This is designed to prevent the depopulation of rural areas and the loss of their agricultural character. In Poland, 58.7% of the utilised agricultural area (UAA) has been classified as restricted. Of this, 1.7% of the UAA is included in the first group and comprises mountain/highland areas with shorter vegetation periods due to the altitude and/or slope; the second group—47% of the UAA—includes areas other than mountain areas facing significant natural constraints, such as inadequate climatic conditions, low soil productivity or steep slopes (outside areas considered mountainous); the third group, which makes up 10% of the UAA, includes areas affected by specific constraints where land management is carried out and includes the protection or improvement of the environment and provision of appropriate landscape. In Poland, biophysical criteria, which relate directly to the properties of soils and slopes, are the most important; climatic factors are not very significant. Poland is characterised by a large share of agricultural areas with restrictions. In most cases, these restrictions result from the properties of soils [1] (p. 27).

**Citation:** Pastusiak, R.; Soliwoda, M.; Jasiniak, M.; Stawska, J.; Pawłowska-Tyszko, J. Are Farms Located in Less-Favoured Areas Financially Sustainable? Empirical Evidence from Polish Farm Households. *Sustainability* **2021**, *13*, 1092. https://doi.org/10.3390/su13031092

Academic Editor: Aitazaz A. Farooque Received: 7 December 2020 Accepted: 8 January 2021 Published: 21 January 2021

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The traditional concept of "sustainability" in agriculture is based on three pillars that include economic, social and environmental dimensions. This is highly related to the "triple bottom line" approach, which links economic, environmental and social aspects of sustainability. On the one hand, the perspective of farm sustainability and its sustainable development is based on the balance between farming goals, its operators and the environment. Therefore, a detailed analysis of the economic and financial condition of farm households should refer to the concept of "three pillars." On the other hand, the managerial approach in financial management underlines the concept of balance between farm growth and access to financing. The concepts of financial sustainability (including sustainable growth) at the microscale level (e.g., for enterprises—Higgins [2]; for farms—Escalante et al. [3,4], Mishra et al. [5,6]) integrates equity growth rate, financial leverage and growing sales revenues on agricultural products. This is very important in agriculture, which is considered one of the riskiest businesses. A high number of farm households, the price risk level and sensitivity to weather events and climate changes results in high income variability. This partially justifies public policies that comprise targeted support instruments (e.g., direct payments to agricultural sector operators), such as the Common Agricultural Policy (CAP) of the European Union (EU). The modern concept of sustainability includes the stakeholder interests and long-term growth objectives (e.g., the concept of optimal growth).

Although environmental constraints may negatively affect the economic and financial condition of farms located on LFAs, the Rural Development Programme (RDP) with LFA subsidies can weaken external business conditions. Monitoring the in-depth financial behaviour of farms located on LFAs may shed light on the financial sustainability of farm households with some peculiarities (compared with non-LFA farms). Furthermore, the nexus between sociodemographic characteristics of farms operators and financial sustainability of farm households is interesting from the perspective of rural polices that seek to improve human and social capital in rural areas (e.g., through courses for active farmers).

The objective of the paper is to verify whether LFA farms are financially sustainable and evaluate the influence of selected factors on financial behaviour. In addition, the paper aims to provide a comparison between the financial situation of LFA and non-LFA farms.

The following hypotheses are formulated:

**Hypotheses 1 (H1).** *The financial behaviour of LFA farms (analysed by the Sustainable Growth Challenge model) is significantly more sustainable.*

We treat the sustainable growth challenge (SGC) level as a proxy for farms' financial balance. The farm may be described as financially sustainable when its SGC level reaches 0. We assume that LFA farms face more environmental constraints (e.g., hills, lower soil quality) and limitations in production management that highly influence their total output, and consequently, their income and profitability.
