Volume 66, Number 1, Spring 2006
Issue
Biography
"William Irving Myers: A Biography" authored by Calum G. Turvey and Douglas P. Slaybaugh
Invited Papers
"Bankruptcy Reform and the Effects on Chapter 12 Bankruptcy for Farmers (and Fishermen)" authored by Neil E. Harl
Abstract
The United States Constitution assures debtors a right to relief from creditors seeking to satisfy claims against debtors unable to pay their debts. For well over a century, farmers as debtors have enjoyed a favored status by being exempt from involuntary bankruptcy. The landmark 2005 bankruptcy legislation continues that favored status even though the thrust of most of the rest of the 2005 law tightens the rules for non-farm debtors in several significant respects. The 2005 bankruptcy amendments made Chapter 12 bankruptcy for family farmers a permanent part of the Bankruptcy Code, relaxed the rules on family farmers eligible to file for Chapter 12 bankruptcy relief, and created an innovative way to treat tax liability from liquidation of business assets. The contrast in Congressional treatment of farm debtors and non-farm debtors in the 2005 statute is striking and appears to be attributable to strong and effective political support from farm state Members of Congress, the widespread belief that farmers in financial difficulty are deserving of assistance, and that abuse of the bankruptcy system has been less of a problem with the agricultural sector.
Key words: 2005 legislation, bankruptcy, Chapter 12 bankruptcy, farmers, financial stress, indebted farmers, political support
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"Permanent and Expanded: Chapter 12 Bankruptcy Regulations Following BAPCPA" authored by Barbara O’Neill
Abstract
The purpose of this article is to describe Chapter 12 of the Federal Bankruptcy Code and recent changes in federal bankruptcy legislation that affect family farmers and fishermen. Chapter 12 provides debt relief to financially stressed family farmers and, since 2005, fishermen with regular income. It was first enacted in 1986, in response to the farm financial crisis of the early- to mid-1980s, and was subsequently renewed by Congress until being made a permanent part of the Bankruptcy Code on July 1, 2005. This article provides an overview of the history and procedural aspects of Chapter 12 bankruptcy for family farmers and fishermen who are experiencing financial distress. It also discusses changes to the Bankruptcy Code enacted in 2005 under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) that affect the agricultural community.
Key words: bankruptcy, BAPCPA law, Chapter 12 bankruptcy, farm financial distress
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Research
"Managing Economic Risk Caused by Insects: Bug Options"
authored by Timothy J. Richards, James Eaves, Valerie Fournier, S. E. Naranjo, C.-C. Chu, and T. J. Henneberry
Abstract
The market for insuring insect damage is far from complete. This study introduces a new type of derivative instrument—insect derivatives—that provide growers a market-based means of transferring insect risk to speculators or others who may profit from higher insect populations. A risk-neutral valuation model is developed and applied to Bemisia tabaci population data. Economic simulation models show how insect derivatives can improve risk-return results for a representative cotton farm in the Imperial Valley of California. The results suggest that insect derivatives may become important risk management tools for a wide range of growers.
Key words: Bemisia tabaci, cotton, derivatives, forecasting models, insects, insurance, risk management
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"Loss-Given-Default on Farm Real Estate Loans: Probability of Full Recovery" authored by
Yan Yan and Peter J. Barry
Abstract
The non-depreciability characteristic of farmland value implies that farm delinquencies and default may not necessarily lead to loan loss. Considering this, a model under the framework of Value-at-Risk is developed to estimate probabilities of debt coverage by farmland that is mortgaged to secure a loan. Loss-given-default (LGD) under collateral risk is conceptualized and empirical estimation of land values considering time pattern and uncertainty is proposed. Given different economic situations, the probabilities of full recovery of loan balances under both loan-level and portfolio specifications are estimated using USDA data from selected states and regions. Results indicate that farmland pledged as collateral is expected to cover the loan balance with relatively high probability.
Key words: collateral risk, farm real estate, loss-given-default, recovery rates
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"Business Start-Up Survival Challenges and Strategies of Agribusiness and Non-Agribusiness Entrepreneurs" authored by Cesar L. Escalante and Calum G. Turvey
Abstract
The increasing demand for highly differentiated products in today’s enterprise economies has emphasized the small firms’ comparative advantage over larger firms. Business mortality rates, however, remained very high among more vulnerable start-up businesses still in their earliest stage of business development. The challenges experienced by agribusiness entrepreneurs and their counterparts from other industries in their start-up years are analyzed using case-study research techniques. Results indicate that highly differentiated start-up conditions between industries and among firms usually resulted in varied survival strategies. Notable differences include pricing policies dependent on market structures, more consultative management styles, inadequate start-up resources, and preferences for brand new equipment.
Key words: entrepreneurship, execution deficiency, innovation, market segmentation, product differentiation, product diversification, specialist or niche marketing, undercapitalization
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"Ledger Provision in Hog Marketing Contracts" authored by David A. Hennessy and Donald Lien
Abstract
Price-dependent loan agreements at low interest rates have sometimes been included in North American hog sector long-term marketing contracts. We show that a general form of this stipulation can be viewed as a hybrid between a forward rate agreement and a bundle of commodity spot options. In some cases, the provision amounts to a commodity swap. These observations provide an approach to valuing the provision. Historical data are used to estimate expected payouts to the producer under the contract feature.
Key words: commodity option, contract production, forward rate agreement
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"Rates of Return on U.S. Farm Investments, 1940-2003: A Comparison of Imputed Returns versus Residual Income Approaches" authored by Charles B. Moss, Ashok K. Mishra, and Kenneth W. Erickson
Abstract
The rate of return on farm assets is a key indicator of the profitability of farm sector investments. The residual income approach is most commonly used to estimate the returns to farm assets, farmland, and labor and management. However this approach may be sensitive to the underlying assumptions. This study examines the implications of the residual return assumption by using alternative formulations for computing the rate of return to farm assets. Specifically, we develop the rate of return on agricultural assets using an alternative imputation method. We demonstrate that the presence of multiple quasi-fixed factors implies the rate of return to farm assets may be understated by the residual income approach.
Key words: imputation method, quasi-fixity, residual income approach, returns to farm assets
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"Accounting for Loan Amount and Credit Rating When Calculating Lifetime Value of Agricultural Lending Relationships" authored by Michael A. Gunderson, Brent A. Gloy, and Eddy L. LaDue
Abstract
Using empirical default probabilities and profitability distributions, a simulation model is developed to identify the long-term value of relationships among differing credit rating and loan amount groups. According to the results generated from a set of lending relationships, agricultural lenders are pricing low and moderate credit rating customers such that similar long-term values are found among the groups. Also, large loan amount relationships generate more dollars of lifetime value. The large relationships, however, earn fewer dollars of lifetime value per dollar of loan amount among risk peers. Implications are also drawn for the retention rates of existing customers.
Key words: agricultural lending, lending relationships, lifetime value
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Extension
"A Crop Profitability Analysis for Long-Term Crop Investments" authored by Clark Seavert, Herbert Hinman, and Karen Klonsky
Abstract
The Crop Profitability Analysis (CPA) computer program is designed to help agricultural producers make long-run cropping decisions. CPA uses previously generated enterprise budgets to establish a base from which producers can analyze the potential profitability of perennial crops with establishment periods, such as orchard, berry, and vineyard crops, or the feasibility of long-term crop rotations. CPA permits up to a 20-year planning horizon and uses the economic concepts of net present value, annual equivalence, and internal rate of return to analyze the potential profitability of a given enterprise. CPA also analyzes the financial feasibility of potential investments by generating annual net cash flows.
Key words: crop profitability analysis, financial feasibility, investments, net present value, perennial crops
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