Agricultural Finance Review

Current Issue

Volume 67, Number 2, Fall 2007

Biography

"J. D. Black: A Biography" authored by Calum G. Turvey

Research

"Factors Influencing Borrowers’ Preferences for Lenders" authored by Travis A. Farley and Paul N. Ellinger

Abstract

Data from a survey of Midwest producers are used to examine the credit source decisions of farm borrowers. The lender attributes preferred by producers are identified in terms of their importance in selecting credit providers. The influence of farm business information on farmers= interest rate sensitivity and loyalty is investigated. Regression results indicate that patrons of the Farm Credit System are more likely to be highly price sensitive. Furthermore, the likelihood for strong borrower loyalty is found to be higher for smaller, less leveraged, and more tenured farms and by those who source financing from bank institutions.

Key words: binomial logit, interest rate sensitivity, lender attributes, lender-borrower relationships

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"Combining Hedonic and Negative Exponential Techniques to Estimate the Market Value of Land" authored by Leah J. Tsoodle, Allen M. Featherstone, and Bill B. Golden

Abstract

Given the importance of land valuation to various stakeholders, the objective of this research is to estimate a theoretically sound model to model the market value of land in Kansas, accounting for urban influence and site specific characteristics. The model is estimated using data on all sales of agricultural land in Kansas between 1996 and 2004. Results indicate that the upward, urban pressure on price is greater for Kansas City relative to Wichita. Kansas City had a much slower rate of decay than either Wichita or cities with a population of more than 10,000.

Key words: hedonic model, negative exponential function, urban influence on land values

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"Off-Farm Income and Farm Capital Accumulation: A Farm-Level Analysis" authored by Carl J. Lagerkvist, Karin Larsen, and Kent D. Olson

Abstract

An intertemporal model in which farm capital accumulation and work choices by a single-agent farm household are interdependent is developed and tested using a farm-level data set. Estimation is done using a recursive two-step simultaneous censored equations model. The results of this study are of relevance for an understanding of structural change within the agricultural sector as they point toward the emergence of a dual farming structure and rigidity in off-farm work adjustments. Our findings suggest that off farm income reliance is associated with a farm asset disinvestment strategy, that there is rigidity in off farm income reliance, and that factors explaining farm capital growth indirectly affect the off farm reliance.

Key words: agricultural sector, human capital, investment, off-farm work

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"Structural Breaks and Agricultural Asset Allocation" authored by Dustin L. Pendell and Allen M. Featherstone

Abstract

Structural breaks have been found to have large effects on optimal investment allocations. This analysis empirically tests for a structural break and then evaluates the impact the break has on the optimal allocation of agricultural and nonagricultural investments using a mean-variance model. Results indicate nonfarm investors could enhance their portfolios by investing in farm assets. However, the results suggest that the allocation of assets prior to the structural break in the early 1950s is much greater than the time period following the break and the entire 1926-2004 time period. Typically, portfolio research has not tested for structural breaks and this may adversely affect decisions on investment allocation.

Key words: agricultural assets, investment portfolio, mean-variance, structural break

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"Capital Structure, Firm Size, and Efficiency: The Case of Farm Petroleum and Animal Feed Co-operatives in Canada" authored by Getu Hailu, Scott R. Jeffrey, and Ellen W. Goddard

Abstract

This paper examines the cost structure and cost efficiency for an unbalanced sample of 42 animal feed and 115 farm petroleum co-operatives in Canada over the period 1984-2001 using heterogeneous technology stochastic frontier models. The parameter estimates of the cost frontier and the resulting cost efficiency scores indicate there are statistically and economically significant cost inefficiencies. Further analysis revealed that financial structure and firm size have likely contributed to variations in cost efficiency. Obtaining sufficient equity capital is expected to improve co-operative efficiency

Key words: agribusiness co operatives, capital structure, cost efficiency

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"Marginal Impact of Sales Consultant Visits and Financing Opportunities on Adoption of Variable-Rate Fertilizer Application" authored by William E. Nganje, Mary S. Friedrichsen, Cole R. Gustafson, and Gregory McKee

Abstract

Precision agriculture has been practiced since the early 1990s, but the adoption rate of this technology has been slower than experts had predicted. This study explores the role of public- and private-sector financial assistance in the adoption of variable-rate fertilizer application. Public- and private-sector financial assistance are modeled to show the marginal impacts of changes in the traditional flow of government assistance, sales consultant visits, and financial risk. Results indicate that deviation from traditional Aone stop shopping@ has a negative and significant impact on the adoption of alternative fertilizer application technology. However, sales consultant visits, in conjunction with conservation and environmental quality incentive programs and the availability of financing opportunities, significantly favor the adoption of variable-rate fertilizer application. Changes in business risk produced opposite movements in financial risk to facilitate increased adoption of variable-rate fertilizer application technologies.

Key words: financing opportunities, multinomial logit model, risk balancing, variable-rate fertilizer application

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"Cooperative Risk Management, Rationale, and Effectiveness: The Case of Dairy Cooperatives" authored by Mark R. Manfredo and Timothy J. Richards

Abstract

Numerical simulation of several typical risk management strategies using pro forma financial statements from representative U.S. dairy cooperatives shows that combinations of forwards, swaps, and cash marketing strategies for output (cheese), along with various forward contracts offered to cooperative members to manage the variability of milk revenues, have the potential to improve cooperative-, and ultimately member-level risk-return performance. Because most cooperatives have limited access to equity capital, effective use of available risk management tools can increase cooperative value by increasing debt capacity, avoiding bankruptcy costs, and preventing the distortion of capital budgeting decisions. Moreover, the offering of risk management tools to individual members as a service may prove valuable in the retention of these members in the cooperative.

Key words: cooperative, expected utility, futures, options, risk management, value-at-risk

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"Evaluating the Effects of Asymmetric Information in a Model of Crop Insurance" authored by Adeyemi Esuola, Michael Hoy, Zahirul Islam, and Calum G. Turvey

Abstract

Asymmetric information in the form of moral hazard and adverse selection can result in sizable program costs for government-provided crop insurance plans. We present a methodology and illustrative simulations to show how these two types of information problems interact in a way to create program costs for the providers of crop insurance. Our methodology allows us to ascertain the relative contributions to program costs of these two sources of asymmetric information. The exercise is useful in pointing out directions for future study seeking ways to improve the design of crop insurance plans.

Key words: adverse selection, crop insurance, moral hazard

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"Evaluating Risk Management Strategies for Pacific Northwest Grain Producers" authored by Larry D. Makus, H. Holly Wang, and Xiaomei Chen

Abstract

A utility maximization model is used to assess alternative risk management portfolios of Pacific Northwest non-irrigated grain producers using three rotational practices. Risk management tools include hedging with wheat futures, yield insurance, two revenue insurance products (with and without price replacement), and government programs under the 2002 Food Security and Rural Investment (FSRI) Act. Government programs account for the primary risk management value of all the analyzed portfolios. The revenue insurance product with price replacement is preferred when available, and yield insurance is preferred over revenue insurance without price replacement. Hedging is not extensively utilized unless government programs are eliminated.

Key words: crop insurance, hedging, non-irrigated crops, risk management

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"Producers’ Preferences for Round Number Prices" authored by Joni M. Klumpp, B. Wade Brorsen, and Kim B. Anderson

Abstract

The purpose of this study was to determine if a preference for round prices exists in the wheat market and how wheat sales react to price movements around whole-dollar amounts. The results show round prices are slightly more prevalent than non round prices, and transactions increase when price moves above a whole-dollar amount. While such predictable behavior could be exploited by speculators in other markets, the effect is not large enough to merit concern in the market studied here.

Key words: behavioral finance, round prices, threshold prices, wheat

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