Emerald | Agricultural Finance Review | Table of Contents

What's the ticker symbol for farmland?

Fri, 03 May 2013 00:00:00 +0100

Abstract

Purpose – Relatively high recent returns to farmland investments have led to substantially elevated interest in farmland investments. Absent, however, is a well-functioning equity market in farmland real estate, or well-developed indexes of farmland returns that might contribute to the development of tradable shares tied to farmland returns, or to methods to hedge the value of owned agricultural assets. The purpose of this study is to empirically present relevant measures related to farmland returns and other financial assets to provide a broad context for evaluation of farmland investments in a portfolio context. Issues related to the development of a farmland fund and index construction are discussed along with major risk and transactional factors that are somewhat unique to the asset class. Design/methodology/approach – Returns data from a broad set of financial categories and broad set of agricultural returns measures are developed and presented in multiple frameworks to convey temporal persistence, relatedness, and portfolio considerations related to farmland. Issues related to the construction of claims based on agricultural assets are discussed. Findings – Agricultural real estate investments have performed well compared to most other financial assets on most traditional measures of risk adjusted performance. However, the difficulties in direct investment remain and the need to develop securitized conduit exposures to farmland returns is identified. Originality/value – The study presents a unique set of farmland returns measures and examines the stability of the statistics used to describe these through time. Novel characterizations of the data compared to traditional assets helps investors and asset owners accurately understand the exposure to farmland returns.

Farmland rental markets: trends in contract type, rates, and risk

literatinetwork@emeraldinsight.com (Nicholas D. Paulson, Gary D. Schnitkey) — Fri, 03 May 2013 00:00:00 +0100

Abstract

Purpose – This article aims to explore recent trends in farmland rental markets using data for the state of Illinois. Trends in the types of rental agreements used and the relationship between the rental rate for those contracts, land values, crop revenues, production costs, and farm returns are examined. Design/methodology/approach – Data from various sources and at different levels of aggregation for the state of Illinois are used to provide illustrations of historical trends in farmland rental agreements and rental rates, and how they are related to various market and industry factors. Focus is placed on the more recent period since 2005 characterized by high commodity price levels and volatility. Findings – The majority of farmland in the Midwest is controlled under rental agreements which are increasingly of the fixed cash rent type. Rental rates have increased, but at a slower rate than farm returns. Average rental and interest rates imply that land values are consistent with the current market environment. Aggregate rental rates mask considerable variation in farm-level rents, only a portion of which can be explained by differences in soil productivity. Given the current level of price volatility, the tenure position of a farm operation has a significant effect on downside risk exposure. Originality/value – The illustrations provided in this paper should be of interest to researchers working in the area of farmland values and rental agreements, as well as to practitioners including farmers, landowners, and professional farm managers. The findings should motivate additional research and recognition of the importance of tenure position to the performance and risk exposure of grain farms.

The information content of farmland value surveys

literatinetwork@emeraldinsight.com (Todd H. Kuethe, Jennifer Ifft) — Fri, 03 May 2013 00:00:00 +0100

Abstract

Purpose – Farmland plays a critical role in the financial health of the agricultural sector. As a result, a number of institutions closely monitor farm real estate markets and publicly report estimated farmland values. This study aims to compare the information content of reported farmland values from three institutions. Design/methodology/approach – A state space model is formulated to link observed price estimates to the unobservable value of farmland. The model considers reported values over the period 1965-2010 for Iowa from three surveys: Iowa State Extension Service, the Federal Reserve, and the USDA. Findings – The values reported by Iowa State receive the greatest weight in estimating the unobservable market value, yet the appreciation rates implied by the USDA estimates most closely track those of the unobservable value. Originality/value – This study is the first to estimate the unobservable value of farm real estate based on observed estimates. The empirical procedure offers a number of unique advantages. It combines information from data reported at both annual and quarterly intervals and addresses potential problems related to cointegration, nonstationarity, and nonlinearity.

Financial performance of publicly-traded agribusinesses

literatinetwork@emeraldinsight.com (Ani L. Katchova, Sierra J. Enlow) — Fri, 03 May 2013 00:00:00 +0100

Abstract

Purpose – Agribusinesses represent a fundamental link in connecting farmers with retailers and consumers, yet little research has been done to examine the historical financial performance of these food processing firms. This paper aims to address this issue. Design/methodology/approach – The authors' research examines how publicly-traded agribusinesses perform financially compared to all firms over the period from 1961 to 2011. The authors utilize several indicators of company success, including financial ratios and balance sheet/income statement items, to compare agribusiness firms to all firms in the market. The authors perform the analysis over time and also for companies with low, median, and high performance. They also perform Du Pont analysis to compare return on equity components between agribusinesses and all firms. Findings – The authors find that agribusinesses outperform at the median the sample of all firms in terms of financial ratios related to profitability, liquidity, and market ratios, but have slightly lower liquidity and debt ratios. The Du Pont analysis shows that the higher return on equity for agribusinesses is mostly due to higher asset turnover ratios, indicating higher operating efficiency of agribusinesses. The strong financial performance of food manufacturing agribusinesses makes them valuable companies in an investment portfolio. Originality/value – This study provides a basic overview of financial ratios used to examine the financial performance of publicly-traded agribusinesses. The authors' findings show that agribusinesses outperform all firms in terms of key financial indicators.

Estimating structural change in US crop insurance experience

Fri, 03 May 2013 00:00:00 +0100

Abstract

Purpose – The purpose of this research is to investigate the degree to which trends and structural change may have altered crop insurance expected loss cost ratios across time. Because loss experience is used to set rates for the program, these changes can impact the premiums paid by producers and cost to the government. Design/methodology/approach – County level adjusted loss cost data was merged with climate division weather data for the 1980-2009 period. Crop-specific regional-level regression models were estimated to test for trends and structural changes in the loss experience for major crops (corn, soybeans, sorghum, cotton, winter wheat, and spring wheat). Climate data was used to control for the effect of weather. Findings – For several crops and regions, a significant break point in the loss cost data is found at 1995. This is consistent with the policy changes that occurred in in the program due to the 1994 legislative change. In most instances loss experience prior to 1995 is higher than more recent years even when controlling for the effect of weather. The exception is in winter wheat where it appears recent experience may be worse rather than older experience. Originality/value – This paper provides a large-scale assessment of the magnitude of improved crop insurance loss experience across time.

Accounting for short samples and heterogeneous experience in rating crop insurance

Fri, 03 May 2013 00:00:00 +0100

Abstract

Purpose – The purpose of this paper is to be an academic inquiry into rating issues confronted by the US Federal Crop Insurance program stemming from changes in participation rates as well as the weighting of data to reflect longer-run weather patterns. Design/methodology/approach – The authors investigate two specific approaches that differ from those adopted by the Risk Management Agency, building upon standard maximum likelihood and Bayesian estimation techniques that consider parametric densities for the loss-cost ratio. Findings – Both approaches indicate that incorporating weights into the priors for Bayesian estimation can inform the distribution. Originality/value – In most cases, the authors' results indicate that including weighting into priors for Bayesian estimation implied lower premium rates than found using standard methods.

Determinants of the patronage refund decision of Farm Credit System associations

literatinetwork@emeraldinsight.com (Tianwei Zhang, Mindy Mallory, Peter Barry) — Fri, 03 May 2013 00:00:00 +0100

Abstract

Purpose – The authors aim to investigate what influences a Farm Credit System association to make a patronage refund payment. In particular, they seek to investigate what causes the regional heterogeneity in the patronage refund payment decision. It is unclear whether patronage refunds have been used more as a capital management tool or as a member recruitment and retention tool. This study aims to bring some clarity to this issue. Design/methodology/approach – The authors use an empirical logistic model to estimate the probability of a positive patronage refund payment by a Farm Credit System association, controlling for variables related to the associations' balance sheet as reported in the associations' quarterly call reports. Findings – The authors find there is evidence that Farm Credit Service associations use patronage refunds as a capital management tool, at least in part. However, they also find that there are still significant regional differences in the patronage refund payment decision even after controlling for variables affecting the associations' balance sheet. The authors conclude that this likely represents member heterogeneity in preferences for patronage refunds versus a discounted interest rate. Originality/value – The present study is one of the few empirical papers to examine a broad panel of financial cooperatives. Because of this, the authors' paper provides valuable insight into the aggregate behavior of Farm Credit Service associations, particularly into whether they use patronage refunds as a capital management tool, or as a marketing and retention tool.

Agricultural lending and early warning models of bank failures for the late 2000s Great Recession

Fri, 03 May 2013 00:00:00 +0100

Abstract

Purpose – The late 2000s Great Recession led to a surge of bank failures in the USA with nearly 300 banks failing from 2009 to 2010. Recalling the farm crises of the 1980s where the farm sector was pinpointed as one of the major precursors of such crises, this study is an attempt to validate if the agricultural sector can once again be considered as a major instigator of the current financial crises. Design/methodology/approach – An early warning model is developed based on factors that may cause bank failures, with special attention given to the role of the agricultural lending portfolios of commercial banks. The model will have several time period versions that will determine the length of time prior to the actual bank bankruptcy declarations that early warning signals could be detected. Findings – The empirical results indicate that credit exposure to the farm sector does not necessarily enhance a bank's tendency to fail or its probability of success or survival. This lends support to the reality that agricultural loan delinquency rates are consistently below the banks' overall loan delinquency rates, thus confirming that agricultural lenders are in relatively stronger financial health. This study instead finds that costly funding arrangements, increasing interest rate risk, and declining asset quality can be possible early warning signals that can be detected as far back as two or three years before eventual bank failure. Originality/value – This study differentiates itself from previous studies by its special focus on the role of the agricultural finance industry in the ensuing economic crises. This study's early warning model also presents an extended version of previous empirical models as it accounts for measures of capital adequacy, asset quality, management risk, profitability, liquidity risk, loan portfolio composition and risk, funding arrangement, structural and macroeconomic variables.

Hedging late frost risk in viticulture with exotic options

literatinetwork@emeraldinsight.com (Elsa Cortina, Ignacio Sánchez) — Fri, 03 May 2013 00:00:00 +0100

Abstract

Purpose – The purpose of this paper is to model and to value a temperature derivative to hedge late frost risk in viticulture. Design/methodology/approach – Starting from 11 years of historical temperature data collected in Mendoza, Argentina, the authors reconstruct the missing data using principal component analysis. The frequency content of time series is examined by the periodogram method; ordinary least squares are used to estimate the trends of minimum, maximum and average temperatures, and hypothesis tests of univariate and bivariate normality are performed on deseasonalized and filtered temperature returns. The authors express the temperature dynamics by correlated Ornstein-Uhlenbeck processes and historical data were fitted into the model to obtain parameters estimates. An Asian-type option on a temperature index is constructed and its price and sensitivities are computed by Monte Carlo method. Findings – The authors define an index in terms of minimum and average temperatures that, under some simplifying hypotheses, quantifies the damage produced by a late frost. To hedge the late frost risk, an Asian-type option on the index is constructed. Together with the results concerning the design and pricing of the option, the analysis of historical data reveals non-negligible linear trends, negative in minimum temperature and positive in maximum and average temperatures. These findings may be consistent with the hypothesis of global warming or with the presence of out-of-phase very low frequency components. Originality/value – The authors have not found in the literature a similar option to hedge the risk of spring frosts faced by fruit producers.

Weather risk management by Saskatchewan agriculture producers

Fri, 03 May 2013 00:00:00 +0100

Abstract

Purpose – The purpose of this research is to study the weather risk management practices of agriculture producers. In particular, the authors look at the extent to which farmers use weather derivatives to complement insurance. Unlike insurance, weather derivatives mitigate risk associated with low intensity, high probability events and therefore offer the potential of a more complete hedge than insurance alone. Design/methodology/approach – The authors conducted a survey of grain farmers in the province of Saskatchewan, Canada, a typical jurisdiction in which farmers tend to face weather events that are high in frequency but low in severity, to study the usage of weather derivatives compared to insurance and identify the hurdles to their usage. Findings – The authors find that fewer than 10 percent of their respondents use weather derivatives. Consistent with previous literature in other contexts, they identify participation costs, especially lack of awareness, to be the most significant hurdle to their usage. Research limitations/implications – A limitation of this study is that the data were collected using a survey methodology and are therefore subject to the usual risks of bias associated with that approach. Moreover, because the authors' survey was delivered online, it may have favoured the participation of farmers that were more comfortable with technology and some bias may have also been introduced into the data as a result. Practical implications – The authors' findings suggest that there is significant potential to improve farmers' ability to hedge weather risk and thereby improve economic outcomes if the major barriers to the usage of weather derivatives can be overcome. The study paves the way for further research to support the development of public policy strategies that could help farmers take advantage of weather derivatives as part of their inventory of risk management tools. Originality/value – To the authors' knowledge this is the first study that quantifies the usage of weather derivatives by agriculture producers and identifies the hurdles.

Testing for speculative bubbles in agricultural commodity prices: a regime switching approach

Fri, 03 May 2013 00:00:00 +0100

Abstract

Purpose – The authors' paper aims to deal with the question whether speculative bubbles are present in agricultural commodity prices. Design/methodology/approach – The authors apply a regime switching regression model to test the hypothesis that agricultural prices contain periodically collapsing bubbles. Using daily futures prices for six agricultural commodities, the authors calculate net convenience yields from which price fundamentals are derived. Findings – The authors discover pronounced deviations between observed prices and their fundamental values. However, they do not find evidence for the presence of periodically and partially collapsing speculative bubbles for five of six commodities. Except for soybeans, the signs and the significance of the estimated coefficients are not entirely in line with the predictions of the theoretical model. Originality/value – The authors' study adds to the heated discussion on the impact of speculative behavior on agricultural commodity prices. So far, most contributions in the literature either use theoretical arguments for the (non-) existence of bubbles or apply indirect tests which are plagued by low statistical reliability. In contrast, the authors apply a direct test. They find that the outcome of empirical bubble tests depends on the considered bubble type and on the testing procedure. In view of these ambiguities, definite statements on the presence of speculative bubbles as well as demands for limitations of speculative positions in commodity futures markets should be carefully reconsidered.

Preface to AFR Proceedings Issue

literatinetwork@emeraldinsight.com (Nicholas Paulson) — Fri, 03 May 2013 00:00:00 +0100

2012 Awards for Excellence

literatinetwork@emeraldinsight.com (Glenn Pederson) — Fri, 03 May 2013 00:00:00 +0100