Emerald | Agricultural Finance Review

Ag lending: the next generation

Michael A. Gunderson, Joshua D. Detre, Brian C. Briggeman, Christine A. Wilson — 2011-11-08 00:00:00.0

Abstract

Purpose – The purpose of this paper is to identify relevant financial concepts and skills that are being taught and/or should be taught, as part of the financial management curriculum in undergraduate agricultural economics and agribusiness programs. Design/methodology/approach – The skill gap analysis uses survey respondents' rankings of the importance and competence scores of recent graduates' skills. The scores help to identify opportunities for improvement in the most critical areas of importance. The skill gap is calculated as (Average importance–Average competence)*Average importance. Findings – Generally, employers in the agricultural financial services sector saw greater opportunities for improvement in finance skills relative to non-finance skills. The results also indicated a greater focus on business and financial risk might be helpful in increasing the competence of new hires. Finally, respondents strongly endorsed maintaining a focus on the problem-solving skills in undergraduate agribusiness programs. Originality/value – The value of the study would be that departments of agricultural and applied economics would use the results of this survey to enhance their financial management curriculum and their undergraduate program. By responding to the desires of employers, agricultural economics and agribusiness programs cannot only remain relevant as a source of employees for the industry but the first choice of agricultural financial services sector when they are searching for new hires. This should also help inform students of the desirability of the skills they acquire in their degree programs. This information will also benefit the agricultural finance services sector by assisting college and university instructors in developing and/or enhancing their agricultural finance course(s) so that the may provide their students with the requisite financial and non-financial skills that they require.

Joint measurement of farm size and farm performance: a confirmatory factor analysis

Joleen C. Hadrich, Frayne Olson — 2011-11-08 00:00:00.0

Abstract

Purpose – The purpose of this paper is to determine if a single dominant measure defines farm size and farm performance consistently over a ten-year time period, or if alternative measures are needed. The paper also seeks to determine the correlation between farm size and farm performance and how this correlation may change over time. Design/methodology/approach – A confirmatory factor analysis was used to test the relative strength of farm size and performance indicator variables and estimate the relationship between farm size and performance latent variables. Data were collected from the North Dakota Farm and Ranch Business Management Association (NDFRBA) Annual Summaries for 2000-2009. Findings – Results demonstrated that a single indicator, such as acres or rate of return on assets, may not capture the array of farm size and farm performance concepts and multiple indicators should be used to jointly determine farm size and farm performance measures. Results also found a sequential decrease in correlation between farm size and performance for seven of the ten years. Originality/value – This paper addresses the issue regarding multiple measures for farm size and farm performance which helps provide the framework to begin developing a systematic classification of farms for use in strategic farm planning and guide future government policies, federal farm programs, and environmental regulations.

A triple hurdle model of US commercial bank use of guaranteed operating loans and interest assistance

2011-11-08 00:00:00.0

Abstract

Purpose – The purpose of this paper is to estimate a three-equation model of US commercial bank usage of the Farm Service Agency's (FSA) guaranteed operating loan and interest assistance programs. Also, to identify the key farm and banking variables that affect the decision to use loan guarantees and the volume of loans with interest assistance. Design/methodology/approach – A triple hurdle, three-equation system is estimated to model three decisions: to participate in the FSA operating loan program; whether to use interest assistance given the decision to participate in the operating loan program; and then the degree of participation in the interest assistance program. Statistical selection is modeled. Data on almost all commercial banks in the USA from 1995 to 2003 are used in the estimation sample. Findings – Statistical selection is statistically significant so selection must be included in the models. Variables reflecting state-level characteristics such as farm debt servicing ratio, individual bank loan-to-asset ratio, bank size and the general guaranteed loan and interest assistance environment are significant in all three equations. Intensity of interest assistance use varies markedly across states. Originality/value – The interest assistance program has high subsidy costs and is an important source of support for financially marginal farmers. Scant prior research has investigated this program. The present study also shows that modeling interest assistance usage must be embedded in a larger model to give a complete specification.

Farm income variability and off-farm diversification among Canadian farm operators

Simon Jetté-Nantel, David Freshwater, Ani L. Katchova, Martin Beaulieu — 2011-11-08 00:00:00.0

Abstract

Purpose – For many farm families and operators across the OECD countries, off-farm income has become a major determinant of their well-being. The purpose of this paper is to investigate the potential role of off-farm employment as a risk management tool among farm operators. Design/methodology/approach – A two-part model is applied to a longitudinal farm-level data set for about 20,000 Canadian farms, from 2001 to 2006, in order to estimate the relationship between farm income risk and the decision to participate in the off-farm labor market and the level of off-farm employment income. Findings – The variability of farm market revenue is found to be positively related to the likelihood of off-farm work and the level of off-farm employment income, in particular for operators of relatively large farms. Hence, farm operators' production decisions appear to be conditioned on an income portfolio that includes a substantial amount of off-farm income for all sizes of farms. Social implications – These results reinforce the need to consider the portfolio effect induced by the integration of farm resources within the non-farm sector. This is particularly relevant to risk management farm policies that have typically considered decisions made in the agricultural sector in isolation. Originality/value – This paper uses a true farm-level panel data set to investigate the relationship between farm income risk and off-farm work. The size of the data set also allows the robustness of the results across farm typologies and size to be tested. This study contributes to the understanding of structural changes in the farm sector, and their potential implications for both rural and agricultural policies.

The effects of direct payments on liquidity and repayment capacity of beginning farmers

Jaclyn D. Kropp, Ani L. Katchova — 2011-11-08 00:00:00.0

Abstract

Purpose – US decoupled direct payments, paid to farm operators based on historic yields and base acreage under the 2002 Farm Bill, may alter a farmer's access to credit or his ability to meet debt servicing obligations. More specifically, direct payments might improve the farmer's liquidity position or repayment capacity enabling the farmer to obtain more favorable credit terms. In turn, more favorable credit terms might allow a farm to remain in business or expand production, leading to current production distortions. Since direct payments are based on historic production, beginning farmers tend to receive lower levels of direct payments and hence these payments might impact beginning farmers differently than more experienced farmers. The purpose of this paper is to investigate the effects of direct payments on liquidity and repayment capacity for experienced and beginning farmers. Design/methodology/approach – Given the manner in which direct payments are calculated and administered, it is likely that direct payments affect beginning farmers and more experienced farmers differently; hence the authors analyze the impacts of direct payments on the current and term debt coverage ratios for these two groups separately. In the analysis, the authors control for farm financial characteristics, farm operator characteristics, and other factors. Data from the US Department of Agriculture (USDA) Agricultural Resource Management Survey (ARMS) for the years 2005, 2006, and 2007 were used in the weighted regression analysis and jackknifed standard errors computed. Findings – A positive significant relationship was found between the level of direct payments (in dollars) and the term debt coverage ratio for experienced farmers, suggesting that direct payments improve repayment capacity. However, this relationship is not significant for beginning farmers. Also, a negative significant relationship was found between the number of base acres and the current ratio for experienced farmers, while this relationship lacks significance for beginning farmers. Originality/value – The paper provides evidence that decoupled direct payments impact a farmer's liquidity and repayment capacity. Furthermore, direct payments impact beginning and experienced farmers differently. This paper also contributes to the growing body of research investigating the mechanisms by which decoupled payments have the potential to distort current production.

AgProfit™: a net present value and cash flow based decision aid for agriculture producers

James W. Julian, Clark F. Seavert — 2011-11-08 00:00:00.0

Abstract

Purpose – The purpose of this paper is to present AgProfit™ as a tool for users to assess economic risks associated with adoption of new technologies or production practices in production agriculture. Design/methodology/approach – This paper presents the AgProfit™ software program, its approach to capital investment analysis and demonstrates the program use by developing a scenario for analysis and discusses the process and results of the analysis. Findings – AgProfit™ was developed to assist growers in understanding the risks associated with technology adoption. The example presented in this paper demonstrates the value of the software program as a decision-making tool on the complex question of how many acres are required for an economically beneficial adoption of a new technology. Thus, with this software program, a grower can base investment decisions on the net present value and internal rates of return on an investment rather than a sales pitch or “gut” feeling. Originality/value – AgProfit™ is a recently developed software program that fills a void in available decision tools, providing users with the ability to assess the profitability and feasibility of production investment decisions.

Factors affecting variability in farm and off-farm income

Kenneth Poon, Alfons Weersink — 2011-11-08 00:00:00.0

Abstract

Purpose – The purpose of this paper is to examine the factors affecting the relative variability in farm and off-farm income for Canadian farm operators. Design/methodology/approach – Variability of farm and off-farm income is analyzed using a dataset of 17,000 farm operators from 2001 to 2006. Relative ranking of the coefficients of variation (CV) for farm and off-farm income are compared across farm types and are regressed against factors conditioning the variations. Findings – Greater reliance on farm income results in lower (greater) relative variability in farm (off-farm) income. Larger commercial operations experience larger farm income volatility because they are less risk averse or they can manage more risk. Diversification and off-farm employment appear to be risk management strategies for commercial operations. Research limitations/implications – Government payments have a small, positive effect on farm and off-farm income variability, indicating this support leads farmers to take on more risky activities and/or reduce the use of self-insurance activities. Results could also be due to the lag between the time of the income reduction and the time in which the aid is received. Further research is necessary to decipher the effects of government support on farm decisions. Practical implications – The results on relative variation in the farm and off-farm income across farm type raises questions about whether government programs should target specific operations. Originality/value – While income variation remains a focus of public policy, factors affecting its variability are not well-understood. Studies have examined the level of farm income and the decision to participate in off-farm employment but none has examined the variance in both income sources.