DEVELOPMENT OF A STOCHASTIC MODEL TO EVALUATE PLANT GROWERS' ENTERPRISE BUDGETS

Increased domestic concentration and international competition in the floricultural industry are forcing growers to improve resource management efficiency. Cost management and cost accounting methods are becoming key tools as growers attempt to reduce costs. These tools allow growers to allocate costs for each crop, increasing their greenhouse planning abilities. Growers have a relative high degree of risk due to potential crop and market failure. Individual growers have different tolerance for risk and risk bearing capacity. Growers need a cost accounting system that incorporates production and market risk, a system that allows them to make informed business decisions. The research reported in this paper developed a greenhouse budgeting model that incorporated risk to allow growers to compare production costs for flowers with different genetics and production technologies. This enables greenhouse growers to make production management decisions that incorporate production and market risk. The model gives growers the option of imputing their own production data to evaluate how various yield and price assumptions influence income and expense projections, and ultimately, profit. The model allows growers to compare total production cost and revenue varying grower type, production time, geographical location, operation size, and cost structure. The model evaluates budgets for growers who market to mass-market retail operations or wholesale intermediaries who sell to merchandisers or flower shops distribution channels. The model was demonstrated with sample data to illustrate how incorporating risk analysis into a grower's greenhouse budget model effects resource allocation and production decisions as compare to a budget model that does not incorporate risk. Deterministic and stochastic models were used to demonstrate differences in production decisions under various assumptions. The stochastic model introduced prices and flowering characteristics variability. The @Risk software was used to generate the random number simulation of the stochastic model, and stochastic dominance analysis was used to rank the alternatives. The result for both the deterministic and stochastic models identified the same cultivar as most profitable. However, there were differences in crop profits levels and rankings for subsequent cultivars that could influence growers' production choice decisions. The grower's risk aversion level influenced his/her choice of the most profitable cultivars in the stochastic model. The model summarizes the sources of variability that affect cost and revenue. The model enables the grower to measure effects that change in productivity might have on profit. Growers can identify items in their budget that have a greater effect on profitability, and make adjustments. The model can be used to allocate cost across activities, so the grower would be able to measure the economic impact of an item on the budget.Crop Production/Industries,

Linking marketing choices with farming practices of grain producers: A farm level modeling approach applied to the South-west of France

With the increasing commodity prices volatility over the last years and the successive agricultural policy reforms, European grain producers face greater uncertainty. To better understand consequences of a price risk increase on production decisions, marketing decisions and farm revenue as well as linkage between production and marketing decisions, we develop a multiperiodic risk farm model. Production decisions concern selections of crop mix and farming practices (conventional or integrated farming) while marketing decisions focus on four types of pricing arrangements. The model is applied to a representative farmer of a region located in the Southwest of France. The results exposed in this paper shows that with a price risk increase, production adjustments of a risk averse farmer are oriented toward less risky (environmentally friendly) farming practices unless marketing contracts allow to mitigate price risk.multiperiod farm model, marketing contracts, risk, common agricultural policy, Agricultural and Food Policy, Farm Management,

Issues in evaluating tax and payment arrangements for publicly owned minerals

Many developing countries are still heavily dependent on mineral extraction to generate fiscal revenue and to earn foreign exchange. When minerals form a significant proportion of the country's asset base it is particularly important to have a framework to evaluate the adequacy of compensation schemes. Are these countries collecting enough in return for depleting their reserves? Are these countries carrying too much of the risk? This paper describes work in progress in developing such a framework. In many mineral dependent countries, the government holds the mineral rights and enters into compensation agreements with public or private firms that will extract the resources. Given the high degree of risk and uncertainty associated with mineral development, determining tax/payment arrangements is further complicated by the need to develop risk-sharing schemes between government and the resource extractors. This paper reviews these issues briefly and concludes that when objectives are not perfectly correlated it is preferable to use multiple instruments and to match each instrument to an objectives.Economic Theory&Research,Environmental Economics&Policies,Health Economics&Finance,Banks&Banking Reform,Insurance&Risk Mitigation

Closing down the Farm: An Experimental Analysis of Disinvestment Timing

Agrarian structures are often characterized by some kind of economic inertia. It is particularly puzzling why unprofitable farms persist over time instead of being sold. In this paper we analyze the exit decision of farmers using the real options approach. The validity of the real options theory is assessed by means of laboratory experiments. Our results show that real options models are able to predict actual disinvestment decisions better than traditional investment theory. Nevertheless, the observed disinvestment reluctance was even more pronounced as predicted by theory. This finding suggests the inclusion of bounded rationality into normative disinvestment models.Disinvestment, Real Options, Experimental Economics, Agricultural Finance, Farm Management, C91, D81, D92,

EVALUATING USE OF OUTLOOK INFORMATION IN GRAIN SORGHUM STORAGE DECISIONS

This study examines grain sorghum storage decisions in the Texas Coastal Bend region. Decisions involving use and non-use of outlook information are compared using stochastic dominance criteria. Results indicate outlook information is of value to most classes of decision-makers. The value of outlook information, however, is contingent upon producers' risk preferences. The methodology presented could be used to evaluate a more extensive set of marketing strategies for grain sorghum as well as for other crops.Crop Production/Industries,

Taxation, Risk, and Portfolio Choice: The Treatment of Returns to Risk Under a Normative Income Tax

Many articles in the legal and economic literature claim that a pure Haig-Simons income tax cannot effectively tax investment income. This is because an investor can use leverage to gross up her investments in risky assets such that the increased gain (or loss) exactly offsets any income tax (or deduction) on the returns to risk-taking. This article argues, however, that while it is possible for an investor to make such portfolio shifts, she almost certainly will not because of the increased risk of doing so. Central to any discussion of the effects of taxation on investment risk-taking is the meaning of risk itself. The central claim of this article is that a better conception of investment risk is the risk of loss and not merely the variance of returns. Applying this notion of risk—one that is well supported in the finance literature but new to the taxation-and-risk literature—to an investor’s portfolio choice question shows that an investor will not increase her investment in risky assets by enough to offset the tax. As a result, there is an effective tax on investment risk-taking under a normative income tax

Savings and Loan Usage of the Authority to Invest in Corporate Debt

This paper examines the portfolio choice of savings and loan associations (SLAS) between mortgages and bonds, first in a certainty world and then under uncertainty. Differences in servicing and transactions costs, in default losses, in tax treatment and in the timing of payments are accounted for in a certain world. SLAs are seen as investing in bonds only if the demand for mortgage funds is sufficiently weak that more profitable SLAs compete away some of the value of their tax preference by bidding down mortgage rates; in this case less profitable SLAs would find corporate debt attractive. In an uncertain world, mortgages will command a premium over bonds to compensate for the prepayment option extended mortgage borrowers. The appropriate value of this premium depends on uncertainty regarding future interest rates and aversion to this uncertainty. SLAs that view future interest rates as more uncertain than the market does generally, or who are more averse to this uncertainty, will require an options premium greater than that determined in the market. Thus they will find corporate debt to be attractive relative to bonds, even when the demand for mortgage funds is strong and their mortgage tax preference is not competed away.

Real Estate Portfolio Management : Optimization under Risk Aversion

This paper deals with real estate portfolio optimization when investors are risk averse. In this framework, we determine several types of optimal times to sell a diversified real estate and analyze their properties. The optimization problem corresponds to the maximization of a concave utility function defined on the terminal value of the portfolio. We extend previous results (Baroni et al., 2007, and Barthélémy and Prigent, 2009), established for the quasi linear utility case, where investors are risk neutral. We consider four cases. In the first one, the investor knows the probability distribution of the real estate index. In the second one, the investor is perfectly informed about the real estate market dynamics. In the third case, the investor uses an intertemporal optimization approach which looks like an American option problem. Finally, the buy-and-hold strategy is considered. For these four cases we analyze numerically the solutions that we compare with those of the quasi linear case. We show that the introduction of risk aversion allows to better take account of the real estate market volatility. We also introduce the notion of compensating variation to better compare all these solutions.Real estate portfolio, Optimal holding period, Risk aversion, Real estate market volatility

Firm Behaviour Under the Threat of Liquidation: Implications for Output, Investment & Business Cycle Transmission

Cash balances of the firm follow a diffusion process, triggering liquidation when they cross a threshold value. Access to external funds is constrained. Shareholders are impatient. With these assumptions there is a precautionary motive for retaining earnings; the internal cost of funds and local risk-aversion are decreasing functions of net worth; and, in extensions of our basic model, output and investment are increasing functions of net worth. We numerically simulate aggregate behaviour of a population of such firms. Shocks to net worth lead to substantial and prolonged deviations from steady state, consistent with a financial mechanism of business cycle transmission.Financing constraints, output, investment