STOCHASTIC DYNAMIC MODELING: AN AID TO AGRICULTURAL LENDER DECISION MAKING

Factors affecting a lenderÂ’s decision to grant farmers operating credit in North Dakota are quantified in an intertemporal loan profitability model using stochastic dynamic programming. Experimental data obtained from a panel of lenders demonstrates the sensitivity of an optimal policy to changes in a lenderÂ’s discount rate, a borrowerÂ’s repayment status, and patronage. The value of credit scoring models that appraise a borrowerÂ’s credit worthiness also is determined.Agricultural Finance,

VALUE OF SOCIAL CAPITAL TO MID-SIZED NORTHERN PLAINS FARMS

As farms increase in size, operators often face the difficult decision of remaining loyal to local merchants or obtaining volume discounts from more distant input suppliers. When farmers bypass local merchants and buy inputs in volume from a wholesaler, they often realize a price discount but forego many services including credit forebearance. In essence, when farmers buy locally, they pay higher prices, which decreases profits and increases financial risk, but generates social capital which can be drawn upon during periods of economic adversity later in the form of credit forebearance. A theoretical model of farm financial risk evaluates borrower behavior in light of cash flow constraints, volume discounts, and social capital. Monte-carlo simulation was used to empirically apply the model to a representative 2,000-acre Northern Plains crop farm. The stochastic simulation model embodied local price and yield distributions, tax policy, and financial repayment risks. A survey of local input suppliers and lenders provided key information on levels of price discount and credit forebearance. Competition among suppliers resulted in less difference between retail and wholesale prices than expected a priori. Results of the analysis delineated the financial risks involved and value of social capital received in the form of credit forebearance. The distribution of year-end available funds when inputs were purchased locally had a slightly lower mean and longer left tail. While a longer and bulkier left tail appeared to present the farm with additional financial risk, it was actually the result of additional borrowing arising from credit forebearance. If forebearance were not available, the firm would have been bankrupt. In this model, bankruptcy occurred with 2.6 percent frequency. Personal exemptions provided under statutory bankruptcy provisions altered the shape of the left tail.Social, capital, financial risk, simulation, stochastic, Farm Management, Institutional and Behavioral Economics,

AGRIBUSINESS TRADE CREDIT -- A PARADOX

This article utilizes the Survey of Small Business Finances to compare and contrast trade credit practices of rural small business firms. The results show that these firms borrow money and then re-lend it to others in the form of trade credit. There is a strong direct relationship between various forms of debt held by these firms and their level of accounts receivable (e.g., trade credit extended to customers). The actual level of re-lending varied among firms depending on their adoption level of computers that are used for cash management and credit services. Accounts receivable balances were also dependent on sales levels, costs of doing business, and other income. The most important source of funds for re-lending was obtained from mortgages and stockholder loans. These fund sources provide continuity in trade credit availability. The results also identify key factors affecting demand for trade credit extended to agribusinesses by other firms' accounts payable. A strong inverse relationship exists between accounts payable and other credit sources, indicating they are substitutes. Greater availability of credit from mortgages, other loans, and credit lines, reduces demand for accounts payable. However, they are not perfect substitutes. Demand for accounts payable varies with level of sales, cost of doing business, other income, and adoption of technology.agribusiness, trade, credit, finance, Agribusiness,

RURAL SMALL BUSINESS FINANCE: EVIDENCE FROM THE 1998 SURVEY OF SMALL BUSINESS FINANCES

The 1998 Survey of Small Business Finances provides robust information on the financing of small businesses including an overview of their firm's organization, financial characteristics, and credit use. Information from the survey is used in this study to compare the financial characteristics of urban and rural small businesses. Overall, rural small businesses have very similar financial characteristics, access to technology and financial services, sources of financial capital, and creditworthiness when compared to urban small businesses. Nonparametric rank order statistical methods were required when comparing dollar values of urban and rural small businesses because normality assumptions were violated due to the high concentration of small firms. On average, rural and urban small businesses were strong financially and profitable. Accounts receivable and inventory comprise nearly a third of total assets. Most were organized as either sole proprietorships or corporations. The majority of small businesses utilized computers, primarily for accounting/bookkeeping, administration, and email. Primary financial services are used for transactions and trade credit. Two-thirds of purchases involve trade credit from more than 20 trade credit suppliers, on average. Both urban and rural small businesses rely on a wide variety of sources for financing and use each to the same degree. Rural small businesses possess higher creditworthiness, but nearly one-fourth still report being delinquent on business obligations.rural, small, business, finances, survey, Community/Rural/Urban Development,

RABOBANK'S OFFER TO PURCHASE FARM CREDIT SERVICES OF AMERICA -- A CASE STUDY

Rabobankâs offer to purchase Farm Credit Services of America (FCSA) for $600 million was a surprise because few people ever envisioned 1) fragmentation of the Farm Credit System and/or 2) a foreign lender gaining large market share of U.S. agricultural financial markets. Although FCSA has formally rejected the offer, the action has generated intense public debate about cooperative dividend policy, capital adequacy standards, government sponsored entity (GSE) status of the Farm Credit System and credit gaps in rural America. This case study provides a brief overview of FCSA, Rabobank, and motivation for the purchase offer. Next, the actual deal and timeline for implementation are described, had the offer to buy been accepted by FCSA. Finally, lingering issues raised by the offer are discussed. These issues will likely be important topics of deliberation in forthcoming federal farm and agricultural credit program legislation.agricultural finance, capital dividend, policy, government sponsored entity, Agricultural Finance,

Role of Extension in a Research University

University administrators are placing greater emphasis on research and extramural funding in an effort to raise their stature among peer institutions. While Extension faculty could feel threatened, they actually have an opportunity to fill the void in land grant mission being vacated by research and teaching faculty. Assuming great roles in applied research and teaching activities will strengthen traditional Extension programs and provide new opportunities for growth.Teaching/Communication/Extension/Profession,

Financing Growth of Cellulosic Ethanol

The U.S. biofuel industry is striving to produce ethanol from cellulosic feedstock sources in an effort to augment its existing corn grain-based ethanol production infrastructure. Technology to commercially produce cellulosic ethanol is rapidly advancing due in large part to the availability of substancial federal research and development funding. At the moment, several firms have pilot scale cellulosic ethanol production facilities under construction and testing. The transition from pilot scale to full commercialization of cellulosic ethanol will be difficult, due in large part financial constraints being imposed both internally and externally on the biofuels industry. This paper provides an overview of the biofuel industry’s current financial setting and describes future challenges it faces in attempting to expand. These challenges are rooted in lack of industry capital, limited availability of performance benchmarks, concerns regarding future prospects of the industry, and general uncertainty in U.S. financial markets. If the U.S. biofuels industry is unable to capitalize and develop this next phase of growth, foreign competitors, primarily Brazil and Mexico, appear well positioned to fill U.S. consumer’s demand for advanced biofuels.biofuel cellulosic ethanol finance investment risk, Agricultural Finance, Resource /Energy Economics and Policy,

WHEN DO STUDENTS WORK?

This study examines test taking patterns of students enrolled in an introductory economics class who could complete their exams electronically at any time-of-day or day-of-week. Exam completion patterns are related to several student characteristics including gender, class rank, major, and whether the student was enrolled online. Statistical differences in both time-of-day and day-of-week were observed across these strata and related to overall performance. The majority of students completed their exams in late evening time periods, which negatively affected overall performance. These results have important implications for educators and may partially explain past anomalous results in other studies of student study habits.distant education, exam completion patterns, learning styles, online classes, students' work, study habits, Teaching/Communication/Extension/Profession,

MEASURING THE PRODUCTIVITY OF CAPITAL IN UNITED STATES AGRICULTURE

The agricultural sector has operated in a period of high real interest rates for over half a decade. Some are concerned that this has limited capital availability and stagnated the historic capital for labor substitution occurring in the sector. This study proposes new procedures for estimating the aggregate production function of United States agriculture. Improvements include incorporation of total returns and revised measures of both durable and nondurable capital inputs. Results indicate increasing capital productivity has occurred, but encouraging further capital substitution may not benefit agricultural producers.Agricultural Finance,

POTENTIAL CORN ACREAGE EXPANSION FOR ETHANOL PRODUCTION: WESTERN NORTH DAKOTA--MINOT

Several recent developments have stimulated farmers' interest in raising corn for ethanol production in northwestern North Dakota. The purpose of this study is to estimate the corn supply response of western North Dakota farmers for ethanol production. Two focus groups of western North Dakota farmers (Williston and Minot) were organized. The market premium over prevailing local corn prices that was required by western North Dakota farms to entice additional production of an ethanol specific hybrid was determined. Aggregation of these farm responses yielded a supply function of corn for the region. Results show that sufficient corn can be produced in the surrounding region to support a 12 million gallon ethanol facility if modest price premiums are provided. The availability of short-season hybrids adapted specifically to the region may constrain expansion.Ethanol, corn supply, response, Crop Production/Industries, Resource /Energy Economics and Policy,