Measuring credit capacity on Danish farms using DEA
Abstract
Purpose
The purpose of this paper is to introduce a novel measure of access to credit suited to estimate the relative change in credit reserves.
Design/methodology/approach
A debt possibility frontier is estimated using data envelopment analysis and the Malmquist index is calculated. The Malmquist index is redubbed the Debt Development index and decomposed into “change in debt capacity” and “change in debt capacity utilization”. Bootstrapping is applied for statistical inference. The method is applied to an unbalanced panel of 92,000 Danish farm accounts from 1996 to 2009.
Findings
The paper finds that credit capacity roughly doubled for Danish farmers over the period, and that utilization of credit capacity generally was proportional to capacity change, utilization being higher for dairy and pig farms, than for crop farms.
Research limitations/implications
Changes in credit reserves may have important implications for risk management practice, investment and technology adoption and related policy issues. The method is limited by the possibility of strategic behavior of lenders during credit cycle busts. In credit cycle booms, the method gives a good basis for the estimates of change in credit reserves.
Practical implications
In a period of increasing credit reserves, risk management institutions are unlikely to develop. Like agricultural policy, access to credit may crowd out market-based risk management.
Originality/value
The study represents a novel application and interpretation of a well-known method.
Keywords
Acknowledgements
The authors would like to thank the Norma and Frode S. Jacobsen's Trust for financial support and Carl-Johan Lagerkvist, the PhD advisors and a number of anonymous referees for helpful and constructive suggestions. All errors and omissions are the authors' sole responsibility.
Citation
Friis Pedersen, M. and Vesterlund Olsen, J. (2013), "Measuring credit capacity on Danish farms using DEA", Agricultural Finance Review, Vol. 73 No. 3, pp. 393-412. https://doi.org/10.1108/AFR-08-2012-0040
Publisher
:Emerald Group Publishing Limited
Copyright © 2013, Emerald Group Publishing Limited