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Article

Yufei Jin and Calum G. Turvey

One of the particular problems facing agribusiness firms is the relationship between commodity price risk (a source of business risk) and debt repayment ability (a source…

Abstract

One of the particular problems facing agribusiness firms is the relationship between commodity price risk (a source of business risk) and debt repayment ability (a source of financial risk). This study examines the use of commodity‐linked loans applied to agricultural credits. A commodity‐linked loan is a credit instrument whose payoff is contingent on the value of an underlying commodity or portfolio of commodities. The payoff structure includes an option (call or put) rider that provides a payoff if the commodity price rises above or drops below a preset strike price. The payoff is applied directly to the loan. This study introduces the general concept, reviews the literature, and develops and applies a particular model. Simulation results illustrate the interrelationship between options payoffs, strike prices, volatility, and downside financial risk reduction.

Details

Agricultural Finance Review, vol. 62 no. 1
Type: Research Article
ISSN: 0002-1466

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Article

Calum G. Turvey, Michael Hoy and Zahirul Islam

We develop a theoretical model of input use by agricultural producers who purchase crop insurance, and thus may engage in moral hazard. Through simulations, our findings…

Abstract

We develop a theoretical model of input use by agricultural producers who purchase crop insurance, and thus may engage in moral hazard. Through simulations, our findings show a combination of partial insurance coverage and partial monitoring of inputs may reduce substantially the problems associated with moral hazard. The minimum level of input use that must be required by regulation is determined to be substantially lower than the optimal or actual input level chosen by producers. Because the use of inputs for crop production occurs in many stages over the pre‐planting, planting, and growing seasons, only a minimal input requirement is needed. Thus, the cost of implementing such a regulation can be kept much lower than would be the case for a regulation of complete monitoring of input usage.

Details

Agricultural Finance Review, vol. 62 no. 2
Type: Research Article
ISSN: 0002-1466

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Article

Michael K. Ndegwa, Apurba Shee, Calum G. Turvey and Liangzhi You

Drought-related climate risk and access to credit are among the major risks to agricultural productivity for smallholder farmers in Kenya. Farmers are usually…

Abstract

Purpose

Drought-related climate risk and access to credit are among the major risks to agricultural productivity for smallholder farmers in Kenya. Farmers are usually credit-constrained due to either involuntary quantity rationing or voluntary risk rationing. By exploiting randomized distribution of weather risk-contingent credit (RCC) and traditional credit, the authors estimate the causal effect of bundling weather index insurance to credit on uptake of agricultural credits among rural smallholders in Eastern Kenya. Further, the authors assess farmers' credit rationing, its determinants and effects on credit uptake.

Design/methodology/approach

The study design was a randomized controlled trial (RCT) conducted in Machakos County, Kenya. 1,170 sample households were randomly assigned to one of three research groups, namely control, RCC and traditional credit. This paper is based on baseline household survey data and the first phase of loan implementation data.

Findings

The authors find that 48% of the households were price-rationed, 41% were risk-rationed and 11% were quantity-rationed. The average credit uptake rate was 33% with the uptake of bundled credit being significantly higher than that of traditional credit. Risk rationing seems to influence the credit uptake negatively, whereas premium subsidies do not have any significant association with credit uptake. Among the socio-economic variables, training attendance, crop production being the main household head occupation, expenditure on food, maize labour requirement, hired labour, livestock revenue and access to credit are found to influence the credit uptake positively, whereas the expenditure on non-food items is negatively related with credit uptake.

Research limitations/implications

The study findings provide important insights on the factors of credit demand. Empirical results suggest that risk rationing is pervasive and discourages farmers to take up credit. The study results also imply that credit demand is inelastic although relatively small sample size for RCC premium subsidy groups may be a limiting factor to the authors’ estimation.

Originality/value

By implementing a multi-arm RCT, the authors estimate the factors affecting the uptake of insurance bundled agricultural credits along with eliciting credit rationing among rural smallholders in Eastern Kenya. This paper provides key empirical findings on the uptake of RCC and the effect of credit rationing on uptake of agricultural credits, a field which has been majorly theoretical.

Details

Agricultural Finance Review, vol. 80 no. 5
Type: Research Article
ISSN: 0002-1466

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Article

Yu Wu and Calum G. Turvey

The purpose of this paper is to determine the effects of the 2018–2020 China–US trade war on US farm bankruptcies as filed under Chapter 12. The key task is to identify…

Abstract

Purpose

The purpose of this paper is to determine the effects of the 2018–2020 China–US trade war on US farm bankruptcies as filed under Chapter 12. The key task is to identify the economic factors affecting farm bankruptcies generally, and to then control for the trade war impacts including the Market Facilitation Program (MFP), floods, agricultural conditions and the health of agricultural finance leading into the trade war.

Design/methodology/approach

Results were obtained using ordinary least square regression and panel fixed effect model using bankruptcy rates and number as the dependent variable. Independent variables included market effects, credit conditions, yield variation, trade impacts, 2019 flooding, macroeconomic conditions and regional fixed effects. The authors use cubic splines to interpolate annual and quarterly data to a monthly base.

Findings

Based on a fixed effect model, the authors find that all other things being equal the China–USA trade war would have had a significant impact on Chapter 12 farm bankruptcies, increasing the bankruptcy rate by 25.7%. The flooding in 2009 had minor effects of increasing the rate by only 0.05%. The overall impact will, however be substantially lower than the 25.7% because of the MFP. The MFP variables (binary) had mixed effects and its true impact is unknowable at this time; however, the authors also find that a 1% increase in the producer price index decreases bankruptcy rates by 2.62% and farm bankruptcy numbers by 3.70%. Likewise a 1% increase in GDP reduces bankruptcies by 3.25%. These suggest that the MFP program will have likely reduced farm bankruptcies considerably than what would have occurred in their absence. The authors also find that states heavily dependent on trade faced lower market uncertainty. Broader economic factors (net charge-offs of farm loans held by insured commercial banks, US real GDP, the average effective interest rate on nonreal estate farm loans) affect farm bankruptcy.

Research limitations/implications

The authors use monthly bankruptcy statistics, however not all data were available in monthly measures requiring interpolation using cubic spline functions to approximate monthly changes in some variables. Although the MFP had mixed effects in the model, the mid- to longer-term effects may be more impactful. These longer-term effects (and even shorter-term effects through 2020) are complicated by the coronavirus disease 2019 (COVID-19) pandemic, which will require a different identification strategy than that employed in this paper.

Originality/value

The analysis and results of this paper are, to the authors' knowledge, the first to investigate the impact of the China–US trade war on Chapter 12 farm bankruptcy filings. The use of cubic splines in the interpolation of agricultural data is also a technical innovation.

Details

Agricultural Finance Review, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0002-1466

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Article

Calum G. Turvey, Amy Carduner and Jennifer Ifft

The purpose of this paper is to investigate the market microstructure related to the Farm Credit System (FCS), Commercial Banks (CB) and Farm Services Administration…

Abstract

Purpose

The purpose of this paper is to investigate the market microstructure related to the Farm Credit System (FCS), Commercial Banks (CB) and Farm Services Administration (FSA). The commercial banks frequently call out the FCS as having an unfair advantage in the agricultural finance market place due to tax exempt bonds, and an implied guarantee of those bonds. This paper addresses the issue by examining the interrelationships since 1939, while addressing the historically distinctive roles that the FCS, CB and FSA have played in the US agricultural credit market.

Design/methodology/approach

There are two components to our model. The first is the estimation of short and long run credit demand elasticities, as well as land elasticities. These are estimated from a dynamic duality model using seemingly unrelated regression. The point elasticity measures are then used as independent variables in least square regressions, combined with farm specific and related macro variables, for the Cornbelt states. The dependent variable is the year-over-year changes in paired FCS, CB and FSA loans.

Findings

The genesis of the FCS was to provide credit to farmers in good and bad years. Therefore, we expected to see a countercyclical relationship between FCS and CB. This is found for the farm crisis years in the 1980s but is not a continuous characteristic of FCS lending. In good times the FCS and CB appear to compete, albeit with differentiated market segmentation into short- and long-term credit. The FSA, which was established to provide tertiary support to both the FCS and CB, appears to be responding as designed, with greater activity in bad years. The authors find the elasticity measures to be economically significant.

Research limitations/implications

The authors conclude that the market microstructure of the agricultural credit market in the US is important. Our analysis applies a broader definition of market microstructure for institutions and intermediaries and reveals that further research examining the economic frictions caused by comparative bond vs deposit funding of agricultural credit is important.

Originality/value

The authors believe that this is the first paper to examine agricultural finance through the market microstructure lens. In addition our long-term data measures allow us to examine the economics through various sub-periods. Finally, we believe that our introduction of credit and land demand elasticities into a comparative credit model is also a first.

Details

Agricultural Finance Review, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0002-1466

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Article

Calum G. Turvey

The purpose of this paper is to provide a review of major historical developments in agricultural finance, with particular emphasis on agricultural credit. It reviews the…

Abstract

Purpose

The purpose of this paper is to provide a review of major historical developments in agricultural finance, with particular emphasis on agricultural credit. It reviews the development of Raiffeisen and related banks that emerged in Germany and Europe throughout the nineteenth century and how the cooperative banking system made its way into the banking system of the USA in the early twentieth century. The paper emphasizes the role of the state in the developing of agricultural credit, especially with respect to farm mortgages, securitization, and bond structures.

Design/methodology/approach

This paper presents a historical synthesis of historical literature on agricultural credit.

Findings

This paper shows the direct linkage between the developments in Raiffeisen credit cooperatives and the Farm Credit System (FCS) and details the emergence of the land banks, farm credit banks, agricultural bonds and the role of joint-stock banks in agricultural credit policy.

Originality/value

In total, 2016 marks the 100th anniversary of the passing of the 1916 Federal Farm Loan Act which set in motion the USs’ first Government Sponsored Enterprise and catalyzed the formation of the FCS as it operates today to provide credit to farmers and rural communities on a cooperative basis. Although there are a few wonderful books written on certain aspects of the FCS the story of how the FCS was initiated and the many struggles it faced up to the 1933 Act has not been told often enough. This paper tells the story of the evolution of agricultural credit that ultimately led to the formation of the FCS.

Details

Agricultural Finance Review, vol. 77 no. 1
Type: Research Article
ISSN: 0002-1466

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Article

Calum G. Turvey

This paper aims to provide a “biography” of sorts on Agricultural Finance Review. The paper tracks the evolution of Agricultural Finance Review from its introduction in…

Abstract

Purpose

This paper aims to provide a “biography” of sorts on Agricultural Finance Review. The paper tracks the evolution of Agricultural Finance Review from its introduction in 1938 to its current status.

Design/methodology/approach

The paper is based on a complete review of every paper and every issue. Not all papers were read by the author, but key papers of interest that in one way or another made significant contributions to the study of agricultural finance were reviewed.

Findings

The paper shows the evolution of agricultural finance from the early days of reporting financial data in the 1930s and 1940s, to its emergence as a major and significant sub discipline of the general field of agricultural economics.

Research limitations/implications

As indicated, not all papers were fully reviewed or read. It is possible that papers identified as “firsts” may have been preceded by other papers. Nonetheless the paper identifies the basic evolutionary path of the journal and defines key points in time when a paradigm shift emerged to change the direction of this discipline.

Practical implications

As Agricultural Finance Review transitions from the Department of Applied Economics and Management at Cornell University to Emerald Group Publishing Limited, this “biography” provides readers with a general overview of the journal's and the discipline's historical development.

Originality/value

This paper is simply a review of the existing literature found in Agricultural Finance Review.

Details

Agricultural Finance Review, vol. 69 no. 1
Type: Research Article
ISSN: 0002-1466

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Article

Calum G. Turvey, Joshua Woodard and Edith Liu

The purpose of this paper is to provide a general discussion of how techniques from financial engineering can be used to investigate the economic costs of farm programs…

Abstract

Purpose

The purpose of this paper is to provide a general discussion of how techniques from financial engineering can be used to investigate the economic costs of farm programs and to aid in the design of new financial products to implement margin protection for dairy farmers. Specifically the paper investigates the Milk Income Loss Contract (MILC) and the Dairy Margin Protection (DMP) program. In addition the paper introduces the concept of the Milk to Corn Price ratio to protect margins.

Design/methodology/approach

The paper introduces and reviews the tools of financial engineering. These include the stochastic calculus and Itô's Lemma. The empirical tool is Monte Carlo simulations. The approach is part pedagogy and part practice.

Findings

In this paper the authors illustrate how financial engineering can be used to price complex price stabilization formula in the USA and to illustrate its use in the design of new products.

Practical implications

In this paper the authors illustrate how financial engineering can be used to price complex price stabilization formula in the USA and to illustrate its use in the design of new products.

Social implications

Farm programs designed to protect dairy farmers margins are designed in a seemingly ad hoc fashion. Assessments of programs such as MILC or DMP are conducted on an ex-post basis using historical data. The financial engineering approach presented in this paper provides the means to add significant depth to the assessment of such programs which can be used in conjunction with Monte Carlo simulation to identify alternative model structures before they are written into law.

Originality/value

This paper builds upon an existing literature. Its originality is in the application of financial engineering techniques to farm dairy policy.

Details

Agricultural Finance Review, vol. 74 no. 2
Type: Research Article
ISSN: 0002-1466

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Article

Li Zhou, Fan Zhang, Shudong Zhou and Calum G. Turvey

The purpose of this paper is to examine the relationships of technical training and the peer effects of technical training with farmers' pesticide use behaviors.

Abstract

Purpose

The purpose of this paper is to examine the relationships of technical training and the peer effects of technical training with farmers' pesticide use behaviors.

Design/methodology/approach

This study uses survey data from 300 peanut growers in Zoucheng County, Shandong, China, in 2016 and employs spatial econometric models to examine the relationships of technical training and the peer effects of technical training with farmers' pesticide use behaviors.

Findings

This paper reveals that important peer effects can be channeled through technical training and that these peer effects are sufficiently significant to encourage neighboring farmers to reduce the amount of pesticide use, to transform the structure of pesticide use, and to increase the usage amount of low-toxicity, low-residue pesticide use per hectare. The estimated parameters for the peer effects from technical training are significantly larger than those from technical training alone, which suggests that the technical training of neighboring farmers plays a greater role than technical training for farmers individually.

Originality/value

The research finds that technical training within smaller, localized, groups can induce previously unobservable spillover effects, and this provides a scientific, theoretical and empirical justification for agricultural technology extension that can lead to a rapid, effective transformation of applying new agricultural technologies in an environmentally sensitive and economically sustainable manner.

Details

China Agricultural Economic Review, vol. 12 no. 3
Type: Research Article
ISSN: 1756-137X

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Article

Calum G. Turvey

The purpose of this paper is to present a discussion on the idea of “policy rationing”. Policy rationing refers to constraining impacts on farm credit through policy…

Abstract

Purpose

The purpose of this paper is to present a discussion on the idea of “policy rationing”. Policy rationing refers to constraining impacts on farm credit through policy action or inaction. To present the ideas the author discusses ten themes in policy rationing, ranging from macro‐finance policies to smart lending and financial inclusion.

Design/methodology/approach

The paper is developed as a narrative on agricultural credit policies based largely on existing literature.

Findings

This paper argues that the various critiques of rural credit policy in favor of free market principles have generally not worked in developing economies. Large numbers of farmers do not have access to formal credit. It is argued that there is a role for government and credit programs.

Research limitations/implications

The opinions expressed in this paper are based on existing literature and not all ideas hold with general agreement across researchers and practitioners. The discussion is not exhaustive and in some cases the ideas might have been parsed further.

Practical implications

In this paper the author discusses ten themes that he thinks are relevant for a balanced discussion of farm credit in a development context. These themes illustrate a variety of complexities with respect to rural credit policy. The author ends by restating the themes in the form of ten questions that should be asked in whole, or in part, before any farm credit policy is field‐implemented.

Social implications

This paper deals with a broad range of issues on rural credit policy. It is directed towards a reformation of ideas about credit policy, especially in developing economies. It is argued that, all things considered, on balance there is a role for government in rural credit policy.

Originality/value

There is much discourse amongst development economist about the role of government and credit policy in agricultural development. By thinking of government action or inaction as a form of policy rationing, some clarification is brought to the policy debate.

Details

Agricultural Finance Review, vol. 73 no. 2
Type: Research Article
ISSN: 0002-1466

Keywords

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