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Article

Nicholas D. Paulson and Gary D. Schnitkey

This article aims to explore recent trends in farmland rental markets using data for the state of Illinois. Trends in the types of rental agreements used and the…

Abstract

Purpose

This article aims to explore recent trends in farmland rental markets using data for the state of Illinois. Trends in the types of rental agreements used and the relationship between the rental rate for those contracts, land values, crop revenues, production costs, and farm returns are examined.

Design/methodology/approach

Data from various sources and at different levels of aggregation for the state of Illinois are used to provide illustrations of historical trends in farmland rental agreements and rental rates, and how they are related to various market and industry factors. Focus is placed on the more recent period since 2005 characterized by high commodity price levels and volatility.

Findings

The majority of farmland in the Midwest is controlled under rental agreements which are increasingly of the fixed cash rent type. Rental rates have increased, but at a slower rate than farm returns. Average rental and interest rates imply that land values are consistent with the current market environment. Aggregate rental rates mask considerable variation in farm‐level rents, only a portion of which can be explained by differences in soil productivity. Given the current level of price volatility, the tenure position of a farm operation has a significant effect on downside risk exposure.

Originality/value

The illustrations provided in this paper should be of interest to researchers working in the area of farmland values and rental agreements, as well as to practitioners including farmers, landowners, and professional farm managers. The findings should motivate additional research and recognition of the importance of tenure position to the performance and risk exposure of grain farms.

Details

Agricultural Finance Review, vol. 73 no. 1
Type: Research Article
ISSN: 0002-1466

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Article

Nicholas D. Paulson, Joshua D. Woodard and Bruce Babcock

The purpose of this paper is to investigate changes proposed in 2012 to commodity programs for the new Farm Bill. Both the Senate and House Agriculture Committee versions…

Abstract

Purpose

The purpose of this paper is to investigate changes proposed in 2012 to commodity programs for the new Farm Bill. Both the Senate and House Agriculture Committee versions of the new Farm Bill eliminate current commodity programs including direct payments, create new revenue‐based commodity program options designed to cover “shallow” revenue losses, and also introduce supplemental crop insurance coverage for shallow revenue losses.

Design/methodology/approach

This paper documents the payment functions for the new revenue programs proposed in both the Senate and House Ag Committee Farm Bills, and also estimates expected payments for each using a model based on historical county yield data, farmer‐level risk rates from RMA, and commodity price levels from the March 2012 CBO baseline projections.

Findings

The authors find significant variation in expected per acre payment across programs, crops, and regions. In general, the Senate's bill would be expected to be preferred over the House's bill for corn and soybean producers, particularly those in the Midwest. Also, the RLC program in the House's Bill typically would be projected to pay much less than the Senate's SCO or ARC programs for most producers in the Midwest.

Originality/value

This study develops an extensive nationwide model of county and farm yield and price risks for the five major US crops and employs the model to evaluate expected payment rates and the distribution of payments under the House and Senate Farm Bill proposals. These analyses are important for program evaluation and should be of great interest to producers and policymakers.

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Article

Nicholas D. Paulson, Gary D. Schnitkey and Bruce J. Sherrick

This study seeks to evaluate the impacts of land rental arrangements on crop insurance and grain marketing decisions.

Abstract

Purpose

This study seeks to evaluate the impacts of land rental arrangements on crop insurance and grain marketing decisions.

Design/methodology/approach

The analysis is conducted in an Illinois corn‐soybean setting in which optimal marketing and crop insurance decisions are estimated for a risk‐averse producer under typical cash rent and share rent agreements using numerical simulation methods.

Findings

Results indicate that the availability of crop insurance impacts the intensity of use of put options under both cash and share rent arrangements. Similar to previous work in this area, revenue insurance is found to cause a substitution away from marketing using put options, while yield insurance is complementary to price risk management alternatives. However, while insurance and marketing play a role under both types of land tenure arrangements, shifting from a cash rent to a share rent agreement provides a relatively greater degree of risk reduction.

Practical implications

The results suggest that additional research is needed to explain trends in land rental contracts. Crop insurance and other federal programs may provide incentives to switch from share leases to cash rent arrangements. Changes to the design of these programs could facilitate risk management for producers more efficiently.

Originality/value

The unique contribution of this study is the comparison of insurance and marketing decisions under both cash rent and share rent agreements for crop land.

Details

Agricultural Finance Review, vol. 70 no. 3
Type: Research Article
ISSN: 0002-1466

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Article

Bruce J. Sherrick, Christopher A. Lanoue, Joshua Woodard, Gary D. Schnitkey and Nicholas D. Paulson

The purpose of this paper is to contribute to the empirical evidence about crop yield distributions that are often used in practical models evaluating crop yield risk and…

Abstract

Purpose

The purpose of this paper is to contribute to the empirical evidence about crop yield distributions that are often used in practical models evaluating crop yield risk and insurance. Additionally, a simulation approach is used to compare the performance of alternative specifications when the underlying form is not known, to identify implications for the choice of parameterization of yield distributions in modeling contexts.

Design/methodology/approach

Using a unique high-quality farm-level corn yield data set, commonly used parametric, semi-parametric, and non-parametric distributions are examined against widely used in-sample goodness-of-fit (GOF) measures. Then, a simulation framework is used to assess the out-of-sample characteristics by using known distributions to generate samples that are assessed in an insurance valuation context under alternative specifications of the yield distribution.

Findings

Bias and efficiency trade-offs are identified for both in- and out-of-sample contexts, including a simple insurance rating application. Use of GOF measures in small samples can lead to inappropriate selection of candidate distributions that perform poorly in straightforward economic applications. The β distribution consistently overstates rates even when fitted to data generated from a β distribution, while the Weibull consistently understates rates; though small sample features slightly favor Weibull. The TCMN and kernel density estimators are least biased in-sample, but can perform very badly out-of-sample due to overfitting issues. The TCMN performs reasonably well across sample sizes and initial conditions.

Practical implications

Economic applications should consider the consequence of bias vs efficiency in the selection of characterizations of yield risk. Parsimonious specifications often outperform more complex characterizations of yield distributions in small sample settings, and in cases where more demanding uses of extreme-event probabilities are required.

Originality/value

The study helps provide guidance on the selection of distributions used to characterize yield risk and provides an extensive empirical demonstration of yield risk measures across a high-quality set of actual farm experiences. The out-of-sample examination provides evidence of the impact of sample size, underlying variability, and region of the probability measure used on the performance of candidate distributions.

Details

Agricultural Finance Review, vol. 74 no. 3
Type: Research Article
ISSN: 0002-1466

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Article

Nicholas D. Paulson, Bruce Babcock and Jonathan Coppess

The purpose of this paper is to discuss the growth and rising costs association with the Federal Crop Insurance program in the USA, justifications for public support, and…

Abstract

Purpose

The purpose of this paper is to discuss the growth and rising costs association with the Federal Crop Insurance program in the USA, justifications for public support, and recent reforms that have been implemented or proposed to reduce program costs. It also analyzes a specific policy to reduce premium assistance spending.

Design/methodology/approach

Data from the Risk Management Agency are used to illustrate historical trends in crop insurance program costs and to analyze the impacts of imposing a per acre cap on premium assistance.

Findings

Imposing a per acre cap on premium assistance could achieve significant savings. A $20 per acre cap is estimated to reduce premium subsidy expenditures by more than 40 percent. However, the impact of such a policy would be most severe on crops currently receiving the largest subsidies per acre, which happen to be some of the largest program crops in the USA.

Originality/value

This paper adds to the literature analyzing potential reform in crop insurance industry. The subsidy cap considered has been proposed and considered by policy makers, and this paper provides estimates for its potential savings.

Details

Agricultural Finance Review, vol. 74 no. 4
Type: Research Article
ISSN: 0002-1466

Keywords

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Article

Todd H. Kuethe, Brian Briggeman, Nicholas D. Paulson and Ani L. Katchova

– The purpose of this paper is to compare the characteristics of farms who participate in farm management associations to the wider population of farms at the state level.

Abstract

Purpose

The purpose of this paper is to compare the characteristics of farms who participate in farm management associations to the wider population of farms at the state level.

Design/methodology/approach

Farm-level records obtained from the USDA's Agricultural Resource Management Survey (ARMS) are compared to similar data obtained from farm management associations in three states: Illinois, Kansas, and Kentucky.

Findings

Data collected through farm management associations tend to represent larger farms and a greater share of crop producers as compared to livestock producers. Association data, however, capture a greater share of younger farm operators.

Originality/value

This is the first study to compare farm statistics from several farm management associations to ARMS, and the study confirms the findings of existing studies of prior USDA surveys.

Details

Agricultural Finance Review, vol. 74 no. 4
Type: Research Article
ISSN: 0002-1466

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Article

Nicholas D. Paulson, Chad E. Hart and Dermot J. Hayes

While the demand for weather‐based agricultural insurance in developed regions is limited, there exists significant potential for the use of weather indexes in developing…

Abstract

Purpose

While the demand for weather‐based agricultural insurance in developed regions is limited, there exists significant potential for the use of weather indexes in developing areas. The purpose of this paper is to address the issue of historical data availability in designing actuarially sound weather‐based instruments.

Design/methodology/approach

A Bayesian rainfall model utilizing spatial kriging and Markov chain Monte Carlo techniques is proposed to estimate rainfall histories from observed historical data. An example drought insurance policy is presented where the fair rates are calculated using Monte Carlo methods and a historical analysis is carried out to assess potential policy performance.

Findings

The applicability of the estimation method is validated using a rich data set from Iowa. Results from the historical analysis indicate that the systemic nature of weather risk can vary greatly over time, even in the relatively homogenous region of Iowa.

Originality/value

The paper shows that while the kriging method may be more complex than competing models, it also provides a richer set of results. Furthermore, while the application is specific to forage production in Iowa, the rainfall model could be generalized to other regions by incorporating additional climatic factors.

Details

Agricultural Finance Review, vol. 70 no. 1
Type: Research Article
ISSN: 0002-1466

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Article

Nicholas Paulson, Gary Schnitkey and Patrick Kelly

The purpose of this paper is to evaluate the risk management benefits provided by the supplemental coverage option (SCO) insurance plan which was created in the 2014 Farm…

Abstract

Purpose

The purpose of this paper is to evaluate the risk management benefits provided by the supplemental coverage option (SCO) insurance plan which was created in the 2014 Farm Bill. Specifically, the marginal expected utility benefits are compared with the potential additional subsidy cost introduced by the new program for a stylized example of a corn producer.

Design/methodology/approach

The paper uses a stylized simulation model examines the preferred insurance program choice for a typical Midwestern corn farmer. The expected utility of the farmer is calculated under their preferred insurance program choice both with and without the availability of the SCO program, and compared to the case where crop insurance is not available. Scenarios are examined for a range of farmer risk aversion levels, different levels of correlation between farm-level and county-level corn yields, and case with and without insurance premium subsidies.

Findings

The SCO program is found to enter into the preferred insurance program choice for risk averse farmers. As risk aversion increases, farmers are estimated to prefer higher coverage levels for individual products along with SCO coverage. While the availability of existing crop insurance programs are shown to substantially increase the expected utility of farmers, the marginal impact of adding SCO to the crop insurance program is relatively small. Furthermore, the additional expected benefits generated by SCO are shown to include both risk management and expected return components. With subsidies removed, the estimated marginal benefits provided by SCO are reduced significantly.

Practical implications

The findings of this paper can help inform the policy debate for future farm bills as agricultural support programs continue to evolve. The results in this paper can also be used to help explain farm-level decision making related to crop insurance program choices.

Originality/value

This paper contributes to the literature by documenting a new, federally supported risk management programs made available to farmers in the 2014 Farm Bill and evaluates the marginal benefits the SCO program offers US crop producers.

Details

Agricultural Finance Review, vol. 76 no. 3
Type: Research Article
ISSN: 0002-1466

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Article

Bruce J. Sherrick, Mindy L. Mallory and Timothy Hopper

Relatively high recent returns to farmland investments have led to substantially elevated interest in farmland investments. Absent, however, is a well‐functioning equity…

Abstract

Purpose

Relatively high recent returns to farmland investments have led to substantially elevated interest in farmland investments. Absent, however, is a well‐functioning equity market in farmland real estate, or well‐developed indexes of farmland returns that might contribute to the development of tradable shares tied to farmland returns, or to methods to hedge the value of owned agricultural assets. The purpose of this study is to empirically present relevant measures related to farmland returns and other financial assets to provide a broad context for evaluation of farmland investments in a portfolio context. Issues related to the development of a farmland fund and index construction are discussed along with major risk and transactional factors that are somewhat unique to the asset class.

Design/methodology/approach

Returns data from a broad set of financial categories and broad set of agricultural returns measures are developed and presented in multiple frameworks to convey temporal persistence, relatedness, and portfolio considerations related to farmland. Issues related to the construction of claims based on agricultural assets are discussed.

Findings

Agricultural real estate investments have performed well compared to most other financial assets on most traditional measures of risk adjusted performance. However, the difficulties in direct investment remain and the need to develop securitized conduit exposures to farmland returns is identified.

Originality/value

The study presents a unique set of farmland returns measures and examines the stability of the statistics used to describe these through time. Novel characterizations of the data compared to traditional assets helps investors and asset owners accurately understand the exposure to farmland returns.

Details

Agricultural Finance Review, vol. 73 no. 1
Type: Research Article
ISSN: 0002-1466

Keywords

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Article

Steven H. Appelbaum, Seth Keller, Harold Alvarez and Catherine Bédard

The purpose of this paper is to provide a comprehensive review of organizational crisis and organizational change management and to provide a guide to crisis prevention…

Abstract

Purpose

The purpose of this paper is to provide a comprehensive review of organizational crisis and organizational change management and to provide a guide to crisis prevention, management and recovery by highlighting critical actions to be taken during each stage of an organizational crisis. A second aim is to compare the crisis management of two financial firms during the 2007 financial crisis: Lehman Brothers and Paulson & Company.

Design/methodology/approach

The methodology involved a review of the literature and a case analysis related to organizational crisis and organizational change management. The synthesis of these two approaches is a conceptual paper. Furthermore, the article is supplemented by comparing the management of the 2007 financial crisis by both Lehman Brothers and Paulson & Company in an attempt to compare the literature findings to a global organizational crisis.

Findings

The literature suggests that organizations with early crisis detection methods and crisis management plans already in place before the onset of a crisis are significantly better prepared to manage and survive a crisis event. In addition, these better prepared organizations have the opportunity to reposition themselves and turn a crisis event into a strategic opportunity. This is evident in the authors' comparisons of both Lehman Brothers' and Paulson & Company's different management of the 2007 financial crisis.

Practical implications

The demand for crisis management is on the rise as the 2007 financial crisis exposed the lack of preparedness among financial institutions, challenged the assumptions crisis management plans were based on and required a regulatory transformation of financial markets. Surviving firms are recovering and learning from the crisis as their crisis management proved to be ineffective.

Originality/value

The scope of this paper offers readers a guide to organizational crisis management, supplemented with examples from a financial crisis that affected almost every organization in the world and from which many organizations are still recovering. Any organization, regardless of industry, can benefit from the guide presented in this research. Moreover, the framework of this paper can enable practitioners to formulate and improve their organization's crisis management plans and capabilities.

Details

International Journal of Commerce and Management, vol. 22 no. 4
Type: Research Article
ISSN: 1056-9219

Keywords

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