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Article

Peter J. Barry, Cesar L. Escalante and LeeAnn E. Moss

This study utilizes an expected utility framework to conceptualize the risk‐adjusted valuation of cash versus share leases for farmers and landowners. Farm‐level data then…

Abstract

This study utilizes an expected utility framework to conceptualize the risk‐adjusted valuation of cash versus share leases for farmers and landowners. Farm‐level data then are used to empirically estimate the rental spread between these leases in Illinois, and to econometrically evaluate how these spreads are related to risks and other farm characteristics. The results indicate that non‐risk factors likely are the primary determinants of the magnitude and sign of the rental spread. In particular, high cash rent may be a bidding strategy to control additional leased acreage and thus expand farm size.

Details

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

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Article

Cesar L. Escalante, Peter J. Barry, Timothy A. Park and Ebru Demir

Logistic regression techniques for panel data are used to identify factors affecting farm credit transition probabilities. Results indicate that most farm‐specific factors…

Abstract

Logistic regression techniques for panel data are used to identify factors affecting farm credit transition probabilities. Results indicate that most farm‐specific factors do not have adequate explanatory influence on the probability of farm credit risk transition. Class upgrade probabilities are more significantly affected by changes in certain macroeconomic factors, such as economic growth signals (from changes in stock price indexes and farm real estate values) and larger money supply that relax the credit constraint. Increases in interest rates, on the other hand, negatively affect such probabilities.

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Article

Cesar L. Escalante and Peter J. Barry

This study identifies key strategies employed by Illinois grain farms to prevent the erosion of their equity positions due to significant downturns in commodity prices…

Abstract

This study identifies key strategies employed by Illinois grain farms to prevent the erosion of their equity positions due to significant downturns in commodity prices during the implementation of the 1996 farm bill. The econometric results emphasize the collective importance of revenue enhancement, cost reduction, and capital management strategies. Nonfarm‐related strategies aimed at minimizing equity withdrawals through regulated family living expenditures, as well as supplementing low farm incomes with receipts from nonfarm employment and investments, significantly affect cost value equity growth rates. Moreover, significant financial and asset management strategies include those that minimize the costs of borrowing and maintain high asset productivity levels through elimination of excess farm capacity.

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Article

Peter J. Barry, Cesar L. Escalante and Paul N. Ellinger

The migration approach to credit risk measurement is based on historic rates of movements of individual loans among the classes of a lender’s risk‐rating or credit‐scoring…

Abstract

The migration approach to credit risk measurement is based on historic rates of movements of individual loans among the classes of a lender’s risk‐rating or credit‐scoring system. This article applies the migration concept to farm‐level data from Illinois to estimate migration rates for a farmer’s credit score and other performance measures under different time‐averaging approaches. Empirical results suggest greater stability in rating migrations for longer time‐averaging periods (although less stable than bond migrations), and for the credit score criterion versus ROE and repayment capacity.

Details

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

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Article

Nick Walraven and Peter J. Barry

This paper reviews the prevalence of the use of risk ratings by commercial banks that participated in the Federal Reserve’s Survey of Terms of Bank Lending to Farmers…

Abstract

This paper reviews the prevalence of the use of risk ratings by commercial banks that participated in the Federal Reserve’s Survey of Terms of Bank Lending to Farmers between 1997 and 2002. Adoption of risk rating procedures held about steady over the period, with a little less than half the banks on the panel either not using a risk rating system, or reporting the same rating for all their loans in the survey. However, most of these banks were small, and roughly four‐fifths of all sample loans carried an informative risk rating. After controlling for the size and performance of the bank and as many nonprice terms of the loan as possible, findings reveal that banks consistently charged higher rates of interest for the farm loans they characterized as riskier, with an average difference in rates between the most risky and least risky loans of about 1 and a half percentage points.

Details

Agricultural Finance Review, vol. 64 no. 2
Type: Research Article
ISSN: 0002-1466

Keywords

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Article

Lindon J. Robison and Peter J. Barry

This paper demonstrates that present value (PV) models can be viewed as multiperiod extensions of accrual income statements (AISs). Failure to include AIS details in PV…

Abstract

Purpose

This paper demonstrates that present value (PV) models can be viewed as multiperiod extensions of accrual income statements (AISs). Failure to include AIS details in PV models may lead to inaccurate estimates of earnings and rates of return on assets and equity and inconsistent rankings of mutually exclusive investments. Finally, this paper points out that rankings based on assets and equity earnings and rates of return need not be consistent, requiring financial managers to consider carefully the questions they expect PV models to answer.

Design/methodology/approach

AISs are used to guide the construction of PV models. Numerical examples illustrate the results. Deductions from AIS definitions demonstrate the potential conflict between asset and equity earnings and rates of return.

Findings

PV models can be viewed as multiperiod extensions of AISs. Mutually exclusive rankings based on assets and equity earnings and rates of return need not be consistent.

Research limitations/implications

PV models are sometimes constructed without the details included in AISs. The result of this simplified approach to PV model construction is that earnings and rates of return may be miscalculated and rankings based as asset and equity earnings and rates of return are inconsistent. Tax adjustments for asset and equity earnings may be miscalculated in applied models.

Practical implications

This paper provides guidelines for properly constructing PV models consistent with AISs.

Social implications

PV models are especially important for small to medium size firms that characterize much of agricultural. Providing a model consistent with AIS construction principles should help financial managers view the linkage between building financial statements and investment analysis.

Originality/value

This is the first paper to develop the idea that the PV model can be viewed as a multiperiod extension of an AIS.

Details

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

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Article

Peter J. Barry, Cesar L. Escalante and Sharon K. Bard

This study uses farm‐level data from the Illinois Farm Business Farm Management Association to determine whether the variability of net farm income is significantly…

Abstract

This study uses farm‐level data from the Illinois Farm Business Farm Management Association to determine whether the variability of net farm income is significantly influenced by farm size, financial structure, and other structural characteristics of farm businesses. The econometric results indicate that under a cross‐sectional model the relative variability of real net farm income is not significantly influenced by farm size, measured either by acreage or value of farm production. However, under a time‐series/cross‐section model, periodic variations in farm size, along with differences in the relative crop price received, crop yield, degree of enterprise diversification, and geographic location, can significantly influence changes in farm income variability.

Details

Agricultural Finance Review, vol. 61 no. 1
Type: Research Article
ISSN: 0002-1466

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Article

Peter J. Barry

This article reviews and analyzes the emerging approaches to capital management under risk by financial institutions. Included are discussions of recent developments in…

Abstract

This article reviews and analyzes the emerging approaches to capital management under risk by financial institutions. Included are discussions of recent developments in the measurement and modeling of credit risk and other sources of risk, and comparisons of the regulatory environment for capital adequacy under the old versus the proposed New Basel Accord. The relationships for agricultural finance are considered in terms of the uniqueness of agriculture, current institutional capital positions and practices, risk measures, and recent experiences in developing risk‐based approaches to determining capital adequacy in agricultural finance.

Details

Agricultural Finance Review, vol. 61 no. 2
Type: Research Article
ISSN: 0002-1466

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Article

Sharon K. Bard, Peter J. Barry and Paul N. Ellinger

A case loan request methodology evaluated how changes in commercial banking structure are influencing credit availability and terms for selected farm business types. Tobit…

Abstract

A case loan request methodology evaluated how changes in commercial banking structure are influencing credit availability and terms for selected farm business types. Tobit and OLS regressions were used to assess bank characteristic effects on loan amount and rate, and a paired comparisons approach evaluated credit term differences among borrower types. Loan amounts were not significantly influenced by bank characteristics, and loan rates were significantly affected by bank characteristics sporadically. Some differentiation in credit terms among the demographic groups occurred. These results showed no overwhelming evidence in favor of or against the trend toward commercial bank consolidation as it impacts agricultural lending.

Details

Agricultural Finance Review, vol. 60 no. 1
Type: Research Article
ISSN: 0002-1466

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Article

Jianmei Zhao, Peter J. Barry and Gary D. Schnitkey

A stochastic, multi‐period simulation model is developed based on the prevalent capital structure theories, in searching for and identifying an optimal combination of…

Abstract

A stochastic, multi‐period simulation model is developed based on the prevalent capital structure theories, in searching for and identifying an optimal combination of related financing strategies. The model reflects both conceptual and empirical implications of the pecking order, trade‐off and signalling theories on farm business financing, investment, and expansion process. The comparisons of simulation output indicate that farm businesses could expand at a moderate speed accompanied by financial health when they concurrently adopt these financing tactics. Pecking order financing benefits short‐term financial management, trade‐off strategy effectively adjust farm capital structure, and the signaling theory enables the adoption of risk‐adjusted interest rate policies between the farm borrower and the lender.

Details

Agricultural Finance Review, vol. 68 no. 2
Type: Research Article
ISSN: 0002-1466

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