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Abstracts Invited Paper Michael D. Boehlje and David A. Lins Dramatic changes are occurring in the agricultural sector—changes which will result in agricultural industries having many of the characteristics of manufacturing industries. These changes are resulting in new and different risks for the industry as well. The purpose of this discussion is to identify some of those risks, how they might be analyzed, and what we find to be some of the more interesting research and educational challenges and opportunities because of the changing risk environment in agriculture. Key
words: industrialization, risk, strategic risk, value at risk, real
options, market risk, credit risk. Research Annual Effective Interest Rates When the Term Structure Is Stochastic Jeffrey R. Stokes For truth-in-lending type compliance, lenders must disclose information about loans to borrowers, including the annual percentage rate of interest. Inconsistency and confusion over which noninterest costs to include, the failure to account for compounding, and the typical implicit assumption of a deterministic and flat term structure of interest rates imply the annual percentage rate disclosed by lenders is potentially meaningless. This is especially true for adjustable-rate mortgages. Monte Carlo simulations of the annual effective rate of interest under popular parametric term structure models reveal, in most cases, that the deterministic annual percentage rate of interest understates the true cost of financing when interest rates are relatively low or near their long-term average, but may overstate the true cost of financing when interest rates are relatively high. Key words: adjustable-rate mortgage, annual percentage rate, annual effective rate, truth in lending, Monte Carlo simulation. Financial Structure and Efficiency of Grain Farms Raoul E. Nasr, Peter J. Barry, and Paul N. Ellinger The relationships between farm-level efficiency and financial structure are evaluated using agency cost, free cash flow, and credit evaluation concepts of finance theory. A nonparametric analysis of efficiency is performed based on a sample of 154 Illinois farmers over a seven-year period from 198894. The results suggest a positive relationship between efficiency and financial structure, where the linkage is reflective of the motivation provided by Jensen’s free cash flow concept and the credit evaluation concept. These findings are further evidence of a lack of separation between financing and production, as is implied by financial theory. Key
words: efficiency, nonparametric, financial structure, agency costs,
free cash flow. Capital Structure Under Stochastic Interest Rates: An Empirical Investigation of the Midwestern Agricultural Cooperative Joseph L. Parcell, Allen M. Featherstone, and David G. Barton The financial structure of an agricultural cooperative requires the balancing of debt and equity to assure member patrons the lowest possible costs on goods and services. One of the most important decisions a cooperative must make is the choice of capital structure. This research used a capital structure model incorporating a stochastic interest rate to determine the optimal equity-to-asset (solvency) ratio for Kansas and Midwestern agricultural cooperatives. Optimal leverage was very sensitive to a change in business risk, but less sensitive to a change in interest rate risk. The probability of equity loss declined as the level of risk aversion was increased. Key
words: capital structure, cooperatives, stochastic interest rate. The Effects of Department Operating Budget Reductions on Systemwide Agribusiness Operations Ruby Ward, M. Edward Rister, Bruce A. McCarl, David J. Leatham,Dean McCorkle, and Charles R. Long Mathematical programming-based systems analysis is used to examine the consequences of alternative operating budget levels for a large, vertically integrated agribusiness operated by the Texas Department of Criminal Justice. Budget restrictions imposed on a single department level are demonstrated to have adverse effects across the total agribusiness-related operation. The capability and value of using a mathematical model to assimilate and account for interlinkages among departments is illustrated. Key
words: integrated agribusiness, constrained operating budgets, mathematical
programming, criminal justice. Evaluation of Farm Investments: Biases in Net Present Value Estimates from Using Quasi-Deterministic Models in an Uncertain World Robert A. Collins and Claus-Hennig Hanf This article discusses the impact that some of the recent theoretical developments in capital budgeting have had on the practical evaluation of farm investments. Some well-accepted and widely taught methods have recently been shown to produce biased results in common circumstances. Most of these problems arise from the existence of risk in the planning environment, but they arise even when risk neutrality is assumed and not as a result of some complex utility argument. Some sources of bias discussed include the errors that can result from using average values of random variables, and biases resulting from neglecting consideration of the possible irreversibility of investment decisions and the option to postpone decisions until more information is available. Key
words: capital budgeting, investment, option theory, project evaluation,
risk. Extension A Management Game Providing Experiential Learning for Bankers Chris A. Petermann, Harry P. Mapp, and Ross O. Love A bank management game designed to provide experiential learning for bankers is developed and tested in an Intermediate School of Banking. Primary and secondary data are used to estimate market volume and market share equations for five bank deposit categories and five loan types. These equations and other economic information provide the basis for the computerized game. Management decisions include interest rates on deposits and loans, advertising expenses, officer and employee salaries, service charges, and loan and investment strategies. Bank performance is measured in terms of income after taxes and market shares of deposits and loans. Key
words: bank game, bank management game, experiential learning, bank
simulation model, bank management decisions. Book Review Duncan,
Marvin, and Jerome M. Stam, eds. Financing Agriculture into the Twenty-First
Century. Send questions and comments to Faye Butts: fsb1@cornell.edu This page was last modified on: 01/05/09 |
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