Financial stress test under multiple risks for representative farms of Central Illinois

Shasha Li, Purdue University

Abstract

Farming is a risky operation. In recent years, farmers' incomes have been increasingly volatile due to variation in crop prices, crop productivity, fertilizer expense, farmland cash rents and farmland values. Previous studies focus on those variations separately. There has been little research on analyzing financial performance of a set of representative farms under a combination of risks from prices, costs and productivity. In the first part of this study, a parametric stochastic simulation was used to model price and yield of corn and soybean, fertilizer price, cash rent and farmland value for a three-year period from 2012 to 2015. In the second part, a test was performed on financial performance of a set representative farms with various scales, farmland ownerships, and capital structures in Central Illinois under the shock of simulated price, yield and expense with the presense of crop insurance and crop hedge using futures. Management adjustments were implemented for situations of excess or insufficient cash balances within the simulation period. Results were analyzed and compared. Larger farms were found to be more likely to obtain financial success with their farm businesses. Farms with lower farmland ownership were found to have higher possibilities of insufficient cash balance to meet all financial obligations and have to either finance the cash insufficiency with further borrowing or shrink their farm business due to high cash rent expense crashing farm revenues. Farms with a capital structure of lower debt proportion were found to be more likely to meet all financial obligations with cash generated from farm operation, while a higher debt load made the farm business risker because the deviation in rate of return on equity increased and the possibility of having an insufficient cash balance was increased when the debt-to-asset ratio increased..

Degree

M.S.

Advisors

Boehlje, Purdue University.

Subject Area

Economics|Agricultural economics

COinS