54 July 1989
Western Journal of Agricultural Economics
Table 3. End-Of-Year 10 Simulation Results under Alternative Growth Rates and Beginning
Leverage Positions
|
Beginning Debt-Io-Asset Ratio | ||||||||
|
0.0 |
10.0 |
20.0 |
30.0 |
40.0 |
50.0 |
60.0 |
70.0 | |
|
I Price response; growth rates, 3o∕o | ||||||||
|
Net worth change, % |
123.0 |
131.10 |
131.77 |
139.22 |
133.78 |
118.65 |
112.51 |
15.01 |
|
Return on assets, % |
9.26 |
8.88 |
9.48 |
9.62 |
8.96 |
8.77 |
9.76 |
10.41 |
|
Return on equity, % |
8.61 |
8.23 |
8.77 |
8.89 |
8.66 |
8.50 |
9.75 |
1.31 |
|
Debt to assets, % |
32.0 |
33.0 |
34.0 |
34.0 |
30.0 |
29.0 |
34.0 |
73.0 |
|
Land purchases, acres |
360 |
320 |
280 |
240 |
120 |
40 |
0 |
0 |
|
Year first purchased |
3 |
3 |
3 |
4 |
5 |
8 |
0 |
0 |
|
Credit score |
10 |
10 |
8 |
8 |
8 |
8 |
10 |
26 |
|
Credit class |
2 |
2 |
2 |
2 |
2 |
2 |
2 |
4 |
|
Interest rate |
10.0 |
10.0 |
10.0 |
10.0 |
10.0 |
10.0 |
10.0 |
14.0 |
|
II Price response; growth rates: operating costs, 3o∕o; farm income and land values, 5o∕o | ||||||||
|
Net worth change, % |
224.7 |
236.1 |
243.2 |
251.8 |
257.3 |
268.9 |
297.0 |
245.1 |
|
Return on assets, % |
12.89 |
13.18 |
13.15 |
14.05 |
12.48 |
14.80 |
14.68 |
15.19 |
|
Return on equity, % |
14.19 |
14.60 |
14.44 |
15.43 |
13.94 |
17.77 |
18.39 |
18.16 |
|
Debt to assets, % |
35.0 |
35.0 |
34.0 |
36.0 |
33.0 |
38.0 |
32.0 |
31.0 |
|
Land purchases, acres |
520 |
480 |
400 |
360 |
240 |
240 |
120 |
0 |
|
Year first purchased |
3 |
3 |
3 |
4 |
4 |
6 |
8 |
0 |
|
Credit score |
10 |
10 |
10 |
10 |
10 |
8 |
8 |
8 |
|
Credit class |
2 |
2 |
2 |
2 |
2 |
2 |
2 |
2 |
|
Interest rate |
10.0 |
10.0 |
10.0 |
10.0 |
10.0 |
10.0 |
10.0 |
10.0 |
|
III Price response; growth rates: operating costs, 3o∕o; farm income and land values, - lo∕o | ||||||||
|
Net worth change, % |
12.5 |
10.4 |
6.0 |
-2.2 |
-20.6 |
-76.4 |
-198.6 |
-355.9 |
|
Return on assets, % |
0.43 |
0.19 |
0.00 |
-0.28 |
-0.35 |
-0.49 |
-1.46 |
-1.46 |
|
Return on equity, % |
-3.03 |
-3.67 |
-4.71 |
-6.54 |
-14.03 |
-63.63 |
-99.00 |
-99.00 |
|
Debt to assets, o∕o |
27.0 |
29.0 |
33.0 |
39.0 |
52.0 |
88.0 |
141.0 |
180.0 |
|
Land purchases, acres |
160 |
120 |
80 |
40 |
0 |
0 |
0 |
0 |
|
Year first purchased |
3 |
3 |
3 |
4 |
0 |
0 |
0 |
0 |
|
Credit score |
10 |
14 |
14 |
20 |
26 |
30 |
30 |
30 |
|
Credit class |
2 |
2 |
2 |
3 |
4 |
4 |
4 |
4 |
|
Interest rate, % |
10.0 |
10.0 |
10.0 |
12.0 |
14.0 |
14.0 |
14.0 |
14.0 |
cial capacity had accumulated, aided in some
cases by a strengthening in the firm’s credit
classification.
Concluding Comments
Our goal in this study was to portray a firm’s
financial performance over time in a fashion
that endogenizes farm investment decisions,
credit evaluation, and loan pricing based on
the credit scoring procedures of agricultural
lenders. This modeling framework is expected
to yield more valid projections of farmers’ fi-
nancial performance, in light of lenders’ in-
creasing use of differential loan pricing as a
response to changes in a borrower’s credit wor-
thiness. As the results of the growth-oriented
simulation analysis show, the adoption of
credit-scored pricing yields time patterns of
performance, credit classifications, and inter-
est rates that parallel the changes in the firm’s
financial position arising from its investment,
financing, and debt servicing activities. More-
over, including the lenders’ price responses in
the analysis provides an internal control mech-
anism that dampens the growth incentive as
credit worthiness diminishes, stimulates
growth as credit conditions strengthen, and
leads to similar capital structures over time,
at least under the deterministic conditions of
this study.
Extensions of the analysis could compare the
effects on farm financial performance of inter-
relationships between different risk attitudes
ofborrowers and lenders, as expressed through
the credit scoring model, as well as considering
the effects of alternatives in risk management
for farm businesses with different structural
characteristic's. Further refinements of the