Research Bulletin (Iowa Agriculture and Home Economics Experiment Station)


It is widely accepted that agriculture is one of the riskier industries in the United States; the wide fluctuations experienced in grain and livestock prices are well known (Nelson et al., 32, pp. 131-132). Cattle feeding in recent years has been notoriously volatile in profitability, resulting primarily from fluctuations in feed costs and feeder cattle and fed cattle prices (Futrell and Bums, 12).

Risk management is important for a successful farm operation (Nelson et al., 32, pp. 169-184). One possible way to manage risk is through the choice of firm size and leverage (debt in relationship to total assets) configuration. As farm size is increased, the need for nonequity funds to finance land and machinery purchases as well as operating expenses becomes larger. Greater use of credit results in larger fixed repayment commitments, and a drop in income creates the possibility that obligations may not be met (Nelson et al., 32, p. 97). In that case, past savings of the firm would need to be used, and the accumulated wealth of the firm could be seriously or totally impaired. Consequently, a cautious or risk-averse farmer would be expected to rely more on internally generated funds rather than on credit to finance asset expansion and production expenses. This more conservative use of borrowed funds implies that the firm employs fewer assets than if it were more highly leveraged.



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