FARM-LEVEL EVIDENCE ON THE FINANCIAL GROWTH PARADIGM

1. FARM-LEVEL EVIDENCE ON THE FINANCIAL GROWTH PARADIGM Cesar L. Escalante University of Georgia 21st Annual Southeastern Agricultural Lenders School (SEALS) April 27, 2004

2. The Financial Growth Paradigm • A business growth strategy could be either • an operations or • capital management decision • Greater growth potential only if the farm business performs well in bothof these interdependent categories of farm management.

3. Revenue Enhancement Profit Asset Management Operational Management Capital Management Debt Management Cost Reduction Assets Generate Revenues

5. TWO EMPIRICAL EXAMPLES • Business Growth Strategies of Grain Farms • Escalante and Barry, 2001 • Financial Management Characteristics of Successful Farm Firms • Plumley and Hornbaker, 1991

6. Farm-Level Evidence #1:“Business Growth Strategies of Small and Large Grain Farms” MOTIVATIONS • Increasing income risk • Farm size and business growth • Heterogeneity of farm operating and asset structures among small and large farms • Inherent differences in choice set of business growth and risk management strategies

7. Analytical Model • Panel data of 52 Grain Farms, 1995-1999 • Size Measure: USDA’s definition based on gross revenues • $250,000 and below  SMALL • Over $250,000  LARGE • Cost value equity growth rates

8. Proxy Variables for Business Growth Strategies • Asset Management • asset turnover ratio, tenure ratio • Capital Management • debt-to-asset ratio, interest expense ratio • Revenue Enhancement • net farm income ratio, net non-farm income • Cost Reduction • operating expense ratio, family living expenses

11. Summary of Findings • Interdependence of capital and operating plans for growth • For both small and large farms • BUT differ in choices of growth strategies due to heterogeneity of business conditions

12. OPERATIONS MANAGEMENT • BOTH farm types: Increase farm returns and minimize family living withdrawals • Small Farms: Enhance revenues from non-farm sources • Large Farms: Effective cost reduction strategies • CAPITAL MANAGEMENT • Small Farms: Asset Productivity • Large Farms: Debt Management and Leasing strategies

13. Farm-Level Evidence #2:“Financial Management Characteristics of Successful Farm Firms” MOTIVATIONS • Financial stress of the 1980s • 123 farms operating in 1985-1988 • To identify a dominant group of financially successful farm firms

14. Methodology • Three Levels of Success • Successful, Less Successful and Least Successful • Statistical difference between financial ratios for two extreme groups • Four performance measures • NFI/AC : Net farm income per tillable acre • MR/AC : Management returns per tillable acre (NFI less interest on equity capital and unpaid family and operator labor) • NFI/FEQ : Net farm income per dollar of farm equity • MR/FEQ : Management returns per dollar of farm equity

15. LIQUIDITY Current Ratio Current-Intermediate Ratio ASSET MANAGEMENT Current to Total Assets Ratio Fixed to Total Assets Ratio VFP to Total Assets Ratio DEBT MANAGEMENT Debt-to-Asset Ratio Interest Expense Ratio Times Interest Earned PROFITABILITY Rate of Return on Farm Assets Rate of Return on Farm Equity Net Profit Margin OPERATING EFFICIENCY Operating Expense Ratio Depreciation Expense Ratio FINANCIAL CATEGORIES

16. RESULTS