Cole R. Gustafson

Credit risk assessment

Lenders, regulatory agencies, and investors have increased their demand for credit risk exposure information to appropriately price risk and evaluate risk migration patterns that affect institution safety and soundness. This review provides a synthesis of the advances in credit risk assessment made through journal articles and other professional reports. Contributions in three primary areas are considered: (a) how the credit risk assessment problem has been defined and redefined over time in response to the changing information needs of lenders and regulators, (b) how methodological innovations have improved credit assessment procedures, and (c) how the efficiency of financial markets has changed due to the evolution of credit risk assessment. The paper concludes with a discussion of how transactional and relationship lending approaches are expected to evolve in the future and whether measures can be developed to more accurately assess factors such as management capacity and commitment to repay.

Rural small business trade credit: a paradox

This article examines trade credit practices of rural small business firms. The results show that these firms borrow money and then re‐lend it to others in the form of trade credit. There is a strong direct relationship between various forms of debt held by these firms and their level of accounts receivable (e.g., trade credit extended to customers). The actual level of re‐lending varied among firms depending on their adoption level of computer usage for cash management and credit services. Accounts receivable balances were also dependent on sales levels, costs of doing business, and other income.

Crop insurance in malting barley: a stochastic dominance analysis.

Purpose - Malting barley is an important specialty crop in the Northern Plains and growers mitigate risk with federally subsidized crop insurance and production contracts. The purpose of this paper is to quantify risks growers face due to “coverage gaps” in crop insurance that result in uncertain indemnity payments when their crop does not meet contract specifications. Design/methodology/approach - A stochastic dominance model is developed to evaluate alternative strategies for growers with differing risk attitudes and production practices (irrigation vs dryland). Findings - The results illustrate how alternative crop insurance provisions affect efficient choice sets for growers. Risk premiums for irrigated growers all point to valuations favoring more coverage, contracts, and malting option B. As the crop insurance industry matures in the functions it performs, it will become increasingly more important to address quality attributes. Originality/value - This paper addresses quality issues and coverage gaps in crop insurance provisions.

Economic Impact of Harvesting Corn Stover under Time Constraint: The Case of North Dakota

This study examines the impact of stochastic harvest field time on profit maximizing potential of corn cob/stover collection in North Dakota. Three harvest options are analyzed using mathematical programming models. Our findings show that under the first corn grain only harvest option, farmers are able to complete harvesting corn grain and achieve maximum net income in a fairly short amount of time with existing combine technology. However, under the second simultaneous corn grain and cob (one-pass) harvest option, farmers generate lower net income compared to the net income of the first option. This is due to the slowdown in combine harvest capacity as a consequence of harvesting corn cobs. Under the third option of separate corn grain and stover (two-pass) harvest option, time allocation is the main challenge and our evidence shows that with limited harvest field time available, farmers find it optimal to allocate most of their time harvesting grain and then proceed to harvest and bale stover if time permits at the end of harvest season. The overall findings suggest is that it would be more economically efficient to allow a firm that is specialized in collecting biomass feedstock to participate in cob/stover harvest business.

Community Economic Development and Commercial Bank Performance: A Mutually Dependent Relationship

This study tests the circular relationship between bank lending practices and community economic development in North Dakota counties. A seven-equation, two-stage, simultaneous regression model was constructed using pooled, cross-sectional, timeseries data from 1972 to 1986. Results of the study show that economic activity at the retail, wholesale, and farm levels in North Dakota is strongly influenced by commercial bank lending policies. Each dollar of consumer lending was associated with

Rural small business finance: evidence from the 1998 survey of small business finances

4.54 of retail sales. At the wholesale and farm levels, the corresponding values were

Do lender‐imposed sweeps affect ethanol technology investment?

.007 and

Utilizing expectations to measure economic depreciation and capital gains of farm machinery.

2.80, respectively. In turn, increases in community economic activity result in greater loan demand and bank profitability.

Marginal impact of sales consultant visits and financing opportunities on adoption of variable-rate fertilizer application

The 1998 Survey of Small Business Finances provides robust information on the financing of small businesses, including an overview of the firms’ organization, financial characteristics, and credit use. Information from the survey is used in this study to compare the financial characteristics of metro and rural small businesses. While many financial characteristics are similar, rural small businesses do own more land and depreciable assets, and have lower inventory and other current assets when compared to metro firms. Rural firms have relatively similar access to technology and financial services, although utilization varies. Both metro and rural small businesses rely on a wide variety of sources for financing; however, rural small businesses have significantly more mortgages, loans from shareholders, and other types of loans, but fewer credit cards. Use of nonparametric rank order statistical methods was required because normality assumptions were violated due to asymmetric distribution of small firms.

The economic feasibility of sugar beet biofuel production in central North Dakota.

Purpose - New federal legislation proposes to reduce greenhouse gas (GHG) emissions associated with biofuel production. To comply, existing corn ethanol plants will have to invest in new more carbon efficient production technology such as dry fractionation. However, this will be challenging for the industry given the present financial environment of surplus production, recent profit declines, numerous bankruptcies, and lender-imposed covenants. The purpose of this paper is to examine a dry mill ethanol firms ability to invest in dry fractionation technology in the face of declining profitability and stringent lender cash flow repayment constraints. Firm level risk aversion also is considered when determining a firms willingness to invest in dry fractionation technology. Design /methodology/approach - A Monte Carlo simulation model is constructed to estimate firm profits, cash flows, and changes in equity following new investment in fractionation to determine an optimal investment strategy. Findings - The addition of a lender-imposed sweep, whereby a percentage of free cash flow is used to pay off extra debt in high profit years, reduces the firms ability to build equity and increases bankruptcy risk under investment. However, the sweep increases long-run equity because total financing costs are reduced with accelerated debt repayment. Practical implications - Results show that while ethanol firm profits are uncertain, imposition of a lender sweep combined with increased profit from dry fractionation technology helps the firm increase long-run financial resiliency. Originality/value - Examination of ethanol plant financial structures and investment capabilities has received scant research attention to date.