Glenn A. Helmers

Chance-Constrained Financing as a Response to Financial Risk

The results of a recent survey suggest that many decision makers view financial risk in a safety-first context. Imposing safety-first chance constraints on potential financial ratios or flows can be difficult with traditional methods. This is particularly true with financial ratios when both the numerator and denominator are random and are affected by endogenous decisions. A model and numerical example are presented which enforce probabilistic or chance constraints upon potential debt/asset ratios in a multiperiod linear program. The model can be easily modified to probabilistically constrain alternative financial performance measures such as current ratios, working ratios, or cash flows.

Inflation and Machinery Cost Budgeting

Machinery costs are affected by inflation which, if not correctly considered, will bias cost estimates. Accurate estimates of machinery costs are essential in budgeting costs of crop production in farm policy programs, crop hedging decisions, and general cost of production research. Machinery decisions relating to replacement, size, and custom or leasing alternatives are also improved by realistic budgeting techniques. The objective of this article is to examine appropriate adjustments for inflation in developing machinery costs through budgeting techniques. The authors attempt to demonstrate the adjustments necessary in both capital and traditional budgeting models to place cost estimates on a real basis. Capital budgeting is first compared with traditional budgeting. Next, by the use of a simple machinery example, the necessary adjustments to account for inflation are shown for a capital budgeting model that does not include income tax considerations. Similarly, the inflation adjustments are demonstrated for a traditional budgeting model that does not include income tax considerations. Finally, a capital budgeting model including income tax aspects is examined in reference to real and nominal after-tax cost estimates.

Examining Quantity and Quality Effects of Restricting Nitrogen Applications to Feedgrains

Restricting the timing and level of nitrogen applications has been proposed as a response to nitrate contamination in Nebraska. Agronomic research indicates that reducing available nitrogen reduces both the yield (quantity) and protein content (quality) of feedgrains. A differential system is developed to estimate the social costs of regulation while simultaneously considering both quantity and quality effects of a tax and/or a rationing policy. The results indicate that ignoring the quality effects of a proposed policy can lead to erroneous estimates of changes in factor use, output responses, and the social costs of regulation. Copyright 1998, Oxford University Press.

Impact of Machinery Ownership Costs on Risk Efficiency and Farm Organization

Risk efficient crop enterprise combinations are developed on the basis of fixed machinery ownership costs (depreciation, interest, taxes, insurance, and housing) as well as variable operating costs in the optimizing process using a mixed-integer risk programming model. Selected solutions optimized with (versus without) machinery ownership costs tend to be less diversified with larger-sized crop acreage that capitalize on lower per unit fixed costs. In addition, they show lower income variability at comparable levels of income.

Performance of Risk-Income Models Outside the Original Data Set

Selected risk programming solutions (i.e., profit maximization, Target-MOTAD, and MOTAD) are tested in an economic environment outside the data set from which they were developed. Specifically, solutions are derived from either a longer 10-year (1965-74) or shorter 6-year estimation period (1969-74), and then, they are tested for consistent risk-income characteristics over a later 10-year period (1975-84). Risk solutions estimated from earlier periods perform well in the later test period in spite of different economic conditions between time periods. However, favorable performance may be related to the specific example used in this analysis. Further testing for other farm situations is needed before general conclusions can be reached.

Relevancy of cash flow in firm financial management

The inadequacies of assessing business performance and credit worthiness by short run cash flow under conditions of inflation are stressed in this article. Because of the economic nature of traditional loan amortization, short-run cash flow cannot be relied on in gauging: (1) true business performance and (2) long-run repayment capacity. In addition, standard financial performance ratios using nominal flows are shown to be inadequate under inflationary conditions. This article stresses that business performance and credit worthiness analysis should be based on a real monetary basis. An example is provided to demonstrate the necessary modifications of nominal business flows to place the financial analysis on a real basis.