John R. Brake

Application of Portfolio Theory to Farmer and Lender Behavior

Randomness of commodity output and prices in agriculture are well-known phenomena that have plagued both farmers and their lenders as they develop plans and financial programs for the coming year. The same phenomena have plagued researchers who attempt to model the farmer-lender relationships for improved explanations of farmer and lender behavior. Early decision models of resource allocation under risk sought to maximize expected returns. However, in the early 1700s, Bernoulli demonstrated the irrationality of this criterion in explaining gambling behavior. More recently, portfolio theory, as developed by Markowitz and Tobin with extensions by Sharpe and Lintner, has improved our ability to analyze farmer and lender behavior under risk by considering variance as well as the expected value of returns. This paper discusses developments in portfolio theory, reviews its application to farmer and lender behavior, considers its limitations, and suggests several extensions to account for asset liquidity, liquidity risk, and portfolio adjustments. We conclude with recommendations for future application of portfolio theory to farmer and lender behavior.

Fertilizer Demand in the South Atlantic and East North Central Regions

The chief objective of the North Carolina study was the derivation of equations for predicting fertilizer consumption in the year ahead for two regions of the United States.l It was expected that such prediction equations could be used, with the judgment of fertilizer producers, to arrive at more accurate forecasts of fertilizer consumption than previously could be made. The South Atlantic2 and East North Central regions were chosen because of differences in their historical pattern of increase in consumption and because they are the two regions of greatest fertilizer consumption in the United States. Predictive variables considered in this study fall into five general classes: (1) the price of output, (2) the price of the input specifically being considered, (3) the prices of associated (substitutable or complementary) inputs, (4) the units of the fixed input to which the variable input is applied, and (5) factors which limit the farm firm in attaining the equilibrium conditions.