Agricultural Finance

Finance Versus Financial Management Charles B. Moss and Michael A. Gunderson Lecture I: Introduction to Agricultural Finance Table of Contents De? ning Agricultural Finance Finance Versus Financial Management What is Agricultural Finance? Economics and Agricultural Economics De? ning Finance De? ning Agricultural Finance De? ning Agricultural Finance? What is Agricultural Finance? Agricultural ? nance is typically taught in agricultural economics or agribusiness departments in colleges of agriculture. Agricultural ? nance is then de? ned somehow based on Economics Finance Agriculture.

Charles B. Moss and Michael A. Gunderson Lecture I: Introduction to Agricultural Finance Table of Contents De? ning Agricultural Finance Finance Versus Financial Management What is Agricultural Finance? Economics and Agricultural Economics De? ning Finance De? ning Agricultural Finance Economics and Agricultural Economics Following Becker economics is the study of the allocation of scarce resources to meet unlimited and competing human wants and desires. Becker has used economic theory to study such factors as marriage, fertility, and even suicide.

Agricultural economist reduce the scope of their concer to questions involving agriculture (including production decisions, implications of agricultural policy, and agricultural trade), natural resources, and envionmental issues. Agricultural economics tends to be more applied, less concerned about the development of theory and more concerned with the analysis of policy. Charles B. Moss and Michael A. Gunderson Lecture I: Introduction to Agricultural Finance Table of Contents De? ning Agricultural Finance Finance Versus Financial Management What is Agricultural Finance?

Economics and Agricultural Economics De? ning Finance De? ning Agricultural Finance De? ning Finance A frequent criticism of neoclassical economics is that it is sterile. By focusing on optimality conditions and e? ciency, modern microeconomics has removed the economic agent. Following Mises, the description of economcis abstracts away from the particulars of human action. Similarly, according to Hicks economics tends to be timeless. The production function representing the transformation of inputs into outputs typically does not reference time.

Time is an extremely important facet of agricultural production. Most agricultural production processes involve biological processes which occur over time. Most production processes are less than instantaneous. They require the creation of intermediate inputs which must be stored and transported. Charles B. Moss and Michael A. Gunderson Lecture I: Introduction to Agricultural Finance Table of Contents De? ning Agricultural Finance Finance Versus Financial Management What is Agricultural Finance? Economics and Agricultural Economics De? ning Finance De?

ning Agricultural Finance De? ning Finance – Continued In fact, the investment in plant and equipment used in the production process can be viewed as the creation of intermediate products It is the existence of these intermediate products (along with the natural means of production such as land) that gives de? nition to the ? eld of ? nance. Charles B. Moss and Michael A. Gunderson Lecture I: Introduction to Agricultural Finance Table of Contents De? ning Agricultural Finance Finance Versus Financial Management What is Agricultural Finance?

Economics and Agricultural Economics De? ning Finance De? ning Agricultural Finance De? ning Finance – Continued The use of these longer-term inputs raises the question of ownership or control In agriculture, farmers must gain control of these longer-term inputs as a part of the production process. The farmer buys inputs (seed, fertilier, and hires labor), pays for the services of machinery (such as tractors and combines) used in the productive process, and pays for the services of land (i. e. , rent) as a part of the productive process.

These inputs and services can be acquired either through equity (embodied in the ownership of the assets, acquired with money, or acquired by leasing someone else’s equity [borrowing]) or leasing someone else’s equity claim. These markets for equity [either debt or ownership] gives rise to the ? eld of ? nance Charles B. Moss and Michael A. Gunderson Lecture I: Introduction to Agricultural Finance Table of Contents De? ning Agricultural Finance Finance Versus Financial Management What is Agricultural Finance? Economics and Agricultural Economics De? ning Finance De?

ning Agricultural Finance De? ning Agricultural Finance The di? erence between Corporate Finance as taught in the business school and Agricultural Finance as typically taught in the college of agriculture is the equity markets in which ? rms operate and to some extent by the specialized asset base of a most agricultural ? rms. Corporations raise money in equity markets such as the New York Stock Exchange. These organizations can raise money by either selling stocks or bonds, in addition to borrowing from banks using standard loan or mortgage instruments.

The value of each instrument (stocks and bonds) are determined by the market of investors based on a variety of sources of information including required publications of ? nancial statements. Charles B. Moss and Michael A. Gunderson Lecture I: Introduction to Agricultural Finance Table of Contents De? ning Agricultural Finance Finance Versus Financial Management What is Agricultural Finance?

Economics and Agricultural Economics De? ning Finance De? ning Agricultural Finance De? ning Agricultural Finance – Continued Continued Farm ? rms are typically organized as Sole Proprietorships whose source of capital includes the owner’s resources (i.e. , savings) and loans or mortgage borrowing from banks and similar entities. While it is conceivable that some farm ? rms may access equity markets, some informational aspects of agricultural production favor organization as sole proprietorships.

Charles B. Moss and Michael A. Gunderson Lecture I: Introduction to Agricultural Finance Table of Contents De? ning Agricultural Finance Finance Versus Financial Management Finance Versus Financial Management In addition to the di? erences between agricultural ? nance and ? nance, a distinction of degree can be made between the study of ?

nance and the study of ? nancial management. The analysis of asset ownership contains two concepts The analysis of asset values in production. The analysis of the equity market for owning assets. In the old accounting identity A=E+L (1) where A are the ? rm’s assets, E is owner equity, and L is the level of debt (or liabilities). Anticipating the Modiglianni-Miller theorem, the value of the ? rm’s assets is determined by the price of the ? rm’s outputs and the cost of other inputs which are independent of ownership. Charles B. Moss and Michael A. Gunderson Lecture I: Introduction to Agricultural Finance.

Table of Contents De? ning Agricultural Finance Finance Versus Financial Management Finance Versus Financial Management – Continued Financial management involves balance sheet decisions within the ? rm. Should the farmer buy a new machine – does the addition of the machine increase the ? rm’s asset values over time? Ownership decisions – should the machine be purchased using debt or equity? Financial Economics typically involves the e? ect of these individual decisions on society’s capital markets. Charles B. Moss and Michael A. Gunderson Lecture I: Introduction to Agricultural Finance.