Progress 10/01/04 to 09/30/09
Outputs
OUTPUTS: Under the first objective of the project we investigated two primary areas. First, the role of foreign direct investment in the food industry and in the promotion of growth in developing countries was analyzed and presented at an international conference. One paper was disseminated as a food industry center working paper and two other papers are still in preparation for submission to journals. Second, an evaluation of the economic and financial impacts of a state-funded loan program on beginning farmers was published as a staff paper and has been submitted for publication in an applied economics jourmal. Another paper on the use of real options analysis to evaluate ethanol plant investments was disseminated as a staff paper and was also published in an agricultural finance journal. Also, the project report was submitted to the USDA for wider dissemination. Under the second project objective the focus has been on evaluating credit risk exposure and economic capital positions of agricultural lenders, and the use of credit risk management in agriculture. A journal paper was published on the use of credit risk portfolio models for identifying the appropriate level of economic capital in farm lending institutions. A second paper on credit risk migration was prepared and presented at a research conference and shared with a Farm Credit System bank. That paper was also published in an agricultural finance journal. A second paper focused on the joint impacts of default and loss given default through the business cycle on agricultural lenders. This work was presented to lenders in the Farm Credit System in the form of a staff paper and a journal paper is currently under preparation. A third paper on credit risk assessment methods was published in an agricultural finance journal. These ongoing efforts to publish reports and disseminate outputs to financial institutions and other clientele will continue under the new research project (NC-1177). PARTICIPANTS: Professor Glenn Pederson, M.Sc. Graduate Students: Derek Hoyt, Minh Wendt, Michael Pollei, Bryan Nelson, Roelof Nel, Peter Bartek, Andrew Behrens, Tianyu Zou, Jingzhe Xu, Nicholas Sakaimbo, Zihua Bian, Ph.D. Graduate students: Alexander Amati, Jose Diaz, Wonho Chung Partnering Financial institutions: AgStar Financial Services, ACA and AgriBank, FCB TARGET AUDIENCES: The audience for our credit risk management research is farm and rural financial institutions and their managers. In our microfinance research we are targeting the managers of the microfinance institutions, and the government agencies and international NGOs who sponsor and fund them. In our ethanol investment study we are communicating to the managers, farmers, and lenders who manage, own and finance these facilities. The foreign direct investment analysis is targeted to policymakers in developing countries and the managers of firms investing in those countries. Our analysis of the state-funded loan program for beginning farmers is state-level policymakers. PROJECT MODIFICATIONS: Nothing significant to report during this reporting period.
Impacts
The work on credit risk was greatly facilitated by the collaboration of several agricultural lenders and through presentations at finance industry conferences. Lenders who participated with us during the project provided both data and their expertise to develop the methods of analysis and to review the project results and reports. They have indicated that this work contributes to their capacity to measure risk and identify appropriate levels of capital to meet regulatory and market requirements. We continue to work with these lenders as a vehicle for dissemination of results and for ideas on further applied research. This collaboration makes the tools and methods we use and develop more accessible to them as analysts and decision makers. During the project we have seen some analytical tools being adopted and they have influenced the portfolio risk analyses and strategies of Farm Credit System associations. The study of the Minnesota beginning farmer loan program has been made available to the Rural Finance Authority and the findings are being considered as part of future program implementation. The work on foreign direct investment has less direct impact to this date, yet as these publications evolve we hope to have a positive effect on investment policy decisions, as global trends continue to shape international economic and financial development. Research on use of real options to analyze ethanol investments is expected to provide the industry with a useful tool to better evaluate the long-term risks associated with large scale plant investments. The industry has historically used relatively simple budgeting methods. The project findings and methods allow them to explicitly model and evaluate the market price and technological risks in these strategic investment decisions. The research results have been shared also with a major ethanol lender.
Publications
- Pederson, G. and L. Zech. 2009. Modeling credit risk in agriculture, Canadian Journal of Agricultural Economics. 57:169-185.
- Pederson, G. and T. Zou. 2009. Using real options to evaluate ethanol plant expansion decisions, Agricultural Finance Review. 69:23-35.
- Sakaimbo, N. and G. Pederson. 2009. Assessing the relationship between probability of default and loss given default in an agricultural loan portfolio, Staff Paper P09-11, November.
- Sakaimbo, N. K. 2009. Evaluating the role of loss given default in an agricultural loan portfolio, unpublished M.S. Plan A paper, 100p.
- Nel, R. and G. Pederson. 2009. Economic effects of Minnesotas basic and seller assisted loan program on farm profitability and investment, Staff Paper P09-10, July.
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Progress 01/01/08 to 12/31/08
Outputs
OUTPUTS: Agricultural credit remains one of the focuses of this project. A study is underway on credit risk migration using loan data from several Farm Credit Associations. The analysis is using entropy econometrics to evaluate risk migration in the context of borrower heterogeneity, where the underlying characteristics of borrowers who migrate and those who do not migrate are not observed. Panel data has been assembled covering 1997-2007, and the econometric analysis is beginning. A second study is also being initiated on the impact of increasing levels of loss given default on economic capital through the agricultural business cycle. This study will improve our understanding of how loss given default varies with the probability of default. A journal paper on farm lender portfolio credit risk and economic capital was submitted and accepted for journal publication. The paper evaluates the risk exposure of a Farm Credit Association under the Basel II Accord. We demonstrate the sensitivity of the institution-level capital position to alternative credit risk scenarios and estimates of loan default. A second focus of continuing research is on the economic impacts of international finance and investment decisions. We are submitting a journal paper which evaluates the important roles of ownership and control in dynamic foreign investment decisions, economic spillovers and policies toward foreign investments in the host (recipient) countries. In another study we are completing research on the impact of host country population health on foreign direct investment using a cross-country panel data set. The results support the hypothesis that improved health increases inward foreign investment flows, but we also decompose the direct (expenditure) and indirect (productivity) effects of country-level differences in health to show that low- and middle-income countries gain more from public health investments. In a third area, our research efforts continue on the microeconomic impacts of microfinance institutions in developing countries. We are initiating a project that focuses on identifying the factors that result in differential rates of income growth among the clients of microfinance institutions in developing countries. The conceptual model has been developed and the analysis will look at the impacts of human capital and technology in creating these differential growth rates. The research will continue with an econometric analysis of micro-entrepreneur data. The third focus of the research project has been on decisions to invest in ethanol producing facilities. The research uses real options analysis to determine the desirability of investing for expansion or choosing among alternative plant technologies (which vary in their energy efficiencies) under conditions of uncertainty about energy prices and feedstock prices. A journal paper has been submitted and accepted based on this study. A fourth study area is on the risk management aspects of weather derivatives. This is a new project and we are currently building the weather model and the crop yield model components using Minnesota data. PARTICIPANTS: Glenn Pederson, professor, Tianyu Zou, graduate student, Jingzhe Xu, graduate student, Nicholas Sakaimbo, graduate student, Zihua Bian, graduate student, Alexander Amati, former graduate student, Jose Diaz, graduate student, Wonho Chung, graduate student TARGET AUDIENCES: The audience for our credit risk management work is farm and rural financial institutions and their managers. In our microfinance research we are targeting the managers of the microfinance institutions and the international NGOs who sponsor them. In our ethanol study we are trying to communicate new methods of financial analysis to the managers, farmers, and lenders who manage, own and finance these facilities. The foreign direct investment analysis is targeted to policymakers in developing countries. PROJECT MODIFICATIONS: Not relevant to this project.
Impacts
Published reports on agricultural credit risk analysis continue to be presented to farm financial institutions. The findings have influenced the loan portfolio strategies and methods of analysis of several Farm Credit Associations. These studies are timely and match well with the ongoing research efforts of district Farm Credit Banks to better understand and manage credit risk in the farm sector. Our work on foreign investment is in an early stage. As publications are produced we believe that the findings will highlight the important role that foreign direct investment has had in promoting international economic growth and social development and what policymakers can do to promote positive impacts in the host countries. Published research on use of real options to analyze ethanol investments has provided lenders with a useful tool to better evaluate the long-term risks associated with lending to these large-scale investment projects. The research results have been shared with one major ethanol lender in the Midwest. While financial managers in the ethanol industry have not historically used the real options approach, this study points out the advantages of using real options to explicitly model and evaluate the market price and technological risks in these strategic investment decisions.
Publications
- Zou, T. 2008. Using Real Options to Evaluate Investment in Ethanol Facilities, unpublished M.S. Plan B paper, 98p.
- Zou, T. and G. Pederson. 2008. Using Real Options to Evaluate Investment in Ethanol Facilities, Staff Paper P08-6, July.
- Xu, J. 2008. Health as a Determinant of Foreign Direct Investment: A Cross-Country Analysis, unpublished M.S. Plan B paper, 62p.
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Progress 01/01/07 to 12/31/07
Outputs
OUTPUTS: Several publications are being completed on agricultural credit. A study was published on credit risk migration using loan data from several Farm Credit Associations. The results show a trend reversal pattern over time, particularly among ratings that reflect higher risk. A journal paper was revised and submitted for journal publication on the impact of credit risk exposure on the level of economic capital of farm lenders. We develop an approach to modeling the risk exposure of a Farm Credit Association under the Basel II Accord and demonstrate the sensitivity of the institution-level capital position to alternative credit risk scenarios and estimates of default. A project continues to identify the determinants of commercial bank participation in the Farmer Mac II secondary market. Bank-level data is being assembled and the empirical analysis is beginning. Second, research is continuing on the determinants of foreign direct investment. A journal paper was submitted and is
now in revision on the set of factors that make multi-national food manufacturing firms more likely to invest abroad. We are also writing a journal paper which evaluates the important roles of ownership and control in dynamic foreign investment decisions, economic spillovers and policies toward foreign investments in the host countries. We are also initiating research on the impact of host country health (the economic burden of disease) on foreign direct investment using a cross-country panel data set. Third, research continues on the microeconomic impacts of microfinance institutions in developing countries. We are initiating a project (a Ph.D. thesis) that will focus on identifying the factors that result in characteristic diminished income growth among the clients of microfinance institutions in developing countries. The research will provide an econometric analysis of micro-entrepreneur data. Fourth, research is continuing on decisions to invest in ethanol producing facilities.
The research uses real options analysis to determine the desirability of investing for expansion or choosing among alternative plant technologies (which vary in their energy efficiencies) under conditions of uncertainty about energy and feedstock prices.
PARTICIPANTS: Glenn Pederson, professor; Andrew Behrens, graduate student; Peter Bartek, graduate student; Tianyu Zou, graduate student; Alexander Amati, graduate student; Jose Diaz, graduate student; Kayla Hertel, graduate student; Jingzhe Xu, graduate student
TARGET AUDIENCES: In the area of credit risk management we focus on farm and rural financial institutions and their managers. In the area of microfinance institutions (MFIs) we target managers of MFIs in developing countries and the international NGOs who sponsor them. In the ethanol industry we target the managers and farmers who own and manage these investments. In the area of foreign direct investments we target policymakers who develop and implement foreign investment policies in less developed countries.
Impacts
Reports that focus on credit risk analysis have been published and presented to farm financial institutions. These findings have influenced the portfolio risk strategies and methods of analysis of several Farm Credit Associations and are part of the ongoing research efforts of district Farm Credit Banks to better understand and manage credit risk. The work on foreign direct investment is still in the publication stage. Yet, we expect that the results will have an impact on policy discussions as foreign investment continues to be a major factor that shapes global economic and social development. Research on use of real options to analyze ethanol investments is in the prepublication phase, yet it is expected to provide the industry with a useful tool to better evaluate the long-term risks associated with large scale plant investments. The industry has historically used simple cash budgeting methods to look at alternative scenarios. The real options approach will allow
them to explicitly model and evaluate the market price and technological risks in these strategic investment decisions. The project report will be submitted to the USDA for wider publication.
Publications
- Behrens, A. and G. Pederson. 2007. An Analysis of Credit Risk Migration Patterns of Agricultural Loans, Agricultural Finance Review, 67(1):87-98.
- Bartek, P. 2007. Bank Efficiency and Macroeconomic Performance: Evidence from 19 Transition Countries, unpublished M.S. Plan B paper, 110 p.
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Progress 01/01/06 to 12/31/06
Outputs
Several publications were written on agricultural credit. One study measured the impacts of the Rural Finance Authority (RFA) loan program on profitability and investment behavior of beginning Minnesota farmers. The study found positive impacts from better access to RFA financing. We identified aspects of the program that could improve financial access and performance of credit rationed farmers and the results were presented to the RFA. A study was completed on credit risk migration using loan data from several Farm Credit associations. The results show a trend reversal pattern over time, particularly among ratings that reflect higher risk. Several loan-level and environmental determinants of credit risk migration were identified. The results have been presented to farm lenders and are being published. A literature review was published on credit risk analysis covering the period 1960-present. A journal paper is being revised and submitted on the impact of credit risk
exposure on the level of economic capital in the Farm Credit System. We analyze aspects of modeling risk exposure under the Basel II Accord and measuring institution level capital positions. A new project is being initiated to identify the determinants of commercial bank participation in the Farmer Mac II secondary market. The empirical analysis is under way. Second, research is being completed on foreign direct investment. Research on investments by food manufacturing firms identifies the set of factors that make multinational enterprises more likely to invest abroad was published. A Ph.D. thesis has evaluated the important roles of ownership and control as they influence dynamic foreign investment decisions, economic spillovers and policies toward foreign investments in the host countries. These research results are new to the professional literature and journal publications are being developed. Third, research continues on the microeconomic impacts of microfinance institutions in
developing countries. A journal paper was accepted for publication on an analysis of the access of rural households in Uganda to formal financial institutions. The findings show that improved access does not greatly affect the propensity to save, but it alters the composition of savings and the willingness of households to hold illiquid (real) assets. A new project has been started which will focus on identifying the factors that result in diminished income growth performance among the clients of microfinance institutions in developing countries. Fourth, a research paper has been completed on the potential for use of weather derivatives (options) to manage crop production (yield) risk. The initial empirical results for Minnesota indicate that the potential for reducing corn revenue variability is rather small. This research will look at alternative ways of modeling production risk and pricing the weather option contracts. Fifth, research is being initiated on the analysis of
investments in ethanol producing facilities. It will emphasize the role of real options analysis in determining the desirability of these large scale investments under conditions of uncertainty about markets and technology.
Impacts
Several of the reports on credit risk analysis have been published and presented to farm financial institutions. The findings have already been adopted and they have influenced the portfolio risk strategies and methods of analysis of several Farm Credit System associations. The study of the Rural Finance Authority has been made available and its results are being considered by the agency for future program implementation. The work on foreign direct investment is just being published, yet it is expected to have a positive effect on policy discussions, as investment and globalization trends continue to be major factors in shaping economic and social development in the U.S. and internationally.
Publications
- Behrens, A. 2006. Credit Risk Migration Patterns of Agricultural Loans, unpublished M.S. Plan B paper, 108 p.
- Behrens, A. and G. Pederson. 2006. Credit Risk Migration Patterns of Agricultural Loans, Proceedings of Regional Research Committee NC-1014 Meeting, Purdue University.
- Gustafson, C., G. Pederson, and B. Gloy. 2006. Credit Risk Assessment, Agricultural Finance Review, Special Issue.
- Nel, R. 2006. Measuring the Effect of Basic and Seller Assisted Loans on Beginning Farmer Profitability and Investments, unpublished M.S. Plan B paper, 89 p.
- Nelson, B. 2006. An Analysis of the Mutual Fund Portfolio Choices of Households, unpublished M.S. Plan B paper, 123p.
- Pollei, M. 2006. An Empirical Analysis: Hedging Southern Minnesota Corn Output Risk with Weather Derivative Contracts, unpublished M.S. Plan B paper, 87 p.
- Wendt, M. and G. Pederson. 2006. Foreign Direct Investment in the Food Manufacturing Industry, Working Paper 06-04, The Food Industry Center.
- A. Amati. 2006. Foreign Ownership and Control of Direct Investments, unpublished Ph.D. thesis, 161 p.
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Progress 01/01/05 to 12/31/05
Outputs
Research continues on foreign direct investment. An M.S. research paper investigated the determinants of investments by food manufacturing firms. Capital-intensive firms with higher levels of intangible assets, profitability, and knowledge capital are more likely to be a multinational enterprise and they have higher propensities to invest abroad. Diverse enterprises with these characteristics tend to have higher levels and intensities of foreign investment than other multinational firms. A Ph.D. thesis is currently investigating the role of financing and ownership on the determinants and spillovers of foreign investments. Second, an evaluation of the impacts of the Rural Finance Authority on the profitability and investment behavior of Minnesota farmers is in the analysis phase. Data collection was delayed during 2005. This will be published as an M.S. research paper. Third, several publications are being completed on credit risk analysis. A conference paper was
written on credit risk migration using loan data from a Farm Credit Association during 1997-2004. The results confirm that loan risk ratings follow a trend reversal pattern. Several farm-level and macroeconomic determinants of risk migration are identified. These results are being published and presented to the financial institutions who participated in the study. A literature review was written on credit risk analysis covering the period 1960-present. This journal paper will be published in 2006. Another journal paper is expanding on an earlier analysis of the impact of credit risk exposure on the level of economic capital in the Farm Credit System. Credit risk models are compared and the application of CreditRisk+ to association data reveals that the existing level of capital in the representative association is not optimal. The paper raises questions about the appropriate capital policy. Fourth, research continues on the impacts of microfinance institutions in developing countries.
A journal paper was completed on an analysis of the access of rural households in Uganda to formal financial institutions. The results show that better access does not materially affect the propensity to save, but it does alter the composition of savings and the willingness of households to hold illiquid assets. Another paper is being completed on the determinants of investment in fixed assets in food manufacturing businesses in Uganda during 1990-2003. Firm-level and macroeconomic variables are found to influence the level and rate of change of investment in fixed assets. Fifth, an M.S. research paper is being completed on the potential for use of weather derivatives to manage production (yield) risk in Minnesota. The detrended deviations in corn yield are not characterized by high correlations with deviations from historic averages for the weather variables (temperature and rainfall) at the county level. Thus, the observed decrease in the standard deviation in a farm revenue stream
is likely to be marginal. Hedging with weather derivative contracts does tend to decrease revenue variability, but the decrease is rather small.
Impacts
This project is at an early stage of work. Several of the reports are just being completed and the results will be published and disseminated to financial institutions during the next year. It is expected that the findings on credit risk analysis will have direct impact on financial institutions serving agriculture, as they continue to develop and refine their capital strategies and credit risk models in response to the implementation of the Basel II accord.
Publications
- A. Amati and G. Pederson (2005). Some Aspects of Small Firm Research in Food, Agriculture and the Environment: Economic Issues, E. DeFranceso, L. Galetto and M. Thiene (eds.), Universita di Padova, Dipartimento Territorio e Sistemi Agroforestali, Milano Italy.
- Pederson, G. (2005). Enhancing Financiera Rurals Medium-Term Strategy, Report to USDA Foreign Agriculture Service, Washington, D.C.
- Wendt, M. (2005). Determinants of Foreign Direct Investment in the Food Manufacturing Industry, unpublished M.S. Plan B paper, 86 pp.
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Progress 01/01/04 to 12/31/04
Outputs
Under the first project objective three topics were investigated. First, several conference papers were prepared on foreign direct investment; the role of multinationals and the role of small firms. This included the food manufacturing and retailing industry in the U.S. and Europe. Some of these papers will be revised for publication in 2005. Second, an overview was published on the role of financial institutions and policies in promoting rural development in transition economies. Third, an evaluation of the impacts on beginning farmers of the Minnesota Rural Finance Authority was initiated. Data collection and analysis will begin in early 2005. Under the second project objective the focus has been on evaluating the use of credit risk management in agriculture. A journal paper was written and submitted on the use of credit portfolio analysis for identifying the appropriate level of economic capital in Farm Credit System associations. This area of work will continue in
2005 with further model development and data collection. A second paper is under preparation which provides a review of the credit risk assessment literature. This paper will be submitted for journal publication.
Impacts
This project is in the early stages of work. The analysis of credit risk is expected to provide financial institutions with additional tools to evaluate their exposures to credit risk and potential losses. This work will improve their capacity to measure risk and identify appropriate levels of capital to meet regulatory and market requirements.
Publications
- Pederson, G. and W. Pyle (2004). Introduction to Finance and Credit, in Building Market Institutions in Post-Communist Agriculture: Land, Credit and Assistance. D. Macey, W. Pyle and S. Wegren (eds.), Lexington Books, Boulder.
- Hoyt, D. (2004). The Implications of the Correlation of Prices on the Use of Mechanical Trading Methods, unpublished M. S. Plan B paper., 81 pp.
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