Doctoral Dissertations

Date of Award

6-1982

Degree Type

Dissertation

Degree Name

Doctor of Philosophy

Major

Agricultural Economics

Major Professor

Luther Keller

Abstract

The general objectives of the study were: 1) the development of a firm growth model consistent with economic theory and which approximated technological production possibilities faced by farmers in a given area, 2) to develop an analytical framework sufficient for quantitative investigation of both the decision-making and the planning processes and 3) to examine the effects of changes in selected growth variables, viz., equity levels, interest rates, land values, off-farm investment opportunities, land acquisition methods, crop yield variability and risk preference levels held by the farmer on the growth process of a typical farm firm in Western Tennessee. A typical farm firm was synthesized from available data applicable for the Deep Loess Soils Area of Tennessee. The typical farm as defined had an initial land base of 350 total acres with 252 acres or 72 percent classified as openland. The farm operator was assumed to supply approximately 2,500 hours of labor annually, hiring additional seasonal or part-time labor as needed. Capital could be borrowed for land purchase by amortized loan with restrictions based on equity ratios of either 40 or 60 percent. Operating capital could be borrowed without limitation. Additions to the land base could be made using credit and an amortized loan, by outright cash purchase or by cash rental. Firm growth was measured by changes in net worth and total acres operated. Growth in net worth could occur as increased equity in land and machinery, investment in an off-farm savings alternative or as cash on hand at the end of the planning horizon. The growth variables analyzed were: two rates of interest on the off-farm investment alternative, two equity ratios, three rates of interest on borrowed operating capital, three rates of interest on amortized land purchases, six time sequences of yield variability and three risk preference levels. When an off-farm investment alternative earning eight percent interest was included net worth accumulation increased by 33 percent over an eight-year period. No additional land was acquired and all net worth growth accrued through the off-farm investment. When the off-farm investment option was eliminated, growth in net worth over the eight-year period was 29 percent and involved substantial expansion by land. A reduction in interest charges on borrowed operating capital resulted in a 22 percent increase in total openland acreage. Reducing the interest charge on amortized land purchases resulted in an increase in total openland acreage of 26 percent from the initial level of 252 acres. A reduction in per acre land values from $1111 to $835 per acre resulted in an increase in total openland acreage of 68 percent. Associated net worth increased 31 percent. The effects of year-to-year yield variability were, in general, of little consequence. Net worth increased 28 percent and total openland acreage increased 22 to 27 percent among the six time sequences of yield variability investigated. Net worth accumulation over an eight-year period was 28 percent for the high risk preference as compared to 21 percent for the risky and low risk preference levels. At the high risk level, acreage operated increased by 19 percent over the eight-year period. No expansion of land occurred at the risky and low risk preference levels. Prom this study, it would appear that farmers in this particular area of West Tennessee would experience highest potential for farm expansion through purchase of land, either by outright cash purchase or by amortized loan and specialization of soybean production. Off-farm returns on capital funds also seem to yield higher returns than on-farra investments.

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