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Interest rate premiums and capital rationing in agriculture: a look at the effects of multi-regional banking in Texas
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As banking in Texas continues to move away from the local (rural) bank to a multi-regional, more diverse banking system, agriculture may be confronted with fierce competition to acquire operating loans. As multi-regional banks expand their asset base outside a single region they may reduce their risk by choosing safer/higher yielding investments in other regions. Therefore, an agricultural firm will not only have to compete with the consumer, real estate, and commercial lending sectors within its own region, but may be in competition with potentially higher return, less risky investments in agriculture, consumer, real estate, and commercial loans in other regions as well. This analysis developed a mean-variance model to analyze the risk-efficient portfolio for a multi-regional bank in Northwest Texas. A whole farm simulation model was used for simulating the macro-credit situation and the distributions of prices and yields for three farms under three different debt levels. The whole farm simulation model determined the returns to the lender from agricultural loans. Macroeconomic variables and ordinary least squares regression were used to project nonagncultural returns to the lender. Interest rate premiums were charged to agricultural loans in an iterative fashion until a portion of the bank's portfolio was allocated to each type of farm/debt combination. This methodology was used under four different scenarios: (a) a base policy; (b) an alternative policy; (c) a base policy with a higher risk aversion parameter; and (d) a base policy with a lower risk aversion parameter. Results from the portfolio analysis indicated that capital rationing in agriculture was likely to occur over the planning horizon. Interest rate premiums charged to each farm allowed them to overcome the capital rationing problem. The alternative policy indicated that changes in farm policy that reduce agricultural income support programs will increase the interest rate premiums that high debt farmers must pay. Finally, results of the risk aversion parameter sensitivity indicated that a more risk averse decision maker will charge a smaller premium than a more risk averse decision maker.
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Includes bibliographical references.
Gray, Allan Wayne (1993). Interest rate premiums and capital rationing in agriculture: a look at the effects of multi-regional banking in Texas. Master's thesis, Texas A&M University. Available electronically from
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