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Is geographic diversification sufficient to limit contract grower risk?

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  • Geyser, Mariette
  • Louw, Andre
  • Botha, L.
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    Abstract

    Lending and financial institutions have looked for a variety of ways to expand their portfolios into agriculture, but because of the risks associated with lending to farmers who lack traditional forms of collateral, they face price and yield risks, causing these inroads to be limited. Market-based instruments are readily available for price risk. Organised exchanges offering the most basic of these instruments, futures and options, have operated for a long time, providing transparency to the market and low-cost risk transfer tools for those able to access them. While the use of price risk management instruments is an incomplete solution, it has sufficient merits on its own and will make the overall burden of risk more bearable. The use of these instruments and multi-peril crop insurance products is expensive and does not provide full protection for financial lending institutions to limit their credit risk exposure. This article determines whether geographic diversification would be sufficient as a risk management tool for lending institutions to limit their credit risk.

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    File URL: http://purl.umn.edu/49163
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    Bibliographic Info

    Article provided by Agricultural Economics Association of South Africa (AEASA) in its journal Agrekon.

    Volume (Year): 48 (2009)
    Issue (Month): 1 (March)
    Pages:

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    Handle: RePEc:ags:agreko:49163

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    Web page: http://www.aeasa.org.za/
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    Related research

    Keywords: Geographic diversification; Contract grower; Risk; Lending; Rainfall; Yield; Agricultural Finance;

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    1. Nelson, R. A. & Holzworth, D. P. & Hammer, G. L. & Hayman, P. T., 2002. "Infusing the use of seasonal climate forecasting into crop management practice in North East Australia using discussion support software," Agricultural Systems, Elsevier, vol. 74(3), pages 393-414, December.
    2. Podesta, Guillermo & Letson, David & Messina, Carlos & Royce, Fred & Ferreyra, R. Andres & Jones, James & Hansen, James & Llovet, Ignacio & Grondona, Martin & O'Brien, James J., 2002. "Use of ENSO-related climate information in agricultural decision making in Argentina: a pilot experience," Agricultural Systems, Elsevier, vol. 74(3), pages 371-392, December.
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