IDEAS home Printed from https://ideas.repec.org/a/spr/jecfin/v49y2025i3d10.1007_s12197-025-09722-0.html
   My bibliography  Save this article

Farm liquidity and business risk from the risk balancing perspective: evidence from selected U.S. states

Author

Listed:
  • Emin Allahverdiyev

    (Oklahoma State University)

  • Xudong Rao

    (Texas A&M University System)

  • Andres Trujillo-Barrera

    (University of Idaho)

Abstract

We develop a model integrating liquidity and risk management within the classical risk balancing framework, incorporating the current ratio as a measure of liquidity reserves within the Dupont Identity. Two hypotheses are proposed: (1) The current ratio increases with higher business risk, reflecting precautionary behavior, and (2) The current ratio decreases with higher expected return to assets, reducing liquidity reserves. Using state-level data (1995-2019) from nine US states, we find that business risk is positively associated with liquidity reserves, as higher business risk leads farmers to hold greater liquidity reserves. We also find that the choice of the income measure influences both the magnitude and significance of the relationship between current ratio and business risk. Our findings provide insights for policymakers aiming to align risk management tools with farmers’ financial behavior.

Suggested Citation

  • Emin Allahverdiyev & Xudong Rao & Andres Trujillo-Barrera, 2025. "Farm liquidity and business risk from the risk balancing perspective: evidence from selected U.S. states," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 49(3), pages 710-732, September.
    • Handle: RePEc:spr:jecfin:v:49:y:2025:i:3:d:10.1007_s12197-025-09722-0
    DOI: 10.1007/s12197-025-09722-0
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s12197-025-09722-0
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s12197-025-09722-0?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Escalante, Cesar L. & Barry, Peter J., 2003. "Determinants of the Strength of Strategic Adjustments in Farm Capital Structure," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 35(1), pages 67-78, April.
    2. Calum G. Turvey, 2012. "Whole Farm Income Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 79(2), pages 515-540, June.
    3. Escalante, Cesar L. & Barry, Peter J., 2001. "Risk Balancing In An Integrated Farm Risk Management Plan," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 33(3), pages 1-17, December.
    4. Coble, Keith H. & Heifner, Richard G. & Zuniga, Manuel, 2000. "Implications Of Crop Yield And Revenue Insurance For Producer Hedging," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 25(2), pages 1-21, December.
    5. Jennifer E Ifft & Todd Kuethe & Mitch Morehart, 2015. "Does federal crop insurance lead to higher farm debt use? Evidence from the Agricultural Resource Management Survey (ARMS)," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 75(3), pages 349-367, September.
    6. Allen M. Featherstone & Charles B. Moss & Timothy G. Baker & Paul V. Preckel, 1988. "The Theoretical Effects of Farm Policies on Optimal Leverage and the Probability of Equity Losses," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 70(3), pages 572-579.
    7. Erwin Wauters & Yann de Mey & Frankwin van Winsen & Steven Van Passel & Mark Vancauteren & Ludwig Lauwers, 2015. "Farm household risk balancing: implications for policy from an EU perspective," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 75(4), pages 450-468, November.
    8. Peter J. Barry & C. B. Baker & Luis R. Sanint, 1981. "Farmers' Credit Risks and Liquidity Management," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 63(2), pages 216-227.
    9. repec:cup:jagaec:v:33:y:2001:i:03:p:413-420_02 is not listed on IDEAS
    10. Calum G. Turvey & Rong Kong, 2009. "Business and financial risks of small farm households in China," China Agricultural Economic Review, Emerald Group Publishing Limited, vol. 1(2), pages 155-172, January.
    11. Erwin Wauters & Yann de Mey & Frankwin van Winsen & Steven Van Passel & Mark Vancauteren & Ludwig Lauwers, 2015. "Farm household risk balancing: implications for policy from an EU perspective," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 75(4), pages 450-468, November.
    12. Robert A. Collins, 1985. "Expected Utility, Debt-Equity Structure, and Risk Balancing," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 67(3), pages 627-629.
    13. Feng Wu & Zhengfei Guan & Robert Myers, 2014. "Farm capital structure choice: theory and an empirical test," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 74(1), pages 115-132, April.
    14. Jennifer E Ifft & Todd Kuethe & Mitch Morehart, 2015. "Does federal crop insurance lead to higher farm debt use? Evidence from the Agricultural Resource Management Survey (ARMS)," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 75(3), pages 349-367, September.
    15. Feng Wu & Zhengfei Guan & Robert Myers, 2014. "Farm capital structure choice: theory and an empirical test," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 74(1), pages 115-132, April.
    16. Calum G. Turvey & Rong Kong, 2009. "Business and financial risks of small farm households in China," China Agricultural Economic Review, Emerald Group Publishing Limited, vol. 1(2), pages 155-172, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Rakhal Sarker & Truc Phan & Yu Na Lee & Alfons Weersink, 2022. "Business Risk Management Program and risk‐balancing in Ontario hog sector: An empirical analysis," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 70(4), pages 287-304, December.
    2. Adhikari, Sudip & Khanal, Aditya R., 2020. "Does higher business risk influence financial risk and induce savings among small agricultural operations? Findings from Tennessee," 2020 Annual Meeting, July 26-28, Kansas City, Missouri 304509, Agricultural and Applied Economics Association.
    3. Sarker, Rakhal, 2021. "Farm Safety Net Payments and Risk Balancing in Ontario Beef Sector," 2021 Conference, August 17-31, 2021, Virtual 315321, International Association of Agricultural Economists.
    4. Sarker, Rakhal, 2024. "Farm Policy Support Payments and Risk Balancing Phenomenon in Grain and Oilseed Sector in Ontario, Canada," IAAE 2024 Conference, August 2-7, 2024, New Delhi, India 344398, International Association of Agricultural Economists (IAAE).
    5. Uzeaa, Florentina Nicoleta & Poon, Kenneth & Sparling, David & Weersink, Alfons, 2013. "Farm Support Payments and Risk Balancing: Implications for Financial Riskiness of Canadian Farms," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150708, Agricultural and Applied Economics Association.
    6. Nathan D. DeLay & Brady Brewer & Allen Featherstone & David Boussios, 2023. "The impact of crop insurance on farm financial outcomes," Applied Economic Perspectives and Policy, John Wiley & Sons, vol. 45(1), pages 579-601, March.
    7. Khatami, Koohyar & Shadbolt, Nicola & Dooley, Anne & Gray, David, 2019. "New Zealand dairy farmers’ debt management strategies," 22nd Congress, Tasmania, Australia, March 3-8, 2019 345895, International Farm Management Association.
    8. Aderajew, Tamirat S. & Du, Xiaoxue & Pennings, Joost M. E. & Trujillo-Barrera, Andres, 2020. "Farm-Level Risk-Balancing Behavior and the Role of Latent Heterogeneity," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 45(2), March.
    9. Ifft, Jennifer & Kuethe, Todd & Morehart, Mitch, 2015. "Does Federal Crop Insurance lead to higher farm debt use? Evidence from the Agricultural Resource Management Survey," Working Papers 250011, Cornell University, Department of Applied Economics and Management.
    10. Sharma, Sankalp & Bairagi, Subir K., 2021. "Role of Producer Risk-preferences on Debt Undertaking: Evidence from Nebraska," 2021 Annual Meeting, August 1-3, Austin, Texas 313998, Agricultural and Applied Economics Association.
    11. Peter Slade, 2021. "The impact of price hedging on subsidized insurance: Evidence from Canada," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 69(4), pages 447-464, December.
    12. Ahrendsen, Bruce L. & Collender, Robert N., "undated". "Leverage Decisions In The Presence Of Bankruptcy Laws," 1989 Annual Meeting, July 30-August 2, Baton Rouge, Louisiana 270695, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    13. Pardeshi, Shefali & Loughrey, Jason & O'Connor, Declan, . "Farm Investment and Adoption of Fixed Milk Price Contracts on Irish Dairy Farms," German Journal of Agricultural Economics, Humboldt-Universitaet zu Berlin, Department for Agricultural Economics, vol. 73(1).
    14. Cai, Rong & Ma, Jie & Wang, Shujuan & Cai, Shukai, 2024. "Access to credit and scale efficiency: Evidence from family farms in East China," Economic Analysis and Policy, Elsevier, vol. 84(C), pages 1538-1551.
    15. Escalante, Cesar L. & Barry, Peter J., 2001. "Farm-Level Evidence On The Risk Balancing Hypothesis From Illinois Grain Farms," 2001 Annual meeting, August 5-8, Chicago, IL 20617, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    16. Featherstone, Allen M., 1990. "Optimal Capital Structure as Business Risk Changes," 1990 Quantifying Long Run Agricultural Risks and Evaluating Farmer Responses to Risk Meeting, January 28-31, 1990, Sanibel Island, Florida 271544, Regional Research Projects > S-232: Quantifying Long Run Agricultural Risks and Evaluating Farmer Responses to Risk.
    17. Collins, Robert A. & Karp, Larry S., 1993. "Lifetime Leverage Choice For Proprietary Farmers In A Dynamic Stochastic Environment," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 18(2), pages 1-14, December.
    18. Ifft, Jennifer & Jodlowski, Margaret, "undated". "Federal crop insurance and agricultural credit use," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 259120, Agricultural and Applied Economics Association.
    19. Marcu, Mihaela & Moss, Charles B., 2005. "The Effect of Consumption Based Taxes on Agriculture in the United States," 2005 Annual meeting, July 24-27, Providence, RI 19217, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    20. Harris, James Michael & Blank, Steven C. & Erickson, Kenneth W. & Hallahan, Charles B., 2010. "Off-farm Income and Investments in Farm Assets: A Double Hurdle Approach," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado 61531, Agricultural and Applied Economics Association.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets
    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy; Animal Welfare Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:jecfin:v:49:y:2025:i:3:d:10.1007_s12197-025-09722-0. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.