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Value Of Social Capital To Mid-Sized Northern Plains Farms

  • Gustafson, Cole R.

As farms increase in size, operators often face the difficult decision of remaining loyal to local merchants or obtaining volume discounts from more distant input suppliers. When farmers bypass local merchants and buy inputs in volume from a wholesaler, they often realize a price discount but forego many services including credit forebearance. In essence, when farmers buy locally, they pay higher prices, which decreases profits and increases financial risk, but generates social capital which can be drawn upon during periods of economic adversity later in the form of credit forebearance. A theoretical model of farm financial risk evaluates borrower behavior in light of cash flow constraints, volume discounts, and social capital. Monte-carlo simulation was used to empirically apply the model to a representative 2,000-acre Northern Plains crop farm. The stochastic simulation model embodied local price and yield distributions, tax policy, and financial repayment risks. A survey of local input suppliers and lenders provided key information on levels of price discount and credit forebearance. Competition among suppliers resulted in less difference between retail and wholesale prices than expected a priori. Results of the analysis delineated the financial risks involved and value of social capital received in the form of credit forebearance. The distribution of year-end available funds when inputs were purchased locally had a slightly lower mean and longer left tail. While a longer and bulkier left tail appeared to present the farm with additional financial risk, it was actually the result of additional borrowing arising from credit forebearance. If forebearance were not available, the firm would have been bankrupt. In this model, bankruptcy occurred with 2.6 percent frequency. Personal exemptions provided under statutory bankruptcy provisions altered the shape of the left tail.

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File URL: http://purl.umn.edu/23677
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Paper provided by North Dakota State University, Department of Agribusiness and Applied Economics in its series Staff Papers with number 23677.

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Date of creation: 2004
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Handle: RePEc:ags:nddsps:23677
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  1. Robison, Lindon J. & Siles, Marcelo E. & Schmid, A. Allan, 2002. "Social Capital And Poverty Reduction: Toward A Mature Paradigm," Agricultural Economic Report Series 10941, Michigan State University, Department of Agricultural, Food, and Resource Economics.
  2. Mogues, Tewodaj & Carter, Michael R., 2004. "Social Capital and the Reproduction of Inequality in Socially Polarized Economies," Staff Paper Series 476, University of Wisconsin, Agricultural and Applied Economics.
  3. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2000. "The Role of Social Capital in Financial Development," CRSP working papers 511, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  4. John Maluccio & Lawrence Haddad & Julian May, 2000. "Social capital and household welfare in South Africa, 1993-98," Journal of Development Studies, Taylor & Francis Journals, vol. 36(6), pages 54-81.
  5. Saxowsky, David M. & Gustafson, Cole R. & Ali, Mir B. & Braaten, Joan M. & Rotering, Jeff, 1987. "Economic Impact of North Dakota Laws that Permit Delayed or Partial Repayment of Agricultural Debt – July 1, 1986," Agricultural Economics Reports 23462, North Dakota State University, Department of Agribusiness and Applied Economics.
  6. Shideler, David W., 2004. "Determinants Of Individual Social Capital Investment," 2004 Annual meeting, August 1-4, Denver, CO 20224, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  7. Lindon J. Robison & Jan L. Flora, 2003. "The Social Capital Paradigm: Bridging across Disciplines," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 85(5), pages 1187-1193.
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