Epsilon Archive for Student Projects

Abstract

The agricultural sector has historically seen stable prices and a relatively constant demand for its products. Companies within the sector have generally had few loans and large sums of money tied in assets. The profitability of the companies has on the other hand been low. Together these circumstances have determined the creditors’ demands on the companies within the sector and have formed the rules and regulations that exist today. These regulations differ from those of companies outside the agricultural sector, especially regulations concerning mortgages on permanent property.

The situation, however, is developing towards more market adaptation, larger and fewer agricultural producers as well as more intense price competition. Hence the number of farmers has decreased which has reduced the number of buyers of agricultural property. A smaller number of potential buyers along with bigger market fluctuations have made it difficult for banks to determine future the market values of the assets of agricultural firms.

This problem has led to the project's aim, whether or not it is right for banks to apply a different set of rules and regulations specifically for agricultural firms. Subordinate to this aim the project is to determine which valuation method gives the creditor the best possible security.

To answer these questions and to reach a conclusion, a study of relevant literature was carried out. Concepts like risk and asymmetric information were studied as well as the farmers’ perception of business and factors that generate value. The literature review led to theoretical conclusions that shaped the questions of the empirical study. The empirical study is limited and concise and the purpose of it is to indicate whether the theoretical conclusions are correct or not.

The conclusions are that banks should take into consideration the increasing risk that the development of the farming industry is causing. Creditors should pay more attention to the business managers' achievement capacity since this clearly reflects upon the performance of smaller companies. The banks should increase their insight on the firms’ cash flow as this often reflects companies’ economic status more accurately than for example return on equity. Since the number of farmers decreases, banks should consider being more cautious when it comes to alternative uses of assets when they are used as loan collateral, particularly larger buildings used for animal production.