Epsilon Archive for Student Projects

Abstract

The agricultural sector is characterized by larger crop farms and more extensive livestock
production. The efficiency improvement is partly a result from a stronger competition in the
global market. The agricultural products need to be produced at a lower cost than competitors
in order to survive as a farmer. The solution is larger firms that benefit from economies of
scale. This brings large investments that create a greater need for leverage and closer relation
to the credit agency. What influences the farmers’ decision to increase leverage and enact one
comprehensive investment plan? Those who choose to make the investment are dedicated to
develop their business.

The aim of this master thesis is to identify how the farmer's quest to develop their farms
impact leverage and choice of credit agency and what criteria for the agency that are valued
by the farmer.

In addition, the study attempt to analyze how higher leverage affects farmer's risk
management strategies.

In order to answer the aim of this thesis, seven case study interviews are conducted among
farmers in the agriculture intensive areas in Sweden. These interviews form the core of this
study.

Some of the conclusions that emerge from this study are that farmers want to create a farm
they feel satisfied and proud with rather than create any fortune. This is because the farm
often has been in the family's possession for several generations. To expand the farm is also
an opportunity to hire staff and get more time off. The quest to develop the farm is reflected
more by soft goals, rather than economic motives. However the economic result is a
precondition for achieving these goals and is often a sub goal to achieve a purpose in the
longer term. The main ability of development lies at the farmer. However guidance, advice
and external discussions contribute to the farmers’ ability to develop the business in a
successful manner.

It is not the economic factors that have the highest priority of the farmer before an investment.
It is rather criteria attributed to the production process that are important. Reducing hours of
work and to improve the production processes is primary. This is obviously a part aim to
achieve a higher economic result. Before the investment process, many farmers have
encountered obstacles in order to borrow capital. They were then forced to switch bank
because of their strong determination and desire to develop their farm.

There are soft values that are valued highest by the farmers in their relations with the credit
agency, such as personal contact, knowledge of the agricultural sector and confidence
between the parties involved. Almost all famers experience a risk with their business, but
perceive that it is acceptable in relation to what they managed to create. Ambition and the
willingness of farmers to diversify and spread risks are obvious. There are however obstacles
such as lack of capital and time to engage in multiple enterprises on the farm. The leverage of
farmers in this study is in the most cases high. Five out of seven has a debt-equity ratio of
75% or more. They are considered to be risk prone by means of their debt leverl but they also
take risks with its interest rate policy even if the aim is to reduce the risk exposure.