External equity financing of production agriculture

Typescript (photocopy).Capital accumulation in American agriculture has undergone an evolution over the last century. The increasing substitution of capital for labor, new technologies, and global product and financial markets, have made it more difficult for farmers to accumulate sufficient equity resources, and managerial and financial skills, to maintain a successful farming operation. The primary purpose of this study was to outline a potential framework where the demand for additional equity by farmers could be satisfied by external suppliers, and to evaluate the effects that external equity financing of production agriculture would have on the financial risk and returns of a representative farm in Texas. To accomplish this objective the linkages that exist between the farm and external capital markets, the barriers to external equity flows, and the motivation to develop a viable farm equity market were identified. Procedures that might allow the demand for equity capital by farmers, to be satisfied by nonfarm suppliers were described. A conceptual model was developed, analytically showing some of the possible effects that accessible external equity would have on the capital structure of a farm firm. The risk adjusted returns were calculated for three alternatives, at two initial leverage positions and across a range of transactions costs and risk levels. It was found that farmers with very low risk aversion would expand their asset size using debt and no external equity. Farmers that were more averse to risk would use debt and external equity. The amount of external equity that they used was dependent upon their initial capital structure, and the size of the transactions costs