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Value of Social Capital to Mid‐Sized Northern Plains Farms

Author

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  • Cole R. Gustafson
  • William E. Nganje

Abstract

As farms increase in size, operators face the decision of remaining loyal to local retail merchants or obtaining volume discounts from distant wholesale input suppliers. When farmers bypass local merchants and buy inputs in volume, they often realize price discounts but forego many services including credit forbearance. 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. A theoretical model of farm financial risk evaluates borrower behavior in light of cash flow constraints, volume discounts, and social capital. Results delineate financial risks involved and value of social capital. When inputs are purchased locally and social capital is generated, the distribution of year‐end funds had a slightly lower mean and longer left tail. The longer left tail results from additional borrowing arising from credit forbearance. If this forbearance were not available, the firm would be bankrupt. À mesure que la taille des exploitations agricoles augmente, les producteurs doivent décider s'ils demeurent loyaux envers les détaillants locaux ou s'ils tentent d'obtenir des remises sur quantité auprès de fournisseurs d'intrants éloignés. Lorsque les producteurs contournent les marchands locaux et achètent des intrants en grande quantité, ils obtiennent souvent des rabais sur le prix, mais se privent de nombreux services y compris l'indulgence des créanciers. Lorsque les producteurs achètent localement, ils paient des prix plus élevés, ce qui diminue les profits et augmente le risque financier, mais crée du capital social qui peut être mis à contribution en périodes d'adversitééconomique. Un modèle théorique de risque financier agricole évalue le comportement de l'emprunteur en tenant compte des contraintes de liquidités, des remises sur quantité et du capital social. Les résultats présentent en détail les risques financiers en jeu et la valeur du capital social. Lorsque les intrants sont achetés localement et qu'il y a création de capital social, la queue gauche de la distribution des fonds de fin d'année est plus longue et la moyenne est légèrement plus faible. Cette queue gauche plus longue découle des emprunts supplémentaires résultant de l'indulgence des créanciers. Sans cette indulgence, l'entreprise serait en faillite.

Suggested Citation

  • Cole R. Gustafson & William E. Nganje, 2006. "Value of Social Capital to Mid‐Sized Northern Plains Farms," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 54(3), pages 421-438, September.
    • Handle: RePEc:bla:canjag:v:54:y:2006:i:3:p:421-438
    DOI: 10.1111/j.1744-7976.2006.00058.x
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    References listed on IDEAS

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    1. 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).
    2. 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.
    3. Mogues, Tewodaj & Carter, Michael R., 2004. "Social Capital And The Reproduction Of Inequality In Socially Polarized Economies," 2004 Annual meeting, August 1-4, Denver, CO 20132, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    4. Mogues, Tewodaj & Carter, Michael R., 2004. "Social Capital and the Reproduction of Inequality in Socially Polarized Economies," Staff Papers 12590, University of Wisconsin-Madison, Department of Agricultural and Applied Economics.
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