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Farmers' Choice of Fixed and Adjustable Interest Rate Loans

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  • David J. Leatham
  • Timothy G. Baker

Abstract

A discrete stochastic programming model of a midwestern crop-hog farm was used to investigate farmers' fixed-rate/adjustable-rate loan decision. Results show it is optimal for farmers to pay up to 1.5 percentage points above adjustable interest rates to use some fixed-rate debt. Below a one-point premium all fixed-rate debt is chosen. Above 1.5 points all adjustable rate debt is chosen except for more risk-averse farmers, who choose all adjustable rate debt at 2.25 points or more. The feasibility of using financial options to hedge interest rates was investigated and found to be prohibitively expensive.

Suggested Citation

  • David J. Leatham & Timothy G. Baker, 1988. "Farmers' Choice of Fixed and Adjustable Interest Rate Loans," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 70(4), pages 803-812.
    • Handle: RePEc:oup:ajagec:v:70:y:1988:i:4:p:803-812.
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    File URL: http://hdl.handle.net/10.2307/1241921
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    Citations

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    Cited by:

    1. Collender, Robert N., 1989. "Variable and Fixed Rate Loans: Determinants of Borrower Demand," 1989 Annual Meeting, July 30-August 2, Baton Rouge, Louisiana 270471, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    2. Collender, Robert N., 1989. "Variable and Fixed Rate Loans: Determinants of Borrower Demand," Department of Economics and Business - Archive 259449, North Carolina State University, Department of Economics.
    3. Apland, Jeffrey & Hauer, Grant, 1993. "Discrete Stochastic Programming: Concepts, Examples And A Review Of Empirical Applications," Staff Papers 13793, University of Minnesota, Department of Applied Economics.
    4. Betubiza, Eustacius N. & Leatham, David J., 1994. "The Effects of Holding Nonfarm Related Financial Assets On Risk-Adjusted Farm Income," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 26(2), pages 565-579, December.
    5. Moss, Charles B. & Shonkwiler, J. S., 1991. "Modeling Yield With Stochastic Trend And Nonnormal Errors," 1991 Annual Meeting, August 4-7, Manhattan, Kansas 271165, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    6. Pederson, Glenn D. & Duffy, Michael D. & Boehlje, Michael & Craven, Robert, 1991. "Adjustable -Term Financing Of Farm Loans," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 16(2), pages 1-12, December.
    7. Misra, Sukant K. & Spurlock, Stanley R., 1991. "Incorporating The Impacts Of Uncertain Fieldwork Time On Whole-Farm Risk-Return Levels: A Target Motad Approach," Southern Journal of Agricultural Economics, Southern Agricultural Economics Association, vol. 23(2), pages 1-10, December.
    8. Anderson, Jock R., 2003. "Risk in rural development: challenges for managers and policy makers," Agricultural Systems, Elsevier, vol. 75(2-3), pages 161-197.
    9. Howard, Gregory E. & Roe, Brian E., 2011. "Comparing the Risk Attitudes of U.S. and German Farmers," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114528, European Association of Agricultural Economists.
    10. Dillon, Carl R. & Shearer, Scott A. & Mueller, Thomas, 2001. "A Mixed Integer, Nonlinear Programming Model Of Innovative Variable Rate Planting Date With Polymer Seed Coatings," 2001 Annual meeting, August 5-8, Chicago, IL 20572, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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