Heteroscedasticity and Estimation of Agricultural Debt

Between 2008 and 2012, agriculture in the United States has experienced a period of prosperity similar to that identified as the Golden Age of Agriculture between 1910 and 1914. This period has seen high agricultural prices and significant appreciations in farmland prices. As a result, the Farm Financial Crisis of the mid 1980s has been largely blotted out of the corporate memory. However, it is important to remember that the Farm Financial Crisis of the 1980s followed a boom period for agriculture in the 1970s. During the 1970s, the increased profitability and farmland values provided incentives for farmers to increase their leverage in an attempt to expand production. Hence, the time may be ripe to reexamine our basic models of optimal debt. In the agricultural debt model, whether risks change over time affects the optimal level of agricultural debt, though this fact is usually ignored in the past risk balancing model. In this paper, we will estimate the optimal debt with the focus on risks. Specifically, there are two purposes for this research: test for heteroscedasticity (i.e., is there any evidence that this risk changes over time) and examine the effect of increases in risks on agricultural debt.