Graduate Thesis Or Dissertation
 

Considerations in the financing of Oregon dairy enterprises : investigations of three selected problem areas

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  • As the capital requirements for the modern dairy enterprise increase, the Oregon milk producer and his lender need more information concerning the profitability, solvency and liquidity of the enterprise on which to base their financial decisions. This research examines three areas where more information could be used to evaluate financial feasibility and credit use for Oregon dairy enterprises. The areas of investigation are (1) an analysis of factors important in determining the profitability of the enterprise, (2) an analysis of the alternatives for acquiring Oregon milk market quota and (3) an analysis of the risk that the dairy enterprise will not generate sufficient cash flows to meet various loan repayment requirements. For the first area of investigation the statistical technique of discriminant analysis was used to estimate a linear function using variables common to 63 sample dairy enterprises. The resulting discriminant function is the one that best separates the 63 observations into two groups, those with a net profit per cow greater than the mean average and those with a net profit per cow less than the mean. Fifty-seven of the 63 sample enterprises were correctly classified by the function. Standardizing the coefficients of the function revealed that production per cow, labor requirement (in minutes) per cow-day and the amount of concentrates per cow-day were the most important variables in correctly classifying the observations. The scaled discriminant function provides dairymen and their lenders with a method to assess the profit potential of an enterprise and to predict the effect of possible management changes on profit potential. Oregon milk market quota cannot only be bought and sold, subject to certain regulations, but can also be earned by producing and selling milk in excess of the produce rs quota allotment. Acquisition of additional quota increases the amount of milk sold at the higher quota blend price increasing the producer's revenue. Due to differences in the timing of cash flows, a present value analysis was used to determine which alternative for acquisition, purchase or earn, is most profitable for given sets of circumstances. The present value of the differences between the cash flows for the alternatives is the maximum amount a producer could profitably pay for some amount of quota rather than earning it. For the average difference between quota blend and surplus prices of $1.71 per cwt. and an interest rate of 8%, the break-even prices per pound of quota ranged from a high of $84.00 to a low of $13.84 for a wide range of producer and market conditions. In evaluating a proposed loan, an estimate must be made regarding the risk that sufficient liquidity will not be generated to meet payments as they come due. Cash flow statements, comprised of single-valued figures, in no way reflect the variability of revenues and expenses. Also, the net worth statement measures only current liquidity, but not future liquidity. To evaluate the effect of the variability of cash flow items on the producer's repayment ability, a cash flow simulation model with stochastic variables was developed for a "typical" Willamette Valley dairy enterprise. A run of the model generated distributions of ending accumulated net cash balances for various levels of bay payments. The results showed in general that the greatest risk of illiquidity occurs with large monthly payments and short repayment periods. These findings indicate the lender and borrower can substantially reduce the risk of inadequate liquidity by negotiating loans with smaller monthly payments and longer repayment periods.
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