Farm Financial Structure Under Uncertainty: An Application To Young Farmers

For risk analysis, it is often useful to divide total risk into business risk and financial risk. Business risk is from the variability of returns to assets while financial risk is from the debt employed by the farm business. Young, beginning farmers often have higher levels of both business and financial risks. Their financial risk is higher because of greater debt loads and their business risk is higher because of the use of more rented crop land. The problem for these young, beginning farmers is that their higher levels of risk increase the likelihood of bankruptcy. This paper uses a Monte Carlo analysis to test how often bankruptcy may occur. Results should indicate how much debt young farmers can manage and what would be a reasonable amount of equity to have before starting a farm business. Data for the analysis comes from the Kentucky Farm Analysis Program and from the USDA.