Measuring credit capacity on Danish farms using DEA

TY - JOUR

T1 - Measuring credit capacity on Danish farms using DEA

AU - Friis Pedersen, Michael

AU - Vesterlund Olsen, Jakob

PY - 2013

Y1 - 2013

N2 - The purpose of this paper is to introduce a novel measure of access to credit suited to estimate the relative change in credit reserves. – A debt possibility frontier is estimated using data envelopment analysis and the Malmquist index is calculated. The Malmquist index is redubbed the Debt Development index and decomposed into “change in debt capacity” and “change in debt capacity utilization”. Bootstrapping is applied for statistical inference. The method is applied to an unbalanced panel of 92,000 Danish farm accounts from 1996 to 2009. – The paper finds that credit capacity roughly doubled for Danish farmers over the period, and that utilization of credit capacity generally was proportional to capacity change, utilization being higher for dairy and pig farms, than for crop farms. – Changes in credit reserves may have important implications for risk management practice, investment and technology adoption and related policy issues. The method is limited by the possibility of strategic behavior of lenders during credit cycle busts. In credit cycle booms, the method gives a good basis for the estimates of change in credit reserves. – In a period of increasing credit reserves, risk management institutions are unlikely to develop. Like agricultural policy, access to credit may crowd out market-based risk management. – The study represents a novel application and interpretation of a well-known method.

AB - The purpose of this paper is to introduce a novel measure of access to credit suited to estimate the relative change in credit reserves. – A debt possibility frontier is estimated using data envelopment analysis and the Malmquist index is calculated. The Malmquist index is redubbed the Debt Development index and decomposed into “change in debt capacity” and “change in debt capacity utilization”. Bootstrapping is applied for statistical inference. The method is applied to an unbalanced panel of 92,000 Danish farm accounts from 1996 to 2009. – The paper finds that credit capacity roughly doubled for Danish farmers over the period, and that utilization of credit capacity generally was proportional to capacity change, utilization being higher for dairy and pig farms, than for crop farms. – Changes in credit reserves may have important implications for risk management practice, investment and technology adoption and related policy issues. The method is limited by the possibility of strategic behavior of lenders during credit cycle busts. In credit cycle booms, the method gives a good basis for the estimates of change in credit reserves. – In a period of increasing credit reserves, risk management institutions are unlikely to develop. Like agricultural policy, access to credit may crowd out market-based risk management. – The study represents a novel application and interpretation of a well-known method.

KW - Access to credit

KW - Agricultural finance

KW - Credit reserves

KW - DEA

KW - Malmquist index

KW - Risk management

U2 - 10.1108/afr-08-2012-0040

DO - 10.1108/afr-08-2012-0040

M3 - Journal article

AN - SCOPUS:84946728238

SN - 0002-1466

VL - 73

SP - 393

EP - 412

JO - Agricultural Finance Review

JF - Agricultural Finance Review

IS - 3

ER -