Abstract
The remarkable rise of the soft commodities prices in
2007/2008 represented just a reminder of the importance of agriculture for
humanity. The Arab spring found its base on this mold and pulled down many
regimes considered as stable few months before, like Tunisia or Egypt.
Eventually, these price records could be reached again in 2012, due to a severe
drought in the USA. To meet the challenge of feeding the world while developing
more sustainable forms of production, advisory services must play a great role
to help farmers in their decisions regarding their production as well as their
investments. However, it appears that some financial consultants use really low
actualization rates for agriculture, even lower than the risk-free rate. The
purpose of this paper is therefore to present the different methods that could
be used to determine more appropriate discount rates for farming businesses,
and particularly the Weighted Average Cost of Capital and the bond yield plus
risk premium model as presented by the French tax authority.
Historical results of farms from Isère over 5 years
were studied to determine if the leverage has a significant impact on the
profitability, and if signs of financial distress could be identified for the
higher leverages. The statistical tests performed confirmed the underlying
hypothesis of the WACC theory: the cost of capital is reduced by the increase
of the leverage, up to a limit where financial distress overcomes the advantage
of the lower cost of debt. The optimal capital structure for farms of
Isère seems to range between 40-60% leverage, and up to 60-80% in the
cases of the most stable production such as dairy farms.
This paper provides indications about how to establish the
actualization rates for agricultural consultants, based on the WACC methodology
and the method recommended by the tax authorities. The data analysis confirmed
that the actual rates used by practitioners are clearly undervalued, leading to
an over-valuation by two to four times in their asset valuation studies. The
WACC and the bond yield plus risk premium methodology both seem to be
applicable for small and medium farming businesses. However, further researches
are necessary to validate the robustness of the WACC methodology in the
agricultural context for non listed companies.
Abbreviations
ANOVA: Analysis Of Variance
CAP: Common Agricultural Policy
CAPM: Capital Asset Pricing Model
CNCER: Conseil National des CERFRANCE (national council of the
CERFRANCE) EBITDA: Earnings Before Interest, Taxes, Depreciation and
Amortization
EEP: Expected Equity Premium
FADN: Farm Accountancy Data Network, or RICA: Réseau
d'Information Comptable Agricole FAO: Food and Agriculture Organization
FTE: Full-Time Equivalent
GDP: Gross Domestic Product
Ha: hectare, 10 000 m2 or 2.47105 acres
HEP: Historical Equity Premium
IEP: Implied Equity Premium
IMF: International Monetary Fund
NPV: Net Present Value
NSP: Ne Se prononce Pas (No Answer)
OECD: Organization for Economic Cooperation and Development REP:
Required Equity Premium
ROA: Return On Asset
ROE: Return On Equity
SAFER: Société d'Aménagement Foncier et
d'Etablissement Rural SAS: Statistical Analysis System
SMIC: Salaire Minimum Interprofessionnel de Croissance. The
minimum salary in France. SPSS: Statistical Package for the Social Sciences
TCA: Total Cultivated Area
USD: US dollars
WACC: Weighted Average Cost of Capital
WTO: World Trade Organization
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