Capitalization Methods of Production Credit Associations and Their Impact on Borrowers' Costs (Credit, Pca, Interest Rates)
Jones, Bruce Lynn
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https://hdl.handle.net/2142/69858
Description
Title
Capitalization Methods of Production Credit Associations and Their Impact on Borrowers' Costs (Credit, Pca, Interest Rates)
Author(s)
Jones, Bruce Lynn
Issue Date
1984
Department of Study
Agricultural Economics
Discipline
Agricultural Economics
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, Agricultural
Abstract
Production Credit Associations (PCAs) are farmer-owned cooperatives which are intended to enhance the economic well-being of farmers and ranchers in the United States. A way that PCAs accomplish this purpose is by providing their borrowers low, stable cost credit services. The extent to which PCAs are able to reduce the level and the stability of borrowers' costs depends on the capitalization methods employed by the associations.
Measurement of the financing costs of borrowers is complex because borrowers are investors in a PCA and they are also patrons of the association. Thus PCA borrowers simultaneously receive returns on their investments in a PCA as they incur interest expenses. Therefore PCA borrowers' financing costs should reflect the net effect of the returns the borrowers receive as investors in their association. This was accomplished in this study by expressing borrowers' costs in terms of a single interest rate which was the discount rate that caused the net present value of the cash flows associated with a PCA loan to equal zero.
A stochastic, multi-period simulation model was used to analyze the impacts various capitalization methods have on the level and the stability of borrowers' costs. The model's stochastic variable was the interest rate charged by the Federal Intermediate Credit Bank. In addition to generating measures of the level and the stability of borrowers' costs, this study's simulation model also reported the model PCA's periodic financial position in terms of balance sheets, income statements, and cash flow statements.
Various capitalization and environmental specifications, based primarily on historic data, were used to simulate PCA operations in order to obtain measures of: (1) the model PCA's financial position and (2) the level and the stability of borrowers' costs. The results of these simulations indicated that some capitalization methods were not financially feasible because they caused the model PCA's leverage position to exceed acceptable levels. The simulation results also indicated that some methods were preferred to others because they resulted in lower and/or more stable costs for borrowers. However preferred capitalization methods for one set of economic conditions were not always preferred for the other economic conditions analyzed.
This study provides PCAs with a means for analyzing and comparing the impacts of various capitalization methods on borrowers' costs. By utilizing the information conveyed by this study PCAs should be more able to perform as intended and to serve the interests of their member-borrowers.
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