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Purpose -The purpose of this paper is to provide a general discussion of how techniques from financial engineering can be used to investigate the economic costs of farm programs and to aid in the design of new financial products to implement margin protection for dairy farmers. Specifically the paper investigates the Milk Income Loss Contract (MILC) and the Dairy Margin Protection (DMP) program. In addition the paper introduces the concept of the Milk to Corn Price ratio to protect margins. Design/methodology/approach -The paper introduces and reviews the tools of financial engineering. These include the stochastic calculus and Itô's Lemma. The empirical tool is Monte Carlo simulations. The approach is part pedagogy and part practice. Findings -In this paper the authors illustrate how financial engineering can be used to price complex price stabilization formula in the USA and to illustrate its use in the design of new products. Practical implications -In this paper the authors illustrate how financial engineering can be used to price complex price stabilization formula in the USA and to illustrate its use in the design of new products. Social implications -Farm programs designed to protect dairy farmers margins are designed in a seemingly ad hoc fashion. Assessments of programs such as MILC or DMP are conducted on an ex-post basis using historical data. The financial engineering approach presented in this paper provides the means to add significant depth to the assessment of such programs which can be used in conjunction with Monte Carlo simulation to identify alternative model structures before they are written into law. Originality/value -This paper builds upon an existing literature. Its originality is in the application of financial engineering techniques to farm dairy policy.

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Historical developments in agricultural finance and the genesis of America’s farm credit system

Turvey

2017

AFR

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Purpose The purpose of this paper is to provide a review of major historical developments in agricultural finance, with particular emphasis on agricultural credit. It reviews the development of Raiffeisen and related banks that emerged in Germany and Europe throughout the nineteenth century and how the cooperative banking system made its way into the banking system of the USA in the early twentieth century. The paper emphasizes the role of the state in the developing of agricultural credit, especially with respect to farm mortgages, securitization, and bond structures. Design/methodology/approach This paper presents a historical synthesis of historical literature on agricultural credit. Findings This paper shows the direct linkage between the developments in Raiffeisen credit cooperatives and the Farm Credit System (FCS) and details the emergence of the land banks, farm credit banks, agricultural bonds and the role of joint-stock banks in agricultural credit policy. Originality/value In total, 2016 marks the 100th anniversary of the passing of the 1916 Federal Farm Loan Act which set in motion the USs’ first Government Sponsored Enterprise and catalyzed the formation of the FCS as it operates today to provide credit to farmers and rural communities on a cooperative basis. Although there are a few wonderful books written on certain aspects of the FCS the story of how the FCS was initiated and the many struggles it faced up to the 1933 Act has not been told often enough. This paper tells the story of the evolution of agricultural credit that ultimately led to the formation of the FCS.

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Cited by 3 publications

References 66 publications

Price Index Insurances in the Agriculture Markets

Price Index Insurances in the Agriculture Markets

Financial engineering for the farm problem

Historical developments in agricultural finance and the genesis of America’s farm credit system

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