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| Wheat Farmer:
Regarding explicit or implicit interest costs on a farm, would you not agree that it doesn't make much sense to have a $100K bank CD earning 4% annually when you simultaneously have a bank line of credit for $200K costing 8% annually? That is why we generally consider the opportunity cost of farmer equity to at least equal the bank borrowing rate. Farmers who are completely out of debt might say that they would otherwise place money in a bank CD if they weren't farming. But, I'd retort with "you're comparing assets with considerably different risks." Thus, the opportunity cost of such funds should again be something above bank CD rates. In the business world, cost of money would generally be computed as a weighted average of debt and equity, with equity typically carrying a higher percentage interest charge than debt since the bank is paid first before any money comes into equity (i.e., equity is taking the greater risk). So, some farms likely would consider an opportunity cost that is somewhat higher than the bank borrowing rate. That is, they are making the statement "if I'm going to put my money in a farming investment I'm going to need to expect a higher rate of return than bank loan rates."
Terry Kastens, ag economics, K-State | |
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"Long run" and the life of an operation
