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Asset Valuation and Strategic Analysis of Agribusiness Investment Activities

Investigators
Salin, Victoria
Institutions
Texas A&M University
Start date
2008
End date
2013
Objective
The broad goal of this project is to increase the understanding of investment decision-making. Three specific objectives of the project are to:
  1. Apply financial management and risk assessment tools to issues related to the availability of investment capital in the food, feed, and fiber industries in the USA and abroad
  2. Develop case study research protocols and quantitative methodologies for the analysis of the performance of financial institutions and financial markets
  3. Extend and integrate performance measures for financial risk management to the situation of lenders of varying sizes and organizational forms, including microfinance lenders.
Expected outputs include:
  1. a detailed comparison of microfinance lenders with agricultural lenders, on the basis of measurable performance benchmarks from the literature
  2. ranges of risk estimates that are the result of assumptions on underlying probability distributions or empirical density estimation methods, using Value at Risk
  3. an expanded database of firms involved in product recalls and related food safety incidents that includes indicators of investments in brands and reputations.
More information
NON-TECHNICAL SUMMARY: Firms and entrepreneurs in sectors that are rapidly developing require access to funds so that their proposed businesses can grow sustainably. Risk capital is attracted to sectors such as food and fiber when innovative technologies offer transformational potential. Constraints to capital flows to food and fiber-based firms arise when risks are not well understood, including those risks that relate to food safety and to the capacity of the overall economy to sustain consumer purchasing power. In spite of the exceptional liquidity, efficiency, and scale of global capital markets, under certain economic conditions, markets will fail in efficiently allocating investment capital. Barriers to the efficient allocation of investment capital can occur when the benefits of a project are not clearly valued in the market, or when the risks associated with the investment project are not well understood. This research project will utilize research approaches from financial management theory and practice, and from risk assessment techniques. The outcome will be increased understanding of investment decision-making.

APPROACH: Economic analysis with performance indicators representing firm-level optimal choices. Among the types of predictive models used to forecast financial stress, discriminant analysis approaches are the most well developed (Altman 2002). As with any quantitative method, methodological issues have been identified (Lachenbruch 1967), and statistical refinements have been adapted. In this research, we intend to build on the bankruptcy prediction literature to test a food manufacturer-specific scoring model.

PROGRESS: 2007/01 TO 2007/12
OUTPUTS: Research to quantitatively assess the risks of food product recall and link risks to characteristics of business firms proceeded during 2007. The scientific significance is that this is the first research making the connection between business-relevant risks and firm-level sales performance and product branding strategies. A data set was produced that will advance the understanding of whether branded products are associated with differential risks that products have been recalled from distribution. Faculty development leave at Resources for the Future was completed (Oct. - Dec. 2007). Along with collaborators in the food safety risk analysis group at the host institution, a new measure of risk was developed to include both timing and size of the subject firm (in annual sales value). Preliminary studies support the predictions of economic theory that firms undertaking product branding strategies produce at higher levels of food safety. Another line of research on asset valuation was completed with research on cotton futures contracts. The M.S. thesis by Marissa Chavez was completed, along with a related journal paper. Research on credit markets was initiated. The treatment of assets in lending decisions in Zambia was examined and a paper presented at a national meeting. Funding for the study of the dependence of US community development financial institutions on real estate markets was obtained.
PARTICIPANTS: Marissa J. Chavez (graduate student) Brian N. Mwanamambo (graduate student) Sandra Hoffmann (collaborator at Resources for the Future)

IMPACT: 2007/01 TO 2007/12
Business decision makers will be able to use the results on valuation of cotton futures contracts to consider marketing strategies for their cotton output. The impact is an enhanced set of risk management strategies, possibly increasing net returns to cotton producers. Within non-governmental organizations and other development agencies, alternative lending strategies following the model described in the research will be better understood. In the food safety area, policymakers and industry certification groups will be able to use the results in considering whether to focus regulatory oversight on firms that produce items sold as undifferentiated goods. The findings potentially will impact public health by making better use of scarce regulatory resources.

PROGRESS: 2006/01/01 TO 2006/12/31
The study of agribusiness investments was advanced through quantitative and qualitative analyses of risks and risk management in the food system. An event study of the risk factors in the supply chain of a restaurant company that led to an outbreak of foodborne hepatitis was completed as part of a Ph.D. dissertation. The research examines crisis management theories and ways in which those theories can be used to understand incentives in the food system. A financial market event study was embedded in the case study research design. The findings from the econometric analysis indicate that reaction to the disease outbreak did not significantly impact the food service provider level of the supply chain. Private litigation may substitute for financial market impacts as an incentive for businesses to provide safer foods.

IMPACT: 2006/01/01 TO 2006/12/31
Business and policy decision-makers can use the results of the project to improve their understanding of performance measurement and market incentives that may lead to production of safer foods. The analysis of timing related to food safety issues is expected to be useful to entrepreneurs seeking to commercialize their innovative food control systems. The broader implications of the study will be a positive impact on efficiency in food systems while protecting a high level of public health.

PROGRESS: 2005/01/01 TO 2005/12/31
The investigation of strategic aspects of investment project analysis was advanced through the development of quantitative asssements and qualitative analyses of risks and risk management in the food system. The scientific significance is in of the application of hazard rate techniques to management issues in the food business. Empirical analysis of key parameters in the hazard rate jump process real options model has been completed, for meat and poultry products, two papers reported in 2004 (See AD-421 for FY2004 for titles) were published at peer-reviewed journals, and another is in review. Data collection for food products recalled under FDA supervision has been completed for calendar years 2000-2003 and analyzed for the first time. A descriptive report was presented at a national conference (Food Distribution Research Society) and submitted for publication in a proceedings volume. Analysis of all product recall events, with survival statistics approaches, has been completed and submitted to a journal. Progress on an event study of restaurant firms involved with food contamination was made by an international visiting scholar and a graduate student under the supervision of the investigator. The case study of hepatitis at Chi Chis restaurant is underway and the results from a search of public media reports on the event are summarized in a web-based report at http://agecon2.tamu.edu/people/faculty/salin%2Dvictoria/krippendorf/. The results indicate the various roles of company officials, attorneys, and government officials in public communications about a crisis. Econometric analysis of the financial market reaction is in draft form. The preliminary indications are that financial markets experienced no significant reaction to contamination incidents affecting food service and restaurant levels of the food supply chain. An examination of the international trade situation related to health and sanitary issues was initiated with a masters thesis under the supervision of the investigator. The thesis examined U.S.-Mexico international trade in chicken meat products, using a partial equilibrium approach, to examine the impact of removing the existing sanitary restrictions on trade. A study of real options on investments in perennial crops (table grapes), when crop insurance is available, is in progress. A paper was presented at an international meeting on the use of real options methodologies for the horticultural sector.

IMPACT: 2005/01/01 TO 2005/12/31
Business and policy decision-makers can use the results of the project to improve their understanding of performance measurement and market incentives that may lead to production of safer foods. The analysis of timing related to food safety issues is expected to be useful to entrepreneurs seeking to commercialize their innovative food control systems. The broader implications of the study will be a positive impact on efficiency in food systems while protecting a high level of public health.

PROGRESS: 2004/01/01 TO 2004/12/31
The investigation of strategic aspects of investment project analysis was advanced through the publication of journal articles that quantitatively assess the risks associated with recalls of meat and poultry products. The scientific significance is in of the application of hazard rate techniques to management issues in the food business. Empirical analysis of key parameters in the hazard rate jump process real options model has been completed, for meat and poultry products, and two papers are in press at peer-reviewed journals. Data collection for food products recalled under FDA supervision has been completed for calendar years 2001-2003 and summary statistics were presented at a university conference by a graduate student involved in the project. Funding for further research has been requested under the Food Safety Program of the National Research Initiative, USDA. An event study econometric analysis of restaurant firms involved with food contamination is in the planning stages. The research will use a case-study method to contrast financial market reaction to contamination incidents that affect processing firms compared with food service and restaurant levels of the food supply chain. A study of real options on investments in perennial crops (table grapes), when crop insurance is available, has been completed in dissertation form (Seo) and is in final stages of revision for the publication. A paper was presented at an international meeting on the use of Value at Risk methodology in public finance decisionmaking.

IMPACT: 2004/01/01 TO 2004/12/31
Business and policy decision-makers can use the results of the project to improve their understanding of performance measurement and market incentives that may lead to production of safer foods. The analysis of timing related to food safety issues has been useful to entrepreneurs seeking to commercialize their food control systems. The broader implications of the study will be a positive impact on efficiency in food systems while protecting a high level of public health.

PROGRESS: 2003/01/01 TO 2003/12/31
The investigation of strategic aspects of investment project analysis was advanced through the completion of journal articles that quantitatively assess the risks associated with recalls of meat and poultry products. The scientific significance is in of the application of hazard rate techniques to management issues in the food business. Empirical analysis of key parameters in the hazard rate jump process real options model has been completed, for meat and poultry products, and two related papers are in review at peer-reviewed journals. Data collection efforts to address the recalls occurring under FDA supervision have been proposed for funding in an application submitted to the National Science Foundation. A new study of real options on investments in perennial crops, when crop insurance is available, has been initiated. A Big 12 Faculty Fellowship at University of Missouri in summer 2003 was completed, on the topic of Value at Risk in public finance decisionmaking.

IMPACT: 2003/01/01 TO 2003/12/31
Business and policy decision-makers can use the results of the project to improve their understanding of the dynamic elements of food safety problems and enhance risk management efforts. These findings, should they be adopted, will significantly impact public health.

PROGRESS: 2002/01/01 TO 2002/12/31
The investigation of strategic aspects of investment project analysis was advanced through completion of two working papers that quantitatively assessed the risks of food recalls. The first paper has practical significance in the detailed analysis of a publicly available database (Food Safety and Inspection service recall database). The scientific significance of the second working paper is that it is the first application of biostatistics techniques to a business risk analysis in the food safety area. The parameters estimated in these two working papers will be significant inputs into research applying real option asset valuation to food industry investments. Event study econometric techniques were also used to examine the capital markets' response to food safety problems, using the GARCH technique for the first time in an event study of food processing firms, with the finding that food safety problems affect both mean returns and volatility of returns of publicly-held food manufacturers.

IMPACT: 2002/01/01 TO 2002/12/31
Business and policy decision-makers can use the results of the project to improve their understanding of the dynamics of food safety problems and evaluate the food safety systems in place. Investors and business interests can benefit from the consideration of riskiness associated with food safety problems. ation, Oct. 30, 2002.

Funding Source
Nat'l. Inst. of Food and Agriculture
Project source
View this project
Project number
TEX08896
Accession number
193125
Categories
Bacterial Pathogens
Risk Assessment, Management, and Communication
Commodities
Meat, Poultry, Game