5 Discussion
5.1 Survey Results
The results of the survey confirmed my initial observations:
farm consultants do not often use the WACC method, and the discount factors
used are really low generally, around 2.5% to 4.5%. Moreover, the estimations
based on experience are the most popular, and we can make the assumption that
they are influenced by the low level of bankruptcy in the sector. The means of
the discount factors used by practitioners was compared to the ROE and ROA
statistically observed in Isère and the required risk premium based on
our calculation. As practitioners use lower discount factors than the required
risk premium, it signifies that the estimations they produce are overestimated,
which would lead farmers to base their decisions on overoptimistic
simulations.
5.2 ROE and ROA Analysis the Farms of Isère
The statistical tests performed in part 4 confirm the
underlying hypothesis of the WACC methodology: firm's performance increases
with leverage up to a certain limit where financial distress occurs. The
standard deviation increases in group 1, with lower median results. It can be
safely assumed that 80% leverage is a limit that should not be exceeded in
agriculture.
Groups 2 and 3 are the groups which have results significantly
better than the lower groups, meaning that the optimal level of debt could be
between 40% and 80%. As group 3 shows good results either, better than group 1
which shows strong signs of financial distress some years, it is common sense
to think that the optimal debt level is closer to 60% than 80%. Except for the
dairy specialization, it could be recommended to target a leverage of 40 to
60%.
For grain and cattle producers, the optimal level of debt is
surely between 40% and 60%. The median ROA of the group 2 is never
significantly higher than any other groups, and is even lower some years
(without significant differences). The group 3 on the contrary presents more
stable results in terms of ROA for these specializations (grain vs cattle).
This element may be explained by the difference in nature between these two
productions: dairy farms have to invest in expensive buildings and equipments,
necessary to increase the volume of production (the size of the animal housing
is directly linked with the level of production); However, for grain
production, the most expensive equipments are the tractors, and there is no
such linear relationship between the investment and the productivity. Land is
more linked with the productivity, but availability of land is not linked with
the financial capacity of farmers, and most of the time farmers rent the land.
Therefore, lands are most of the time not financed by loans and have no impact
on the leverage. For cattle farming, the animal housing is less necessary than
for dairy farms, depending on the surface of pasture available for the herd.
Therefore, a high leverage for these farms does not directly guarantee that the
farm will benefit of a higher potential of production.
Other elements can be learned from the results of the analysis
of the ROE and ROA of farms in Isère. The average farm in Isère
has not so low results in terms of ROE and ROA: 8.2% and 3.1% respectively. ROE
and ROA reaches respectively 11.8% and 6.2% for group 2, which is higher than
what consultants use. If we consider that the historical ROA should be the
minimum actualization rate, the difference with the actualization rate used by
practitioners is quite high.
On average, the respondents answered that they used discount
factors around 2.5% to 4.5% depending on the specialization. Moreover, the
results obtained in this analysis are based on historical results: it does not
take all the risks into account and reflects only the past results of the farms
of Isère. Therefore, most agricultural consultants use overoptimistic
discount factors, leading them to consider that some projects are profitable
when not.
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