6 Utilization of These Results
6.1 Managerial Implications
The first conclusion that can be learned from this research is
that agricultural consultants do not use adapted discount factors. The lack of
research and publication on the subject is leading consultants to adopt
discount factors based on the cost of debt or inflation or even only on
risk-free assets, and not on the cost of capital or a real risk premium. The
first managerial implication that should be drawn is the necessity of further
research on the topic. CERFRANCE developed a partnership with a network of
engineering school in agriculture to specialize 40 students in consulting for
farmers every year (CNCER, 2012). This partnership with teaching and research
facilities could be the base of the discussion about the necessity to improve
the knowledge on the topic. The engineering schools in agriculture are the
perfect support for a deeper research on the subject, and this option should be
considered as the partnership with the CERFRANCE would help the researchers to
access a unique database that contains all economical results of more than 50%
of all French farmers. Finally, the CNCER (the central element of the CERFRANCE
network) should initiate a project to uniform the practices among the different
members of the network. It is clearly a weakness of the network so far.
The other implication induced by this research is the
necessity to improve the methods actually used by most practitioners of the
CERFFRANCE. Our survey is not exhaustive, therefore it cannot be said that all
the CERFRANCE are concerned, neither all its consultants. Some answers prove
that some of them use higher rates. However, generally speaking it is obvious
that the different methods to determine appropriate actualization rate are not
well understood by most of the consultants. In-house training should be more
focused on these methods, as well as on the consequences of choosing extremely
low discount factors. This type of training could start without waiting for
other results, because even the descriptive statistics show that for some
groups of leverage the average ROE and ROA are really higher than the discount
factors used by practitioners. The ROE cannot be the right estimation for a
discount factor. However, it seems to be misleading to choose it two times
lower than the ROA for the best groups of farms.
Consultants and farmers should also adapt their methodologies
for the management of the working capital. This element is really important in
agriculture, and represents 34.5% of the total assets in dairy farming in
Isère and 43% for the cattle farms. This working capital is principally
composed by the animals (66% for dairy, and 79% for cattle farms). This working
capital, for the farms that are not enough leveraged, could be financed with
debt instead of being financed with equities, which is usually the case in
agriculture. This financing is possible to put in place, as the financial
institutions could take a guarantee on the herd of cattle. The farmers would be
able to recuperate in cash a part of its equities, as well as reducing its
overall cost of capital. The benefit could be important, both for the financial
institution which would increase its activities, and also for the farmers who
would be able to increase the NPV of their farms and their personal wealth. An
estimation of the possible gain for the farmer is presented in Table 31. The
hypotheses of this calculation are:
- 4% interest rate, higher than the average rate for farms from
Isère, because the loan would be riskier for the bank than a loan
guaranteed by lands or constructions,
- 40 000 € total loan, (45% of the total value of the
animals for an average dairy farm), - 10% actualization rate,
- 6 years maturity, considering that a herd is renewed at 25%
each year on average and calves become productive in their third year.
Year
net cash flow (total)
Present Value at 10%
Positive cash flow
annual payment (4% interest) tax relief on interests (at 33%)
discount rate
NPV
|
0
|
|
1
|
|
2
|
|
3
|
|
4
|
|
5
|
|
6
|
|
40
|
000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-7
|
510
|
-7
|
510
|
-7
|
510
|
-7
|
510
|
-7
|
510
|
-7
|
510
|
|
|
|
429
|
|
356
|
|
281
|
|
203
|
|
122
|
|
44
|
|
40
|
000
|
-7
|
080
|
-7
|
153
|
-7
|
229
|
-7
|
307
|
-7
|
388
|
-7
|
466
|
|
1,000
|
0,909
|
0,826
|
0,751
|
0,683
|
0,621
|
0,564
|
|
40 000
|
-6 437
|
-5 912
|
-5 431
|
-4 991
|
-4 587
|
-4 214
|
|
8 429 €
|
|
|
|
|
|
|
Table 31: NPV of a refinancing operation to reduce the
WACC and increase the wealth of a dairy farm
The example presented in table 31 would not be interesting if
the actualization rate was set at 3% like most consultants do. However, it
becomes really interesting when the actualization rate is set in a normal range
for dairy farms (between 8.3% and 11.7% as presented in section 4).
The only limitation of this strategy is to get the acceptation
of the financial institution which would increase its risk exposure. So far,
the risk associated with the working capital was mostly supported by the farmer
itself. However, this limitation could be reduced if the farmers subscribe to a
predefined percentage of the cash generated by the new loan on a financial
product offered by the institution. This solution would also be interesting for
the preparation of the retirement of the farmers, who are most of the time not
well prepared considering the low level of the pensions in the sector.
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