Introduction
Food safety and agricultural commodities prices played a great
role in the recent Arab spring (Breisinger, Ecker, & Al-Riffai, 2011). The
Arab spring, also called the Arab revolution, is a wave of protestations that
started in Tunisia in December 2010 with the suicide of a student who couldn't
pay for the fruits he was trying to sell in the street as a subsistence job.
This situation is not a surprise for many observers, as the farming business is
facing once again one of its historical challenges: feed the world and its
increasing population. The access to the essential commodities, such as energy
and food, is taken for granted nowadays in the developed countries. However,
the land resource is finite and even subject to a regular contraction due to
urbanization and salinization. Moreover, the increasing consumption of meat is
less efficient in terms of global productivity than the direct human
consumption of grain. The remarkable rise of the soft commodities prices in
2007/08 represented just a reminder of the importance of agriculture for
humanity and the inelasticity of this market. The world market prices are
oriented in the same direction in 2012, and the records reached in 2007 are
getting closer due to a severe drought in the USA (Damgé, 2012). The
OECD and the FAO consider that these high prices will become usual in the next
decade (OECD-FAO, 2010).
Some new challenges arose more recently, and they are not easy
to meet. The public opinion demands farmers to develop new forms of production
more sustainable and respectful to the natural environment (Faure &
Compagnone, 2011). Moreover, they have to maintain an economic activity in
rural areas (Mundler, Labarthe, & Laurent, 2006). To achieve these
challenges, the advisory services play a great role to deliver the best
advices, for agronomical innovation as well as economical consulting (Faure,
Desjeux, & Gasselin, 2011).
However, some financial consultants for farming businesses use
low discount rates. This empirical observation has been made in a company
member of the network of CERFRANCE, the leading accounting network in France,
even ahead of the big four for the French accounting market. This leading
position is due to the really high market share in agriculture and small
businesses. Someone could have expected to find really innovative financial
methods to produce better financial advices for farmers, but the consultants do
not use the NPV method a lot, mainly because of the lack of information about
the calculation of appropriate discount factors. Research in the field seems to
be not sufficient to promote this method among consultants.
The purpose of this paper is therefore to do an exploratory
research about the Weighted Average Cost of Capital (WACC) methodology and its
applicability to the agricultural sector. To reach this main objective, many
other research questions are addressed:
- Which methods are used by the practitioners to determine
actualization rates for farming project in France?
- Does leverage has an impact on the financial performances of
farms?
- What is the optimal structure for a small or medium farm,
considering the risk of financial
distress linked with high leverages?
This research is based on the existing work produced by other
authors, mainly in other economic sectors, but also on primary data extracted
from the database of the CERFRANCE Isère. This exploratory work is
subject to caution, because its subject hasn't been enough covered yet for the
agricultural sector and the assumptions taken have a strong impact on the
results. However, it is essential to improve the current knowledge about the
cost of capital and the actualization rates in
agriculture. This paper aims to rough out this subject and to
improve immediately the practices of the agricultural consultants of the
CERFRANCE.
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