Abstract
This study focuses on developing an agricultural investment model based upon proven financial investment portfolio techniques. The model can be used as a tool to diversify agricultural risk over the long-term by optimising the proportion of land allocated to each of the agricultural products, resulting in increased value of the agricultural enterprise. Sensitivity analysis allows the strategist to understand the impact that future prices, gross margins and land availability may have on the long-term sustainability of the farming enterprise.
Highlights
The traditional role of management is to increase the value of a firm
ILLUSTRATIVE RESULTS We will illustrate the use of the model by introducing an example based on real price information gathered from the South African Department of Agriculture over a sixty-month period, and information submitted from a leading agricultural enterprise
Choosing a strategy that would result in the firm aiming for Postion B would be an irrational one as a higher level of adjusted return may be realised from Position D for the same level of portfolio risk
Summary
The traditional role of management is to increase the value of a firm. In order to successfully increase value, management should focus on increasing profits by operating more efficiently, driving down costs and increasing revenue. Over the long-term, the yields and variable costs are known and considered to be fairly consistent (i.e. less volatile relative to expected change in prices), and if this is consistent over the entire range of products, the expected change in price would be the major driver which would result in the contribution being more volatile (i.e. the volatility of the contribution over time would be most dependant on the volatility of the price) This future expected price growth of the agricultural product must be weighted by its gross margin percentage to avoid biased allocations of land to products with potential for high price growth, but with low gross margins. Referring to the constraints in the adapted Markowitz model shown above, the historical change in price of each agricultural product under consideration is weighted by its gross margin contribution, resulting in an adjusted price increase metric.
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
