Farmers' Choice of Fixed and Adjustable Interest Rate Loans

David Leatham () and Timothy Baker ()

American Journal of Agricultural Economics, 1988, vol. 70, issue 4, 803-812

Abstract: A discrete stochastic programming model of a midwestern crop-hog farm was used to investigate farmers' fixed-rate/adjustable-rate loan decision. Results show it is optimal for farmers to pay up to 1.5 percentage points above adjustable interest rates to use some fixed-rate debt. Below a one-point premium all fixed-rate debt is chosen. Above 1.5 points all adjustable rate debt is chosen except for more risk-averse farmers, who choose all adjustable rate debt at 2.25 points or more. The feasibility of using financial options to hedge interest rates was investigated and found to be prohibitively expensive.

Date: 1988
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