FINANCIAL RISK MEASUREMENTS FOR A CENTRAL ARIZONA FARM.

During the last decade, American agriculture has been faced with financial difficulties unlike any in history. As farm debt has been increasing, farm income has remained relatively unchanged forcing economists to more closely examine the risks involved in the agricultural industry. Measuring financial risk has not previously been empirically tested on the micro level. Presented here is an approach to measuring financial risk, business risk, and total risk. Historically, risk measures have been presented in terms of an expected outcome with a variance representing the likelihood of an outcome that is less than expected. Presented herein is a Monte Carlo simulation approach for measuring the risk facing an individual farm. The results show that as a farm gets more deeply in debt financial risk considerations can become more important than business risk. Also shown herein, which has not be previously discussed in any of the literature, are the problems associated with interpreting the risk measures when the expected cash flow is negative or when the fixed debt payments are greater than the expected cash flow.

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