An Analysis of Financial Risk Measures within Agricultural Cooperatives

Abstract

Agricultural Cooperatives have been facing times of low financial risk in the previous years. However, this is expected to change in the near future and controlling for financial risk will become an increasing concern. A review of the risk balancing hypothesis literature shows that financial risk has not been fully defined by previous researchers. The objective of this research is to better define financial risk and analyze whether the academic literature or the lending industry has found ways to capture and measure financial risk. This is done by utilizing a stochastic simulation model of an agricultural cooperative comparing low and high financial risk scenarios. The results of the simulations are analyzed using coefficients of variations and the contributions to variations for selected ratios. The results show that the ratios used by the lending industry have larger contributions to the variation than those used in the academic literature. This suggests that future research should work to more specifically define the sources of financial risk and identify measures for these risks.