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Abstract

As farms increase in size, operators face the decision of remaining loyal to local merchants or obtaining volume discounts from distant input suppliers. When farmers bypass local merchants and buy inputs in volume, they often realize price discounts but forego many services including credit forebearance. When farmers buy locally, they pay higher prices, which decreases profits and increases financial risk, but generates social capital which can be drawn upon during periods of economic adversity. A theoretical model of farm financial risk evaluates borrower behavior in light of cash flow constraints, volume discounts, and social capital. Results delineate financial risks involved and value of social capital.

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