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Abstract

Volatile net farm incomes and potential for higher interest rates has strengthened the importance of managing liquidity. This paper evaluates the effectiveness of increasing liquidity levels as a means of reducing repayment risk for agricultural firms. Using a base case farming operation and three interest rate scenarios, eight potential changes in the operating situation, and two leverage levels, it was found increasing the level of liquidity was an effective means of reducing repayment risk. The management practice was found to be more effective for offsetting the adverse effects of increasing interest rates and operating expenses than for decreasing gross farm revenue and increasing leverage levels.

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