Question

This is for BA:343 this needs to be 250 words with at least one outside source. You can just add the URL for the outside source. NEED IT BY TONIGHT!!

Explain how diversification and leverage may influence risks associated with financial servicing capacity of an agribusiness firm.

Answer 1

An agribusiness firm is one whose primary occupation is agriculture and farm produce. This is a cyclical business and when the farm produces yield, the sales will be higher and will be lower in other periods of time. Hence this is a seasonal or cyclical business model.

Since one crop will give the yield in one season, the business will be better off in diversification into three crops for the three seasons of summer, spring and autumn. By doing this type of a diversification, the business reduces a dependence on one particular crop and can have stable earnings through all the seasons around this year. This reduces cyclicality. Also, crops are subject to weather conditions and rain. If there is an adverse weather in a particular season, for example, if in a month, the crop was hit by a hurricane and the entire was destroyed, the firm will suffer minimal losses since it has diversified into other crops as well.

This diversification will mean purchasing more crops and more labour required. Hence the firm will have to go in for some sort of short term debt or leverage during the sowing season. Because the firm will have to have additional cash for purchase of seeds for the next season, the firm can take some amount of leverage that can be paid off once the yield comes through. This leverage should not exceed more than half since higher leverage affects the overall profitability of the firm due to interest payment although reduces taxes.