Rates of Return and Risk: Selected Central Hawkes Bay Sheep Farms and a Share Market Portfolio

Abstract

This study was concerned with the investment of capital in the agricultural sector of the economy. The importance of the topic lies in the application of selected aspects of financial theory to the evaluation of investment in sheep farms. The study reveals insights into some measurement problems and into comparisons between investment in sheep farming and a competing investment. The need to understand the flow and utilization of capital investment in this sector, together with the risk associated with such investment, derives from the importance of the agricultural sector in New Zealand's economy. The study was limited to sheep farming in the Central Hawkes Bay area. The objective of the study was: To compare investment in sheep farming with an alternative investment in the form of a share market portfolio. Five sheep farms from the Central Hawkes Bay area were selected. The financial statements and supporting information for the period 1965-1975 were used as the basic data for the study. Adjustments were devised and applied to the statements so that they were expressed in current value terms. The companies used as the basis for calculating the New Zealand United Corporations Share Market Index were used as the hypothetical share market portfolio. Measures of return and associated risk were specified and calculated for both the sheep farm data and the portfolio data. To enhance comparability of results between the alternative investments the major part of the study was based on before tax results although some study of the effect of taxation was made. A comparison and a statistical analysis of the data base and adjusted and derived results was undertaken. The major conclusion of the study was that there was insufficient evidence on which to base a general conclusion that one form of investment was superior to the other in terms of total return and risk. Several other characteristics were identified that could provide a basis for differentiation by a potential investor. The results of the study are limited in application because of the size of the sample and its selection from a specific category of farming in one geographical location.