Optimizing a portfolio of agri-environmental investments
Purpose. The purpose of the article is to substantiate theoretical-and-methodological provisions for building investment portfolios in agribusiness by the criterion of minimizing environmental risk of selected investment-financing strategies.
Methodology / approach. In the article, on the basis of the dialectical method of cognition, the following methods were used: abstract-logical – in the systematization of scientific papers on the problem of diversification and optimization of the agricultural investment portfolio; system analysis and comparison – in the study of portfolio theories and concepts; computational and constructive – in the analysis of environmental-and-economic factors of the profitability of agricultural land use; economic-and-mathematical modeling – in the process of modeling the optimal portfolio of agri-environmental investments by the criterion of minimizing the risk of a particular investor, caused by the action of soil degradation factor in Sumy region. The materials of the Main Department of Statistics in Sumy region and the Sumy regional branch of the Institute of Soil Protection of Ukraine have formed the informational basis of the research.
Results. The optimization of the agri-environmental investment portfolio is due to the modification of the approach by the American Economist H. Markowitz “risk-return analysis” and its adaptation to the conditions of real investment. The paper uses a conservative approach to investment, which involves the construction of portfolios on the criterion of minimizing investment risk due to the influence of soil degradation for a particular investor. This factor requires the determination of the investor’s environmentally related risk, which manifests itself in the following directions: a) a decrease in crop yield due to the action of the factor of high soil pH; b) a decrease in the sales price for crop products because of contamination with heavy metals; c) an increase in the cost of agricultural production in deteriorated ecological conditions. Evaluation of agribusiness investment attractiveness on environmental-and-economic grounds provides for the consideration of the above areas from the standpoint of state, banking, foreign investment and self-investment. Assessment of investment quality identification is performed on the basis of calculation of the investor’s income elasticities to environmental risks on the example of Sumy region, which provides investment rationality decisions in the field of agricultural land use, considering environmental factors. It is substantiated that the highest investment quality is characterized by the bank’s investment financing strategy.
Originality / scientific novelty. The methodological approach to the definition of investor’s environmental risk in agricultural land use is improved. It is calculated considering the influence of factors of environmental destruction of land and soil resources (soil pH, pollution with heavy metals, etc.) on sources of profit, as well as with the definition of returns on investment resources (crop yield, ecological sales price, and income). The system of environmental-and-economic indicators in the formation of the investment portfolio is substantiated, including the following: the structure of investments, which is developed considering the influence of the environmental factor; portfolio investment risk due to environmental factors; and the investment portfolio yield adjusted for the level of environmental risk which provides an assessment of the investment attractiveness of agricultural land use on an environmental-economic basis. A methodical approach to substantiate investment decisions in the agriculture of the Sumy region is proposed, which along with considering the environmental factor, is in calculating the elasticities of investor’s income to the environmental-and-economic risks, which increase the correctness of financial decision-making.
Practical value / implications. Theoretical-and-methodological provisions and conclusions obtained in the study can be used to justify the direction of investment capital in the field of agricultural land use, considering the level of environmental-and-economic constraints.
2. Taylor, Z. (2017). Farming is risky business. Available at: https://lee.ces.ncsu.edu/2017/01/farming-is-risky-business.
3. Truelsenhttp, S. (2015). Farming is risky business. Available at: https://www.fb.org/viewpoints/farming-is-risky-business.
4. Reed, D. B. (2004). The risky business of production agriculture. AAOHN Journal, 52(9), 401–409. http://doi.org/10.1177/216507990405200909.
5. Leonard, B., Farrell, M., Mahon, M., Kinsella, A., & O’Donoghue, C. (2020). Risky (farm) business: perceptions of economic risk in farm succession and inheritance. Journal of Rural Studies, 75, 57–69. https://doi.org/10.1016/j.jrurstud.2019.12.007.
6. Mishenin, Ye., Valentinov, V., Maslak, O., & Koblianska, I. (2017). Modern transformations in small-scale agricultural commodity production in Ukraine. Marketing and Management of Innovations, 4, 358–366. http://doi.org/10.21272/mmi.2017.4-32.
7. Dorohan-Pysarenko, L., Rębilas, R., Yehorova, O., Yasnolob, I., & Kononenko, Z. (2021). Methodological peculiarities of probability estimation of bankruptcy of agrarian enterprises in Ukraine. Agricultural and Resource Economics, 7(2), 20–39. https://doi.org/10.51599/are.2021.07.02.02.
8. Komarek, A. M., De Pinto, A., & Smith, V. H. (2020). A review of types of risks in agriculture: what we know and what we need to know. Agricultural Systems, 178, 102738. https://doi.org/10.1016/j.agsy.2019.102738.
9. Lipinska, I. (2016). Managing the risk in agriculture production: the role of government. European Countryside, 8(2), 86–97. https://doi.org/10.1515/euco-2016-0007.
10. Holden, S., & Shiferaw, B. (2004). Land degradation, drought and food security in a less-favoured area in the Ethiopian highlands: a bio-economic model with market imperfections. Agricultural Economics, 30(1), 31–49. https://doi.org/10.1016/j.agecon.2002.09.001.
11. Banerjee, A. (2020). Managing Institutional risk & human resource risk in agriculture. Available at: https://krishijagran.com/agripedia/managing-institutional-risk-human-resource-risk-in-agriculture.
12. Tukana, A., & Gummow, B. (2017). Dairy farm demographics and management factors that played a role in the re-emergence of brucellosis on dairy cattle farms in Fiji. Tropical Animal Health and Production, 49(6), 1171–1178. http://doi.org/10.1007/s11250-017-1314-8.
13. DeVuyst, E. A., Escalante, C. L., Kropp, J. D., Jones, R., & Kenke, P. (2013). Sources of institutional financial risks in agriculture, risk education publication series. Available at: https://www.uaex.edu/publications/PDF/srme01fs.pdf.
14. De Mey, Y., Wauters, E., Schmid, D., Lips, M., Vancauteren, M., & Van Passel, S. (2016). Farm household risk balancing: empirical evidence from Switzerland. European Review of Agricultural Economics, 43(4), 637–662. https://doi.org/10.1093/erae/jbv030.
15. Kurbatova, T., & Hyrchenko, Ye. (2018). Energy co-ops as a driver for bio-energy sector growth in Ukraine. IEEE 3rd International Conference on Intelligent Energy and Power Systems (IEPS), Kharkiv. https://doi.org/10.1109/IEPS.2018.8559516.
16. Kurbatova, T., & Perederii, T. (2020). Global trends in renewable energy development. IEEE KhPI Week on Advanced Technology. Kharkiv. https://doi.org/10.1109/KhPIWeek51551.2020.9250098.
17. Plastun, A., Makarenko, I., Khomutenko, L., Belinska, Ya., & Domashenko, M. (2018). Exploring frequency of price overreactions in the Ukrainian stock market. Investment Management and Financial Innovations, 15(3), 157–168. https://doi.org/10.21511/imfi.15(3).2018.13.
18. Markowitz, H. M. (1952). Portfolio Selection. Journal of Finance, 7(1), 77–91. https://doi.org/10.2307/2975974.
19. Sharpe, W., Bailey, J. W., & Alexander, G. J. (2010). Investments, transl. from English. Moscow, INFRA-M.
20. Tobin, J., Hahn, F. H., & Brechling, F. P. R. (1965). The theory of portfolio selection, theory of interest rates. London, MacMillan.
21. Halynska, Yu. V. (2018). Strategic view on the rental policy in the field of environmental management. Problems and Perspectives in Management, 16(1), 1–11. https://doi.org/10.21511/ppm.16(1).2018.01.
22. Wiebe, I., Oliinyk, V. M., & Halynska, Y. V. (2018). Innovative instrument of collaborative alliance management in the “stateregion-enterprise” system of withdrawal of the rent income in the extracting industry. Marketing and Management of Innovations, 2, 247–261. http://doi.org/10.21272/mmi.2018.2-20.
23. Pendell, D. L., & Featherstone, A. M. (2006). Agricultural assets in an optimal investment portfolio. Selected Paper prepared for presentation at the Western Agricultural Economics Association Annual Meeting Anchorage. Available at: https://www.researchgate.net/publication/267377219_Agricultural_Assets_in_an_Optimal_Investment_Portfolio.
24. Hennings, E., Sherrick, B. J., & Barry, P. J. (2005). Portfolio diversification using farmland investments. Presented paper at the American Agricultural Economics Association Annual Meeting, Providence. https://doi.org/10.22004/ag.econ.19273.
25. Crisostomo, M., & Featherstone, A. (1990). A portfolio analysis of returns to farm equity and assets. North Central Journal of Agricultural Economics, 12(1), 9–21. https://doi.org/10.2307/1349354.
26. Nalley, L., Barkley, A., Watkins, B., & Hignight, J. (2009). Enhancing farm profitability through portfolio analysis: the case of spatial rice variety selection. Journal of Agricultural and Applied Economics, 41(3), 641–652. https://doi.org/10.1017/S1074070800003126.
27. Trinidad Segovia, J. E., Rambaud, S. C., & Garcia Garcia, C. B. (2005). A model for determining efficient portfolio cropping plans in organic farming. Spanish Journal of Agricultural Research, 3(2), 159–167. https://doi.org/10.5424/sjar/2005032-136.
28. Radulescu, M., & Radulescu, C. Z. (2013). Simulation and optimization for crop planning under risk. 2013 8th EUROSIM Congress on Modelling and Simulation, Cardiff. https://doi.org/10.1109/EUROSIM.2013.117.
29. Vitkovskii, О. (2006). Application of portfolio theories to assess the effectiveness of diversification of the enterprise. Entrepreneurship, Economy and Law, 9, 166–168.
30. Kholod, S., Iefimova, G., Halynska, Y., Marhasova, V., Alnuaimi, H. R. S. A., & Alhammadi, T. A. M. A. (2021). Risk management tools for emergencies in the context of global informatization. Studies of Applied Economics, 39(5), https://doi.org/10.25115/eea.v39i5.4780.
31. Halynska, Y., & Telizhenko, A. (2016). Risk in the formation of collaboration alliance of the redistribution natural rental income. Problems and Perspectives in Management, 14(4), 181–185. https://doi.org/10.21511/ppm.14(4-1).2016.06.
32. Dovgopol, Ya., Gonta, М., Sushchenko, R., Osypyuk, І., Nalyvaiko, М., Tanasiychuk, О., & Banakhevych, Yu. (2016). Svitovi modeli pidtrymky silskohohospodarstva [Global models of agricultural support]. Available at: https://www.ukrinform.ua/rubric-world/2012230-svitovi-modeli-pidtrimki-silskogo-gospodarstva.html.
33. Mishenin, Ye., Yarova, I., & Koblianska, I. (2021). Ecologically harmonized agricultural management for global food security. In M. K. Jhariya, R. S. Meena, A. Banerjee (Eds), Ecological Intensification of Natural Resources for Sustainable Agriculture (рр. 29–76). Singapore, Springer. https://doi.org/10.1007/978-981-33-4203-3.
34. Marekha, I. S. (2013). Innovative approaches to investment decisions substantiation in the sphere of agricultural land use on the base of ecological and economic assessment of investment quality. Marketing and Management of Innovations, 4, 338–345. Available at: https://mmi.fem.sumdu.edu.ua/en/journals/2013/4/338-345.
35. Panchenko, O., Domashenko, M., Lyulyov, O., Dalevska, N., Pimonenko, T., & Letunovska, N. (2021). Objectivation of the ecological and economic losses from solid domestic waste at the heating enterprises. Management Systems in Production Engineering, 29(3), 235–241. https://doi.org/10.2478/mspe-2021-0029.
36. DeGolia, A. H., Hiroyasu, E. H. T., & Anderson, S. E. (2019). Economic losses or environmental gains? Framing effects on public support for environmental management. PLoS ONE, 14(7). e0220320. https://doi.org/10.1371/journal.pone.0220320.
37. Main Department of Statistics in Sumy region (2020). Plant growing in Sumy region 2020. Available at: http://sumy.ukrstat.gov.ua/?menu=686&level=3.
38. Stock, J. & Watson, M. (2019). Introduction to Econometrics. Global Edition (4th ed.). London, Pearson. Available at: https://www.pearson.com/uk/educators/higher-education-educators/program/Stock-Introduction-to-Econometrics-Global-Edition-4th-Edition/PGM2583013.html.