Determinants of loan demand in agriculture: empirical evidence from Germany

Abstract

PurposeThe purpose of this paper is to empirically investigate the influencing factors of loan demand in agriculture. With the structural changes that agriculture is undergoing and the accordingly higher financing requirements and volumes, the analysis of loan demand in agriculture is of particular interest.Design/methodology/approachDetailed actual loan data at farm level, which is provided by a major German development bank for the agricultural sector, is used for the analysis. The data set covers the period from 2010 to 2014 and consists of 68,430 observations. Due to the data structure, an ordinary least square regression is conducted with the loan amount as the dependent variable. Many explanatory variables are included, such as the interest rate, the intended use of the loan, grace periods, the gross value added (GVA) and the business climate index for agriculture.FindingsAmongst others, the authors find that interest rate, GVA, grace periods and farmers’ business expectations have significant effects on the loan demand in agriculture. According to the results, the interest rate has a significant negative effect, whereas the granted grace periods, the GVA in agriculture and farmers’ business expectations have significant positive effects on the loan demand.Originality/valueThis paper investigates the determinants of loan demand in agriculture in a developed country by using unique and comprehensive data at loan and farm level. Amongst others, elasticities of loan demand in agriculture are determined.