Differences in Lending Practices Among Institutions Loaning Capital to Dairy Producers

Abstract

Dairy lenders in Virginia were mailed a 52-question survey of lending practices, customer characteristics, and knowledge of dairy production measures. Seventy-six responses from 72% of those surveyed were distributed nearly equally from the Farm Credit System, Farmers Home Administration, and commercial banks lending to dairy producers. Differences among types of lenders were identified, and orthogonal contrasts were used to compare banks with agricultural lenders and Farm Credit with Farmers Home.Relative to Farm Credit, Farmers Home loaned capital to younger dairy producers having smaller herds and more debt per cow. Agricultural lenders received 13% more requests for refinancing and 17% fewer requests for operating loans than banks. Three-fourths of all dairy loans were sound with banks having 17% more sound loans than agricultural lenders and Farm Credit 17% more than Farmers Home. Refinancing was the preferred method of handling stressed loans for all types of lenders. Although repayment ability was the primary credit evaluation, Farmers Home placed more emphasis than Farm Credit on production management and less on personal characteristics. Cash flow, profit-loss, and net worth statements were preferred by lenders. Statements presented by dairy managers to lenders were predominantly net worth with profit-loss next and cash flow fewest, especially in Farm Credit offices. Length of loans varied among types of lenders with Farmers Home longest on all items except used machinery and banks notably short on land terms. Lender types differed for knowledge of dairy production measures only for identification of genetically superior sires. However, 10 to 20% of all lenders misevaluated the quality of the example figure for each production category. Educational programs should emphasize more compatibility of financial statements prepared by dairy producers to be used by lenders, and identification of superior dairy production management by lenders.