Effects of Selected Credit Programs on Farm Financial Survival

Abstract

AbstractA computer simulation model is used to determine the effects of policies designed to reduce interest rates and/or loan payments on firm solvency, profitability and cashflow adequacy for a representative eastern Corn Belt farm. A state linked deposit program and the FmHA's Interest Rate Reduction and Debt Deferral programs are analyzed under low, medium and high levels of farm financial leverage. The FmHA Interest Rate Reduction program provides some improvement (relative to the base case) in firm profitability, solvency and cashflow at the 40 percent debt‐to‐asset level, with the ending debt‐to‐asset ratio below that at the beginning of the simulation. This same policy, applied to the 70 percent beginning debt‐to‐asset case, results in increased debt‐to‐asset ratios over, and a negative cashflow at the end of the eight‐year simulation. The linked deposit program provides similar, but substantially less, improvement in these financial measures than the FmHA Reduction plan due to its limit to operating loans. Firm solvency tends to deteriorate over the eight‐year simulation period under the FmHA Debt Deferral scenario, and the 70 percent debt‐to‐asset case is insolvent by year eight.