Land Values and Farm Credit Policy

Abstract

The practice of lending agencies is determined by the prevailing theory on the relation between farm incomes and farm real estate values. The generally accepted theory is that the value of farm real estate tends to be a capitalization of net income after reasonable wages have been deducted for the labor of the operator and of other workers. This presupposes that the labor returns of operators on poor land will be as high as those of operators on rich land. It presupposes that the value of the real estate on farms of different productivity, as reflected in market prices, will be in proportion to their different net rents, except that so-called economic frictions will prevent the relation from being perfect at all times. Were this theory valid it would be proper to lend the same percentage of the value of real estate on farms at different levels of productivity. Farmers could live as well on one farm as on another, considering the outlay required to maintain the capital; and the sacrifices required to increase the equity would be about in proportion to the advantages obtained. The loan policies of most lending agencies are believed to be such as to indicate that the usual theory of land valuation has actually been applied in adjusting loans to productivity. For example, recent studies of land classification and loan experience in several areas have shown that Federal land bank loans made prior to 1933 were the same percentage of appraised value on all grades of land within each area. These studies have also enabled us to measure the results of this policy. In three crop-farming counties in a certain eastern state, loans averaged 46 per cent of appraised value in fair land areas, 45 per cent in good areas, and 47 per cent in very good areas. Foreclosures over a 20-year period were 29, 17, and 11 per cent, respectively. Apparently the loan-paying ability did not bear a standard relation to valuation at all grades of productivity. Very similar results were obtained in sample studies in an eastern dairy area, in a southern cotton county, in several Great Plains counties, and in a large dry-farming area of a mountain state. In each case loans were almost the same percentage of appraised value on all grades of land, but the loan experience was much more favorable in the more productive than in the less productive land classes. Since farm management data began to be available through farm accounting and farm survey studies, an increasing number of people have become acquainted with the fact that the commonly