Farm Lenders Research Articles

Strong Nonagricultural Demand Keeps Agricultural Land Values Increasing

The Florida Land Value Survey, conducted by the Food and Resource Economics Department at the University of Florida, provides estimates of the value of different types of agricultural land for geographic regions of the state. The survey questionnaire was designed to obtain estimates of the market value for different types of land as of May 2005. Survey respondents included rural appraisers, farm lenders, real estate brokers, farm managers, land investors, county extension agents, personnel from the Farm Services Agency and the Natural Resource Conservation Service, county property appraisers, and other persons who develop and maintain information about rural land values in their areas. Respondents provided 185 usable county reports for the 2005 survey. This document is FE625, one of a series of the Food and Resource Economics Department, UF/IFAS Extension. Original publication date January 2006. FE625/FE625: Strong Nonagricultural Demand Keeps Agricultural Land Values Increasing (2005) (ufl.edu)

FSA farm loan repayment under economic recession and drought conditions

Purpose The purpose of this paper is to analyze the repayment records of Farm Service Agency (FSA) borrowers in two distinct US farming regions that have been experienced serious drought conditions even as the US economy was going through a recession. The analysis will identify factors that significantly influence both the probability of FSA borrowers’ survival (capability to remain in good credit standing) and temporal endurance (or length of period of good standing with creditor). Design/methodology/approach This analysis utilizes a data set of farm borrowers of the Farm Service Agency that regular farm lenders have classified as “marginal” relative to other borrowers. The research goal is addressed by confining this study’s regional focus to the Southeast and Midwest that have both dealt with financial stress arising from abnormal natural and economic conditions prevailing during the same time period. A split population duration model is employed to separately identify determinants of the probability and duration of survival (condition of good credit standing). Findings This study’s results indicate that larger loan balances, declining commodity prices, and the severity of drought conditions have adversely affected both the borrowing farms’ probability of survival and temporal endurance in terms of maintaining non-delinquent borrower standing. Notably, Midwestern farms have been relatively less affected by drought conditions compared to Southeastern farms. This study’s results validate the contention that the farms’ capability to survive and the duration of their survival can be attributed to differences in regional resource endowments, farming activities, and business structures. Originality/value This study’s analytical framework departs from the basic duration model approach by considering temporal endurance, in addition to survival probability analysis. This study’s original contributions are enhanced by its specific focus on the contrasting farm business structures and operating environments in the Midwest and Southeast regions.

Reconciling information gaps in organic farm borrowers’ dealings with farm lenders

Purpose – Organic outputs have been increasing at much lower rates than growth in consumer demand. Organic farmers’ debt aversion hinders them from obtaining business funds through borrowing. The purpose of this paper is to clarify that the farmers’ reluctance to use debt as a funding option can be more attributed to gaps in existing borrower-lender relationships, beyond sustainability principles. Design/methodology/approach – Empirical evidence collected from organic farmers and farm lenders establish differing expectations and perceptions that reinforce the organic farmers’ debt aversion. The farm lender survey data set was analyzed using the Heckman approach applied to two lenders’ decisions: their interest in lending to organic farm borrowers and loan amounts approved for successful loan applicants. The econometric results were reconciled with the compiled inputs provided by organic farmers interviewed. Findings – Results validate the farmers’ lower reliance on loans due to suspicions that lenders lack knowledge and consideration of organic farming conditions and principles. Farm lenders must depart from employing a uniform credit risk appraisal model and adopt borrower-specific versions of the model, but not necessarily delineating organic-conventional farming dichotomy that may not substantially affect credit risk measurement. Organic farms, on the other hand, need to better understand the credit risk appraisal principles and use their inherent business strengths to compete for loans with conventional farms without any special consideration. Practical implications – Borrower-lender relationships can improve if information gaps between lenders and borrowers can be minimized with more extensive outreach education efforts. Better relationships would increase organic farms’ credit access to effectively address an impending supply gap in an expanding industry. Originality/value – To the knowledge, a specific focus on organic farms in understanding farm borrower-lender relationships has never been explored in literature.

More Than Counting Beans: Adapting USDA Data Collection Practices To Track Marketing Channel Diversification

In order to differentiate their products, agricultural producers are expanding and diversifying their use of marketing channels. Increasingly, these channels convey farm-level information to the final purchaser. However, the Census of Agriculture, the longest-running U.S. farm survey, tracks only three forms of market differentiation: direct-to-consumer sales, organic sales, and the number of community supported agriculture farms. Current Congressional proposals to increase data collection on market channel diversification rely on "follow-on" surveys and the Agricultural Resource Management Survey (ARMS) conducted by the U.S. Department of Agriculture. Both of these surveys are more limited than the Census of Agriculture in observing farm-level trends; the follow-on survey is particularly limited in providing results that are comparable to all farms and even farms within the same sector. This paper will show that administrative reporting changes in the 2012 census and the introduction of new questions for the 2017 census can improve both farm-level and sector-level observations on marketing channel usage — with greater precision than tracking local and regional food systems. Such data is needed to assist policy-makers, technical assistance providers, and farm lenders in providing resources to the relatively high portion of young, beginning, and full-time producers involved in market channel differentiation.

Markov chain models for farm credit risk migration analysis

This study introduces two Markov chain time approaches, time‐homogeneous and nonhomogeneous models, for analyzing farm credit risk migration as alternatives to the traditional discrete‐time (cohort) method. The Markov chain models are found to produce more accurate, reliable transition probability rates using the 3 x 1 migration measurement method used by farm lenders. Compared to corporate bond ratings migration results, this study obtained larger mean differences in singular value decomposition between the cohort matrix and each of the Markov chain matrices. This finding suggests that the omission of transient, indirect migration activities under the cohort method is more costly when applied to farm credit analysis. This discrepancy could lead to understated transition probability estimates which, in turn, could produce misleading indicators of farm loan portfolio quality.

Cash versus Accrual Measures of Farm Income

This article examines discrepancies between cash and accrual measures of farm profitability for a sample of Illinois farm operators for the years 1981-1984. Results indicate a substantial percentage difference between the two measures of income (an annual average of 88%), with differences being much larger for financially stressed farms. When income figures are averaged over a four-year period, cash-accrual discrepancies diminish to about 36%. The accounting item, Change in Inventory, is shown to account for 93% of cash-accrual differences. Based on the results of this study, farmers and farm lenders using only cash accounting records can get a grossly inaccurate perception of true net farm income.

Effects of Sustained Financial Stress on the Financial Structure and Performance of the Farm Sector

Financial stress in agriculture, as indicated by the problems identified in Jolly et al.'s paper, can be caused by many factors. Farm failures can be the result of everything from poor individual management decisions to weather conditions in other countries. Differences in the causes of failures have different implications for the analysis of the effects of continuing stress. If, for example, all of the farmers who are failing today are simply poor managers, then the effects of continued stress are likely to be minimal. In fact, the elimination of poor managers might bring about net social benefits by reducing the cost of food. If good managers are being forced out of agriculture because of public policies, however, the effects may be substantially different. Thus, while the central purpose of this paper is to describe the measurable effects of sustained financial stress on the farm sector, identifying the causes of today's difficulties is an integral part of the research. Recent literature (Hughes and Penson; Perry et al.; Knutson, Richardson, and Jolly; Grant et al.) suggests three principal reasons for farmers' difficulties: macroeconomic policies, farm policies, and individual management decisions. The economic environment facing farmers has certainly played a central role in the current cash flow difficulties and/or resulting business failures characterizing American agriculture. Macroeconomic policies of recent years have generated prices and interest rates that have skewed economic returns in the economy away from capital-intensive and export-sensitive industries such as farming. Farm policies have also helped to shape current conditions. Although farm programs under the 1977 and 1981 farm bills were sufficient to mask the early stages of the current decline in farm profitability, the resources needed to continue to offset other factors have not been, nor are they likely to be, forthcoming. Finally, some farmers and farm lenders have contributed to their own problems. Many of the producers currently confronted with financial difficulties overcommitted themselves during the 1970s, assuming continuation of favorable economic conditions. As noted by King and Sonka, Because longterm debt and variable interest rates are often used to gain control of assets, managers need to consider the viability of a specific decision for several policy [and macroeconomic] scenarios in addition to the current policy. The rest of this paper is presented in three parts. First, discussion is focused on the aggregate effects of pursuing different macroeconomic policies through the end of this decade. The next section deals with the impacts of continued stress on different types of farms given different beginning leverage positions and farm policies. Finally, some of the effects of continued farm financial distress beyond the farm gate are discussed.

Solutions (or Resolutions) of Financial Stress Problems from the Private and Public Sectors

The current financial stress problem stated succinctly is that farmers and farm lenders are experiencing financial losses, and indeed business failures, in near-crisis proportions. Various data describe the problems including debt-asset ratios of farmers, delinquencies of farm debt, net charge-offs of debt by lenders, loss of capital and failures of farm lenders (USDA, Melichar 1985, Bullock, and Barkema and Doye). Unfortunately, no quick turnaround is in sight unless public policy or acts of nature change the situation. The private sector will bear the brunt of the continuing adjustment, at least until the cost becomes so great that the public is asked to share the burden. While not delineated here, the root causes of financial stress are many (Bullock, Brake, USDA, Melichar 1984). The common element in farm financial problems, however, is unserviceable debt; and, in lender problems, increased default risk and excessive concentra-

Financial Reporting in Agriculture: In Need of A Reliable System

Farm managers and lenders are becoming increasingly aware of the need for thorough and accurate farm financial management.1 The current extended agricultural recession magnifies this need. Increased current loan losses and the increasing financial stress of farm operators have prompted lending institutions, government agencies and farmers to determine what has gone wrong in the area of farm financial management and, more importantly, to search out ways to reduce the frequency of farm business failure. The use of inadequate financial reporting systems is viewed as one source of the problem.

The Status of Farm Lenders: An Assessment of Eighth District and National Trends

Michael T. Belongia and Kenneth C. Carrara examine the performance of the major lenders to the farm sector to gain some perspective about the sector’s financial condition. These financial institutions are the Farm Credit System, agricultural banks and the Farmers Home Administration (FmHA).

Financial Futures: A Useful Tool for Transferring Interest Rate Risk Away From Farm Borrowers or Lenders?

Interest rate risk is more important to agriculture in the 1980s than in earlier decades. Previously, farmers and others were keenly sensitive to fluctuations in production and commodity prices, a sensitivity that led to the development of a variety of methods to alleviate these inherent risks. But agriculture was much less sensitive to movements in interest rates. Rural financial markets that were essentially isolated from national financial markets shielded farm borrowers and lenders from interest rate risk. All that has changed. Deregulation of financial markets along with technological innovations brought financial institutions serving rural areas into direct competition with those in urban areas. This greater competition for funds means that agriculture must now pay market rates as it competes for funds in money markets. Also, the decision of the Federal Reserve since 1979 to target monetary aggregates has made rates more variable. Highly stimulative fiscal policy has contributed further to fluctuations in rates through its effect on inflationary expectations. Therefore, just as deregulation more fully exposed agriculture to financial market conditions, a new macroeconomic policy mix was making interest rates more volatile. A high degree of capital intensity and a surge in debt financing during the past decade make capital formation and financial performance in the agricultural sector particularly susceptible to interest rate swings. To illustrate, in recent years, with farm sector debt exceeding $200 billion while net farm income ranged between $20 and $30 billion, a one percentage point change in interest rates would have reduced or increased net income as much as 10%. Stated another way, agriculture's debt-to-income ratio today is about ten, while it was about one in 1950. Agriculture's challenge now is to manage this interest rate risk. Financial futures can be a highly effective tool for this purpose. This paper examines how financial futures can be used by both farm borrowers and farm lenders as well as the impediments to their use; then the paper summarizes some issues that will determine whether financial futures realize