Farm Loan Research Articles

The Effects of FmHA Guaranteed Farm Loans on Rural Credit Markets

Credit markets allocate a limited supply of loanable funds among alternative uses. In the process, some firms and invesunents are judged too risky and are excluded from receiving “affordably priced” credit Other firms may experience credit rationing because of market imperfections. Over the years, a number of Federally sponsored loan programs have evolved to address perceived problems with the credit delivery system. Several Federal programs are targeted at rural firms, in particular, because of their dependence on fairly small, geographically segmented capital markets. This paper examines the use of one Federal program in an attempt to determine how the delivery mechanism influences credit availability within rural communities. The Farmers Home Administration (FmHA), an agency of the U.S. Deparunent of Agriculture, provides credit to farmers and other rural businesses, homeowners, and communities through direct loans and by guaranteeing privately originated loans. The underlying principle guiding FmHA is that the assisted entity must not be able to obtain credit from usual commercial sources at reasonable rates and terms, but is judged economically viable or capable of becoming so in the future. This paper examines FmHA’ s farmer loan guarantee program operations during fiscal 1988 in an attempt to determine the characteristics of participating lenders and how lender behavior affects the guaranteed loan programs’ impact on local credit markets.

Oral Documentation and the Sustainable Agriculture Movement in Wisconsin

FARMERS CONTINUE TO PRESS federal and state lawmakers for help in responding to the crisis that has swept through rural America in this decade. Their demands include tax restructuring, price support adjustments, moratoria on farm loan foreclosures, changes in inheritance and capital gains tax laws, and aid for depressed rural communities, among other things. New and old progressive farm organizations champion their causes. Such groups as the National Farmers' Union, Groundswell, Prairiefire Rural Action, the National Farmers Organization, the American Agriculture Movement, the North American Farm Alliance, Rural America, and Save the Family Farm Coalition all speak out for farmers in legislative hearing rooms, in courtrooms, at foreclosure sales, and in political campaigns. While these organizations may differ in emphasis and tactics, all aim at helping today's embattled farmer.' Increasing numbers of these same farmers-and others who do not belong to such organizations-have responded to hard times by changing their farming methods. Concerned about the high cost of farming, instead of using expensive synthetic chemicals they have adopted alternative ways to control bugs and weeds, and to supply nutrients to the soil. Many have farmed this way since the early 1970s-long before the current crisis began. These reduced-input, or sustainable agriculture farmers use

Why Did We Grant Su Yulan a 6,000-Yuan Loan?

In February this year, in accordance with directives from the district leadership and Su Yulan's application, we decided, after appropriate investigations, to grant her a farm loan of 6,000 yuan. The loan helped finance the building of ten pigpens, a feed fermentation facility, and a motor pump well for Su and her family's pig farm. The loan agreement specified that the sum was to be paid back within three years.

The History of Recent Farm Legislation: Implications for Farm Families

In order to understand what is happening to contemporary farm families, one must examine the changing structure of agriculture (Haney, 1982). The current economic crisis of many farmers1 is hardly the first time major financial difficulties have been faced by this segment of American society. In fact, United States agricultural policy stems from the very creation of our country when colonials revolted against England's excessive taxation and control of agricultural exports (Rasmussen, 1985). This article reviews from a historical perspective current major agricultural and financial legislation affecting today's farmer. First, it demonstrates that legislation was created in response to domestic social and economic conditions of the United States. Secondly, it illuminates the impact of world economic conditions in recent years. The irrevocable inclusion of the American farm economy into the global macroeconomy in the 1970s will illustrate the complexity of the farm issue. Farm legislation in isolation cannot provide all the support necessary to improve the farmer's economic condition. Thirdly, the philosophical shift in emphasis of farm legislation from welfare of the farm family in the 1930s, to the commercialization of the farm in the 1970s, and to today's market orientation will be explored. Finally, it is argued that if family scientists are to understand what is happening to farm families today, the implications of the historical economic context within which these families are living must be examined. Major legislation in the early 1900s began with the Country Life Commission appointed by President Theodore Roosevelt in 1908. As a result, over the next 10 years laws were passed that created better conditions for rural America. In 1914 the Smith-Lever Act created the Cooperative Extension Service, and in 1916 the Federal Farm Loan Act set up the structure for the Farm Credit System. However, it was not until the 1930s that the Federal Government instituted major farm programs which are the forerunners of those that exist today.

Agricultural real estate loans and secondary markets

As a result of financial difficulties confronting American agriculture, public debate is focusing on longterm options for restoring economic stability and growth to the agricultural economy. Many believe that just as homeowners in small communities throughout the nation have been served by the development of a secondary market for residential mortgages sponsored by the federal government, farmers throughout the country would similarly benefit from the development of a secondary market for farm real estate mortgages. This paper discusses issues relating to the development of a secondary market for agricultural real estate loans. The concept of a secondary market for agriculture is of considerable interest to Congress, as evidenced by recent enactment of the Agricultural Credit Act of 1987 which established the Federal Agricultural Mortgage Corporation (“Farmer Mac”) to create a secondary market for farm real estate loans. The first section discusses the general nature of secondary markets and their purposes, with particular attention given to the secondary market for home mortgages because it served as a model for a secondary market for farm loans. Section two discusses basic differences between agriculture and housing, and section three provides a brief discussion of federal credit subsidies designed to help meet social and economic goals by influencing the allocation of credit to particular sectors of the economy such as housing and agriculture. Potential benefits and costs associated with the development of a secondary market for agriculture are discussed in section four.

The problems and prospects of the farm credit system

Harsh and inaccurately forecasted economic conditions placed stresses on the Farm Credit System (FCS) and caused the organization to incur losses beginning in the mid-1980s. In recent years, the FCS has been neither more nor less able to avoid problem farm loans than commercial banks. But, because of the composition of the FCS portfolio, the problems of the FCS are more severe than those of banks. Federal legislation designed to bolster the FCS achieved certain short-term objectives in 1985 and 1986. However, even with additional federal assistance, the longer-term prospects for the FCS are uncertain since problems which created difficulties for the FCS in the mid-1980s remain unsolved.

Farm survival and performance under alternative financial conditions and credit policies

The impact of beginning equity, credit limits imposed by lenders, and changes in land values on farm survival, changes in equity position and farm success (measured by the probability of a positive net present value of returns) are evaluated. Whole-farm, Monte Carlo simulations for Texas part-owner and tenant rice-soybean operations were completed over the period 1984 through 1988. Results indicate that extending additional credit to part-owner and tenant operators in a high debt position (over 50%) will allow continued operation, but continued operation significantly increases the likelihood of a loss of farm equity and loan losses to agricultural lenders. Deterioration in land values increases the need for a higher equity base.

Effects of Financial Stress on Rural Communities: Discussion

Melichar and Irwin have provided a useful and factual update of the impacts of farm financial stress rural financial intermediaries. I hope that they and their respective agencies will continue to provide objective information on, and analysis of, the farm credit situation. Despite differences in their organizational structures and regulatory constraints, both the Farm Credit System (FCS) and commercial banks have had similar experiences in terms of a continuing deterioration in the quality of their loan portfolios. It is important to note that, contrary to some press reports, a vast majority of individual FCS associations and agricultural banks have thus far been able to absorb their losses; however, continued farm financial stress will challenge those intermediaries whose assets are heavily concentrated in farm loans. I have tried to reconcile the conclusion that on average, farm loans are not responsible for the delinquency problems [of agricultural banks] when they are obviously almost entirely responsible for the delinquency problems of the FCS. Perhaps the problems of small unit banks can be better understood if we recognize the pervasive effects of farm financial stress agribusiness firms, the retail and service sectors, and rural communities as described by Ginder, Stone, and Otto. Their retail sales data suggest that rural banks in towns with populations under 2,500 are especially vulnerable. I would like to see additional work the

Variable Interest Rates and the Financial Performance of Dairy Farm Businesses

The increased variability of interest rates experienced during the early 1980s led many commercial banks to shift the interest rate they charge on farm loans from a fixed to a variable rate (Zook and LaDue). Although the Farm Credit System had used variable rates for a number of years, the index for their rate was the average cost of funds, which is less volatile than some of the rate indices used by commercial banks. Further, in contrast to the situation when the Farm Credit Service switched to variable rates, the shift of commercial banks to variable rates left most farmers with no fixed rate general credit source, no matter how important a fixed debt service commitment might be to their business.

Agricultural credit for farmer groups: Experiments in Honduras

Group lending to farmers in low income countries has been proposed as a way of providing more cost-effective agricultural credit to small producers and of improving loan repayments. The experience of providing credit through small farmer groups in Honduras is reviewed in the light of these suggested benefits. In general, the experience of the lending institution with these groups was positive. However, administrative costs did not decline significantly, repayment problems continued, few groups were reached and farmer loan transaction costs were still high. Operational changes and improvements would produce more of the expected benefits.

A study of farm loan repayment problems in Southwestern Nigeria

The main objective of this paper is to investigate farm loan repayment problems among beneficiaries of the loan schemes of the Ondo State Agricultural Credit Corporation and the Ogun State Agricultural Development Corporation. Data for the study were collected from a sample of eighty-five respondents in Ondo State and seventy-two small-scale farmers in Ogun State. Among the issues investigated were the magnitude and purposes of the loans borrowed, the uses of the loans and repayments to date. The rate of farmers' loan delinquency was measured and the main causes of delinquency of the borrowers were identified.

Some Evidence on the Relationship Between Loan Insurance and the Supply of Agricultural Credit From Commercial Banks

Insured farm loans have evolved to be an important component of the federal role in the agricultural credit subsector. Currently, agricultural credit is supplied by three sets of institutions: (1) private firms and individuals, (2) the quasiprivate cooperative Farm Credit System, and (3) the federal public programs of the Farmers Home Administration (FmHA) and Small Business Administration. Statuatory authority currently limits federal programs to a residual role of lending to borrowers who cannot receive credit from the other segments. Though a large component of public programs consists of emergency loans in areas of economic disaster, the FmHA also makes farm operating and real estate loans to farmers who meet the statuatory requirements. The source of funds for some FmHA loans is federal appropriations and money market certificates. However, guaranteed loans have become an important component of FmHA programs. These loans are made in cooperation with other agricultural finance agencies. The public agency insures or guarantees repayment of the loan. The cooperating firm negotiates the loan and provides the funds. Usually the interest payment is below the current market interest rate structure.

Rural Banks and Farm Loan Participation

AbstractBanking theory is used to develop a static, certainty model for evaluating profitability of farm loan participations for rural banks. Techniques are developed and applied to measure empirically the effects of participations on rural bank earnings attributed to farmer customer relationships and costs associated with demand balances required by correspondent banks. Model results show a decline in optimal levels and profits of loan participations for rural banks as correspondent balance requirements increase and as other parameters adjust to levels reflecting tighter monetary conditions. Participation strategies that may enhance the flow of funds into rural areas are also considered.

The Profitability of Agricultural Loans by Commercial Banks

Data collected from a sample of New York banks were used to assess factors expected to influence the profitability of the various loan programs of commercial banks. Loan loss and loan service costs were lower for farm loans than for either installment or commercial loans. Although not required to maintain compensating balances, farmer time and demand deposits represented 23 percent of outstanding loan balances. The high rate of turnover on farm mortgage loans resulted in an average loan repayment period of 6.2 years, only 40 percent of the original financing period. Lower farm loan costs indicate that banks could charge 3/4 percent lower interest on farm loans than commercial loans.

The Effect of a Negative Income Tax on Farm Business Decisions and Financial Management

production, on changes in asset-debt relationships, and on sources and purposes of farm loans. Theoretical expectations were reported by Meyer and Saupe, Bawden (1970, 1971), and Kerachsky (this issue) and are not repeated here. Multiple regression analysis was the major analytical device. All models contained a set of theoretically plausible explanatory variables to control for any differences in farm resources or demographic characteristics between controls and experimentals plus variable(s) for the tax and guarantee levels in the experimental plans. Observations from Iowa and North Carolina were not combined in the analyses because of substantial differences in the underlying agricultural production relationships.

Inference for Markov Chains Having Stochastic Entry and Exit

Abstract Models suitable for statistical inference in Markov chains are considered featuring various forms of stochastic entry, including Poisson, renewable binomial pool, uncertain pool size, negative binomial, and input-output reservoir. A parallel inactive states model is suggested for exit. Maximum likelihood estimates are obtained and likelihood ratio tests derived. An application is made to the distribution of Ninth Federal Reserve District member banks with respect to the ratio of farm loans to total loans.

Inference for Markov Chains Having Stochastic Entry and Exit

Abstract Models suitable for statistical inference in Markov chains are considered featuring various forms of stochastic entry, including Poisson, renewable binomial pool, uncertain pool size, negative binomial, and input-output reservoir. A parallel inactive states model is suggested for exit. Maximum likelihood estimates are obtained and likelihood ratio tests derived. An application is made to the distribution of Ninth Federal Reserve District member banks with respect to the ratio of farm loans to total loans.

Impact of Farmers Home Administration's Future Policies on Northern New England Dairymen

Individuals working with farmers in the Northern New England States of Maine, New Hampshire and Vermont have claimed that the Farmers Home Administration has increased non-farm loans, while deliberately curtailing new farm loan activities and reducing the service on existing farm loans. If these allegations are true, it is important for the Northern New England agri-business sector to consider the future implications. The objective of this paper is to analyze the impact of future policy alternatives available to the Farmers Home Administration on the region's dairy farms.

Farm Capital and Credit Projections to 1980

W ITH the approach of a new decade, several projections of farm capital in 1980 have appeared. Conceptually, such long-run capital projections ought to be particularly useful to agencies that can influence the volume and terms of credit available to agriculture. For instance, availability of bank credit might be increased by developing secondary markets for farm loan paper, improving access of rural banks to discount facilities of the Federal Reserve Banks and Federal Intermediate Credit

The New Deal in Colorado

A MONG THE WESTERN STATES, few offer the historian greater opportunity to study the impact of the New Deal than does Colorado. Largely agricultural, it encouraged trials in crop reduction, farm loans, mortgage moratoriums, resettlement programs, and Dust Bowl abatement. Beyond the farmlands, in the forested mountains which cover one-third of the state, there abounded numerous possibilities to develop and perfect projects in conservation and reclamation. In addition, urban centers such as Denver and Pueblo cried for creative experimentation that would alleviate the depressed condition of their inhabitants. Like other Rocky Mountain states, Colorado experienced persistent mild depression during the 1920's.1 By this time, wealth from the state's precious metals had declined dramatically as miners depleted the supply of prime quality ore. Down as well were coal consumption and railroad construction. What is more, profits from expanded farm production could not compensate for these economic handicaps. Thus, Colorado failed in its struggle to regain the prosperity it had experienced in the preceding decade.2 Limited economic success was evident in 1929, but within a year it had disappeared.3 The Great Depression of the 1930's descended