Agricultural Finance Review

Volume 57, 1997

Abstracts

The Benefits and Costs of Fee-Income Generation in Small Banks

Jeffrey Stensland and Glenn Pederson

Banks have been expanding the scope of their operations to include more fee-generating services as part of a strategy to increase overall profitability. This study evaluates whether the added services are improving an average bank’s profit margins. The investigation tests for scale and scope economies in service production and examines the profitability of specific fee-based products using survey data from Minnesota banks. A high fee-income strategy does not appear to improve small banks’ performance and does not provide sufficient benefits to overcome the diseconomies of scale in small Minnesota banks.

Key words: banks, service-fee income, economies of scale and scope.

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Lending Relationships, Customer Loyalty, and Competition in Agricultural Banking

Peter J. Barry, Paul N. Ellinger, and LeeAnn McEdwards Moss

Data from a recent survey of midwestern agricultural banks are used to investigate the influence of the competitiveness of lending markets in agriculture on the relationships between lenders and borrowers. The effects of market competitiveness assessments, potential products and services lenders could offer to their borrowers, and other institutional characteristics are investigated for farm real estate and non-real estate farm borrowers using an ordered probit regression model. The empirical results clearly indicate an inverse relationship between competition and borrower loyalty, which serves as a proxy for the lender-borrower relationship.

Key words: agricultural bankers, competition, lender-borrower relationships.

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A Stochastic Optimal Control Formulation of the Consumption/Debt Decision

Octavio Ramirez, Charles B. Moss, and William G. Boggess

The risk-balancing optimal debt model proposed by Collins has been the basis of several studies into the effects of policy on debt choice in agriculture; however, the formulation does not explicitly model the consumption/investment tradeoff facing the farm firm. This study reformulates the optimal debt model using stochastic optimal control to directly address the consumption/investment tradeoff.

Key words: debt, investment/consumption decisions.

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Stabilizing and Extending Qualitative and Quantitative Indicators of Creditworthiness in Agricultural Credit Scoring Models

Michael P. Novak and Eddy L. LaDue

This study introduces quantitative and extended indicators of creditworthiness for use in credit scoring models. Annual, two-year average, and three-year average indicators of qualitative creditworthiness, as well as annual, two-year average, and three-year average indicators of quantitative creditworthiness, are calculated using the coverage ratio. The respective indicators of creditworthiness are incorporated into annual, two-year average, and three-year average credit scoring models. The results indicate that the average models’ creditworthiness prediction rates are more accurate than the annual model’s creditworthiness prediction rates. The results also suggest that the projected coverage ratio may be a viable, alternative, quantitative indicator of creditworthiness.

Key words: extended creditworthiness, quantitative creditworthiness, qualitative creditworthiness, multiperiod model, credit evaluation, coverage ratio.

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Impact of the 1996 FAIR Act on Major Agricultural Input Suppliers

Jian Yang and David J. Leatham

A multivariate regression model is used to evaluate the effects of events leading to the passage of the Federal Agricultural Improvement and Reform (FAIR) Act on the returns to shareholders of two major agricultural input industries. The evidence suggests that passage of the act has produced significant positive abnormal returns to the shareholders of large agricultural chemical firms. Conversely, shareholders of small agricultural chemical firms, and large or small farm machinery firms have not experienced significant abnormal returns.

Key words: FAIR Act, event study, input suppliers.

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Factors Affecting Commercial Bank Use of FSA Loan Guarantees in Arkansas

Bruce L. Dixon, David L. Neff, Bruce L. Ahrendsen, and Scott M. McCollum

The Farm Service Agency (FSA) guaranteed loan program has existed for more than two decades, and it will continue under the FAIR Act to be a major support program for farm operators. This study identifies factors influencing Arkansas commercial bank participation in FSA loan guarantee programs and the dollar volume of participation during fiscal years 199095. Incidental truncation models are estimated to predict whether commercial banks participate in making guaranteed operating loans or farm ownership loans, as well as to predict obligation volumes. Agricultural banks are found to be larger users of loan guarantees than urban and nonagricultural banks. Increasing loan-to-asset ratios are associated with greater bank participation. Belonging to a multi-bank holding company encourages use of farm ownership loan guarantees.

Key words: FSA guaranteed loan program, commercial banks, loan obligation levels, Farm Service Agency.

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Teaching Farm Financial Management by Interactive Simulation

William M. Edwards

Student understanding of quantitative techniques in farm financial management can be enhanced by the use of simulation models. One such model, called Farmsim, has been used successfully in both classroom and extension teaching. It features enterprise selection, input choices, renting and contracting of resources, expansion decisions, short- and long-term financing options, risk management strategies, and cash flow control. By simulating 10 consecutive farming years, students learn whole-farm, long-term financial management concepts. Interactive input screens and complete printed financial reports minimize instructor time, give immediate feedback to students, and provide individualized results for use in class exercises.

Key words: simulation, teaching, experiential learning, financial management, farm management.

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