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Volume 64, Number 2, Fall 2004
Abstract A credit
risk model suitable for agricultural lenders is identified. The model
incorporates sector correlations and is applied to the loan portfolio
of an agricultural credit association to create a distribution of loan
losses. The distribution is used to derive the lender's expected and
unexpected losses. Results of the analysis indicate that the association
is more than adequately capitalized based on 1997S2002 data. Since the
capital position of the association is lower than that of most other
associations in the Farm Credit System, this raises the issue of overcapitalization
in the System. "Bank
Risk Ratings and the Pricing of Agricultural Loans"
authored by Nick Walraven and Peter J. Barry Abstract This paper
reviews the prevalence of the use of risk ratings by commercial banks
that participated in the Federal Reserve's Survey of Terms of Bank Lending
to Farmers between 1997 and 2002. Adoption of risk rating procedures
held about steady over the period, with a little less than half the
banks on the panel either not using a risk rating system, or reporting
the same rating for all their loans in the survey. However, most of
these banks were small, and roughly four-fifths of all sample loans
carried an informative risk rating. After controlling for the size and
performance of the bank and as many nonprice terms of the loan as possible,
findings reveal that banks consistently charged higher rates of interest
for the farm loans they characterized as riskier, with an average difference
in rates between the most risky and least risky loans of about 1½
percentage points. "Economic
Analysis of the Standard Reinsurance Agreement" authored
by Dmitry V. Vedenov, Mario J. Miranda, Robert Dismukes, and Joseph
W. Glauber An economic analysis is presented of the Standard Reinsurance Agreement (SRA), the contract governing the relationship between the Federal Crop Insurance Corporation and the private insurance companies that deliver crop insurance products to farmers. The paper outlines provisions of the SRA and describes the modeling methodology behind the SRA simulator, a computer program developed to assist crop insurers and policy makers in assessing the economic impact of the Agreement. The simulator is then used to analyze how the SRA affects returns from underwriting crop insurance. The results are presented in aggregate and also at the regional and individual company levels. Key words:
crop insurance, policy analysis, risk modeling, Standard Reinsurance
Agreement "Farm-Level
and Macroeconomic Determinants of Farm Credit Risk Migration Rates"
authored by Cesar L. Escalante, Peter J. Barry, Timothy A. Park,
and Ebru Demir Logistic regression techniques for panel data are used to identify factors affecting farm credit transition probabilities. Results indicate that most farm-specific factors do not have adequate explanatory influence on the probability of farm credit risk transition. Class upgrade probabilities are more significantly affected by changes in certain macroeconomic factors, such as economic growth signals (from changes in stock price indexes and farm real estate values) and larger money supply that relax the credit constraint. Increases in interest rates, on the other hand, negatively affect such probabilities. Key words:
demographic factors, farm credit risk migration, macroeconomic variables,
ordered logit regression, random-effects model, transition probabilities "Factors
Affecting Farm Enterprise Diversification" authored
by Ashok K. Mishra, Hisham S. El-Osta, and Carmen L. Sandretto Enterprise diversification is a self-insuring strategy used by farmers to protect against risk. This study examines the impact of various farm, operator, and household characteristics on the level of onfarm enterprise diversification. Evidence exists that larger farms are more specialized. Also, farmers who participate in off-farm work, farms located near urban areas, or farms with higher debt-to-asset ratios are less likely to be diversified. In contrast, evidence suggests there is a significant positive relationship between diversification and whether the farm business has crop insurance, is organized as a sole proprietorship, or receives any direct payments from current farm commodity programs. Key words:
debt-to-asset ratio, enterprise diversification, farm size, government
payments, insurance, location, off-farm income, soil productivity
Agricultural credit markets are dominated by two institutional retail lender groups, the cooperative Farm Credit System (FCS) and commercial banks. Analysis of farm loans made over the 1991S1993 and 2001S2002 periods indicates that FCS lenders were more likely to serve full-time commercial farmers and farmers located in regions with less competitive credit markets. In contrast, commercial banks were more likely to serve small, part-time, and hobby farmers. This segmentation of farm credit markets is consistent with federal regulations requiring the FCS to provide credit to "bona fide" farmers with a basis for credit. Key words:
agricultural banks, farm credit markets, Farm Credit System, farm lenders,
market segmentation
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