Volume 67, Number 1, Spring 2007 Issue

Biography

"John Kenneth Galbraith: The Agricultural Finance Years " authored by Calum G. Turvey

Research

"Factors Affecting the Agricultural Loan Decision-Making Process" authored by Allen M. Featherstone, Christine A. Wilson, Terry L. Kastens, and John D. Jones

Abstract

Agricultural lenders in today’s environment face many challenges when evaluating the creditworthiness of farm borrowers. To address these challenges, a survey was conducted with financial institutions in Kansas and Indiana where agricultural lenders were asked for their responses to hypothetical agricultural loan requests. Each loan request differed by the borrower’s character, financial record keeping, productive standing, Fair Isaac credit bureau score, and credit risk. Lenders provided information about themselves and their financial institutions. The survey data obtained determine the relative importance of financial and nonfinancial information when analyzing agricultural loan applications. Tobit models are estimated to identify the borrower and lender characteristics that are important in determining loan approval, while OLS models are used to investigate the factors that affect interest rates offered to farm borrowers. The results offer a comparison of agricultural lending between two important agricultural states and provide lenders with insight on the factors that influence the decision-making process of other agricultural lenders.

Key words: agricultural loans, credit bureau score, credit evaluation, interest rates

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"FSA Direct Loan Targeting: Successful and Financially Necessary?" authored by O. John Nwoha, Bruce L. Ahrendsen, Bruce L. Dixon, Daniel M. Settlage, and Eddie C. Chavez

Abstract

The Farm Service Agency (FSA) direct farm loan program provides credit to family-sized farms including those operated by beginning farmers and socially disadvantaged applicants. Approximately 37% of all U.S. farms are estimated to be eligible for FSA direct loans when farm size, credit needs, farming experience, and occupation are taken into account. However, market penetration rates for various borrower cohorts range from 0.8% to 4.6% for FY 2000S2003. In general, beginning farmers have weaker financial characteristics than non-beginning farmers. Yet, the same result is not found when comparing socially disadvantaged farmers with non-socially disadvantaged farmers, such that there are few significant differences or the differences in financial characteristics are mixed. Overall, results indicate FSA direct farm loan borrowers have weaker financial characteristics than eligible, non-FSA direct farm loan borrowers, implying FSA is serving farmers likely to be denied credit by commercial lenders.

Key words: beginning farmer, Farm Service Agency, federal direct loan, socially disadvantaged
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"Efficiency Differences of U.S. Agricultural Banks" authored by Onelack Choi, Spiro E. Stefanou, and Jeffrey R. Stokes

Abstract

A balanced panel data set covering 519 U.S. agricultural banks is constructed for the period 1996S2005.  Cost efficiency measures of agricultural banks obtained from stochastic frontier analysis and data envelopment analysis are regressed on various bank_specific characteristics to explain the cost efficiency differences of agricultural banks.  The results indicate that (a) cost efficiencies are positively related to profitability while negatively related with the raw cost inefficiency measure, (b) older agricultural banks tend to be more efficient, (c) regulation may deteriorate efficiency levels, (d) bigger agricultural banks tend to be less efficient, (e) bank-specific characteristics can explain DEA efficiency scores better than they can SFA efficiency measures, and (f) the inconsistency issue related to two-step approaches is not serious.

Key words: agricultural bank, data envelopment analysis, efficiency, efficiency differences, stochastic frontier analysis

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"Estimating Delinquency Migration and the Probability of Default from Aggregate Data" authored by Jeffrey R. Stokes and Brent A. Gloy

Abstract

Defaulting on a mortgage represents the ultimate consequence of past decisions to delay payment. While many modeling approaches are available to estimate the probability of default, most if not all require account-level data. Further, past research has not attempted to estimate the probability that a current loan will transition among delinquency states prior to default. In this paper, we present an econometric approach that makes use of publicly available aggregate data for estimating the probability of delinquency and the probability of default. The results suggest the approach may have merit for monitoring bank performance as well as usefulness for banks’ risk management efforts.

Key words: delinquency, Markov chain, maximum entropy, probability of default

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"An Analysis of Credit Risk Migration Patterns of Agricultural Loans" authored by Andrew Behrens and Glenn D. Pederson

Abstract

Loan migration analysis is conducted using a large data set of loan risk ratings in the Farm Credit System. We find path dependence and limited support for a trend reversal pattern. There is evidence that the magnitude of migrations reported in previous credit score proxy studies overstates trend reversal in agricultural loans rated by lenders. Our results indicate that retention rates of agricultural loan risk ratings are quite high. Small loans are less likely to migrate than medium_ and large-sized loans, and unseasoned loans are more likely to migrate than seasoned farm loans.

Key words: agricultural loans, credit risk migration, Farm Credit System associations, trend reversal

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"Markov Chain Models for Farm Credit Risk Migration Analysis" authored by Xiaohui Deng, Cesar L. Escalante, Peter J. Barry, and Yingzhuo Yu

Abstract

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 3×1 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.

Key words: cohort method, continuous time models, credit risk migration, Markov chain process, semi-parametric multiplicative hazard model, time homogeneity, transition probabilities

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"Changes in the Distribution of Farm Wealth in the United States" authored by Ashok K. Mishra, Charles B. Moss, and Kenneth W. Erickson

Abstract

This paper examines the changes in farm sector wealth from 1949 through 2002. The study uses Theil’s entropy-based measure of inequality of farm wealth for 10 regions of the United States. The entropy measure is then used to decompose U.S. inequality into within-region and between-region differences. Results show that for the period 1949 to 1993, relative to the number of farms per state, farm wealth in the United States became more equally distributed. However, beginning in 1994, findings suggest inequality in wealth may be increasing.

Key words: farm wealth, inequality, regional decomposition, Theil’s inequality

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"Analysis of Rainfall Derivatives Using Daily Precipitation Models: Opportunities and Pitfalls" authored by Martin Odening, Oliver Musshoff, and Wei Xu

Abstract

This study examines rainfall variability and its implications for wheat production risk in northeast Germany. The hedging effectiveness of rainfall options and the role of geographical basis risk are analyzed using a daily precipitation model. Simpler pricing methods such as the burn analysis and the index value simulation serve as benchmarks for comparison. It is found that the choice of statistical approach may lead to considerable differences in the estimation results. Daily precipitation models should be used with some caution in the context of derivative pricing because they tend to underestimate rainfall variability. This is unexpected, because daily simulation models are usually preferred in the context of temperature-based weather indexes.

Key words: hedging effectiveness, precipitation modeling, weather derivatives

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"Evaluation of Risk Management Alternatives for Indiana Grain Producers" authored by Ana R. Rios and George F. Patrick

Abstract

Crop insurance and pre-harvest pricing strategies were analyzed for “all years” and “years following a normal crop year” scenarios for the 1986 through 2001 period in three Indiana counties. Crop insurance products and early spring pre-harvest marketing generally had positive returns for producers. A large number of strategies provided higher mean revenues, higher 5% values-at-risk, and higher certainty equivalents than the benchmark strategy. Although pre-harvest marketing strategies had the highest certainty equivalents in both scenarios, net farm revenues were lower and crop insurance combined with pre-harvest pricing were common among top-ranked strategies following normal crop years.

Key words: crop insurance, pre-harvest pricing, risk management

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"Buying Stock in Value-Added Companies: An Alternative Choice for Vertical Diversification?" authored by Joshua D. Detre, Christine A. Wilson, and Allan W. Gray

Abstract

Recent research has indicated that livestock producers who want to manage risk and diversify their operations should invest in the stock market. This research evaluates whether or not a portfolio of publicly held companies that are first handlers of pork products would provide pork producers with a means of enhancing annual returns and reducing the volatility in the annual returns. Ex ante results suggest producers can gain from investment in value-added stocks. Ex post results, however, imply producers must choose active management of their portfolio to receive the same type of benefits as the ex ante portfolio.

Key words: investment, risk management, stock market, value-added, vertical diversification, vertical integration

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Send questions and comments to Faye Butts fsb1@cornell.edu

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