Agricultural Finance Review

Farmers' financial condition in the eighties will be determined primarily by Government and fiscal monetary policies. Net farm income and farmers' wealth my increase substantially if inflation can be controlled and steady growth in real output sustained. If, however, the general economy suffers from high inflations and slow-to-negative growth in output, farmers will probably face financial difficulties by the end of the decade. Farm debt will likely increase to about $500 billion by the end of the decade with a healthy general economy; it may rise to almost $1 trillion under poor economic conditions.

Fenwick, Harshbarger, and Swakhamer / The Role of Farm Credit System in Financing Agriculture <top>

With outstanding debt held by the Farm Credit System projected to exceed $200 billion by 1990, compared with about $60 billion at the start of 1980, a further rise in the Systems' share of total farm debt is likely. Expected rapid rises in both farm asset values and production expenses in the eighties along with unsteady farm income will adversely affect framers' repayment and credit capacity, increasing lending risks to the System. Because of rapidly growing credit demand, an increased capital base will be a major goal of the Farm Credit System. It is possible that the system will borrow on foreign money markets. New regulatory pressures from the Congress and demands for review of the System's functions by competing lenders may also occur.

Barry / Agricultural Lending by Commercial Banks <top>

Competition in financial markets is increasing. However, successful adjustment by banks to changing regulations, along with further development of nonlocal sources of funds, should reduce periodic liquidity stresses and swings in credit availability for farmers. Costs of funds will be higher and more volatile, thus increasing the need of agricultural banks for efficient, competitive pricing on farm loans and other services to maintain their position in farm credit markets.

Lins / Life Insurance Company Lending to Agriculture <top>

As a result of high inflation and the use of fixed interest rate mortgages, life insurance companies have reduced the length of farm mortgage loans to 3-5 years. This allows them the latitude to adjust interest rates more frequently. They are also moving to acquire investments, such as farmland or shared appreciation mortgages, where returns are geared to the level of inflation, These changes should allow the life insurance industry to continue serving the credit need of the agricultural sector.

Boehje / Noninstitutional Lenders in the Agricultural Credit Market <top>

Noninstitutional lenders have been an important source of funds for farmers. Major sources of noninstitutional funds includes merchants and dealers, personal loans and loan guarantees, and installment land contracts. In general, as noninstitutional lenders are partially residual claimants, the volume of noninstitutional credit will depend on the ability of institutional lenders to serve future credit demand at reasonable rates and profits. Rising interest rates are expected to encourage interfamily loans and land contracts among family members, but to discourage merchants and dealers from extending credit unless it is needed as a sales promotion tool.

Herr and LaDue / The Farmers Home Administration's Changing Role and Mission <top>

While FmHA's traditional farm ownership and operating loan programs continue to serve framers not well served by commercial lenders, the newer emergency loans, now a major part of lending to farmers, serve borrowers whose characteristics more nearly fit into the commercial category. As emergency farm borrowers become the major FmHA farm clientele in the latter half of the seventies, the focus of the agency shifted from limited resource farmers to one more competitive with commercial lenders. Although the future economic environment is uncertain, it is not likely that emergency credit programs will be needed on the scale provided in the last half of the seventies. Expansion of FmHA programs can further distort the allocation of credit within the farm sector and between the farm sector and other sectors of the economy. This study found no evidence that large groups of framers are currently excluded from commercial credit and are, therefore, eligible for FmHA-type programs.

Hottel / The Commodity Credit Corporation and Agricultural Lending <top>

The role of the Commodity Credit Corporation (CCC) in agricultural lending has changed since its beginning in 1933, reflecting changes in Government farm programs and farm economic conditions. The CCC's original purpose of helping to minimize the effects of depressed commodity prices has been de-emphasized as the program has shifted to the financing aspects of crop inventories. With a "most likely" health farm economy in the eighties, CCC's share of total farm nonrealestate debt it expected to change only slightly from that of the seventies-- about 6-8 percent. With an unhealthy farm economy, CCC's share of such debt will be substantially higher.

Penson and Duncan / Farmers' Alternatives to Debt Financing <top>

The importance of leasing and outside equity financing is likely to grow in the eighties if farmers find it increasingly difficult to debt finance the rising costs of land and equipment. Information on the magnitude of equipment leases and outside equity financing, now lacking, is needed to monitor the changing financial structure of the farm sector. Farmers should carefully consider the after-tax cost of capital and cash flow constraints when choosing between lease financing and debt financing. Unless blocked by public policies, investments in farming by nonfarmers could grow rapidly. Increased leasing and entry outside equity capital have important implications for the future of farm ownership and control of agriculture.

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

This page was last modified on: 04/02/04

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