Agricultural Finance Review

volume 44, 1984

Musser, White, and Smith / Current Financial Stress Among Farmers in South Georgia

Luftburrow, Barry, and Dixon / Credit Scorning for Farm Loan Pricing

Lee and Djogo / The Role of Federal Crop Insurance in Farm Risk Management

Seagraves / Price-Level-Adjustment Mortgages for Agriculture and Index-Linked Bonds

Durst and Jeremias / The Impact of Recent Tax Legislation on Inflation on the Taxation of Farm Capital

Sherman and Schrader / Banks and Farm Credit as Agricultural Lenders in Indiana

Grisley and Grady / Equity Levels Necessary for Successful Entry Into Dairy Production

Hanson / Negatively Taxed Farm Expansion Investments

Skees and Reid / Consideration of Farmland Value Variation on Farm Firm Survival

Abstracts

Musser, White, and Smith / Current Financial Stress Among Farmers in South Georgia <top>

A severe cost-price squeeze, high interest rates, and the stagnation of land prices have created a financial crisis for many farmers in the United States. The paper considers the current ramifications of this crisis for Georgia framers. A survey of farmers in South Georgia generated data that reveal and array of current financial situations, that range from normal levels of leverage to a large number of insolvent firms. A simulation analysis of a representative farm for the period 1974-1981 is used to relate expansion strategies to this current situation. None of the different strategies analyzed resulted in financial situations outside the bounds of the survey.

Luftburrow, Barry, and Dixon / Credit Scorning for Farm Loan Pricing <top>

A credit scorning technique for pricing loans to individual farm borrowers is evaluated using financial data for five production credit associations (PCA) in Illinois that currently price loans based on credit risk. Statistical analysis using a probit model to account for the qualitative and ranking characteristics of the problem yielded five significant variables - leverage, liquidity, repayment history, collateral, and cash flow. In various tests, the model classified 70 to 80 percent of the PCA borrowers correctly. In general, the results indicate that credit scorning may play a useful role as a tool in loan pricing.

Lee and Djogo/ The Role of Federal Crop Insurance in Farm Risk Management <top>

This article examines the effects of a recently revised Federal Crop Insurance Corporation (FCIS) programs on income variability for a 600-acre, eastern cornbelt grain farm. Risk-returns trade-off frontiers were generated by MOTAD analysis. Results indicate that FCIS's area yield coverage does not reduce income variability; however, the Individual Yield Certification (IYC) option reduces income variability somewhat at the maximum coverage and price options. Farmers' use of FCIC coverage could be increased if higher coverage levels were offered in low-risk farming areas. All-peril crop insurance was also found to be effective in reducing loan losses for agricultural lenders.

Seagraves / Price-Level-Adjustment Mortgages for Agriculture and Index-Linked Bonds <top>

This article defines index-linked bonds and price-level-adjusted mortgages, explains how an intermediary could borrow money on the one basis and relend it on the other, and is intended to stimulate though regarding desirability of partially-indexed mortgages. As an alternative, banks could allow use of land as security for cash management accounts or overdraft.

Durst and Jeremias / The Impact of Recent Tax Legislation on Inflation on the Taxation of Farm Capital <top>

This article analyzes the impact of recent tax law changes and reductions in the rate of inflation on incentives for investment in farm capital. At present, effective tax rates on income from farm capital are well below those of 1980. The primary reasons for this decline are the drop in the rate of inflation and the statutory tax rate reductions contained in the Economic Recovery Act of 1981 (ERTA). The changes in the capital cost recovery system contained in the ERTA and the subsequent modifications of that system had only a slight impact on the effective tax rate levels.

Sherman and Schrader / Banks and Farm Credit as Agricultural Lenders in Indiana <top>

Lender performances of commercial banks and the Farm Credit System (FCS) are compared using data from a survey completed during 1981. The survey was undertaken during a period of highly variable interest rates and changes in lending practices. FCS lenders were making loans at lower interest rates with nominally more liberal credit terms than banks. FCS lenders, unlimited by state branching law, served larger areas than banks. Operating costs relative to loan volume were lower for the FCS lenders. Interest rate spreads were lower for banks at the time of the survey.

Grisley and Grady / Equity Levels Necessary for Successful Entry Into Dairy Production <top>

The minimum level of equity necessary to successfully enter dairy production on a family farm with 1.5 person units of labor is investigated under different types of business organizations, milk production levels, sources of financing, and rental rates on cropland and milking facilities. Results indicate that under the most favorable circumstances and owner-operator would need $71,579, and a milking facility renter would need $37,604 in starting equity to be financially solvent at the end of a five year period. The whole-farm and milking-facility rental business organizations offer the most viable opportunities for success.

Hanson / Negatively Taxed Farm Expansion Investments <top>

The issue of negative tax on combined land and machinery investments is explored in a sample of Minnesota farms from 1972 to 1978. The expansion investments on ten farms that satisfied test criteria generally resulted in lower tax liabilities and higher tax shielded income. Inclusion of opportunity interest on equity (important for making economic decision-making, although not tax deductible) increased annual per farm negative taxation from $533 to $1,546. Preliminary results suggest large tax offsets may be pervasive in combined land-machinery expansion investments. This may result in economic resource allocation inefficiency an affect increases in agricultural real estate prices as land costs are included in cost of production support prices. Critical issues include the amount of equity interest opportunity costs allocated in the model, the assumption that expansion acres are of similar quality to previously owned land, and the likelihood of a continuation in the long-term land inflation trend in U.S. agriculture.

Skees and Reid / Consideration of Farmland Value Variation on Farm Firm Survival <top>

This research demonstrates the importance of developing appropriate relationship between income risk and asset risk when modeling farm survival. If these interactions are ignored, the research may grossly underestimate risk and may lead to inaccurate conclusions regarding the relative risks that are inherent in different size farms. Without these interactions, the smaller farms appear relatively more risky. Since lenders continue to base their decisions on both asset values and cash flows, it is essential that farm survival research properly account for the relationships between income and asset values. The Monte Carlo simulation approach presented here offers one alternative.