Agricultural Finance Review

Volume 47, 1987 - Special Issue

Financial Stress in Agriculture: Issues and Implications

Proceeding of the symposium sponsored by the American Agricultural Economics Association Task Force on Financial Stress, November 24-35, 1986, Kansas City, Missouri

The Kansas City symposium was organized by the American Agricultural Economics Association Task Force on Financial Stress in Agriculture as a means of focusing on the financial problems of U.S. agriculture and agricultural lenders. Papers were commissioned to highlight the major issues and policy responses. The papers are presented in this issue in the order they were given at the symposium.

Financial Condition of the Agricultural Sector

J. Johnson, Morehart, and Erickson / Financial Conditions of the Farm Sector and Farm Operators

Harshbarger and Chite / Financial Condition of the Farm Credit System

Melichar / Financial Condition of Agricultural Banks

Stone / Impact of Farm Financial Crisis on the Retail and Service Sectors of Rural Communities

Ginder / Farm Debt and Farm Policy Linkages to the Agribusiness Sector and the Financial Condition of Agribusiness Firms

Chicoine / Issues and Implications of the Financial Stress in Agriculture: The State-Local Government Finance Dimension

Financial Stress and Farm Decisions

Barry, Ellinger, and Eidman / Firm Level Adjustments to Financial Stress

Policy Responses to Financial Stress

Hughes, Penson, Richardson, and Chen / Macroeconomic and Farm Commodity Policy Responses to Financial Stress

Carman and Hardesty / Federal Income Tax Policies and Financial Stress in Agriculture

Pederson, Boehlje, Doye, and Jolly / Resolving Financial Stress in Agriculture by Altering Loan Terms: Impacts on Farmers and Lenders

Lins, Drabenstott, and Brake / Programs to Alter Lender Risk

Jones and Heffernan / Educational and Social Programs as Responses to Farm Financial Stress

Research Implications

Lee / Conclusions and Research Implications

Introductions

J. Johnson, Morehart, and Erickson / Financial Conditions of the Farm Sector and Farm Operators <top>

Estimates of the farms sector's income and balance sheet provide a perspective on the financial performance of farm businesses, returns earned by resources used in farm production, and the earnings of individuals and households who either invest in or are employed by production agriculture. Aggregate sector estimates also provide a foundation for understanding the diversity that exists in the financial circumstances of farmers.

Harshbarger and Chite / Financial Condition of the Farm Credit System <top>

Continues financial stress in the farm sector over several years has caused weakness in many dimensions of the financial performance of the Farm Credit System (FCS). As a single-industry lender, the FCS has been severely affected by declining land values, depressed agricultural prices, dwindling export markets, and other economic events that have impaired the repayment capacity of agricultural borrowers.

Melichar / Financial Condition of Agricultural Banks <top>

In the preceding paper, analysis of data reported by farm operators indicate that roughly one-fourth of debt owed to commercial banks was owed by operators who appeared to be experiencing financial difficulty. Thus it is not surprising that the classified as financially stressed by the preceding analyses apparently have remained current on their bank loans.

Stone / Impact of Farm Financial Crisis on the Retail and Service Sectors of Rural Communities <top>

Rural communities have been experiencing gradually declining sales in their business districts for many years. The basic reason for the loss of retail trade is the continual loss of economic base in rural areas caused by technology displacing farmers. However, the trend has been accelerating during recent years because of competition from regional years because of competition from regional shopping centers and improvements in transportation (better highways and more fuel-efficient motor vehicles) (Stone 1980). The farm financial crisis, which began in the early 1980s, has exacerbated the rural-to-urban shopping trends in many states.

Ginder / Farm Debt and Farm Policy Linkages to the Agribusiness Sector and the Financial Condition of Agribusiness Firms <top>

The term agribusiness firm is used to describe a heterogeneous collection of business enterprises that provide a wide variety of goods and services to farms and ranches producing agricultural products. The term is broad enough to include firms engaged in activities as diverse as milk processing, phosphate mixing, grain alcohol production, chemical manufacturing, fertilizer retailing, or trucking. In size agribusiness firms range from small, individually owned retail petroleum operations with less than a million dollars of annual sales to huge multinational chemical corporations with annual sales measured in billions of dollars.

For the purposed off this paper, the term will be used to describe firms that do business directly with producers at the local level. The limitation in scope will highlight the effects on the smaller, less diversifies agribusiness firms. As a rule, those firms are well integrated into rural communities. That is not to imply that the effects on more diversified and multinational corporations are either absent or unimportant. It is, instead, an attempt to keep the focus of the paper on rural communities.

Chicoine / Issues and Implications of the Financial Stress in Agriculture: The State-Local Government Finance Dimension <top>

The financial stress being experienced by the farm economy has implications for the fiscal performance of the state-local government sector. Depending on the importance of farming to the state and local economies and the structure of public finance and governmental service responsibilities, the economic stress on farms will adversely affect the performance of the public revenue systems and the provision of a broad range of local government services. The purpose of this paper is to provide evidence on the potential implications of the poorly performing farm economy for the fiscal condition of the state-local governments and, consequently, the provision and financing of local government services in rural areas. Without national data, focus is on the state and local public finance systems in a group of farm-dependent states.

Barry, Ellinger, and Eidman / Firm Level Adjustments to Financial Stress <top>

The breadth and depth of the current financial problems in agriculture have created a significant dilemma for farmers, lenders, policy makers and other seeking viable solutions. Various groups have increased pressure for continued and even greater public assistance. This paper evaluates the farm level effects of various responses to financial stress. In particular, the results of a simulated financial analysis of alternative farm types are reported as an information base for use in evaluating the financial consequences of various policy options and strategies that farmers and lenders might follow in responding to financial stress. The analysis is intermediate term in length, projecting changes in financial performance over a four-year period.

Hughes, Penson, Richardson, and Chen / Macroeconomic and Farm Commodity Policy Responses to Financial Stress <top>

The purpose of this paper is to identify possible impacts of alternative macroeconomic and farm commodity policies on future financial conditions in the farm sector. An exhaustive search of all policies is, of course, not possible. Alternatives have, therefore, been selected that reflect current policy debates. Where available, specific projections of numeric results are presented. In other cases, economic theory is used to suggest directions of change in economic factors and farm financial indicators.

Carman and Hardesty / Federal Income Tax Policies and Financial Stress in Agriculture <top>

Special income tax rules that apply to agricultural investments have been extensively used and exploited by both farmers and nonfarm investors for more than twenty-five years. Although farmers and organizations that represent their interests have supported "tax breaks" for agriculture, there is growing evidence that short-run gains from provisions for cash accounting, current deduction of capital expenses, capital gains income, accelerated depreciation, and investment tax credits may adversely affect longer-run agricultural returns. The differential impacts of those tax provisions on agricultural investments can be related to structural changes in agriculture. In addition, income tax rules have influenced investment behavior that was characteristic of many farm firms currently facing the greatest financial difficulties.

Pederson, Boehlje, Doye, and Jolly / Resolving Financial Stress in Agriculture by Altering Loan Terms: Impacts on Farmers and Lenders <top>

The financial stress faced by farmers and the agricultural production sector has been the focus of much discussion, debate, and analysis in recent years. Projections of farm financial conditions and failure rates, along with various policy responses to ameliorate financial stress have received the most attention. Discussion of the implications of agricultural financial stress on lenders has been descriptive in nature. The focus has been on deterioration of the implications of agricultural financial performance of various types of lenders, projections of future losses, description of the implications for individual borrowers and various communities, and speculation concerning the long-term restructuring of agricultural financial institutions that may result from the current economic and financial crisis in agriculture.

Lins, Drabenstott, and Brake / Programs to Alter Lender Risk <top>

Commercial lenders face significant risks in lending to agricultural producers-risks that have mounted in the 1980s. Risk originates in the inherent financial structure of the lending institutions, in the nature if the agricultural operations that they finance, and in factors outside of the control of farmers or their lenders. This paper will identify the nature of risks faced by agricultural lenders; the rationale for programs designed to alter lender risks; criteria for evaluating public policies and programs designed to alter lender risks and the expected impact of such policies and programs on farmers, lenders, consumers, and taxpayers.

Jones and Heffernan / Educational and Social Programs as Responses to Farm Financial Stress <top>

The recent declines in the value of U.S. farm assets have resulted in significant financial losses for U.S. farmers. Some farmers have seen most if not all of their wealth disappear in a few years. Others have been forced out of business because their lenders were no longer willing to supply the credit they needed to stay in business.

It is unfortunate that some farmers go out of business. That is clearly an undesirable outcome, but it is unavoidable in a capitalistic system when supplies of products are increasing faster than demand. Government can provide economic assistance to prevent failure of farm businesses in the short run. However, over time the cost of farm economic assistance programs will compound as market forces try to bring supplies in line with demand. When the costs of those programs will rise above acceptable levels, it will become financially imposable to prevent some farm business failures. As that has become more apparent, some policy makers have considered educational and social programs that would help financially stressed farm families cope with the financial or emotional problems they could experience. Some of those programs primarily benefit farm families who leave farming while other programs are most beneficial to those trying to stay in business.

Lee / Conclusions and Research Implications <top>

The purposes of the symposium Financial Stress in Agriculture: Issues and Implications were to share recent information on the nature and extent of the farm financial problem and to evaluate private and public sector responses to farm financial stress. As revealed in the foregoing articles, the farm credit crisis is real. About one-fifth of the nations commercial farmers are experiencing moderate to severe difficulty in servicing their debts, and those farmers owe nearly one-half of all farm sector debt. Hundreds of agricultural banks and farm credit system lending associations have been liquidated, and agricultural lenders will likely struggle with the mounting loan losses for several more years. The effects of the farm sector recession are also rippling through the agribusiness sector and rural communities.