Agricultural Finance Review

volume 49, 1989

Nixon and VanTassell / Farm Operators and Federal Tax Incidence: An Analysis of Two Decades of Changing Federal Income and Employment Tax Laws

Ellinger and Barry / Interest Rate Risk Exposure of Agricultural Banks: A Gap Analysis

Miller and LaDue / Credit Assessment Models for Farm Borrowers: A Logit Analysis

Lemieux / Farmer Mac: How Will It Affect Agricultural Lending

Grisley, Fox, Jenkins, and Hoover / Dairy Farm Size and Federal Income Tax Progressivity

Lins and Robison / Calculation of Loan Losses: Restructuring Versus Foreclosure

Jeschke, Schnitkey, and Lee / Geographical Lending Diversification: An Analysis of Regional Agricultural Asset Returns and Risk

Gustafson and Solemsaas / Lender Liability: Nature, Extent, and Economic Impact of Agriculturally Related Claims in North Dakota

Rossi and Durst / Estimates of Farm Tax Progressivity After Tax Reform

Lowenberg-Deboer, Featherstone, and Leatham / Nonfarm Equity Capital Financing of Production Agriculture

Mazzocco / The Debt Structure Index: An Approach to Evaluating Financial Structure

Leatham / An Empirical Analysis of Strip and Rollover Interest Rate Hedging

Moss, Ford, and Boggess / Capital Gains, Optimal Leverage, and the Probability of Equity Loss: A Theoretical Approach

Abstracts

Nixon and VanTassell / Farm Operators and Federal Tax Incidence: An Analysis of Two Decades of Changing Federal Income and Employment Tax Laws <top>

Income and self-employment tax incidence was determined for profitable married farm operators by varying income levels for the 1970-90 period. Between 1970 and 1990, self-employment tax increases more than offset reductions in income tax liabilities for low- and middle-income farm families. On the other hand, by 1990, high income farm families will enjoy the same relative tax position that they had in 1970. The difference between effective tax rates for high- and low-income farm families will narrow from more than 11 percent in 1970 to less than 10 percent by 1990.

Ellinger and Barry / Interest Rate Risk Exposure of Agricultural Banks: A Gap Analysis <top>

Interest rate risk in commercial banks can occur when the maturity structures of a bank's assets and liabilities are different. Measuring gap is one way of observing the interest rate risk exposure of banks. This paper examines a sample of banks cross-sectionally to explore the range of gap measures among banks of different sizes, legal structure, and agricultural dependence. Results indicate that gap measures for banks as a whole are consistent with expectations, but there is evidence that a portion of agricultural banks have significantly high or low gap measures, thus showing more vulnerability to unexpected changes in market interest rates.

Miller and LaDue / Credit Assessment Models for Farm Borrowers: A Logit Analysis <top>

Farm size, liquidity, solvency, profitability, capital efficiency, and operating efficiency measures are used to develop credit scoring models for dairy farm borrowers. Weighted logit models are used to discriminate between acceptable borrowers and borrowers who have defaulted. Also, methodological issues that pertain to classification models (identifying the conditional probability model, selecting a classification cut-off point, and validating the model) are addressed. Results indicate that larger borrowers can be classified well using financial ratios. Ratios of importance were debt payments per dollar of milk sales, cash expenses before interest and taxes per dollar of gross income, and young stock per cow.

Lemieux / Farmer Mac: How Will It Affect Agricultural Lending <top>

This study investigates the impact of a secondary mortgage market for agricultural real estate loans on agricultural lending using a disaggregated structural model of the U.S. economy. At a volume of 8 percent of farm real estate lending, this market has potential to increase interest rates on Treasury and agency securities and to lower Federal Land Bank interest rates.

Depository institutions will experience a slight increase in market share, Farm Credit System market share will decline, and the market share for individuals and others will remain steady, Farmer Mac should accomplish its objective of increased credit availability for the farm sector.

Grisley, Fox, Jenkins, and Hoover / Dairy Farm Size and Federal Income Tax Progressivity <top>

The effects of farm size on the progessivity of taxes paid by full-time and part-time farmers is examined using a 1984 sample of Pennsylvania dairy farmer personal income tax returns. Under the Economic Tax Reform Act of 1981 we find, using tobit system yields larger farms a competitive cost advantage over smaller farms, negotiating the nominally progressive federal personal income tax rate structure. Simulations indicate that changes incorporated in the Tax Reform Act of 1986 restore modest tax progessivity. Implications of other popular tax reform proposals are simulated, including loss of cash accounting preference.

Lins and Robison / Calculation of Loan Losses: Restructuring Versus Foreclosure <top>

The Farm Credit Act of 1987 requires the Farm Credit System (FCS) and Farmers Home Administration (FmHA) to restructure loans if loan losses are less than foreclosure. Procedures for selecting the appropriate discount rate, length of comparison, and cash flows to include in the analysis are presented. A case example is presented to illustrates issues involved.

Jeschke, Schnitkey, and Lee / Geographical Lending Diversification: An Analysis of Regional Agricultural Asset Returns and Risk <top>

Adjusted per acre net incomes for the forty-eight contiguous states were used to analyze geographic considerations related to the secondary farm mortgage market and potential mergers of Farm Credit System (FCS) districts. A portfolio model was solved to determine expected return-variance (EV) efficient frontiers for state groups and FCS districts. Unconstrained EV frontiers were more risk efficient than partially restrained portfolios based on existing debt levels. In addition in was found that risk reductions can be obtained by considering correlations of agricultural returns when merging FCS districts.

Gustafson and Solemsaas / Lender Liability: Nature, Extent, and Economic Impact of Agriculturally Related Claims in North Dakota <top>

Agricultural borrowers expect certain levels of lender performance that include conditions under which loans are accelerated, extended, and renewed as well as proper lender conduct. When lenders fail to perform satisfactorily, borrowers raise claims of "lender liability". In a survey of North Dakota commercial banks, 22 percent of the respondents were involved in at least one case of lender liability. Failure to advance funds under a loan agreement without due notice and interference with a borrowers business were the most frequently cited claims.

Rossi and Durst / Estimates of Farm Tax Progressivity After Tax Reform <top>

The Tax Reform Act of 1986 (TRA of 1986) resulted in the most comprehensive overhaul of the tax code in more than thirty years. An examination of average tax rates for farm sole proprietors prior to the TRA of 1986 revealed a somewhat progressive tax system. Despite sharp reductions in marginal tax rates, the effective progessivity of the federal income and self-employment taxes for farm proprietors increased as a result of base-broadening provisions. A large part of this increase can be attributed to the elimination of preferential tax treatment for capital gains. Restoring the prereform progessivity by lowering average tax rates for high income taxpayers by as much as 40 percent.

Lowenberg-Deboer, Featherstone, and Leatham / Nonfarm Equity Capital Financing of Production Agriculture <top>

The continued, high real cost of debt and the uncertain future of government programs have increased the attractiveness of financing farm businesses with equity from nonfarm sources. However, the transactions cost and distortion of management incentives in equity sharing arrangements can create doubts about the economic viability of such investments. The benefits and costs of alternative equity arrangements are not well documented. This manuscript reviews the base of knowledge dealing with nonfarm equity use in agriculture and suggests future research needs. Researchable topics include: feasible institutions, transaction costs, liquidity, diversification, principle agent problem, monitoring costs, nonprice considerations, and rights of farm tenants.

Mazzocco / The Debt Structure Index: An Approach to Evaluating Financial Structure <top>

Common ratio analysis does not sufficiently address potential future liquidity issues arising from the timing of liability maturities and rates at which noncurrent assets contribute to cash flow. The debt structure index (DSI) us developed to describe the relative balance between term liabilities and fixed assets. The ratio of term liabilities and fixed assets is shown to be the product of the debt-to-asset (D/A) ratio and the DSI. A sample of Illinois farms is used to generate statistics on the distribution of the DSI and its correlation with other commonly used financial indictors.

Leatham / An Empirical Analysis of Strip and Rollover Interest Rate Hedging <top>

Interest costs on short-term lonable funds used to finance five-year term assets were simulated from June 1978 to June 1986. Strip hedges were used to protect lenders from rising interest rates the first two years of loan. A rollover hedge was used the last three years. Results show that the spread between the expected yield and hedge yield was very small. Thus, profit could be lock in if the loan yield was tied to the expected yield on loanable funds. Strip hedges were more effective than rollover hedges, thus, effectiveness of hedges might be increased in shortening loan maturities.

Moss, Ford, and Boggess / Capital Gains, Optimal Leverage, and the Probability of Equity Loss: A Theoretical Approach <top>

The Tax Reform Act of 1986 eliminated capital gains deduction. Because of the importance of capital gains to investment in agriculture, that change could have considerable ramifications for investment decisions. This study constructs a theoretical model explaining the effect of the elimination of the capital gains deduction on investment decisions and tests the model using aggregate U.S. agricultural data. The results indicate that the elimination of the capital gains exclusion raised optimal leverage levels and the probability of a negative rate of return to equity for all levels of risk aversion.