Agricultural Finance Review

Commercial banks experienced increases in farm real estate loan volume in the mid-1980s and in market shares of farm debt while other lenders were experiencing declines. This article presents results from a survey of Midwestern commercial banks about thier historical and anticipated farm real estate lending practices and policies. The results indicate the growth in farm real estate loans is dominated by purchases of farm real estate. The heavy reliance by responding banks, especially smaller ones, on a fixed-rate loans with short maturities and balloon payments may represent a tradeoff between a reduction in the bank's interest-rate risk and increases in a borrower's credit risk.

Pederson / Determinates of Crop Insurance Protection at Agricultural Banks <top>

A model is developed to analyze the role of lender characteristics as determinants of the level of crop insurance protection on bank loan portfolios. Logistic regression of the data from a sample of agricultural banks supports the hypothesis that bankers use crop insurance as a specialized source of liquidity. Crop insurance protection is found to vary according to specialization of the bank in farm loans, profitability of the bank, and presence of a crop insurance agency in the bank.

Robison, Hanson, and Lins / A Present Value Analysis of Land Transactions and the Proportion of Seller Financing <top>

This paper deduces maximum bid and minimum sell price models with and without seller financing to assist in explaining recently observed trends in land sales. With the decline in land values and the passage of the Tax Reform Act of 1986, land transactions have increased while the percentage of land sales financed by sellers has decreased. This paper uses a present value framework to explain both trends.

Koenig and Rossi / Which Banks Will Participate in Farmer Mac? <top>

Participation of financial institutions in the Farmer Mac secondary mortgage market requires the purchase of voting stock in the corporation. Characteristics of commercial banks, the largest class of stockholders, are examined empirically to determine how they might participate in the new market for agricultural and rural-housing mortgages. Geographic concentration of participating banks in the Upper Midwest has important implications for the sensitivity of the securities to that region's economic health. Participants are small and specialized in agricultural lending. In general, the favorable condition of these firms suggests a stable, but not necessarily large, secondary market.

Turvey and Brown / Credit Scorning for a Federal Lending Institution: The Case of Canada's Farm Credit Corporation <top>

This paper discusses and develops a credit-scoring model for Canada's Farm Credit Corporation. Results of logistic regression verify the importance of liquidity, leverage, profitability, efficiency, and debt-repayment capacity as important determinants of default risk. Moreover, the model illustrates how analysis of covariance can be incorporated into a credit-scoring model to account for differences between regions and farm types.

Irwin and Colling / Are Farm Asset Values Too Volatile? <top>

The research reported in the paper examined the volatility of U.S. farm asset values. Specifically, a variance bounds test was applied to real farm asset returns and values over the 1910-1989 period. The results showed that the standard deviation of actual farm asset values was 2.42 times greater than that of its ex post rational counterpart. Hence, a null hypothesis of excess volatility in farm asset values could not be rejected. Further, the results were not sensitive to alternative assumptions regarding the sample period, discount rate, or terminal value.

Boone and Nixon / Tax Reform, Rural Community Banks, and Municipal Bonds <top>

This study examines the impact of current and proposed changes in the alternative minimum tax on the rural community bank holdings of municipal bonds. Trends in the federal tax law encourage shifting of community-bank investments portfolios away from municipal bonds to taxable bonds. Portfolio shifting will likely cause an increase in funding costs with a resultant decrease in rural-community capital-development projects.

Moss, Shonkwiler, and Ford / A Risk Endogenous Model of Aggregate Agricultural Debt <top>

Several factors interact to determine the optimal capital structure for a sole-proprietorship. The most important of these are the expected return on assets, the cost of additional capital, and the riskiness of the enterprise. This study uses an auto regressive conditional heteroskedastic (ARCH) model to estimate the effect of each of these factors on the level of debt in U.S. agriculture. The results indicate that debt increases as the expected returns increase and decrease as predicted variance increases.

Featherstone, Preckel, and Baker / Modeling Farm Financial Decisions in a Dynamic and Stochastic Environment <top>

Stochastic and dynamic linkages brought about by liquidity risk, and credit-reserve risk are important elements in capital-structure and investment decisions. Discrete stochastic programming (DSP) is one quantitative tool that can be used to capture the sequential and stochastic nature of farm capital-structure choices. Three steps in specifying a DSP are examined for a capital-structure application: (1) definition of the constraints, (2) definition of the probability model, (3) specification of the objective function. The effect of the functional form of the utility function on the optimal solution is discussed.

Johnston and Frengly / Financial Stress on New Zealand Sheep and Beef Farms: Analysis of Change in Financial Performance under Deregulation <top>

A variety of government assistance programs introduced during the 1970s and early 1980s promoted high levels of financial leverage in New Zealand agriculture. Many of the programs have since been terminated in the post-1984 period of economic liberalization, leaving behind a persistent legacy of financial stress and debt overburden. Analysis of financial changes on New Zealand sheep and Beef farms provides insight on these dual effects- first that of amassing substantial financial-assistance programs over time and then removing them in a singular action. Financial measures and ratios are used to trace the changing fortunes of sheep and beef farms affected by these policies.

Duncan, Gajewski, and Burkhart / Farm Banks in the Energy Belt: A Double Whammy? <top>

This paper shows the simultaneous contractions in the farm and energy sectors did not, for the most part, hit farm banks in energy-dependant areas as hard as their nonfarm regional counterparts. Loan losses were more severe for banks in energy-dependant areas that concentrated on lending to the non-farm sectors. However, farm banks in the "energy belt" performed less well than farm banks elsewhere. A simple regression model is used to establish an empirical link between bank nonperforming-loan levels and farm income. Financial ratio analysis is then used by type and region during 1982-88.

Rao and Pederson / Calculation of Loan Losses: Restructuring Versus Foreclosure: A Comment <top>

Lins and Robison provide a useful discussion of the issues involved in the calculation of loan losses when considering the alternatives of restructuring and foreclosure. Our comment focuses on two major issues discussed by Lins and Robison: the assessment of cash flows on restructured loans and what discount rate to use when making the net present value (NPV) calculations.

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

Rao and Pederson focus their comments on the assessment of cash flows for restructured loans and the discount rate to use when making net present value (NPV) calculations. A stated in out article, "losses from structuring are typically measured as the difference between the current balance of principle and accrued interest compared with the net present value of cash flows arising from the terms of the restructured loan." So, in calculating losses from loan restructuring, we have no disagreement with including concessions made by the borrowers. Moreover, our proposed methodology does not preclude such inclusion. Thus, if the restructured loan includes concessions by the borrower in the form of applying existing stock against the loan balance, obviously they should be considered even though we did make explicit mention of this detail in out paper. Rao and Pederson make an important point by emphasizing the role of stock concessions by borrowers when calculating loan losses from restructuring.

<top>

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

This page was last modified on: 04/06/04

Topics

Back Issues

AEM Home Site Map Contact Us Cornell