Agricultural Finance Review

Rationales for government-sponsored farm credit programs are presented. The farm credit market and farm sector are examined to determine the extent to which present conditions require direct government lending to the farm sector. It is concluded that conditions in the farm sector and in the market supplying credit to farmers are dramatically different from those existing when the Farmers Home Administration was created. It is time to let the program expire or radically change the parameter of the program. A number of operational issues impacting the agency's cost effectiveness are identified and discussed.

Buzby, Kenkl, Skees, Pease. and Benson / A Comparison of Subjective and Historical Yield Distributions with Implications for Multiple Peril Crop Insurance <top>

This study examines whether the discrepancies between subjective yield distributions elicited from Kentucky farmers in early 1987 and 1989 and the producers' historical yield distributions explain a general lack of acceptance of Multiple Peril Crop Insurance (MPCI). Results show a correspondence between the elicited subjective means and the historical averages, although produces tend to slightly overestimate their expected yields. The results also show a marked difference in skewness, suggesting that farmers underestimate downside risk. The 1988 drought year appeared to have little impact on the subjective yield expectations. Based on their yield expectations, most producers would perceive the historically based MPCI premium as being overpriced by 36% to 41%.

LaDue / Deferred Taxes: Estimation Errors and Effects on Analytical Ratios <top>

Inclusion of deferred taxes on market-value balance sheets reduced net worth 33% for a sample of dairy farms, indicating that solvency standards need be significantly modified when such balance sheets are used. Reasonable estimations of deferred taxes can be made by incorporating the resistance exemption and maximum capital gains tax rate with basic federal and state tax returns. Most of the other characteristics of the tax code have a modest effect on estimates. Average tax rates of approximately 25%, 30%, and 35% were found for farms with deferred taxable income of under $100,000, $100,000 to $400,000, and over $400,000 respectively.

Splett, Barry, Dixon, and Ellineger / A Joint Experience and Statistical Approach to Credit Scoring <top>

A joint experience and statistical approach was utilized to develop credit-scoring models for the Sixth Farm Credit District. Financial ratios from the Farm Financial Standards Task Force were determined to be appropriate explanatory variable measures in the credit-scoring models. Different structural characteristics of farm businesses were determined to influence credit-scoring accuracy. Different types of loans required different credit-scoring models.

Novak and LaDue / An Analysis of Multiperiod Agricultural Credit Evaluation Models for New York Dairy Farms<top>

A creditworthiness model is developed to overcome the inherent subjectivity of loan default or bank examiner classification models for credit evaluation. The capital replacement and term debt replacement margin is used as a measure of borrower creditworthiness. The multi-period models developed appear to have more stable parameters and provide superior predictive ability when compared with single-period models.

Miller, Barry, DeVuyst, Lins, and Sherrick / Farmer Mac Credit Risk and Capital Adequacy <top>

Data for formulating the credit risk component of the risk-cased capital stress test for Farmer Mac were identified and analyzed. Using farm real estate loan cohorts, defined by year of origination, cumulative loss rates were determined. Incidences of loan loss were found to be well below the various forms of reserves and subordinated position requirements within the Farmer Mac system. A probit regression was estimated to predict whether or not a Farmer Mac eligible loan would be liquidated. The results indicated that the Farmer Mac underwriting ratio criteria were statistically significant.

Perry, Nixon, and Stoff / Sales and Excise Taxes: Differential State Subsidies to Production Agriculture <top>

Sales and exercise taxes are overlooked, but important, tax for farmers. A state-by-state comparison of these taxes is made for commonly purchased farm inputs. Data from New York dairy farms are used to identify states that levy high sales and exercise taxes on their farmers and states that waive a large portion of these taxes.

Oltmans / Aggregate Loan Quality Assessment in the Search for a Related Credit-Scoring Model <top>

Improving the assessment and anticipation of changes on loan quality is a continual challenge to lenders in the management of their loan portfolio. This study shows that the loan quality assessment of a large portfolio through an aggregate scoring model based on farm-sector financial information may be feasible. Aggregate models of Production Credit Association and Federal Land Bank loan quality were developed through ordinary least squares estimation techniques in a pooled cross-section time series framework, using loan quality and farm-sector financial information from the former St. Louis and Louisville Farm Credit Districts. The models quantify a relationship between the quality of farm loan portfolios and aggregate financial measures. Collateral values, changes in farmland values, the debt/asset ratio, liquidity, government payments, and off farm income are significant variables related to the changes in loan quality. However, the models were unable to uncover and early warning signals of changes in loan portfolio quality.

Ahrendsen, Collender, and Dixon / An Empirical Analysis of Optimal Farm Capital Structure Decisions <top>

This study presents empirical tests of the unconstrained, expected utility maximization model of farm capital structure developed by Collins and by Barry, Baker, and Sanint. We extend the model to include depreciation, taxes, investment tax credits, economies of scale, wealth, and a partial-adjustment specification. Econometric models are specified and estimated using firm-level data on 110 North Carolina dairy farms from 1976 through 1986. Test results indicate that policies which increase farmers' profits or decrease farmers' business risk may, in fact, induce farmers without constrained credit to increase financial risk through capital structure adjustments, although the adjustment process is likely slow.

Sherrick and Lubben / Economic Motivations for Vendor Farming <top>

Vendor financing is shown to have advantages over competitive bank financing in cases where there is some "market power" and positive margins in the product market; credit can be used to segment demand and extract additional economic rents; funding, collateral, or security disposition rates favor the vendor; or there is asymmetric information and differing abilities to assess credit risk among the variables in the credit market. Further, the theory predicts that the "optimal" risk exposure for vendor-financed operations exceeds that of traditional lenders, even in cases of purely competitive lending environments.

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

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

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