Farm and lender structural change: implications for federal credit

Abstract

Purpose The purpose of this paper is to examine changes in the structures of US farms and lenders and identify prospective implications for federal credit. Design/methodology/approach Data from US farm operations for 1996-2014 were adjusted to 2014 values using commodity price indices. Farm size groups were constructed by value of farm production to analyze changes in farm numbers, production, assets, debt, leverage, liquidity, profitability, land tenure, commodity type, contract production, organization type, and use of Farm Service Agency (FSA) direct and guaranteed loans by farm size. Bank, Farm Credit System (FCS), and FSA data from 1996 to 2015 were adjusted to 2014 values. Lender size groups were constructed to analyze changes in bank and association numbers, farm loans, and use of FSA guaranteed loans by lender size. Findings The greatest consolidation has been by farms with over $2 million in production. More farm debt is held by large, complex organizations, frequently with multiple operators, more variable income, and greater reliance on production contracts and operating and nonreal estate credit. Large farms have greater leverage, are more profitable, and have a larger share of household income from the farm. Banks and FCS institutions are fewer and larger, yet smaller institutions use FSA guarantees to a greater extent. Larger farms tend to be more reliant on both direct and guaranteed FSA loans and are likely to become more dependent on FSA credit. Originality/value Changing farm and lender structure together with softening farm income may require FSA farm loan program changes to meet any increase in loan demand. Policy alternatives are provided to meet changing demand for farm credit.

Farm income and output and lending by the farm credit system

“…Furthermore, since during the study period, there was a substantial consolidation of the FCS institutions and of other agricultural lenders, it is important to understand how these processes, together with the changing needs of farmers, could have affected farm incomes and output. For example, Dodson and Ahrendsen (2016) point out that the proportion of farm debt used by farms with less than $100,000 in production dropped from 32 percent in 1996 to 22 percent in 2014 but there was an increase in farm debt owed by farms with over two millions in production from 13 percent in 1996 to 32 percent in 2014. These data suggest higher demand for larger loans, and more real-estate backed loans, and these types of loans as the literature above shows have traditionally been the specialty of the FCS institutions.…”

Rural Finance, Capital Constrained Small Farms, and Financial Performance: Findings from a Primary Survey

“…The major financial institutions-Farm Credit System (FCS) and commercial banks are considered the major lenders for agricultural loans in the United States-tend to serve well-equipped farmers with a high degree of credibility, while farmers with lower incomes with low-collateral ability face significant challenges. Bank market structure in the United States has been characterized by consolidation and mergers, where a limited number of financial institutions dominate the market; there are fewer and larger banks and FCS institutions (Dodson and Ahrendsen, 2017). Discussing the two parallel facts: (1) higher profitability of banks who are providing farm loans and (2) the higher demand for agricultural credit in farm-dependent counties possibly crowding out nonfarm demands, Kilkenny and Jolly (2005) postulate that banks providing farm credit may engage in credit rationing towards farmers and away from nonfarm borrowers.…”

“…Many smaller farms face difficulties as loan sizes requested by small farms may not be economical for commercial lenders. In this regard, Dodson and Ahrendsen (2016) discussed debt usage by small and large farmers, particularly noting that there has been a significant drop in debt held by farms with less than $100,000 in production (a drop by 10% between 1996 and 2014), while debt held by larger farms with more than 2 million in production increased significantly (around 20% between 1996 and 2014). Medium-and large-scale farmers have greater flexibility in regards to medium-and long-term credit financing, however making long-term investments by small farmers and entrepreneurs is usually very rare.…”

“…This may prevent small farms from an introduction to new technologies, modernization of equipment, and provision of greater opportunities for profit, leading to inhibited growth and productivity. The Farm Service Agency (FSA)'s direct and guaranteed loans aimed at a specific class of borrowers has served small farms and farms with temporary financial difficulties to some extent through direct loans (Dodson and Ahrendsen, 2017). However, full functionality and sustainability of these direct programs to meet increased loan demands of small farms is debatable at least from two viewpoints-first, in the face of limited budgetary and staffing resources of FSA and second, overall policy level discussion about mainstreaming distinct credit mechanism of part-time, full-time, and beginning farmers (Dodson and Ahrendsen, 2017).…”

Commodity lending in the region agriculture

“…Most economists believed that the goal of "... a commodity loan is not the goods exchange, but the beneficial effect creation." [7][8][9][10] The most fully and varied possibilities of commodity lending are used in the US agricultural sector state regulation system [11][12][13][14][15][16][17][18][19][20][21][22]. There, in 1948, the Commodity Credit Corporation (CCC) was established, the main function of which was commodity lending to agricultural producers [23].…”