Some Price Discrimination Aspects in Bank Farm Loan Interest Rates

Abstract

R APID and far-reaching changes in agricultural technology in recent decades have made it necessary for farmers to use larger amounts of non-real-estate credit. This is reflected in the rapid expansion of the nonreal-estate farm debt, the increased ratio of cash expenses to gross income in farming, and the increased importance of non-real-estate assets in the aggregate financial structure of agriculture. Commercial banks which are the leading suppliers of this type of agricultural credit now hold approximately three fourths of the non-real-estate farm debt.Since farmers are using more credit, interest cost is becoming an increasingly important expense item in agriculture. It is appropriate, consequently, that researchers in the field of agricultural credit devote some of their efforts to the pricing and cost of non-real-estate farm credit. Most of the research studies in farm non-real-estate credit in the past have been, essentially, descriptive. Major emphasis has been placed on describing the terms and characteristics of non-real-estate farm loans. The pricing element has received limited emphasis under such captions as "the structure of interest rates" and "factors affecting interest rates." The tacit assumption in most of these studies is that competition and variations in lending costs are the regulating factors that determine the interest rates on farm production loans.Variations in interest rates between banks in a given agricultural region and between borrowers in a given bank, however, are often not readily accounted for by differences in lending costs-at least to the extent that lending costs are measurable. The lack of a close association between rates and costs leads to the hypothesis that the country banker has considerable latitude in "fixing" the interest rate on farm production loans.