The role of nontraditional lending for socially disadvantaged and financially stressed farmers

Abstract

PurposeIn recent years, socially disadvantaged farmers and ranchers have increased their usage of nontraditional lending nearly converging to levels of usage observed for nonsocially disadvantaged groups. The purpose of this research is to explore explanations for this trend in lending utilization by socially disadvantaged farmers and ranchers by examining factors that influence credit usage and credit choice.Design/methodology/approachA multinomial logit is used to estimate the probability of loan choice given characteristics of the producer and farm.FindingsWhile not a causal analysis, the results suggest that farm characteristics, which differ between socially disadvantaged and nonsocially disadvantaged producers, are associated with a lower likelihood of credit usage by an average socially disadvantaged farmer. For those that have loans, socially disadvantaged producers exhibit higher debt-to-asset ratios and lower current ratios, characteristics that are typically associated with higher than observed probability of usage of loans other than nontraditional. Socially disadvantaged producers also have lower value of assets which is associated with a higher probability of nontraditional loan usage.Originality/valueThis research is among the first to examine loan usage of socially disadvantaged producers using nationally representative data.

Limits to capital: Assessing the role of race on the Paycheck Protection Program for African American farmers in America

“…African American farmers have faced challenges in obtaining credit over the years (Taylor, 2018). McDonald et al (2021) find that minority farmers are more in debt than others, while Brewer et al (2019) find that the FCS borrowers are less leveraged than those that borrow from commercial banks. Farmers with higher financial risk seek multiple lending relationships usually with commercial banks and non-traditional lenders (Brewer et al, 2019).…”

“…Program (Atkins et al, 2021;Chernenko & Scharfstein, 2022;, within United States Department of Agriculture (USDA) loan programs (Escalante et al, 2006;Escalante et al, 2018), within academic institutions (Hilsenroth et al, 2022), and within farmers use of non-traditional lenders (McDonald et al, 2021). Limited credit access can pose challenges in terms of farm start-ups and growth.…”

Racial disparities in farm loan application processing: Are Black farmers disadvantaged?

“…These include court cases like Pigford v. Glickman, Keepseagle v. Vilsack, Garcia v. Vilsack, and Love v. Vilsack (Carpenter, 2012). After Pigford v. Glickman (1999), many studies have investigated discrimination in agricultural lending programs (Escalante et al, 2006(Escalante et al, , 2018 and by nontraditional lenders (McDonald et al, 2021). Studies focusing specifically on FSA direct loan programs have been inconclusive, with some showing minimal evidence of discrimination since Pigford (Escalante et al, 2006(Escalante et al, , 2018.…”

“…Attributes of interest examined in this study are farmers' race. McDonald et al (2021) argue that disadvantaged farmers like Black farmers may face barriers to credit access, reducing a farm's ability to fully realize its profit-maximizing potential. Thus, from the lender's side, the farmer has to apply for a loan through a loan application.…”

Guest editorial: Nontraditional Credit in U.S. Agriculture

“…“The role of nontraditional lending for socially disadvantaged and financially stressed farmers” (McDonald et al , 2022) uses USDA Agricultural Resource Management Survey (ARMS) data to show that socially disadvantaged farmers (defined as non-white or female) have certain characteristics that distinguish themselves from non-socially disadvantaged farmers. Socially disadvantaged farmers had lower value of production, fewer operators, fewer acres, received less government payments, fewer assets and were more leveraged.…”