Showing papers in "Agricultural Finance Review in 2017"

Agricultural credit provision: what really determines farmers’ participation and credit rationing?

Abstract: Purpose The purpose of this paper is to analyze determinants of farmers’ participation and credit rationing in microcredit programs using survey data from Ghana. Design/methodology/approach The authors use the Garrett Ranking Technique to analyze farmers’ reasons for participation or non-participation in credit programs, a probit regression model to estimate factors influencing farm households’ participation, and the Heckman’s sample selection model to identify factors influencing farm households’ probability of being credit rationed by microcredit programs. Findings The results reveal that farm households participate in credit programs because of improved access to savings services and agricultural loans. Fear of loan default and lack of savings are reasons for non-participation in credit programs. Furthermore, membership in farmer-based organizations (FBOs) and the household head’s formal education are positively associated with farmers’ participation in credit programs. The likelihood of farmers being credit rationed (i.e. their loan applications were either rejected or the amount of credit they applied for was reduced) is less likely among higher income farmers and members of FBOs such as farmer cooperatives and savings clubs. Practical implications The findings suggest that policy strategies aiming to improve access to savings and credit services should educate farmers and strengthen FBOs that could serve as entry points for financial service providers. Such market smart strategies have the potential to improve farmers’ access to financial services and reduce rural poverty. Originality/value Although existing studies have examined farmers’ participation in credit markets and credit rationing separately, the unique contribution of this paper is the analysis of participation in microcredit programs as well as the likelihood of farmers being credit rationed in Ghana.

Farm credit access, credit constraint and productivity in Ghana: Empirical evidence from Northern Savannah ecological zone

Abstract: Purpose The purpose of this paper is to examine farmers’ access to credit, credit constraint, and productivity in the Northern Savannah ecological zone of Ghana. Design/methodology/approach Secondary data from the Ghana Feed the Future baseline survey involving a total sample of 2,968 farm households were used. The conditional mixed process (CMP) framework was applied to estimate access to credit, credit constraint, and productivity simultaneously. As a system estimator the CMP corrects for possible heterogeneity and sample selection bias. Findings The results from the estimations revealed that age, literacy, farm non-mechanized equipment, and group membership were the variables influencing farmers’ access to credit. Credit constraint conditions were determined by household size, locality, group membership, and household durable assets. Finally, the results showed that productivity of farmers was dependent on marital status, household size, locality, farm size, commercialization, farm mechanized equipment, group membership, and household durable assets. Originality/value This paper is the first, to the best of the authors’ knowledge, to use the CMP framework to jointly estimate access to credit, credit constraint, and productivity. The results indicate that estimating credit access and constraint models separately would have yielded biased estimates. Thus, this paper informs future research on farmers’ credit access, credit constraint, and productivity for informed policymaking.

Impact of financial inclusion on technical efficiency of paddy farmers in Bangladesh

Abstract: Purpose The purpose of this paper is to investigate the impact of financial inclusion on the enhancement of paddy farmers’ technical efficiency (TE). The impact was evaluated rigorously from different dimensions which could be useful in the policy discussion for enhancing efficiency in utilizing productive resources. Design/methodology/approach A cross-sectional data of randomly selected 120 paddy farmers from Khulna district in the Southwest region of Bangladesh were collected for this study. Initially, a stochastic production frontier approach was used for estimating farmers’ TE. Thereafter, ordinary least squares and quantile regression models were applied for unveiling the existing relationship between TE and various dimensions of financial inclusion after controlling all other socio-economic characteristics. Findings The study findings revealed that farmers were around 86 percent technically efficient and amongst them, credit takers were more efficient than non-credit takers. A non-monotonic relationship between TE and amount of credit was observed where TE was maximized at amount around 20,000 Bangladeshi Taka (USD255), a medium credit in terms of its amount. In addition, credit literacy was identified as a significant factor for improving TE. Though difference in the choice of sources for accessing credit had little impact on mean TE, its effect was found significantly higher for low scored technically efficient farmers compared to high scored farmers. Practical implications The policy toward widening the coverage of financial inclusion would be more effective than providing larger amount of credit to a limited number of farmers for improving their TE. Originality/value Such an in-depth assessment of the impact of financial inclusion on TE is probably the first effort in the Khulna district of Bangladesh.

Effect of agricultural policy on income and revenue risks in Italian farms: Implications for the use of risk management policies

Abstract: Purpose The purpose of this paper is to assess how direct payments (DPs) of the Common Agricultural Policy affect income and revenue variability faced by Italian farmers Design/methodology/approach Balanced farm-level panel data are used to construct coefficients of variation over the period 2003-2012 Nonlinear robust regression techniques are used to measure the effect of DP, farm size, fixity in resources, labor intensity, farm production orientation, and specialization on the variability of farm income (FI) and farm revenue This is done on the overall sample as well as on subsamples of farms located in different regions and belonging to different types of farming Findings DPs have mixed effects on the variability of FI While a negative and significant relationship is found on the whole national sample, this is not generally the case when models are run on the considered subsamples On the contrary, DPs have always significant variability increasing effects on revenue This suggests that DPs reduce the degree of risk that farmers face allowing them to engage in riskier activities Thus, DPs are less effective than expected in terms of income stabilization because these distort farmers’ risk management behavior Because of this, DPs could constrain the development of markets for risk management instruments and reduce the effectiveness of policies supporting the use of these instruments Originality/value The analysis is inspired by El Benni et al (2012) but uses a different approach, applies it to a different country, and yields different results Volatility measures are calculated over more years, and the paper accounts for differences in farm production orientation and is not based on an unbalanced panel of farms Because of these differences, the authors obtained different results regarding the correlation between DP and income and, even more, revenue variability Finally, comparing the results of models referring to FI and farm revenue improves the author’s understanding of the impact of DP on farmers’ risk management behavior and allows interesting policy considerations

Farm entry and exit from US agriculture

Abstract: Purpose The purpose of this paper is to use a linked-farm approach and a cohort approach to estimate farm entry and exit rates using the US Census of Agriculture. The number of new farms entering agriculture was re-estimated and adjusted upward since not all new and beginning farmers are known to US Department of Agriculture. Design/methodology/approach In addition to a linked-farm approach (linking farms over time), a cohort approach (farms that started operating in the same year) is used to determine exit rates conditional on the number of years a farm has been operating. Linear forecasting, moving-average forecasting, and using data from a later Census are used to re-estimate the number of new farms in their first year of operating. Findings Using the linked-farm approach, an average annual entry rate of 7.5 percent and exit rate of 8.5 percent is estimated for 2007 to 2012, which vary based on the farmer’s lifecycle. The cohort approach shows that exit rates are lower than 4 percent for the first 40 years of operating a farm business and then exit rates gradually increase. Revised estimates of approximately 70-80,000 new farms entering each year are calculated, which are considerably higher numbers than the 30-40,000 new farm entrants participating in the Census of Agriculture. Originality/value The linked-farm and cohort approaches are used to provide updated estimates for farm entry and exit using new Census data and to make comparisons with previous years. To the authors’ knowledge, this is the first study to provide revised estimates for new farm entrants into US agriculture.

Historical developments in agricultural finance and the genesis of America’s farm credit system

Abstract: The purpose of this paper is to provide a review of major historical developments in agricultural finance, with particular emphasis on agricultural credit. It reviews the development of Raiffeisen and related banks that emerged in Germany and Europe throughout the nineteenth century and how the cooperative banking system made its way into the banking system of the USA in the early twentieth century. The paper emphasizes the role of the state in the developing of agricultural credit, especially with respect to farm mortgages, securitization, and bond structures.,This paper presents a historical synthesis of historical literature on agricultural credit.,This paper shows the direct linkage between the developments in Raiffeisen credit cooperatives and the Farm Credit System (FCS) and details the emergence of the land banks, farm credit banks, agricultural bonds and the role of joint-stock banks in agricultural credit policy.,In total, 2016 marks the 100th anniversary of the passing of the 1916 Federal Farm Loan Act which set in motion the USs’ first Government Sponsored Enterprise and catalyzed the formation of the FCS as it operates today to provide credit to farmers and rural communities on a cooperative basis. Although there are a few wonderful books written on certain aspects of the FCS the story of how the FCS was initiated and the many struggles it faced up to the 1933 Act has not been told often enough. This paper tells the story of the evolution of agricultural credit that ultimately led to the formation of the FCS.

Financial inclusion and agricultural commercialization in Ghana: an empirical investigation

Abstract: Purpose The purpose of this paper is to investigate the connections between financial inclusion and agricultural commercialization among farmers in Ghana. Design/methodology/approach In order to address endogeneity and sample selectivity bias, the study employs endogenous switching regressions (ESRs) to examine whether financially included and financially excluded maize farm households differ in their commercialization behavior and whether financial inclusion affects commercialization. The Heckman Treatment Effect (HTE) model is used to test for robustness of the results. The data used contain a random sample of 2,230 maize farmers across the ten regions of Ghana. Findings The results from the ESRs show that financial inclusion significantly fosters agricultural commercialization. Specifically, financially included households sell 13.25 percent more output than their financially excluded counterparts. In terms of the counterfactual, financially excluded households would have sold 5.04 percent more output if they were to have access to financial services. Results from the HTE model confirm that financial inclusion promotes agricultural commercialization. Practical implications Financial inclusion is low among maize farmers; this implies that there are more benefits to be gained by ensuring that farmers have access to a broad range of financial services. Social implications The findings imply that the quest for the integration of smallholder farmers into markets cannot overlook measures to ensure financial inclusion. Originality/value It represents the first attempt at linking financial inclusion to agricultural commercialization using econometric methodology. The study serves as a foundation paper and for that matter will serve as a guide to future research on the financial inclusion-agricultural commercialization nexus.

Financial leverage and agency costs in agricultural cooperatives

Abstract: Purpose The purpose of this paper is to examine the extent to which agency costs of leverage are present in farm supply and marketing cooperatives. Design/methodology/approach The authors calculate total factor productivity growth of a sample of agricultural cooperatives from 2005 to 2010 and use regression to determine the effect of leverage on productivity growth. Findings The findings indicate that there is a small but statistically significantly negative effect of leverage on productivity growth. This indicates that, at the margin, the costs of leverage outweigh the benefits. Originality/value This paper measures the magnitude of what is typically considered an important financial transaction cost. The authors find that the magnitude of this effect is small, indicating that government policy should address other financial issues.

Farm income and output and lending by the farm credit system

Abstract: The purpose of this paper is to provide evidence of the positive impact of the FCS lending on farm incomes which should be useful to policymakers as they consider reforms and further support for this 100-year-old major agricultural lender.,The authors construct a panel for the 1991-2010 period from the FCS financial statements and evaluate how lending by the FCS institutions has affected farm incomes and farm output. The authors use fixed effects estimations and control for credit by other agricultural lenders as well as the stock of capital, prices, and interest rates. Since previous work suggests that rural financial markets are segmented and the FCS serves larger full-time farmers with mostly real-estate backed loans, the authors evaluate the impacts of farm real-estate backed loans and of short-term agricultural loans separately for a shorter period for which the data is available. The authors also perform robustness checks with alternative estimation techniques.,The authors found a positive association between credit by the FCS institutions and farm income and output. The magnitude of the estimated impact is larger during the 1990s than in the 2000s.,The positive link between the FCS institutions’ credit and farm incomes and output supports the notion that the FCS lending was beneficial to farmers. The evidence also supports the segmentation hypothesis of rural financial markets. The financial reports data for 1991-2010 are from the ACAs and FLCAs aggregated on the regional level because there is no clear way to classify FCS lending to a more disaggregate level like the state. The authors also assemble and analyze a state-level data set that contains state-level balance sheet data for the period 1991-2003.,The authors are not aware of another work that directly links (real estate and non-real estate) credit by FCS institutions to agricultural output and farm incomes.

Rainfall index insurance for corn farmers in Shandong based on high-resolution weather and yield data

Abstract: Purpose The purpose of this paper is to present the development of cumulative rainfall deficit (CRD) indices for corn in Shandong Province, China, based on high-resolution weather (county, 1980-2011) and yield data (township, 1989-2010) for five counties in Tai’an prefecture. Design/methodology/approach A survey with farming households is undertaken to obtain local corn prices and production costs to compute the sum insured. CRD indices are developed for five corn-growth phases. Rainfall is spatially interpolated to derive indices for areas that are outside a 25 km radius from weather stations. To lower basis risk, triggers and exits of the payout functions are statistically determined rather than relying on water requirement levels. Findings The results show that rainfall deficits in the main corn-growth phases explain yield reductions to a satisfying degree, except for the emergence phase. Correlation coefficients between payouts of the CRD indices and yield reductions reach 0.86-0.96 and underline the performance of the indices with low basis risk. The exception is SA-Xintai (correlation 0.71) where a total rainfall deficit index performs better (0.87). Risk premium rates range from 5.6 percent (Daiyue) to 12.2 percent (SA-Xintai) and adequately reflect the drought risk. Originality/value This paper suggests that rainfall deficit indices can be used in the future to complement existing indemnity-based insurance products that do not cover drought for corn in Shandong or for CRD indices to operate as a new insurance product.

Modeling debt choice in agriculture: the effect of endogenous asset values

Abstract: Purpose The purpose of this paper is to investigate the endogeneity of asset values and how it relates to farm financial stress in US agriculture. The authors conceptualize an implied measure of farm financial stress as a function of debt position. The authors posit that there are variations in the asset values that are beyond the farmer’s control and therefore have implications on farm debt. Design/methodology/approach The framework recognizes the endogeneity of return on assets (ROA). It uses a non-parametric technique to approximate the variance of expected ROA (VEROA). The authors model the rate of return on agricultural assets and interest rate with a formulation that focuses on macroeconomic policy. Further, the authors use a dynamic balanced panel data set from 1960 to 2011 for 15 US agricultural states from the Agricultural Resource Management Survey, and information from traditional state-level financial statements. Findings Estimation of linear dynamic debt panel data models accounting for the endogeneity of ROA and VEROA is a challenging task. Estimated variances are unstable. Hence, the authors focus on variance specification that uses the residuals squared from the ARIMA specification and non-parametric estimators. Arellano-Bover/Blundell-Bond generalized method of moments estimation procedures, although may be biased, show that VEROA has a negative and significant effect on the total amount of debt in the agricultural sector. Research limitations/implications The instruments used in this analysis are lagged regressors which may be weakly correlated with the relevant first-order condition, hence not properly identifying the parameters of interest. Future research could include the identification of better instruments, potentially use of sequential moment conditions. Originality/value Unlike previous study, the authors use non-parametric approximation of VEROA. The authors model the rate of return on agricultural assets and interest rate with a formulation that focuses on macroeconomic policy. Second, the authors make use of a large dynamic balanced panel data set from 1960 to 2011 for 15 agricultural states in the USA. To the best of the authors’ knowledge, this study is one of the few that provides evidence on risk-balancing behavior at the agricultural sector level, of the USA.

Agricultural credit risk and the macroeconomy: Determinants of Farm Credit Mid-America PD migrations

Abstract: Purpose The purpose of this paper is to explore the linkage between agricultural sector and macroeconomic factors with farm financial health. It considers whether agricultural lenders can more accurately anticipate changes in the credit quality of their portfolios by considering broad economic indicators outside the agriculture sector. Design/methodology/approach This paper examines firm, sector, and macroeconomic drivers of probability of default (PD) migrations from a sample of 153 grain farms of actual lender data from Farm Credit Mid-America’s portfolio. A series of ordered logit models are developed. Findings Farm-level and sector-level variables have the most significant impact on PD migrations. Equity to asset ratios, working capital to gross farm income ratios, and gross corn income per acre are found to be the most significant drivers of PD migrations. Macroeconomic variables are shown to unreliably forecast PD migrations, suggesting that agricultural lenders should emphasize firm and sector variables over macroeconomic factors in credit risk models. Originality/value This paper builds the literature on agricultural credit risk by testing a broader set of sector and macroeconomic variables than previous articles. Also, prior articles measured the direction but not magnitude of PD migrations; the ordered model in the analysis measures both.

Institutional drivers of land mobility: The impact of CAP rules and tax policy on land mobility incentives in Ireland

Abstract: Purpose The purpose of this paper is to examine the role of institutional factors in agricultural structural change in the European Union (EU) using the case study of land mobility in Ireland. A range of agricultural land use options are compared in order to examine the effect of domestic and EU policy instruments on land mobility. Design/methodology/approach Using socio-economic data from the Teagasc National Farm Survey, three hypothetical farms are created using a microsimulation approach to compare incomes across farm systems and land use options. Tax and subsidy policies are applied to derive returns for the hypothetical farms under a variety of land use scenarios. Findings The analysis finds that in comparing four hypothetical scenarios, leasing out agricultural land on a long-term basis can prove more profitable for cattle and tillage farmers than farming the land. Only dairy farmers derive consistently higher disposable incomes from farming their land as opposed to leasing it out. Changes in CAP rules can also negatively affect farmers taking advantage of Ireland’s tax-based leasing incentives. Originality/value A gap in the literature exists in terms of how institutional factors may act to prevent either land supply or demand channels from functioning properly. This paper addresses that gap, using Ireland as a case study.

Forecasting Kansas land values using net farm income

Abstract: With the decline of US net farm income from $123.8 billion in 2013 to $71.5 billion forecasted for 2016, concern has developed regarding the future path of agricultural land values. The purpose of this paper is to examine the relationship between net farm income, cash rents and land values in the state of Kansas and provides insight regarding future land values.,This study estimates partial adjustment models for cash rent and land values and uses those results to infer long-run capitalization rates and earnings multipliers. These models are used to forecast Kansas land values through 2018 and also the long-run price of farmland given 2016 expectations.,Land adjusts to changes in Kansas net farm income slowly with a one-year elasticity of 6.7 percent. The long-run elasticity is 96.9 percent which is very close to the 100 percent suggested by the theoretical income capitalization model. The long-run multiplier for income in Kansas is 21.71 which implies a capitalization rate of 4.61 percent. The estimated results suggest that Kansas land values would peak in 2016 and begin to slowly decline. If market conditions were to remain the same, land values would ultimately decrease to $1,171 per acre, a 28 percent decline from current levels.,Declines of the magnitude in estimated land values could negatively affect the financial condition of the sector. Factors such as a change in the long-run capitalization rate or unexpected supply or demand shocks for agricultural commodities globally could certainly alter the long-term prospects. However, current expectations as of March 2016 suggest that farmers will face difficult conditions over the next few years.

Financing agricultural cooperatives with retained earnings

Abstract: Purpose The purpose of this paper is to explore the advantages equity capitalization programs based on retained earnings from patronage sources may provide cooperatives and their patrons that traditional equity financing methods do not offer. Design/methodology/approach The analysis is based on a model used to assess patron benefits from a cooperative that is financed by a combination of allocated equity acquired from noncash patronage refunds and unallocated equity acquired from retained earnings. The level of patron benefits is represented by the present value of the after-tax cash flow patrons receive from the cooperative, and the model is used to determine the combination of noncash patronage refunds and retained earnings that provides the greatest present value given the levels of those parameters that affect capitalization of the cooperative and the distribution of cash benefits to patrons. Findings The analysis demonstrates that only pure plans, i.e., plans based entirely on retained patronage refunds or entirely on retained earnings, will be associated with the greatest present value for any particular set of parameter values. Cooperatives that are characterized by low marginal tax rates and growth rates and whose patrons are characterized by high marginal tax rates and discount rates are those most likely to benefit from equity capitalization programs based on retained earnings. Research limitations/implications The model is based on the assumption of constant parameter values and does not account for the existence of nonpatronage income. Practical implications A useful extension of this work would be the development of a decision aid capable of generating basic operating statement and balance sheet data and enabling cooperative decision makers to conduct experiments concerning alternative financing strategies based on retained earnings. Originality/value The analysis contained in this paper is based on an explicit model and extends across a broad range of values for various parameters that affect the level, timing, and present value of cash distributions from cooperatives. Because the cash flow received by patrons is determined after the cooperative’s planned equity growth is met, cash flow comparisons are equivalent with respect to the capital provided the cooperative. In addition, the revolving period is endogenously determined.

Following beginning farm income and wealth over time: A cohort analysis using ARMS

Abstract: Purpose The paper examines the evolution of beginning farms’ income statement and balance sheet items over a 15-year period. The purpose of this paper is to gain insight into the diversity of beginning farms from a financial point of view. Design/methodology/approach Using the USDA’s Agricultural Resource Management Survey (ARMS), the author constructs a synthetic panel of data consisting of age cohorts of beginning farmers and follow them over time. Baseline financial information for the farm income statement and balance sheet is examined in 1999 and again in 2014 for each cohort. Findings Overall, there is a marked contrast in the evolution in the income statement between beginning farmers who are under 45 years old and those over 45. The gross cash income of the youngest cohorts grows tremendously, as do their expenses, indicating rapid expansion in production on the part of the youngest cohorts. The change in the balance sheets of the cohorts also provides a glimpse into the changing roles of beginning famers over time. The youngest cohort of beginning farmers increase the current and non-current assets on their balance sheets by a substantial amount, more than doubling both. Furthermore, the youngest cohort is the only group to take on more current liabilities, indicating increased financing of the production expenses. Practical implications Differences in the evolution of financial profiles of beginning farms may predict differences in future output, and it could be a predictor of the farm’s operational goals or intentions, as well as predictor of future financial needs and challenges. Originality/value Knowing and understanding likely trajectories of beginning farmers may provide an opportunity to better tailor farm programs, outreach, and support to beginning farmers.

Credit constraints and labour allocation decisions in rural Burkina Faso

Abstract: Purpose Credit is central in labour allocation decisions in smallholder agriculture in developing countries The purpose of this paper is to analyse the effect of credit constraints on farm households’ labour allocation decisions in rural Burkina Faso Design/methodology/approach The study used a direct elicitation approach of credit constraints and applied a farm household model to categorize households into four labour market participation regimes A joint estimation of both the multinomial logit model and probit model was applied on survey data from Burkina Faso to assess the effect of credit constraint on the probability of choosing one of the four alternatives Findings The results of the probit model showed that households’ endowment of livestock, access to news, and membership to an farmer-based organization were factors lowering the probability of being credit constrained in rural Burkina Faso The multinomial logit model results showed that credit constraints negatively influenced the likelihood of a farm household to use hired labour in agricultural production and perhaps more importantly it induces farm households to hire out labour off farm The results also showed that the other components of household characteristics and farm attributes are important factors determining the relative probability of selecting a particular labour market participation regime Social implications Facilitating access to credit in rural Burkina Faso can encourage farm households to use hired labour in agricultural production and thereby positively impacting farm productivity and relieving unemployment pressures Originality/value In order to identify the effect of credit constraints on farm households’ labour decisions, this study examined farm households’ decisions of hiring on-farm labour, supplying labour off-farm or simultaneously hiring on-farm labour and supplying family labour off-farm under credit constraints using the direct elicitation approach of credit constraints To the best of the authors’ knowledge, this study is the first to examine this problem in Burkina Faso

Agency cost of debt: evidence from Kansas farm operations

Abstract: Purpose The purpose of this paper is to examine how debt affects the cost structure of a farm. Agency costs arise when stakeholders of a farm manage their farm differently to obtain debt which results in inefficiencies. These inefficiencies cause a farm to deviate from cost minimization strategies. Design/methodology/approach This study uses the non-parametric technique of data envelopment analysis. Through this method, a non-stochastic cost frontier is constructed where all farms must lie on or above the frontier. This allows for the analysis of how debt affects the shape of the cost frontier and for how debt affects deviations away from cost-minimizing strategy. The shadow costs of the debt constraints in the linear programming problem are used to analyze the effect of debt at the cost frontier while a series of Tobit models are estimated to examine the effect of debt on deviations away from the frontier. Findings The findings of this paper support the existence of agency costs associated with debt for Kansas farms. The addition of debt and capital constraints lowered the minimum cost frontier increasing the average efficient cost under variable returns to scale. However, for those farms on the frontier, the shadow cost of debt was negative meaning an increase in debt would lower the overall variable cost. The increase of debt was found to be negatively correlated to the efficiency score of the farms. Originality/value This paper provides value by supporting the existence of agency costs which has been disagreed upon in the literature and also providing new insights for how to analyze agency costs. Since debt was found to have a negative shadow value for those farms on the frontier but negatively correlated with efficiency scores, this suggests that agency costs affect firms differently depending on where the farm is on the cost frontier.

Heterogeneity in loss aversion: evidence from field elicitations

Abstract: Purpose Prospect theory is now widely accepted as the dominant model of choice under risk, but has not been fully incorporated into applied research because of uncertainty about how to include population-level parameter estimates. The purpose of this paper is to characterize heterogeneity across people to lay a foundation for future applied research. Design/methodology/approach The paper uses elicitation data from field experiments in Vietnam to fit a finite Gaussian mixture model using the expectation maximization algorithm. Applied results are simulated for investment allocations under myopic loss aversion. Findings The authors find that about 20 percent of the sample is classified as extremely loss averse, while the rest of the population is only mildly loss averse. This implies a bimodal distribution of loss aversion in the population. Research limitations/implications The data set is only moderately sized: 181 subjects. Future research will be needed to extend these results out of sample, and to other regions. Originality/value This paper provides empirical evidence that heterogeneity matters in prospect theory modeling. It highlights how policy makers might be misled by assuming that average prospect theory parameters are typical within the population.

Characterizing US dairy farm income and wealth distributions

Abstract: Purpose The structural change of the dairy industry has been a long-term process with fewer, larger dairy herds in all regions. The purpose of this paper is to evaluate whether this structural change is leading to less income and wealth equality across dairy farms and how these factors differ across the USA. Design/methodology/approach Income and wealth inequality of US dairy farms was estimated by Gini coefficients using data from the 2000 and 2010 ARMS dairy costs and returns data. A population-level quantile regression was estimated at decile increments to determine the factors that affect net farm income (NFI) and net worth (NETW) and if they changed across the time periods. Findings Adjusted-Gini coefficients were estimated and indicated that income inequality was greater than wealth inequality across US dairy farms. Results of the quantile regressions confirm regional differences exist with dairy farms in Mountain regions consistently having lower NFI and NETW relative to farms in the Lake States region when factors such as herd size were equal. Life cycle effects were not observed for NFI, but present within NETW estimates across the ten years. Originality/value This analysis estimates industry-specific-adjusted Gini coefficients to determine if income and wealth inequality exist.

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.

Effects of business maturity, experience, and size on farms economic vitality: a credit migration analysis of farm service agency borrowers.

Abstract: Purpose The purpose of this paper is to examine the relative financial strength and endurance of several paired classes of farmers according to business maturity (beginning versus mature farm businesses), farm operators’ age/experience (young versus older, more experienced farm operators), and farm size (small vs large farm businesses) by utilizing random-effects ordered logistic techniques. Design/methodology/approach This study uses a credit migration approach to analyze the factors that impact the probability of farm credit migration rates. An ordered logit model is used to assess the influence that factors have on a farm upgrading, staying same, or downgrading in credit rating. Findings Results show that increasing farm size will lead to a higher probability of class upgrades. Being a young farm operator, meanwhile, decreases this probability. Positive changes in money supply and farm real estate values were found to increase the likelihood of credit upgrades. Results also show trend reversal of credit risk movement, where upgrades (downgrades) are more likely to be followed by downgrades (upgrades). Originality/value With farms being dependent on capital for growth, knowing what factors affect the ability of a farm to obtain credit lends insight in the agricultural credit markets. This paper is also the first to assess the impacts of these factors on small farms which constitute 92 percent of farms in the USA per the US Department of Agriculture.

Factors affecting household decision to allocate credit for livestock production: Evidence from Ethiopia

Abstract: Purpose The purpose of this paper is to explore the factors that affect farmer’s decision to allocate credit for livestock production. The results are expected to contribute to the understanding of what motivates smallholders to allocate credit to agricultural production in general and livestock production in particular. A better understanding of the farmers’ behavior in allocating credit for livestock would provide useful information for project implementers and financial institutions that work with small-scale livestock producers. Design/methodology/approach A cross-section data set collected in 2014 from 5,000 households and 497 rural communities in the major highland regions of Ethiopia is examined. The authors developed a conceptual framework for credit allocation decision. Percentiles, means, and standard deviation as well as t, χ2 and Fisher’s exact tests for association and Cramer’s V measure for strength of association have been used to describe the status of farmer’s access to credit and analyze credit utilization, while a three-stage probit model with double sample selection is used to identify factors that affect household’s decision to allocate credit for livestock production. Findings After controlling for potential selection biases, sex and literacy status of household head, land size, wealth and access to livestock centered extension service are found to have a statistically significant effect on farmers’ decision to allocate credit to livestock production. The results showed female-headed households, wealthy farmers, farmers with small plot of land and farmers that have access to livestock centered extension services are more likely to allocate the credit for livestock production. The results suggest that policies aimed at improving access to credit together with access to livestock focused extension service are more effective in increasing livestock production. Research limitations/implications The study’s findings should be viewed with perspective and caution, as only households with excess demand for credit were the subject of the research. Originality/value The contribution of this paper is twofold. First, it is one of a very few empirical studies that try to identify factors that affect households credit allocation to livestock in systematic way that removed confounding effects using three-stage probit models. Given the emphasis on financial constraints in livestock development, new empirical insights on household credit allocation are essential to better inform development interventions. Second, the analysis relies on a comprehensive data set that represents the major agricultural system of the country.

A disequilibrium evaluation of public intervention in agricultural credit markets

Abstract: Purpose Agricultural producers rely on debt capital to support many functions of their enterprise, yet private credit markets are frequently characterized by an imbalance between supply and demand. As a result, a number of public lending programs exist to mitigate the perceived market failures of private credit markets that serve agricultural producers. The paper aims to discuss these issues. Design/methodology/approach This study uses a structural disequilibrium model to examine the potential for excess demand or supply in the private market for non-real estate farm loans between 1978 and 2014. Findings The model demonstrates that the market is frequently characterized by disequilibrium, fluctuating between periods of excess demand and excess supply. These disequilibrium periods motivate the discussion of public intervention as a policy proposal within the agricultural sector. Originality/value This study uses traditional disequilibrium modeling to evaluate the private credit market for agriculture lending in a manner that has not been attempted previously in the literature. The model uses maximum likelihood methods with non-linear solution algorithms to investigate excess supply and demand in the sector.

Introduction of the Trend-Adjusted Crop Insurance Program: Participation and Coverage Level Responses

Abstract: Purpose Recently, USDA-RMA introduced a Trend Adjusted-Actual Production History (TA-APH) program, which increases APH by a trend factor to cover yield changes over time. The purpose of this paper is to examine the effects of the TA-APH program on farmer participation, coverage election, and risk by analyzing data before and after the program. Design/methodology/approach Since the program was carried out in selected counties, the authors employ a difference in differences approach doing comparisons of insurance participation and coverage levels between eligible and ineligible counties. Findings The authors find that farmers within the counties where the TA-APH program was available experienced an increase in insured acres of 3 percent for corn and 5 percent for soybeans. The authors also find the farmers eligible for the program purchased lower coverage levels relative to those not eligible. However, the magnitude of that negative effect is relatively small, −0.9 percent in corn and −1.3 percent in soybeans. Collectively the evidence shows the TA-APH program does increase the guaranteed yield level mitigating farmer risk. Research limitations/implications The data set used only permitted analysis at the county level, thus the authors could not look at the individual farmer choices. Practical implications The results suggest that if a greater level of farmer risk protection is desired from crop insurance, the authors find that the trend adjustment as implemented was a successful way to achieve this. Originality/value This paper contributes to the literature on the crop insurance by evaluating the program controlling for a non-participating groups, farming experience, liability rates, and subsidy rates. In doing this, it fulfills an identified need to study the actual impact on participation rates and coverage levels elected.

Modeling heterogeneous risk preferences

Abstract: Purpose The purpose of this paper is to propose a general framework for modeling heterogeneous risk preferences of agricultural producers and identifying the underlying factors that affect risk preferences Design/methodology/approach This paper nests the risk preference function in a general production decision framework to test and model producers’ risk preferences The framework allows for both production and price risk, and accommodates potential inefficient behavior Panel data and the GMM method are used in the empirical estimation Findings The results in this study confirmed the hypothesis of heterogeneous risk preferences Farmers are found to have decreasing absolute risk aversion Both farmer characteristics and socioeconomic factors have significant impact on producers’ risk preferences The results suggest that ignoring heterogeneity in risk preferences across individuals and how non-wealth variables could affect farmers’ risk preferences could result in biased economic behavior analysis Originality/value It is generally assumed in the literature that risk preferences are homogeneous among farmers at given wealth This is a strong assumption and there are abundant evidences that suggest otherwise This paper makes contributions to the literature by proposing an approach to modeling heterogeneous risk preferences and identifying the factors that affect preferences

Forewarned is forearmed – repayment delays in microfinance relationships

Abstract: Purpose In order to improve the assessment of current lending policies for a microfinance institution (MFI) in Azerbaijan, the purpose of this paper is to analyse how lending conditions are adjusted based on knowledge gains during the loan relationship, with particular attention to delays in previous loans. Moreover, the paper examines what a lender can pre-determine from its own collected repayment records of clients. In addition, the repayment performances and lending policies between agricultural and non-agricultural clients are differentiated. Design/methodology/approach The analyses are based on a rich data set of an Azerbaijani MFI. For determining the influence of previous delays on the volume rationing in the following loan, the authors apply a generalized linear model. Subsequently, the probability of recidivism is analysed by means of a logit model. Findings The results confirm a positive relationship between delays in previous loans and repayment problems in present loans, which is increased by the severity of the previous delay. With respect to consequences, it is shown that the borrower with previous delays faces an increase in loan volume rationing in the subsequent loan. Moreover, the authors find that the consequences of previous delays do not differ significantly between farmers and other clients. Originality/value Until now, the consequences of repayment delinquencies in microfinance lending relationships have hardly been investigated. This study enhances the understanding of lending policies in microfinance by focussing on relationship aspects and by simultaneously differentiating between farming and non-farming clients.

The economics and productivity of US dairy farms that use crossbred vs non-crossbred breeding technology (production systems)

Abstract: Purpose The purpose of this paper is to examine the rise in crossbred cow numbers in the US dairy herd Methods used look at well managed herds to see if crossbreeding provides a management tool that producers are using to maintain profitability Design/methodology/approach The authors estimate a Translog stochastic production frontier (SPF) for US dairy farms to examine the competitiveness of crossbred and non-crossbred dairy herds by system and region Findings The bottom-line conclusion is that WM or highly efficient crossbred herds solidly compete on a financial basis with larger WM Western Holstein herds, the most technically efficient managed group, based on the SPF results in the authors’ study The study finds that net return on assets for crossbred herds are not different from Western Holstein herds and that there is no significant difference in amount of milk per cow produced annually Research limitations/implications Because of a need to unmask the advantages of crossbreeding as a technology it was necessary to separate WM herds from poorly managed herds That was done by frontier estimates that robustly ranked operation and corrected for endogeneity, tested for selectivity bias, and incorporated the NASS survey design Originality/value For the first time, the 2010 Dairy Cost and Returns questionnaire version of the Agricultural Resource Management Survey (Dairy CAR) design allows researchers to expand survey observations to represent the vast majority of the US dairy farm population and to sort dairy farms into crossbred/non-crossbred herds

Factors affecting risk-rating migration

Abstract: Purpose The purpose of this paper is to examine empirical customer account data from 2006 through 2012 to review the probability of default (PD) rating methodology implemented by a FCS association for production agricultural accounts. This analysis provides insight into the migration of accounts across the association’s currently established PD rating categories with negative migration being a precursor to potential loan default. Design/methodology/approach The data set contained 17,943 observations from the years 2006 to 2012 and consisted of various fields of data including balance sheet date, earnings statement date, and PD rating as of the statement date. The methods include analysis on the dynamics of the PD ratings and component ratios. OLS regression was used to analyze the data to see how the current period PD rating and component ratios affected the PD rating one year, three years, and five years out. OLS regression examined the statistical significance of the PD ratings and ratio components for this analysis. The dependent variable, Future PD Rating, represents the assigned PD rating for the observed farm either one, three, or five years into the future. It is expected that the initial PD rating in any given year would have a positive relationship, and be statistically significant in estimating future PD ratings. The independent variables are the current PD rating and the various component ratios of the inverse current ratio (CR), the debt to asset ratio (D/A), the gross profit to total liabilities ratio, the inverse debt coverage ratio, working capital to gross profit, and funded debt to EBITDA. Findings Results indicate that financial ratio information gathered today can do a good job forecasting PD ratings up to three years in the future. CR information does not forecast five years into the future very well. Thus, there is an important need to update financial information on a regular basis. The results indicate that the D/A information is very important in predicting risk ratings. As the production agriculture sector has experienced difficult financial conditions during 2014 and 2015, agricultural finance institutions need to obtain up-to-date financial information from their clientele to effectively assess the risk of and manage their financial portfolio. Originality/value Several previous works have examined and established models to assess risk in agricultural lending. This research adds to this body of work by examining the migration of an account’s risk-rating class over time using actual lender account data.

Does ethanol production affect corn basis volatility

Abstract: Purpose South Dakota is ranked sixth nationally for corn and ethanol production (EP). The purpose of this paper is to investigate the relationship between corn-EP and corn basis volatility using South Dakota data. Design/methodology/approach A mixed regression modeling approach was adopted to analyze state EP data, and quarterly corn production and price data for five crop reporting regions in South Dakota (1990-2014). Findings From 2004-Q4 to 2013-Q4, ethanol and corn production in South Dakota increased by 735.50 million gallons and 228.30 million bushel per year, respectively. Empirical estimates indicate that increased EP narrowed the corn basis by 6.16 cents per bushel, and increased corn basis absolute volatility by 2.25 cents. However, increased corn production widened the corn basis by 27.56 cents per bushel and decreased absolute basis volatility by 4.32 cents. On average, for this period, increased EP offset the effect of rapid corn production on average basis and basis volatility in the State of South Dakota. Empirical evidence presented clarifies how the relationship between EP and corn production variability effects the cash basis and basis volatility in local markets. Research limitations/implications Research limitations include the use of statewide EP due to the lack of regional data, and the use of aggregate price data rather than local cash market data. Practical implications During normal crop production years, corn production is a predominant driver for impacting corn basis and basis volatility. In this case, EP plays a secondary role and dampens the corn production effect by narrowing the cash basis and increasing volatility. However, when a negative corn production shock occurs, then EP amplifies the effect of reduced corn production. In this case, EP strengthens market forces that are narrowing the cash basis and amplifies the market forces that are increasing the volatility of the cash basis. Social implications Negative corn production shocks occurring in regions where corn production and corn-based EP are dominant agricultural activities will increase basis volatility, reducing hedging effectiveness. Expansion of the ethanol blending wall in the future may exacerbate the market forces that have evolved in local cash corn markets as EP renews its expansion in major corn production regions. As a result, producers and grain elevator managers need to be aware that traditional hedging strategies may become less effective as one consequence of a renewed expansion of EP in the USA. Originality/value The literature on the effect of corn-EP on corn basis volatility is limited. This is the first study to apply a mixed modeling approach to the issue of how EP affected corn basis and basis volatility.