Progress 10/01/99 to 09/30/05
Outputs
Several important accomplishments were made over the course of the project. In general, the advances resulted in several important findings that should improve financial management in agriculture and the efficiency of agricultural credit markets. The first efforts of the project focused on understanding how government program payments impact the value that risk averse farmers place on the returns to farmland. The results of this work show the connection between government farm programs and the value of a major agricultural asset, farmland. The project resulted in some important findings regarding the financial management and performance of farm businesses, i.e., that although financial performance is quite variable, the most profitable farms are consistently the most profitable. We also investigated the role that financial management practices play in financial performance. The findings demonstrated that farms using modern financial management practices are
consistently more profitable than their peers. The next major effort in the project addressed how borrower characteristics influenced the cost of delivering credit to farmers. For instance, the study examined how factors such as loan volume, lender/borrower relationship factors, and contract terms influence the costs and returns of extending agricultural credit. The results indicated that substantial economies of scale exist at the lending relationship level. This suggests that borrowers utilizing larger amounts of credit will borrower at lower rates than their smaller peers. Additionally, the study found that although young and beginning farmers are more costly to serve in the short term, they are often very profitable to financial institutions over the long term. As a result, this research should help policymakers in designing programs that encourage the delivery of credit to specific types of agricultural borrowers such as small or beginning farmers. We also examined how farm
borrower credit risk migrates over time. The results suggest that credit risk is highly influenced by the lender's assessment of non-financial factors such as management capacity, character, and collateral. In contrast to the proprietary data used in the previous study, the project also developed a method to utilize publicly available bank level data to estimate credit risk migration matrices.
Impacts
The project made several findings that should improve the ability of farmers to manage their businesses and the ability of lenders to supply farmers with cost effective credit. Additionally, the project examined a number of issues that could influence public policy designed to provide financial support to all farmers and particular groups of farmers.
Publications
- Gustafson, C.R., G. Pederson, and B.A. Gloy. 2005. Credit Risk Assessment. Forthcoming, Agricultural Finance Review, 65:2.
- Gloy, B.A., E.L. LaDue, and M.A. Gunderson. 2005. Credit Risk Migration and Downgrades Experienced By Agricultural Lenders. Agricultural Finance Review, 65:1:1-16.
- Gloy, B.A., M.A. Gunderson, and E.L. LaDue. 2005. The Costs and Returns of Agricultural Credit Delivery. American Journal of Agricultural Economics, 87:3:703-716.
- E.L. Ladue, B.A. Gloy, and C. Cuykendall. 2005. The Profitability of Agricultural Lending Relationships. Research Bulletin 1. 94 pages. Department of Applied Economics and Management, Cornell University.
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Progress 01/01/04 to 12/31/04
Outputs
Major progress was made in understanding the costs and returns of agricultural lending. Several research papers are in progress after initial analyses of data collected on agricultural lending relationships. Initial studies examine how factors such as loan volume, lender/borrower relationship factors, and contract terms influence the costs and returns of extending agricultural credit. Among the findings are that economies of size exist in agricultural credit delivery and that lenders pass most of these benefits on to borrowers through lower interest rates. Additional work has expanded this research to look at how costs and returns change over the lender/borrower customer relationship lifecycle. Preliminary results of this research were presented at professional meetings. The project also examines credit risk migration. Borrower level data were used to understand the extent and cause of credit risk migration. Results indicate that lender risk ratings are much more
stable than ratings based on credit scores estimated from financial statements, highlighting the importance that non-financial factors such as management capacity, character, and collateral play in assessing credit risk. Additionally, factors such risk tier, the borrower's personal characteristics, and the stage of the business life-cycle provide useful information in predicting credit quality downgrades, while the type of primary agricultural enterprise did not have a meaningful impact on the likelihood of a downgrade. An additional project on credit risk migration was initiated. This study uses publicly available bank level data to estimate credit risk migration matrices. Initial efforts indicate that it may be possible to estimate credit risk migration matrices using maximum entropy estimation techniques and publicly available bank level data.
Impacts
After an initial focus on farm financial management practices, the project has begun to focus on understanding how lender practices and financial markets influence the cost and price of agricultural credit. The results of the studies should provide lenders with better information about the exact relationships between loan relationships and costs and returns. This information can be used to more cost effectively deliver agricultural credit. In addition, a better understanding of the likelihood and costs of default are critical for the continuing adequate supply of credit to agriculture. These results will help lenders improve the efficiency of credit delivery to agriculture and improve the cost of credit for agricultural producers.
Publications
- Gray, A.W., M.D. Boehlje, B.A. Gloy, and S.P. Slinsky. 2004. How U.S. Farm Programs and Crop Revenue Insurance Affect Returns to Farm Land. Review of Agricultural Economics, 26:2:238-254.
- Gloy, B.A. 2004. Editor. Agricultural Finance Markets in Transition. Proceedings of the Annual Meeting of NCT-194. Research Bulletin 9(2004). 252 pages. Department of Applied Economics and Management, Cornell University.
- Gloy, B.A., E.L. LaDue, and M.A. Gunderson. 2004. Credit Risk Migration Experienced by Agricultural Lenders. Working Paper 8(2004). 31 pages. Department of Applied Economics and Management, Cornell University.
- Gloy, B.A., M.A. Gunderson, and E.L. LaDue. 2004. The Costs and Returns of Agricultural Credit Delivery. Working Paper 3(2004). 30 pages. Department of Applied Economics and Management, Cornell University.
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Progress 01/01/03 to 12/31/03
Outputs
The results of the investigation of the impact of current federal agricultural policy on U.S. farms that was finished in 2002 was published in the proceedings of the regional research meetings of NC-221. In addition, a paper submitted for consideration for publication in the Review of Agricultural Economics was accepted for publication. The research used a simulation model to examine the impact of government farm program and crop revenue coverage insurance on the probability distribution of returns to land. The results of this study were summarized in the progress report for 2002. The results of a study to determine the adoption of financial management practices and their impact on profitability was published in the Agricultural Finance Review. The adoption of several basic financial management practices is examined for a group of New York dairy farms. The paper provides estimates of the extent to which various business analysis and control, investment analysis and
decision making, and capital acquisition practices have been adopted. Many practices such as net present value analysis are not widely adopted by farmers. The paper also examines the relationship between the adoption of financial management practices and farm profitability. The results suggest that the adoption of financial management practices such as using investment analysis techniques significantly impact farm financial performance. In addition, preliminary analysis was begun on the borrower data collected in 2001 and 2002. Analyses of this data formed the basis of a masters thesis and the findings were presented at the meetings of the American Agricultural Economics Association. Initial analyses focused on evaluating the short and long-term profitability generated by agricultural lending activities. Analyses consider a variety of factors that influence the costs and returns associated with agricultural lending relationships. Among other things, the results provide evidence of
substantial economies of size at the relationship level. Work is being conducted to further refine the analyses and develop an article for submission to a peer-reviewed academic journal.
Impacts
In 2003 the project has made a significant impact by furthering the understanding of farm financial management practices. The results of this study should assist farmers in achieving higher rates of return and help educators identify emphasis areas for financial management education efforts. The project also made progress on understanding the costs and returns associated with agricultural lending. These results will help lenders improve the efficiency of credit delivery to agriculture and improve the cost of credit for agricultural producers.
Publications
- Gloy, B.A. and E.L. LaDue. 2003. Financial Management Practices and Farm Profitability. Agricultural Finance Review, 63:2(Fall 2003):157-174.
- Gloy, B.A. and E.L. LaDue. 2003. Financial Management Practices and Farm Profitability. In Financing Agriculture and Rural America: Issues of Policy, Structure, and Technical Change, Proceedings of the NC-221 Committee Annual Meeting. Editor M.A. Diersen. Economics Pamphlet 2003-1, Economics Department South Dakota State University.
- Gray, A.W., M.D. Boehlje, B.A. Gloy, and S.P. Slinsky. 2003. Government Program Payment Mechanisms, Crop Revenue Coverage Insurance, and the Return to Farm Land. In Financing Agriculture and Rural America: Issues of Policy, Structure, and Technical Change, Proceedings of the NC-221 Committee Annual Meeting. Editor M.A. Diersen. Economics Pamphlet 2003-1, Economics Department South Dakota State University.
- Gunderson, M.A. 2003. Profitability of Agricultural Lending Relationships. Unpublished M.S. thesis, Cornell University.
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Progress 01/01/02 to 12/31/02
Outputs
The project finished the examination of the long-term financial performance of New York dairy farms. A panel regression model with fixed effects was estimated in an effort to identify management factors that influence profitability. The model is estimated with two stage least squares to account for endogenous farm size and debt use variables. Production management factors such as farm size, rate of milk production, and milking system had a positive impact on farm profitability. Financial management variables for the type of accounting system used and the debt use were also significantly related to profitability. Unlike the findings of many other studies, measures of human capital did not have a statistically significant impact on profitability. The investigation of the impact of current federal agricultural policy on U.S. farms was finished in 2002. Results of this work were presented at the regional research meetings of NC-221 and a paper has been submitted for
consideration for publication in the Review of Agricultural Economics. A simulation is used to examine the impact of government farm program and crop revenue coverage insurance on the probability distribution of returns to land. When combined, marketing loan program payments, agricultural market transition act payments, and market loss assistance payments substantially increase the value that risk averse producers place on the residual returns to land. Crop revenue coverage (CRC) insurance was found to have a positive certainty equivalent value for most risk averse producers. However, the risk-reducing effects of current farm program payments substantially reduced the certainty equivalent value of CRC. The financial management data that was collected in 2001 was analyzed. This data formed the basis of a masters thesis and the findings were presented at the regional research meeting of NC-221. The study examines the relationship between the adoption of several basic farm financial
management practices and financial performance is examined for 137 New York dairy farms. The paper provides estimates regarding the adoption of various financial management practices. The results suggest that the adoption of financial management practices such as using investment analysis techniques significantly impact farm financial performance. In addition, a data collection effort that began in 2001 was nearly finished in 2002. This effort collected over borrower records from over 1,000 agricultural loan relationships in the Northeastern U.S. Research has begun to analyze this data with the goal of improving the understanding of the costs and returns of lending to various agricultural customers. In this study, detailed customer loan records will be used to investigate the profitability of agricultural lending relationships. Analyses consider both the short-term and long-term profitability of lending relationships for various segments of the agricultural credit market. The results
have important implications for credit delivery to various types and sizes of agricultural loan customers.
Impacts
The project has already made significant progress on understanding the impact of different government program payment mechanisms on the value that risk averse farmers place on the returns to farmland. These results should be of use in guiding policymakers in the design of effective farm program payment mechanisms. The project also made significant headway in examining the factors that influence the long-term profitability of agricultural producers. The results of this study should assist farmers in achieving higher rates of return and help educators dealing with farmers who wish to improve their financial performance. Additional work in progress should help further understand the specific financial management practices that if adopted, could significantly improve farm financial performance. The next major effort in the project addresses factors that influence the costs and returns of credit delivery to agricultural producers. The results should improve the efficiency
of credit delivery to agriculture, thereby reducing the cost of credit to agricultural producers. The results should also assist policymakers in designing programs that encourage the delivery of credit to specific types of agricultural borrowers such as small or beginning farmers.
Publications
- Gloy,B.A.,Hyde,J.and LaDue,E.L. 2002. Dairy Farm Management and Long-Term Farm Financial Performance. Agricultural and Resource Economics Review, 31:2(2002):233-247.
- Gloy,B.A.,LaDue,E.L., and Youngblood,K. 2002. Financial Management Practices of New York Dairy Farms. RB 2002-09, Dept. of Applied Economics and Management, Cornell University, Ithaca, New York.
- Youngblook, K.R. 2002. Financial Management Practices, Management Capabilities, and Competencies of New York State Dairy Farmers. M.S. Thesis, unpub., Dept. of Applied Economics and Management, Cornell University, Ithaca, New York.
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Progress 01/01/01 to 12/31/01
Outputs
The project continues to make progress in assessing the impact of current federal agricultural policy on U.S. farms. A simulation model was used to examine how four different government payment mechanisms impact the returns to farmland. The results indicate that marketing loan payments substantially reduce downside risk. Agricultural market transition act payments shift the distribution of returns without changing its variability. Market loss assistance payments reduce risk, but are worth less to risk averse producers than are agricultural market transition act payments and marketing loan payments. Crop revenue coverage insurance was found to enhance the benefits of other government payments. However, the risk-reducing effects of current farm program payments substantially reduced the relative value of crop revenue coverage insurance. The project also examined the long-term financial performance of a panel of New York dairy farms. The project focused on examining the
relationship between several management factors and the financial performance of these dairy farms. A panel regression model with fixed effects was estimated in an effort to identify management factors that influence profitability. The model was estimated with two stage least squares to account for endogenous farm size and debt use variables. The findings indicate that production management factors such as farm size, rate of milk production, and milking system had a positive impact on farm profitability. Financial management variables for the type of accounting system used and the debt use were also significantly related to profitability. Unlike the findings of many other studies, measures of human capital did not have a statistically significant impact on profitability. Two significant data collection efforts were initiated in 2001. Data regarding the financial management practices of New York dairy farms that participate in Cornell's dairy farm business summary was collected in a
mail survey. The data is extremely useful because the farm business summary already contains detailed financial performance and operational data for these farms. The newly collected data will facilitate the examination of the relationship between the adoption of various financial management practices and farm financial performance. Data is also being gathered from agricultural lenders to examine the profitability of various agricultural production market segments. This research involves understanding and estimating the cash flows that various groups of agricultural producers generate for financial institutions. Ultimately, the research seeks to use a net present value model to evaluate various marketing alternatives. Likewise, the profitability of making loans and servicing the small farm sector has several potential public policy implications for delivery of credit to the small farm sector.
Impacts
The project has helped us understand how different government program payment mechanisms impact the distribution of returns to farmland. Work in progress addresses the level of adoption and economic impact of the adoption of various financial management practices on farm profitability. Other work in progress will provide new information regarding the costs and profitability of credit delivery to the agricultural sector.
Publications
- No publications reported this period
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Progress 01/01/00 to 12/31/00
Outputs
The project has made progress in assessing the impact of current federal agricultural policy on U.S. farms. The initial focus of the research was directed toward understanding how different program payments impacted behavior in the land rental market. A simulation model was used to examine how different government payments mechanisms impact land rents. Preliminary results indicate that to the extent that farmers are risk averse, the marketing loan program payments have the greatest impact in the rental market. It is also important to understand how supplemental or emergency government payments alter economic behavior. The next stages of the research involve development of a mathematical programming model which is capable of measuring the dynamic impact of agricultural policies at the farm level. It is critical that such model be able to explain the debt use, hedging practices, and insurance purchases under alternate farm policies. Public data will be utilized to
develop a model of a case farm. The behavior of this farm will then be optimized under different federal policies.
Impacts
The project has helped us understand how different government program payment mechanisms impact behavior in the land rental market. Further work will evaluate the impact of these changes on debt use, hedging practices, and insurance purchases.
Publications
- No publications reported this period
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