Performing Department
Agribusiness and Applied Economics
Non Technical Summary
The modern agricultural production system is critically dependent upon the financial management of agricultural operations. Producers need cost-effective access to capital and sound government policy in order to continue to meet the food, fiber, and bio-energy demands of the United States. Agriculture has evolved into a very diverse and complex system which has exposed agriculture to many new risks, most recently was the subprime lending crisis. Not since the Great Depression were financial markets in such turmoil due to the increase in mortgage foreclosures, loan write-offs, and deterioration of new financial instruments (e.g. credit default swaps). The full causes of the financial crisis are beginning to be understood by academics. Fortunately, the agricultural industry was not greatly harmed by the recent financial crisis, partly due to sustained high commodity prices even during the financial crisis. However, there are many lessons to be learned regarding the role of systemic risk in the crisis, which is important not only to capital suppliers and Wall Street but agricultural users of capital and rural America as well.
Animal Health Component
0%
Research Effort Categories
Basic
50%
Applied
30%
Developmental
20%
Goals / Objectives
Examine the impact of recent fluctuations in capital and commodity markets on the performance, management, and regulation of agricultural financial institutions
Project Methods
Presently, the primary concern is whether the agricultural sector will continue to experience high growth, income levels, and healthy credit markets relative the broader economy. Previous research of this regional research group suggests that the financial health of the agricultural sector should be closely monitored as the risk of a decline in agricultural incomes and asset values appears likely. While the agricultural sector appears decoupled from the broader economy, declining commodity prices and increasing costs of borrowing may be a harbinger of a significant decline in the farm financial conditions.The theoretical basis used to frame the research outputs of this regional research group are drawn from theory of finance and credit markets. According to the simplest model of asset valuation, the present value model, the value of an asset is determined by the discounted stream of expected future returns. As a result, the major areas of concern for agricultural finance are (i) expected farm income, (ii) interest rates (the discount factor), and (iii) asset values. These three components comprise the tenants of agricultural finance research and are the primary topics of inquiry for this regional research group. These theories are applied to the research objectives of this group and are explained below.The recent financial crisis motivated a number of reforms in US credit markets. In addition, changes in US farm and energy policies have led to increase in volatility in commodity markets, and farmland values are at record levels. Many believe that these changes have led to a significant increase in systematic risk in the agricultural sector. Because systematic risk is inherent to the broader financial system, it cannot be diversified away and poses a series threat to the long run success of firms. While the agricultural sector, in particular agricultural financial institutions, remained somewhat insulated from the catastrophic effects of increased systematic risk (e.g., US bank foreclosures following the recent recession), it would be naïve to say that the sector is completely immune to the short- and long-run effects of this increase in systematic risk or the increase in volatility of capital and commodity markets. Research of the widespread effects of the capital and commodity market fluctuations on the performance, management, and regulation of agricultural financial institutions is the focus of this objective.Agricultural banks are but one type of agricultural financial institution. Other key agricultural financial institutions are government sponsored enterprises (GSE's), like the Farm Credit System and Farmer Mac. A series of studies will be conducted to address the implications of fluctuations in capital and commodity markets on these GSE agricultural firms. Efforts will focus on examining how changes in government policy toward GSE's would impact the supply and price of capital in agricultural markets. The collapse and reorganization of other prominent GSE's, Fannie Mae and Freddie Mac, has called into question the role of GSE's in modern capital markets. Work is needed to understand how changes in the GSE status of these lenders would impact capital availability in agricultural markets. Research will be conducted to determine how GSE status influences the cost of funds for Farmer Mac and the Farm Credit System and how alternative structuring of these institutions might be best accomplished so as not to disrupt the agricultural credit markets.Efforts in this objective will be directed toward issues related to capital supply and demand in agriculture, financial management of agricultural businesses, and the impacts of public policy on capital availability and its use in the agricultural system. One key to successfully addressing this objective is to utilize a variety of state and national level data sets designed to understand the financial situation of farms. Many of the researchers involved in the project lead or assist with farm level data collection efforts in their respective states. These data sets will be analyzed in a coordinated manner to shed light on how capital needs vary across states and regions and how national level policies will impact the financial performance on firms in the sector. Additionally, the project has a long history of collaborating with researchers from the USDA's Economic Research Service. Several of the researchers have developed collaborative working relationships with ERS to analyze ERS's Agricultural Resource Management Survey (ARMS). This data set contains arguably the most definitive data on the financial structure and characteristics of the farm sector. In completing this objective researchers will continue to collaborate with and involve ERS scientists in the project. This will greatly expand the scope of the work that is done and will also greatly benefit the analysis by bringing together many of the top agricultural researchers to work on analyzing the data. The data will be analyzed with well-known and accepted econometric and optimization procedures.The weak recovery from the recent economic recession has severely curtailed the credit available to agricultural communities and especially young, beginning, and small (YBS) producers or socially disadvantaged producers. Thus, (YBS), socially disadvantaged, and/or specialty crop producers will benefit from additional efforts to ensure adequate credit. These farm groups can play a vital role in maintaining and growing rural communities in the U.S. Ensuring that YBS farmers as well as socially disadvantaged farmers receive credit is one of the missions of the Farm Service Agency within the U.S. Department of Agriculture. In addition, the Farm Credit System is charged with providing credit to YBS farmers. The NC-1177 group has strong ties to these two government agencies and sharing data between these groups has improved lending and financial service practices to YBS farmers, socially disadvantaged, and/or specialty crop producers in the past. An example of this is the research completed by Oklahoma State University, Purdue University, and the Farm Credit Administration (regulator of the Farm Credit System) on the importance of credit to YBS farmers that operate nonfarm businesses.Growth in the renewable fuels industry has slowed from its previous fervent pace. Unforeseen reductions in gasoline demand that resulted from the recent economic recession and increased fuel efficiency of the U.S. auto fleet were contributing factors to a reduction in the proposed 2014 Renewable Fuel Standard mandated levels of conventional and advanced biofuel production. Depending on other unfolding market factors like world demand and South American production, a relaxation of the floor on corn based ethanol consumption could impact agriculture and rural communities, particularly since this reduction comes on the heels of the expiration of tax incentives commonly known as the 'Blenders Credit'. The sector has recently experienced how strain in the renewable fuel sector can cause strain in rural communities and for agricultural producers. Financial stress in the corn ethanol production sector was experienced during the run up in corn prices in 2008. This led to the bankruptcy of VeraSun, the largest publically traded ethanol producer, and others in or around October 2008. This strain was acutely felt in the surrounding rural communities because many farmers held valuable forward contracts with the ethanol producers that suddenly became worthless. As the renewable fuel sector enters a more mature phase, there is much need for research on how the slowing growth in this industry will affect rural communities and farmers.