Commodity prices and farmland values have surged recently. As a result, farmers and land owners have enjoyed an increase in their farm income, rate of return on assets, and wealth. Concern regarding the sustainability of these recent profits and the striking similarity of today's economic forces to the 1980s, have caused many individuals to wonder if U.S. agriculture is set up for another 1980s-type agricultural bust. Just as in the 1980s, government policies have contributed to the run up in commodity prices and land values (e.g. today's ethanol mandates). In addition, commodity prices and land values are at historic highs. For example, the USDA estimates show the average value of land today (approximately $2,400 per acre) is higher than 1980s average land value as measured in 2008 dollars (approximately $2,000 per acre). Another similarity is that the value of the dollar is at high levels relative to historical values, which has helped expand agricultural export markets. Furthermore, low interest rates along with recent profits have encouraged farmers to use debt and cash to invest in machinery, equipment, and land. The sluggish recovery from the recent financial crisis warrants research on how U.S. agriculture will be affected by these and future events and the long-term impact they present.

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.

The use of credit by farmers, rural businesses, and agribusinesses has a critical impact on their long-term sustainability and competitiveness. One aspect of credit use is determining when and how much credit the business should use. At the heart of this issue is determining the extent to which the firm should utilize its credit reserves or unused borrowing capacity. Borrowing capacity has a value to the firm because it can be called upon in times of financial distress and keeps options for future projects available. Determining the value of unused credit capacity, however, is a challenge complicated by the fact that the unused borrowing capacity tends to grow and shrink as the overall market conditions in agriculture fluctuate. When times are bad, unused credit reserves tend to shrink as lenders become more conservative. These unused credit reserves are typically larger for established farmers but many of these farmers are nearing retirement and may not want to take on additional debt. Young and beginning farmers, which are often small or have less than $250,000 gross farm sales, are now in position to move back to the farm or start a new or another career in production agriculture. While some of the wealth will be transferred from the older to the younger generation of farmers, many young farmers will need access to credit to start or grow their operations. Work is needed to determine how to value and manage credit reserves in agriculture as well the implications of a new generation of borrowers entering agriculture.

Firms in the food, fiber, and bio-energy industry are experiencing continued financial risk in their operations as input and output prices have been highly volatile in recent years, a risk that is likely to continue for the foreseeable future. Rising food prices worldwide resulting from bad crop years, possibly related to climate change, have reinforced the need to develop informed policies to promote economic development and expansion of agricultural markets in the developing world. Broadening and deepening financial markets in rural areas is one effective way to promote strong emerging markets as recent microfinance and rural finance initiatives have demonstrated. Agricultural economists have lagged in their contribution to the knowledge of the programs that bring about strong financial development in rural areas of developing countries, but recently this area has been more active among agricultural economics research. More work is needed, however, to further develop our understanding about the nature of risk in emerging markets.

Arguably, some of the increase in agricultural commodity and input prices is attributable to renewable energy. Ethanol production subsidies led to growth of the renewable energy industry, which resulted in over $3 billion of external capital flowing into agriculture and rural America. One source of funding is federal and state subsidization of the industry (e.g. tax credits), which recently expired (although the renewable fuel standard, a consumption mandate, is still in place). Moreover, most renewable energy firms have financial sweeps embedded in their debt financing which makes financing new investment difficult. Lack of financing jeopardizes the long term competitiveness of renewable fuels if new technology is not adopted. It is unclear how much growth in this sector will be sustained in the absence of federal and state tax credits.

The members of NC-1177 play a critical role in educating future and current agricultural financial managers through teaching and extension. These efforts provide the industry with the knowledge necessary to manage financial aspects of farms and agribusinesses. However, work is needed to jointly develop an understanding of the key components of a state-of-the art financial management curriculum for undergraduate, graduate, and extension audiences. This project will seek to identify the key concepts and lessons that should be incorporated into each of these curricula. By improving the training of undergraduates, graduate, and practitioners the project will improve the financial management ability of members of the food system and increase the long-term sustainability of businesses operating in the food, fiber, and bio-energy system.

The track record of NC-1177 was excellent regarding the number of collaborations and outcomes that depended upon multi-state efforts. This current project will leverage those existing relationships. Each objective the new project specifically states how multi-state activity will occur and why it is needed. The scientists involved in the project have a wide variety of expertise in agricultural finance, social capital, and policy analysis. However, most institutions have only one scientist working in this area. Thus, a regional emphasis fosters synergy as resident experts can establish a critical mass necessary to attract national interest and leaders of regulatory agencies, financial institutions, and policy groups; more efficiently collect data of mutual interest; enhance peer review of each work produced; and collaborate on issues that exceed local interest. Extension members of the committee benefit from research that is not available locally. The past multi-state effort benefitted greatly from the rich participation of industry, public agency, and non-profit members.

This group has a strong history of leveraging the multistate funds to acquire numerous national and state level grants. For example, in 2013 members of NC-1177 from Kansas State, North Dakota State, University of Illinois, University of Minnesota, and University of Kentucky have collaborated on a national farm benchmarking grant with just under a million in funds received. NC-1177 members have also leveraged multistate funds by working with industry. Researchers at Kansas State have received funds from CoBank to understand the outlook for farm supply cooperatives. Researchers at North Dakota State University have received funds from four Farm Credit Associations to develop and aid with lender training. Members will continue to collaborate and pursue grant opportunities from USDA, state agencies, and private industry to maximize benefit of multistate funds.

The primary activity of this regional research group is our annual meeting held each year in conjunction with the National Agricultural Credit Committee (NACC) and hosted by the Federal Reserve Bank of Kansas City. The meetings therefore represent one of the few opportunities to bring together members of academia, industry, and government to discuss important issues in agricultural finance. Each of the objectives will be explicitly addressed in the call for papers for the academic portion of the meetings. In addition, the industry and government panels of the combined sessions with the NACC will address each of the objectives. The objectives will be evaluated based on the research projects presented and the discussion between the various parties attending. Further, a number of the research projects are expected to be published in peer-reviewed academic journals and the extension service of the various states represented by the meeting. This will provide a quantitative measure of the impact of the research generated and the reach of the findings in academic, policy, and business communities.

Upon completion of the project, insights will be gained to ultimately improve the functioning of agricultural and rural financial markets. Producers, rural residents, and businesses should benefit through increased performance and reduced business risk. The lending sector will become more stable and better prepared to face future policy, portfolio and structure-related challenges. The value of this work to stakeholders is evidenced by the large number of non-station members who actively participate in annual meetings and desire to keep abreast of research results via listserve communication.
There are no apparent barriers hindering the technical feasibility of the proposed research project.