NC1177: Agricultural and Rural Finance Markets in Transition
(Multistate Research Project)
The presence of internal and extental shocks to U.S. agricultural markets generate the impetus for new agricultural finance research on the response of U.S. agriculture to farm financial stress. The agricultural commodity price boom of 2007-2013 generated substantial increases in farm income, farm asset prices, and farm (and farmland owner) wealth. Recent commodity price declines due to a glut of global production, the prospect of increased tariffs on agricultural commodities, considerable agricultural and macroeconomic policy uncertainty, and the similarity of other economic indicators to those in the 1980s, lead many to wonder if U.S. agriculture is on the brink of another 1980s-type agricultural bust. In the 1980s, farm asset prices and farm wealth declined forcing many farmers into bankruptcy and exit with negative consequences for rural economies.
Since early 2013, prices for corn, soybeans, and wheat have declined by approximately 50%. Livestock and dairy prices have seen similar declines. Concurrent to these sector-wide output price decreases, agricultural real estate value have declined despite low interest rates and continueddemand for farmland, land values in many agricultural states across the U.S. have seen at least three years of continued decline. While large profits and low interest rates during the boom encouraged farmers to use debt to invest in capital assets such as equipment and farmland, interest rates are rising which threatens to put additional negative pressure on farm asset prices and makes farmers particularly vulnerable to financial shocks. Trade disputes with key trading partners such as China, Mexico and Canada also created uncertainty and negative shocks to the farm income that could worsen agricultural credit conditions.
U.S. agricultural production is critically and increasingly dependent on cost-effective access to capital and prudent regulation of the financial system to continue to meet the food, fiber, and bio-energy demands of the U.S. and the world. Production agriculture is part of a diverse and complex economic and financial system that is subject to systemic risks of the type seen during the 2008 financial crisis. While agriculture was not greatly harmed during this financial crisis, in part because commodity prices were high, it remains vulnerable to shocks to the availability and price of credit. These shocks can spillover from other sectors as was the case with the housing sector in 2008. There are important lessons to be learned about the role of systemic risk that are important to both Wall Street capital providers and Main Street agricultural users of capital in rural America. In addition, increasing farm financial stress is testing the tighter agricultural credit regulations and more prudent agricultural lending practices, in part adopted after the 1980s farm crisis.
The availability and 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 and when credit use should adjust to changing economic conditions. At the heart of this issue is determining the extent to which the firm should use 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 investment. Determining the value of unused credit capacity, however, is a challenge complicated by the fact that 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 in gross farm sales, are now in a 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. This issue and its distributional implications are particularly salient now since young and beginning farmers are more likely to experience greater income shocks and financial stress due to the ongoing trade disputes.
The increased regulatory environment is also playing a role in reshaping rural financial markets. In response to the 2008 financial crisis, the U.S. Congress enacted sweeping financial regulations. These financial regulations on rural credit institutions have had major impacts to oversight and bank lending. Since these regulations were passed, mergers and acquisitions within the rural credit markets have increased. This has the direct effect on reducing the choices available to farmers and agribusiness for credit and reducing competition. These trends have major long-term impacts on credit availability and how rural financial markets are structured.
Firms in the food and agribusiness sector 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 poor crop production years 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.
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 key concepts and lessons that should be incorporated into each of these curricula. By improving the training of undergraduates, graduates, 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 multistate efforts. This current project will leverage those existing relationships. Each objective of 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 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 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 the annual meeting held each year in conjunction with the National Agricultural Credit Committee meeting. The meeting is hosted by the Federal Reserve Bank of Kansas City. The meetings represent an excellent opportunity to bring together members of academia, industry, and government to discuss important and current issues in agricultural finance. The academic call for papers for these meetings will ask participants to explicitly address the objectives of this project in their presentations. In addition, industry and government participants will address project objectives from an ‘real world’ perspective. The objectives will be evaluated based on the relevance and quality of research projects presented and discussion among academic and industry participants. Further, many research projects are expected to be published in peer-reviewed academic journals and the number of such publications is a quantitative measure of the impact of the research generated. Other work will result in extension publications and outputs targeted toward business and policy audiences. The number and geographic reach of these outputs is another measure the project’s impact.
In addition to the fall Annual Meeting, many of our members are part of the Agricultural Finance and Management (AFM) section of the Agricultural and Applied Economics Association (AAEA). This group meets annually during the summer AAEA meetings and hosts track sessions in the area of agricultural finance. Leadership of the AFM section is the same as the NC-1177 leadership. Activities sponsored by the AFM section foster collaboration among agricultural finance scholars throughout the U.S. and abroad and generate additional research presentations and publications related to the objectives of this project.
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.