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How do financially vulnerable farms finance debt in periods of falling prices?

Author

Listed:
  • Daniel L. Prager
  • Christopher B. Burns
  • Noah J. Miller

Abstract

Purpose - The purpose of this paper is to examine the effect of falling commodity prices on farm debt usage of corn and soybean farms, and how this debt usage differs based on the financial leverage of the farm. Design/methodology/approach - Using panel data on farms surveyed at least twice in the Agricultural Resource Management Survey (ARMS) from 1996 to 2015, this paper uses a difference-in-differences approach to measure the effect of low commodity price shocks on financially vulnerable farms. To account for the correlation in the error structure between the three dependent variables (real estate debt, non-real estate debt, and interest payments) we use a seemingly unrelated regression approach. Findings - Following a commodity price shock, financially vulnerable farms (debt-to-asset ratio greater than 40 percent) were found to increase their non-real estate debt when compared with non-financially vulnerable farms. Off-farm business income was found to help farms reduce real estate debt and interest payments in the face of these shocks. Research limitations/implications - Data consist of corn and soybean farms surveyed more than once in the ARMS from 1996 to 2015 and are not representative of all US farms, but have similar characteristics to US commercial farms. Social implications - The results indicate that financially vulnerable commercial crop farms respond to lower prices by taking on non-real estate debt, increasing financial stress. Well-targeted federal programs could prevent further financial stress for this group. Originality/value - This is the first paper to use unbalanced panel data from ARMS to examine how farm debt use responds to commodity prices. This paper can inform policymakers about the financial risks to farms resulting from the current low-price environment.

Suggested Citation

  • Daniel L. Prager & Christopher B. Burns & Noah J. Miller, 2018. "How do financially vulnerable farms finance debt in periods of falling prices?," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 78(4), pages 412-424, March.
    • Handle: RePEc:eme:afrpps:afr-08-2017-0066
    DOI: 10.1108/AFR-08-2017-0066
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    Citations

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    Cited by:

    1. Geoffroy Enjolras & Philippe Madiès, 2020. "The role of bank analysts and scores in the prediction of financial distress: Evidence from French farms," Economics Bulletin, AccessEcon, vol. 40(4), pages 2978-2993.
    2. Steele C. West & Amin W. Mugera & Ross S. Kingwell, 2021. "Drivers of farm business capital structure and its speed of adjustment: evidence from Western Australia’s Wheatbelt," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 65(2), pages 391-412, April.
    3. Chandio, Rabail & Katchova, Ani & Giri, Anil K. & Subedi, Dipak, 2023. "Impact of interest rate changes and government payments on farm operation's debt," 2023 Annual Meeting, July 23-25, Washington D.C. 335958, Agricultural and Applied Economics Association.
    4. Ty Kreitman & Todd Kuethe & David B. Oppedahl & Francisco Scott, 2022. "The Supply and Demand of Agricultural Loans," Research Working Paper RWP 22-06, Federal Reserve Bank of Kansas City.

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