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Farm Financial Stress in a Changing Economic Environment: Simulating Credit Risk with New Imputed ARMS Data on Farm Debt

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  • Burns, Christopher
  • Tulman, Sarah
  • Harris, J. Michael

Abstract

Current USDA forecasts indicate that US farms are entering a period of lower net farm income, following historical highs in 2012 and 2013. A sustained period of lower net farm income may lead to lower farmland values as returns to farmland decline, raising questions about whether specific sectors of the U.S. farm economy will become financially stressed in this environment. Using USDA’s 2013 Agricultural Resource Management Survey data (ARMS) with new imputed farm debt data we assess financial stress for both borrowers and lenders under scenarios of lower net farm income and land values. To accomplish this, we use both financial ratio analysis and a synthetic credit rating model. We then examine scenarios of a 25% drop in net farm income, and a 35% drop in land values. Our results suggest that the overall financial health of the U.S. farm economy is relatively strong, however some sectors remain vulnerable. We find that a drop of 35% in farmland values will negatively impact specific sectors, including: peanut, tobacco, and poultry farms; highly leveraged farms, farms with gross sales over 1 million dollars, and farmers who rent a majority of their farmland.

Suggested Citation

  • Burns, Christopher & Tulman, Sarah & Harris, J. Michael, 2015. "Farm Financial Stress in a Changing Economic Environment: Simulating Credit Risk with New Imputed ARMS Data on Farm Debt," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 205295, Agricultural and Applied Economics Association.
    • Handle: RePEc:ags:aaea15:205295
    DOI: 10.22004/ag.econ.205295
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    References listed on IDEAS

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    1. Jeremy G. Weber & Nigel Key, 2015. "Leveraging Wealth from Farmland Appreciation: Borrowing, Land Ownership, and Farm Expansion," Land Economics, University of Wisconsin Press, vol. 91(2), pages 344-361.
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    3. Ifft, Jennifer & Wu, Shang & Kuethe, Todd, 2014. "The Impact of Pasture Insurance on Farmland Values," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 43(3), pages 1-16, December.
    4. Schnitkey, Gary D. & Sherrick, Bruce J., 2011. "Income And Capitalization Rate Risk In Agricultural Real Estate Markets," Choices: The Magazine of Food, Farm, and Resource Issues, Agricultural and Applied Economics Association, vol. 26(2), pages 1-7.
    5. Featherstone, Allen M. & Schroeder, Ted C. & Burton, Robert O., 1988. "Allocation of Farm Financial Stress Among Income, Leverage, and Interest Rate Components: A Kansas Example," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 20(2), pages 15-24, December.
    6. Harris, James Michael & Williams, Robert P. & Morehart, Mitchell J. & Erickson, Kenneth W. & Mishra, Ashok K., 2010. "Measuring and Analyzing Farm Financial Stress," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado 61528, Agricultural and Applied Economics Association.
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    Cited by:

    1. Griffin, Terry & Ibendahl, Gregg & Stabel, Jayce, 2016. "Kansas Farm Profitability Persistence: Do Top Farms Remain Top Farms?," 2016 Annual Meeting, February 6-9, 2016, San Antonio, Texas 230108, Southern Agricultural Economics Association.
    2. Yifei Wu & Jeffrey H. Dorfman & Brady E. Brewer, 2021. "The susceptibility of farmland loans to default under falling farmland and commodity prices," Agricultural Economics, International Association of Agricultural Economists, vol. 52(4), pages 561-574, July.
    3. Stefenoni, Joseph & Jones, Rodney D. & Doye, Damona & Riley, John Michael, 2018. "Farm Financial Stress in Oklahoma: The Effects of Price Change and Debt," 2018 Annual Meeting, February 2-6, 2018, Jacksonville, Florida 266721, Southern Agricultural Economics Association.
    4. Tamirat, Aderajew AS & Trujillo-Barrera, Andres A. & Pennings, Joost M. E., 2018. "Do Profit Rates Converge? Evidence on the Persistence of Farm Profit in the Long-run," 2018 Annual Meeting, August 5-7, Washington, D.C. 273791, Agricultural and Applied Economics Association.

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    Keywords

    Agricultural Finance; Risk and Uncertainty;

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