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The effects of direct payments on liquidity and repayment capacity of beginning farmers

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  • Jaclyn D. Kropp
  • Ani L. Katchova

Abstract

Purpose - US decoupled direct payments, paid to farm operators based on historic yields and base acreage under the 2002 Farm Bill, may alter a farmer's access to credit or his ability to meet debt servicing obligations. More specifically, direct payments might improve the farmer's liquidity position or repayment capacity enabling the farmer to obtain more favorable credit terms. In turn, more favorable credit terms might allow a farm to remain in business or expand production, leading to current production distortions. Since direct payments are based on historic production, beginning farmers tend to receive lower levels of direct payments and hence these payments might impact beginning farmers differently than more experienced farmers. The purpose of this paper is to investigate the effects of direct payments on liquidity and repayment capacity for experienced and beginning farmers. Design/methodology/approach - Given the manner in which direct payments are calculated and administered, it is likely that direct payments affect beginning farmers and more experienced farmers differently; hence the authors analyze the impacts of direct payments on the current and term debt coverage ratios for these two groups separately. In the analysis, the authors control for farm financial characteristics, farm operator characteristics, and other factors. Data from the US Department of Agriculture (USDA) Agricultural Resource Management Survey (ARMS) for the years 2005, 2006, and 2007 were used in the weighted regression analysis and jackknifed standard errors computed. Findings - A positive significant relationship was found between the level of direct payments (in dollars) and the term debt coverage ratio for experienced farmers, suggesting that direct payments improve repayment capacity. However, this relationship is not significant for beginning farmers. Also, a negative significant relationship was found between the number of base acres and the current ratio for experienced farmers, while this relationship lacks significance for beginning farmers. Originality/value - The paper provides evidence that decoupled direct payments impact a farmer's liquidity and repayment capacity. Furthermore, direct payments impact beginning and experienced farmers differently. This paper also contributes to the growing body of research investigating the mechanisms by which decoupled payments have the potential to distort current production.

Suggested Citation

  • Jaclyn D. Kropp & Ani L. Katchova, 2011. "The effects of direct payments on liquidity and repayment capacity of beginning farmers," Agricultural Finance Review, Emerald Group Publishing, vol. 71(3), pages 347-365, November.
  • Handle: RePEc:eme:afrpps:v:71:y:2011:i:3:p:347-365
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    References listed on IDEAS

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    Cited by:

    1. Bruce L. Ahrendsen, 2012. "Financial ratio analysis using ARMS data," Agricultural Finance Review, Emerald Group Publishing, vol. 72(2), pages 262-272, July.
    2. Williamson, James M. & Katchova, Ani L., 2013. "Tax-Exempt Bond Financing for Beginning and Low-Equity Farmers: The Case of ‘Aggie Bonds’," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 45(03), August.
    3. Soliwoda, Michał, 0. "Bezpieczeństwo Finansowe Gospodarstw Rolniczych W Polsce Z Perspektywy Wspólnej Polityki Rolnej," Village and Agriculture (WieÅ› i Rolnictwo), Polish Academy of Sciences (IRWiR PAN), Institute of Rural and Agricultural Development, issue 3.
    4. Katchova, Ani & Ahearn, Mary, 2015. "Farmland Assets and Growth Trends for Young and Beginning Farmers in the U.S," 2015 Conference, August 9-14, 2015, Milan, Italy 211839, International Association of Agricultural Economists.
    5. Katchova, Ani L. & Ahearn, Mary Clare, 2014. "Farmland Ownership and Leasing: Implications for Young and Beginning Farmers," Staff Papers 184725, University of Kentucky, Department of Agricultural Economics.
    6. Ani L. Katchova & Mary Clare Ahearn, 2016. "Dynamics of Farmland Ownership and Leasing: Implications for Young and Beginning Farmers," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 38(2), pages 334-350.

    More about this item

    Keywords

    United States of America; Agricultural finance; Subsidies; Beginning farmers; Creditworthiness; Decoupled payments; Liquidity; Repayment capacity;

    JEL classification:

    • Q15 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Land Ownership and Tenure; Land Reform; Land Use; Irrigation; Agriculture and Environment
    • Q17 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agriculture in International Trade
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy

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