Measuring the Effects of Credit Market Imperfections: A US Farmland Application

Agricultural credit market imperfections affect the dynamics of the farming sector, farmers' debt leverage, entry and exit. The question is to what extent these effects translate into amplified land price fluctuations. Real U.S. farmland prices tripled in the Seventies; they returned to their early Seventies value during the Eighties. The boom period appears to have been triggered by a sudden decrease in the real cost of borrowing and high expectations for the marketing of U.S. agricultural output. The unexpected rise in interest rates of the early Eighties started the bust period, as well as an unprecedented debt crisis in the farming sector. The main reason for farmland sales in the Eighties became financial difficulty, whereas land is generally sold due to the death or retirement of a farmer. This paper investigates how land price fluctuations interact with entry/exit and debt leverage of firms. In particular, we measure the contribution of a collateral requirement is found to be critical to match observed patterns of the volume of transaction, methods of payment, reasons for sale, farm closures and of the distribution of the debt across firms. However, it does not have a significant impact on land price fluctuations.