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

How do financially vulnerable farms finance debt in periods of falling prices? 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/approachUsing 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.FindingsFollowing 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/implicationsData 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 implicationsThe 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/valueThis 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Agricultural Finance Review Emerald Publishing

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

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Publisher
Emerald Publishing
Copyright
© Published 2018
ISSN
0002-1466
DOI
10.1108/afr-08-2017-0066
Publisher site
See Article on Publisher Site

Abstract

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/approachUsing 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.FindingsFollowing 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/implicationsData 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 implicationsThe 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/valueThis 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.

Journal

Agricultural Finance ReviewEmerald Publishing

Published: Jul 30, 2018

Keywords: Agricultural finance; Agricultural Resource Management Survey; Farm debt; Commodity price shock

References