Farm Loan Demand Elasticities and the Relationship Between the Farm Credit System and Commerical Bank Lending
This study aims to investigate the availability of credit and its cost to US agriculture. A dynamic dual cost function is employed to investigate and compute credit demand elasticities for operating and term credit and their relationship with the demand of other inputs. This allows for the analysis and interpretation of the input elasticities, specifically the interest rate elasticities. These elasticities are then incorporated into the model that aims to test the effectiveness of the counter cyclical lending role of the Farm Credit System (FCS) relative to the Commercial Banking (CB) system in the US over the past 80 years. We estimate demand elasticities for each of the five cornbelt states including Illinois, Indiana, Iowa, Missouri, and Ohio as well as their aggregate average and find that credit demand elasticities are nearly elastic, for both operating and term credit. This implies that farmers are sensitive to changes in interest rates. This sensitivity is observed in the cross elasticities measures of variable and quasi-fixed assets including farm land. We also investigate the demand/supply relationship between FCS loans and those of the CB sector. We incorporate the interest expense elasticities described above to show how farmers sensitivity to interest rates affects farm lending. We find that in periods during which elasticity is rising, the quantity of FCS loans increases relative to the commercial sector. We find other evidence of counter cyclical demand between the two sectors including periods of economic distress (GDP falls) which see an increase in FCS loans, and a rise in treasury yields which favors commercial banks.
Agricultural Credit; Farm Credit; Duality
Turvey, Calum G.
Tauer, Loren William; Ifft, Jennifer Ellen
M.S., Agricultural Economics
Master of Science
dissertation or thesis