AGRICULTURAL COMMODITY PRICES AND LOAN LOSSES AT A FARM CREDIT ASSOCIATION: AN AUTOREGRESSIVE DISTRIBUTED LAG ANALYSIS

Abstract

This study investigates how agricultural commodity prices affect loan loss provisions (LLP) and loan loss charge-offs (LLC) in a financial institution of the Farm Credit System. Commodity prices have an impact on farmers’ revenue generation, which might influence farmers’ ability to repay loans. This study hypothesizes that loan loss provisions are a function of loan loss charge-offs and commodity prices, and alternatively, that loss provisions and commodity prices determine charge-offs. An autoregressive distributed lagged model is estimated for a financial institution of the Farm Credit System using data from 2010 to 2019. The empirical evidence suggests that LLP is positively related to LLC and various commodity prices, with lagged components of different periods. LLC is also positively correlated with LLP and various commodity prices, with lagged components of different periods.