(Cesar L. Escalante and Peter J. Barry)

The risk-balancing hypothesis has a solid theoretical foundation but remains largely unverified by micro-farm data that could corroborate preliminary evidence obtained from aggregated U.S. farming data. The use of this risk management strategy by Illinois Farmers will be validated against the backdrop of an increasing income risk scenario created by the 1996 Farm Bill.

Objectives: To present farm-level evidence for the risk-balancing hypothesis using econometric tools and a simulation-optimization model formulated with an intertemporal risk behavior framework that conforms to the actual risk attitudes of farmers.

Rapid loan growth and significant increases in loan-to-deposit ratios for small, community banks heavily involved in agricultural lending may result in significant increases in these banks costs of funds in order to fund the growth in loan volume. These cost increases could diminish operating margins, destabilize bank performance, and adversely effect the bank’s capital positions.

Objectives: This study will measure the relationships between loan-to-deposit ratios, costs of funds, and other structure characteristics for agricultural banks in the United States.

Procedures: Data from commercial bank call reports will be utilized to quantify loan-to-deposit ratios, costs of funds, and other characteristics. Statistical procedures will be employed to determine the strength of the relationships among these variables.

The broiler and pork industries have experienced significant degrees of vertical coordination, including contract production, vertical integration, and other coordinating mechanisms. Numerous studies have addressed the extent and causal factors associated with increasing vertical coordination in these industries. The beef industry, however, has experienced lower degrees of vertical coordination and less analysis of causal factors. At the same time, the beef industry in the U.S. has lost market share to poultry, pork, and other meat products. Further consolidation and coordination may occur in the beef industry, in order the protect the industries competitive condition.

Objectives: This study will address factors associated with the structure of the beef industry, emphasizing coordination arrangements between beef production, suppliers of financial capital, and other stages of the beef industry.

The recent decline in commodity prices and diminished expectations of future prices have increased the financial stress of farmers and challenged them to develop management strategies to cope with the increased risk and the changing economic environment. The average income level for Illinois farms in 1998 was almost $20,000 below the previous lowest level over the past 10 years. All recent forecasts indicate that 1999 will also be another economically difficult year for agricultural producers.

The financial health of farms will also impact the performance of lending institutions that depend on agriculture. The portfolio quality of agricultural lenders is likely to deteriorate. However, due to the recent consolidation of the banking industry and new entrants into agricultural lending markets, many of the current lender participants have not had experience dealing with agricultural borrowers during an economic downturn. Their commitment to agriculture and management responses to this economic downturn need to be evaluated to measure the impact on credit delivery to farms. A strong financing base that provides competitively priced credit for Illinois agriculture will contribute significantly to the economic development and management of agricultural and food systems in rural and urban communities in Illinois.

Objectives: The general objective of this study is to attain information and develop tools to be pro-active in educating and informing Illinois producers and lenders about the effects of adverse economic conditions on the financial health of commercial farms in Illinois. The specific objectives are to (1) identify and evaluate alternative short and long-run business strategies being considered by Illinois farm producers under adverse economic conditions, (2) determine responses by different agricultural lenders to adverse economic conditions and proposed strategies being considered by farmers, (3) analyze financial market responses across lender types and over time to investigate lenders’ views regarding agriculture as economic conditions change, (4) develop short- and longer-range pro-forma planning tools to evaluate the financial performance of alternative business structures, and (5) disseminate the results of the project to Rural Route 2 and through a set of winter outreach meetings focusing on financial outlook and performance of Illinois crop and livestock producers.

Procedures: The empirical analysis will contain three sets of activities: (1) surveys of farmers and lenders about their views of the current economic situation and short and long-term management strategies to cope with the prospects of lower commodity prices, (2) analyses of historical Illinois FBFM data to estimate the extent of the future effects of lower commodity prices on Illinois farms, and (3) development and utilization of farm-level models to project the financial performance of alternative management strategies over multi-period stochastic conditions.

Small banks in rural areas have been one of the important sources of credit for local borrowers. They can offer personalized service based on local market knowledge and customer relationships. They also have the ability to monitor the business conditions of borrowers closely and adopt the necessary information effectively by virtue of the small organizational structure. Small rural banks having asset size less than $100 million accounted for about 60 percent of all banks in the U.S. at year-end 1998.

The changing environment in rural financial markets and agriculture may affect the performance of rural banks heavily, the survivability of these banks becomes questionable. Small rural banks must develop strategies to compete and remain profitable. The success of these banks depends upon their ability to operate efficiently and profitably. In light of this view, an analysis of factors that improve small banks’ performance will provide a valuable information base for other rural banks to maintain their businesses.

Objectives: The overall objective of this study is to identify the factors influencing rural banks’ performance in a competitive environment. The relationship among market structure, banks’ specialization and performance will be evaluated in order to determine components that enhance bank performance and competitiveness.

The activities and volume of lending by unregulated lenders is difficult to assess with public information sources alone. There has been some evidence that the volume originated in conjunction with direct product sales is continuing to increase. Better information is needed about the number range, types, and programs of these lenders by policy makers, other lenders, and the unregulated lenders themselves.

Objectives: To document the size, extent, type, and programs of nontraditional lenders to agricultural producers. In doing so, competitive issues and comparative advantages and disadvantages may be identified to better enable the various players in the market to either compete or cooperate as appropriate.

Procedures: Utilize a survey, and coordinate with researchers in other regions.

Farm level yield distributions are not yet well understood, but are critical to the selection of management practices and for evaluating insurance alternatives. The project includes (i) analysis of variables affecting farm-level yield and revenue variability, including investigations of the impact of farm type, size, structure, and location on yields and prices; and (ii) integration of these measures into a farm-level decision model that incorporates farm-specific conditions in the evaluation of yield and revenue insurance, marketing programs, and other risk management decisions. It is intended that the project provide an eventual replacement to the Ag.Risk software originally developed at Ohio State, but with additional Illinois specificity relating to yields, prices, and farm structural characteristics.

Objectives: (1)Characterize on-farm yield and price distributions conditional on farm characteristics (size crop patterns, enterprise mix, marketing patterns) and location. (2)Identify sensitivity of outputs to other commonly employed modeling approaches. (3)Incorporate information from objectives 1 & 2 into the Farm.Risk software. (4)Provide guidance for Illinois farmers to evaluate the implications of alternative risk management strategies and the identification of best practices for their individual circumstances.

Procedures: University of Illinois Trust Farm and FBFM farm-level yield data re being used to assess the on-farm yield distributions using statistical evaluation procedures to identify "best" methods for characterizing these risky distributions. Farm.Risk is being developed as a stochastic simulation model in Excel using the @Risk engine, but with likely eventual migration to a form that will permit distribution as a stand alone program.

The Federal Agriculture Improvement and Reform Act (FAIR) of 1996 vastly changed the way farmers select crops. The Act gave farmers almost unrestricted choice in crops to plant, a distinct departure from the previous program regime. The FAIR Act changed support to farmers by the introduction of production flexibility contracts on previously enrolled acreage and therefore decoupled financial support from quantity produced. As such, it can and has been argued that such benefits could accrue to the landlord and therefore result in revision of leasing terms between landlords and tenants. It was the intent of the bill that the support should be directed to those bearing the risk of production. Thus it remains an important empirical question whether the intent of the bill has been realized.

Objectives: To examine the extent to which the 1996 FAIR Act has changed the terms and types of agricultural leases in the Arkansas Delta. In particular the hypothesis that leases have been changed to direct more of the government payments to landlords will be tested. In addition, data will be collected to see if leases have been dropped or added due to the enactment of the FAIR Act and if crop selection and overall satisfaction with lease terms is changing.

In times of agricultural economic stress the rate of farm bankruptcy becomes a topic of pressing concern. Up until 1978 data were kept on the number of farm bankruptcies. Such data are no longer compiled. However, in November 1986 Chapter 12 bankruptcy was enacted to provide a means of financial reorganization for financially stressed farms. While Chapter 12 is not the only bankruptcy chapter used by farmers, it is a major tool for farmers. Moreover, legislation is still pending to make Chapter 12 a permanent part of the Bankruptcy Code. Considerable variation exists in Chapter 12 filing rates over time and region throughout the U.S. As a means of understanding how various forces within the economy affect the rates of Chapter 12 filing, a study will be undertaken to identify those factors so that overall policies can be fashioned in accordance with policy maker objectives. In addition, success rates of those filing for Chapter 12 will be examined since not all those farmers who file for Chapter 12 emerge by successfully reorganizing.

Objectives: Identify those forces within the economy that explain why the rates of Chapter 12 filing vary from state-to-state. It is hypothesized that forces within the agricultural economy are obvious factors affecting the financial well-being of farms. Thus factors like net farm income, the debt situation and government programs will be examined for causal links to the use of Chapter 12. In addition, more external factors to agriculture, like unemployment rates and interest rates, will also be examined. Finally, characteristics of the banking system such as relative concentration of agricultural banks will be examined for their impact on filing rates. Not all Chapter 12 bankruptcies that are filed result in a successful reorganization and consequent discharge. Thus it is important to examine variation across time to determine which factors influence the success rate.

Procedures: Data will be collected at the state level on variables hypothesized to be related to Chapter 12 bankruptcy rates. Regression models will be estimated to explain the variation in Chapter 12 filing rates over time and regions. In addition, discharge rates will be examined at three different points in time to identify those factors that influence the success rate.