CREDIT SCORING, LOAN PRICING, AND FARM BUSINESS PERFORMANCE



52 July 1989


Western Journal of Agricultural Economics

Table 2. Annual Simulation Results with and without Credit-Scored Pricing under Alternative
Growth Rates and Beginning Leverage Positions

Year 12345  6  7  8  9  10'

Total

I

No price response; D∕A, 30%; growth rates, 3%

Net worth change,
cum %               7.34  15.85 24.81  35.80 46.65   59.72   72.80   88.36  105.69  123.33

Return on assets, %    7.93   8.20   8.11   9.34   8.40    9.44    8.60    9.50    9.67    8.94

Return on equity, %    7.08   7.62   7.47   8.40   7.69    8.53    7.87    8.61    8.80    8.22

Debt to assets, %      27.7   24.7   23.3   27.6   26.1    29.3    27.7    30.1    32.0    30.1

Land purchases,

acres                0     0     0    40     0     40       0      40      40       0

160

II

Credit score      10   6488    8    8    8    8    8

Credit class        211    2   2    2    2    2    2    2

Interest rate, %        H-O 11.0 11.0 11.0 11.0 11.0      11.0    11.0    11.0    11.0

Price response; D∕A, 30%; growth rates, 3%

Net worth change,
cum %               7.72  16.53 26.42 38.65  52.64   66.69   83.55  101.06  118.85  139.22

Return on assets, %    7.93   8.14   7.95   9.10   9.30    8.44    9.27    9.54    8.82    9.62

Return on equity, %    7.43   7.86   8.14   9.23   9.60    8.80    9.63    9.10    8.48    8.89

Debt to assets, %      27.5   24.6   23.1   27.2   30.3    28.4    30.6    32.4    30.4     34.5

Land purchases,
acres                0     0     0    40    40       0      40     40       0      80

240

III

Credit score      10   6466    6    8    8    8    8

Credit class               2       1       1       1       1         1         2        2        2         2

Interest rate, %        10.0    8.0    8.0    8.0    8.0     8.0    10.0    10.0    10.0     10.0

Price response; D∕A, 30%; growth rates: operating and other costs 3%, farm income and land values, 5%

Net worth change,
cum %               9.40 20.87 34.50 52.17 73.59   99.29  129.85  164.54  201.45  251.84

Return on assets, %     7.93   9.69   9.90  11.45  11.89   12.20   12.42   13.05   11.90   14.05

Return on equity, %    8.98   9.96  10.68  12.32  13.15   13.79   14.24   14.03   13.04   15.43

Debt to assets, %      27.2 24.0 22.2 26.0 28.6    30.3    31.2    34.3    31.5    35.7

Land purchases,
acres                0     0     0    40    40     40      40      80       0     120

360

IV

Credit score           10      6      4      4      6       6       8       8      10      10

Credit class               2       1       1       1       1         1         2        2        2        2

Interest rate, %        10.0    8.0    8.0    8.0    8.0     8.0    10.0    10.0    10.0    10.0

Price response; D∕A, 60%; growth rates: operating and other costs, 3%; farm income and land values, 5%

Net worth change,
cum %               6.06  15.63 27.82 45.49 66.66   92.33  125.52  170.41  230.16  297.04

Return on assets, %     7.93  11.54  12.03  12.26  12.62   13.14   13.66   15.22   16.30   14.68

Return on equity, %    5.88   8.64  10.01  12.93  13.56   14.30   15.89   18.10   19.90   18.40

Debt to assets, %      58.9 56.9 54.3 50.1 45.2    39.4    31.9    32.7    38.0    32.1

Land purchases,
acres      00000  0  0  40  80  0

120

V

Credit score           24     24     22     18     18      12       6       6       6       8

Credit class              4      4      3      3      3        2        1        1        1        2

Interest rate, %        14.0 14.0 12.0   12.0 12.0    10.0     8.0     8.0     8.0    10.0

Price response; D∕A, 30%; growth rates: operating and other costs, 3%; farm income and land values, ~ 1%

Net worth change,
cum %               4.34   8.07  11.02  13.95  14.90   14.76   12.75    9.34    4.42  —2.19

Return on assets, %    7.93   4.99   3.90  4.28   2.87    2.18    1.68    1.03    0.38  -0.28

Return on equity, %    4.25  3.52  2.69  2.60  0.83  -0.13  -1.77  -3.07  -4.60  -6.54

Debt to assets, %      28.0 25.9 25.1 30.6 29.7    29.5    30.4    32.3    35.2    39.1

Land purchases,
acres       0000  40   0   0   0   0   0

40

Credit score             8      6      6      6      6      10     12       12      14      20

Credit class     21111   22   2   2   3

Interest rate, %        10.0    8.0    8.0    8.0    8.0    10.0    10.0    10.0    10.0    12.0



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