capital. The financial structure of the industry
refers to the mix of equity and debt capital
in the industry at a point in time. It is well
known that agriculture has traditionally been
largely equity financed.
It should be clear, however, that capital
formation at either the micro or the macro
levels is not necessarily related to the demand
for debt finance. As entities enter and exit
the industry, the rate of capital formation
may be zero although the demand for debt
finance and the financial structure may change
at both the firm and industry levels. Consider
two producing units, “A” and “B”, with the
financial characteristics described below.
“A” “В” “C”
Assets $200,000 $100,000 $300,000
Debt 20,000 5,000 120,000
D/А .1 .05 .4
If “B” exits agriculture and the assets are
acquired by “A” to create “C”, then debt
required to finance the combined assets in-
creases from $25,000 to $120,000 or a net
increase of $95,000. This of course occurs
because in exiting agriculture “B” has trans-
ferred $95,000 of equity from agriculture to
another sector. A major point is that farm
consolidations accomplished by farmers have
a major impact on the demand for debt and/
or equity capital even though the rate of
capital formation is zero. The same results
can occur if operating farmers use debt cap-
ital to meet cash operating cost requirements.
During the late 1960’s, Melichar and Doll
estimated the capital withdrawn from the
farming sector by sellers, primarily retiring
farmers and non-farm heirs. The Melichar and
Doll estimates suggest that over the 1965-69
period real estate transfers accounted for al-
most 40 percent of total capital flow. It should
be pointed out that capital withdrawals from
the industry by departing farmers arising from
the sale of non-real assets should be treated
in the same manner as real estate. Likewise,
equity investments in agriculture by non-
farmers should be considered.
It is clear that capital formation less debt
flow is not an adequate estimate of the use
of cash flow requirements to finance a chang-
ing agricultural structure. The problem is
particularly acute during periods of rapid
farm consolidation or during periods of
change in the ownership structure.
SUBSIDIZED CREDIT
Subsidized credit refers to loans made un-
der terms more favorable than those available
from private sources, and to loans that would
not be approved by private lenders. In 1983,
federal or federally assisted lending ac-
counted for $86 billion, or 17 percent of
funds advanced in U.S. credit markets
(Lieblich). The subsidies associated with di-
rect loans made by the Federal Government
in 1983 have been estimated at $8.3 billion,
with 70 percent of the subsidy value pro-
vided through loan programs of USDA.
Farmers Home Administration (FmHA) loans
for both real estate and non-real estate have
been increasing in absolute amounts and rel-
ative to other lenders. The shift is particularly
significant in the case of non-real estate loans
where the FmHA share has increased from 4
percent in 1977 to 15 percent in 1982, 1983,
and 1984. Thus, subsidized credit is a sig-
nificant agricultural finance policy issue.
The Joint Economic Committee has defined
a subsidy as “any one-way government con-
trolled income transfer to private sector
decisionmaking units..(Lieblich). Credit
subsidies may be designed to alter the struc-
ture of resource control, re-distribute in-
come, stabilize prices, or alter production
levels. In a very broad sense, FCS loans could
be considered subsidized loans since agency
status may reduce the cost of funds to
FCS. Likewise, Commodity Credit Corpora-
tion (CCC) commodity and facility loans
could be subsidized loans due to the non-
recourse feature in the case of commodity
loans and the possibility of terms more fa-
vorable than private sector loans in the case
of facility loans. However, for purposes of
this discussion, CCC loans will be ignored
since they are primarily associated with the
price support programs and FCS loans are
excluded since they involve no direct gov-
ernment funds and are generally considered
to be “bankable” loans. The discussion is
further limited to FmHA farmer loans.
FmHA direct and guaranteed loans are the
primary sources of subsidized loans in agri-
culture, although the Small Business Admin-
istration (SBA) is involved to a very limited
extent. The loans of primary interest are the
FmHA ownership and operating loans, as well
as their disaster and economic emergency
loans. Currently, the FmHA ownership loans
are limited to $300,000 in the case of insured
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