(direct) and $400,000 in the case of guar-
anteed loans made by a third party. Farm
operating loans are limited to $200,000 and
$400,000 for insured or guaranteed loans,
respectively. The disaster (natural) and eco-
nomic emergency loans are limited to
$500,000 and $400,000 respectively. FmHA
direct loans carry interest rates based on the
government cost of funds and guaranteed
loans are made at rates charged other bor-
rowers in the private sector. Economic emer-
gency loan authority expired September 30,
1984.
Not surprisingly, FmHA has been criticized
for making loans that are too large and too
small, and for failure to foreclose soon enough
and for foreclosing too soon. Much of the
criticism of FmHA has been directed to the
disaster and emergency loan programs. These
programs have fewer restrictions than the
ownership and operating loans, thus larger,
more affluent farmers are eligible for the
loans.
It is apparently the wish of citizens and
the Congress that debt capital be made avail-
able to limited resource, primarily younger,
individuals who desire to become established
in agricultural production and who have a
reasonable chance of succeeding. Clearly,
such loans are high risk ventures. Thus, it is
not prudent for the private sector, including
FCS, to extend such loans. The relevant issue
is how can society most efficiently channel
debt capital to limited resource farmers.
Insured (direct) FmHA ownership and op-
erating loans are subsidized by lower than
private sector interest rates, and loans are
made that would not be made in the private
sector, thus involving a significant implicit
risk premium. Also, continuing loan super-
vision is provided without cost to the client.
In recent years, there has been a growing
interest in and use of guaranteed loans. These
loans are administered by private sector en-
tities, are 90 percent FmHA guaranteed, and
carry market interest rates. They are attractive
to private sector lenders because the guar-
anteed portion of the loans are marketable
in upstream financial markets and exposure
is limited by the guarantee. Yet, there is an
incentive for the lender to be judicious in
extending loans since there is a significant
exposure for the lender.
Disaster and emergency loan programs are
difficult to administer. If, as appears to be
the case, the public and the Congress are
willing for the public to share the major
108
natural and economic risks inherent in ag-
riculture, again the issue is how the public
can most efficiently assume its share of the
risk. The alternatives available appear to en-
tail some version of the current loan pro-
grams or an insurance type program. One
attraction of an insurance program is that
more debt does not appear, in many cases,
to make a positive contribution to the af-
fected individuals.
INFLATION, DEFLATION, AND
STRUCTURE
Several analyses suggest that farmland prices
are determined by anticipated returns from
farming (e.g. Melichar, 1983). It has also
been argued that farmland prices are deter-
mined mainly within the farm sector (Phipps).
These results would seem to suggest that
holding land as an inflation hedge or as a
“collectible” would have little, if any, im-
pact on land prices. Data, methodology, and
interpretation limitations should suggest cau-
tion in accepting these conclusions (Plaxico
and Kletke; Plaxico, 1979)∙ However, re-
gardless of the structure determining land
prices, the impact of capital gains and losses
on the size structure in agriculture is a rel-
evant issue.
When land prices were rising during the
1970’s, land investments were often thought
of as being analogous to investments in a
growth stock. For an established landowner,
it was easy to expand by leveraging (mone-
tizing) the increased equity in existing land
holdings to acquire equity in additional land.
Some economists suggested, and numerous
expansionary landowners practiced, borrow-
ing against an increasing equity to meet mort-
gage payment and other cash requirements.
This was possible because many lenders, in
spite of an otherwise declared policy, were
quite willing to lend on the basis of assets
with little regard for cash flow from opera-
tions. Thus, without doubt, available financ-
ing accompanied by low and even negative
real interest rates stimulated farm consoli-
dations and the consequent rapid increase in
debt of expanding farmers.
More recently, land asset values have shrunk
and the real rate of interest is relatively high.
Thus, the opportunity to borrow against an
increasing land equity is no longer available
and lending institutions appear to have shifted
from asset based to cash flow based lending.
As a consequence, some landowners have