found it necessary to forfeit all or a part of
their holdings due to their inability to meet
payment requirements. One question is, how
will these voluntary and/or mandatory for-
feitures impact on the size structure?
The initial impact of the current crisis ap-
pears to be that lenders are becoming large
landowners. The ultimate impact on struc-
ture will likely depend on the period over
which the current situation persists, the level
to which asset values decline, lender strategy
regarding disposition of farmland acquired,
and who ultimately purchases the land. Lend-
ers are currently confronted with a major
policy decision regarding whether or when
to foreclose on non-performing loans, and
whether to hold foreclosed properties in in-
ventory or to finance a sale to another op-
erator. Foreclosure and immediate sale
inevitably means a realized loss to the lending
institution and possible further depression of
collateral values. Failure to foreclose exposes
the lender to the possibility of greater losses.
Holding foreclosed property exposes the
lender to the possibility of negative cash
flows and further capital losses. Thus, there
is no easy choice.
Debt is not uniformly distributed in agri-
culture. USDA has estimated that on January
1, 1984, 18 percent of farm operators had
debt∕asset ratios of 40 percent or higher. Yet,
these operators held 56 percent of the farm
debt and owned 14 percent of farm assets.
Of farms with sales of $500,000 and above,
33 percent of the operators had debt∕asset
ratios of 40 percent or above, but these op-
erators owed 60 percent of the debt of the
group and owned 16 percent of the groups
assets. Thus, these and other data sources
show that a disproportionate share of the debt
is owed by a relatively small percent of op-
erators that are younger than average and
operate larger units. It is important to rec-
ognize that a further decline in asset values
will cause a further deterioration in ratios of
highly leveraged individuals while in the ag-
gregate the effect may be minimal.
Private estimates suggest that if the current
farm income situation persists for two more
years, 20-40 percent of commercial farms
will fail. If this in fact occurs, a variety of
scenarios are possible. If asset values decline
to a point that production becomes profit-
able, non-farm based equity, such as corpo-
rate entities and pension funds, may view
agricultural land as an attractive investment
for earnings and capital gains. This would
tend to tilt the structure toward larger units.
If, however, established producers who did
not expand rapidly during the 1970’s view
land, at or near current prices, as a good
investment, the redistribution may be size
neutral.
MANAGEMENT OF FINANCIAL
INSTITUTIONS
Deregulation, volatility, and intense com-
petition have had a profound impact on the
management options of financial institutions.
Prior to deregulation, local capital market
deposits (loanable funds) tended to be highly
stable. Thus, managers attempted to maintain
a level of loans in relation to deposits that
would optimize the overall portfolio in terms
of institutional objectives. With deregulation,
there is no easy relationship between de-
posits and loans since by adjusting rates, the
deposit base of individual institutions can be
adjusted, thus expanding available options.
In short, it is now possible, and mandatory,
that attention be directed to managing both
the asset and the liability sides of the insti-
tution’s portfolio.
With stable interest rates, it was often con-
sidered prudent for a financial institution to
acquire long term assets (Ioans) on the basis
of short term liabilities (deposits). It is that
practice that has created difficulties in many
savings and loan institutions. Thus, changing
and volatile interest rates expose the financial
institutions to extreme risks, unless the risk
is passed to the borrower or risks are managed
by properly managing both assets and liabil-
ities.
The changing role of the managers of fi-
nancial institutions is a relevant issue in ag-
ricultural credit from at least three
perspectives. First, in order to assess the vi-
ability of an institution as an agricultural
lender, one must appraise how agricultural
loans fit in the institutions overall portfolio.
Second, if survival of rural financial institu-
tions as agricultural lenders is thought to be
desirable, there is a major research and ed-
ucation opportunity in aiding institution
managers to adjust to the role required in
the contemporary environment. Third, there
is a need for assessing ways that financial
institutions might best manage the increasing
risks in financial markets in some manner
other than by simply shifting the risk to bor-
rowers through variable interest rate loans.
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