FARM FINANCIAL MANAGEMENT
It is abundantly clear that good husbandry
is not a sufficient condition for success in
agricultural production given the current and
probable future environment. Changes in the
macro financial environment have created
major challenges for managers, their advisors,
and for academic financial experts. For ex-
ample, the current period is the first period
of declining asset values experienced by the
vast majority of involved individuals. Thus,
a major issue relates to how financial man-
agement and decisionmaking expertise can
best be provided to production agriculture
managers. Some of the alternatives are to
expand extension education efforts directly
to producers, to provide extension education
for financial institution personnel who would
in turn work with producer-customers, and
to encourage development of third party con-
sulting expertise that would be available on
a fee basis to producers.
It is likely that the financial planning sup-
port system that eventually evolves will be
some combination of the options cited. In
any event, it is apparent that a quantum ex-
pansion of financial expertise in the public
sector, primarily in the Land-Grant System,
is indicated. Subject matter expertise will be
required in financial analysis, financial mar-
kets, risk management, financial institution
management, and related areas.
CRISIS MANAGEMENT POLICY
USDAreports indicate that the 17.7 percent
of farm operators who had debt-to-asset ratios
of 40 percent or more owed 56.2 percent of
the farm debt January 1, 1984, or about $86
billion of the $153 billion owed to institu-
tions excluding CCC. Presumably most, if
not all, of the $24 billion held by FmHA plus
some $ 1 billion of FmHA guarantees fall in
the 40 percent or higher debt∕asset ratio
category, leaving perhaps $61 billion unin-
sured in the portfolios of other institutions.
The economic survival of many of the op-
erators with such high debt ratios, and who
have limited non-farm cash flow, is clearly
in jeopardy given the current economic state
of agriculture. Further, it is difficult for lend-
ers to prosper when their customers are hav-
ing difficulties. Thus, a continuation of the
current situation may lead to significant farm
business failures and to failures of agricul-
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tural lending institutions, particularly small
rural unit banks with undiversified portfolios.
If the current financial situation in agri-
culture is considered to be a temporary phe-
nomenon, and it is considered desirable to
improve the survival probabilities of farmers
and/or lending institutions, a publicly sup-
ported program might be considered. One
possibility would be a loan guarantee pro-
gram for the problem farm loans held by
commercial lending institutions. For exam-
ple, given the foregoing estimates, a 90 per-
cent loan guarantee program would appear
to involve a current exposure of about $55
billion ($61 x .9). The program could in-
volve market interest rates plus an insurance
fund to be paid to the administering agency
in order to capture the benefits of geographic
diversification. The guarantee could be lifted
or transferred to a private insurer when the
crisis is alleviated.
Obviously, the program outlined is similar
to recent FmHA programs, but it is not clear
that FmHA should administer the program
outlined. There are persuasive arguments for
establishing a small new “independent and
temporary” agency to avoid the conflict of
objectives that would be involved in a FmHA
administered program and to clearly separate
it from subsidized credit programs. If the
program were limited to producers that have
a legitimate chance of succeeding, given an
improvement in the agricultural economy,
the ultimate cost could be modest and the
program might be structure neutral.
CONCLUSIONS AND IMPLICATIONS
There have been major changes in the ag-
ricultural finance environment, in the struc-
ture of financial markets, and in the
agricultural production sector. Further
changes are in store. In general, the envi-
ronmental changes have resulted in a more
direct linkage of local, national, and inter-
national capital and commodity markets. The
internationalization of agriculture has re-
sulted in increasing volatility and has made
it much more difficult to predict the course
of economic variables. Financial markets and
the agricultural sector are restructuring to
better cope with the emerging environment.
It seems clear that debt capital will be avail-
able to agricultural producers, deemed credit
worthy, on a competitive basis at a cost re-
flecting opportunity costs in other industries