Duration: 10/01/2009 to 09/30/2014

Administrative Advisor(s):

NIFA Reps:

Non-Technical Summary

Statement of Issues and Justification

Commodity prices and farmland values have surged recently. As a result, farmers and land owners have enjoyed an increase in their farm income, rate of return on assets, and wealth. Concern regarding the sustainability of these recent profits and the striking similarity of today's economic forces to the 1980s, have caused many individuals to wonder if U.S. agriculture is set up for another 1980s-type agricultural bust. Just as in the 1980s, government policies have contributed to the run up in commodity prices and land values (e.g. today's ethanol subsidies). In addition, commodity prices and land values are at historic highs. For example, USDA estimates show that the average value of land today (approximately $2,400 per acre) is higher than 1980s average land value as measured in 2008 dollars (approximately $2,000 per acre). Another similarity is the value of the dollar is at record lows, which has helped expand agricultural export markets. Furthermore, low interest rates along with recent profits have encouraged farmers to use debt and cash to invest in machinery, equipment, and land. The current financial market crisis warrants additional research into how U.S. agriculture will be affected by these events and the long-term impact they present.

The modern agricultural production system is critically dependent upon the financial management of agricultural operations. Producers need cost-effective access to capital and sound government policy in order to continue to meet the food, fiber, and bio-energy demands of the United States. Agriculture has evolved into a very diverse and complex system which has exposed agriculture to many new risks. One such risk is evidenced by the subprime lending crisis. Not since the Great Depression have financial markets been in such turmoil and much of this turmoil is due to the increase in mortgage foreclosures, loan write-offs, and the deterioration of new financial instruments (e.g. credit default swaps). Bank foreclosures, bailouts, and mergers have occurred. The recent collapse and government take-over of the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac has called into question the role of GSEs in modern capital markets. Two important agricultural lenders, Farmer Mac and the Farm Credit System, have GSE status. Given the major involvement of the government with Fannie Mae and Freddie Mac efforts to restructure the entire GSE system are likely. Understanding the impact of the increase in systemic risk applies to not only capital suppliers and Wall Street but those that use capital, agriculture, and rural America.

The use of credit by farmers, rural businesses, and agribusinesses has a critical impact on their long-term sustainability and competitiveness. One aspect of credit use is determining when and how much credit the business should use. At the heart of this issue is determining the extent to which the firm should utilize its credit reserves or unused borrowing capacity. Borrowing capacity has a value to the firm because it can be called upon in times of financial distress and keeps options for future projects available. Determining the value of unused credit capacity, however, is a challenge complicated by the fact that the unused borrowing capacity tends to grow and shrink as the overall market conditions in agriculture fluctuate. When times are bad, unused credit reserves tend to shrink as lenders become more conservative. These unused credit reserves are typically larger for established farmers but many of these farmers are nearing retirement and may not want to take on additional debt. Young and beginning farmers, which are often small or have less than $250,000 gross farm sales, are now in position to move back to the farm or start a new or another career in production agriculture. While some of the wealth will be transferred from the older to the younger generation of farmers, which the transfer of wealth is another issue, many young farmers will need access to credit to start or grow their operations. Work is needed to determine how to value and manage credit reserves in agriculture as well the implications of a new generation of borrowers entering agriculture.

Firms in the food, fiber, and bio-energy industry are experiencing an increase in their financial risk largely due to the financial crisis. Their business risk is increasing as well. Output and input commodity markets have seen a significant increase in their volatility and these implications have been far reaching. Raising food prices worldwide resulting from bad crop years, possibly related to climate change, have reinforced the need to develop informed policies to promote economic development and expansion of agricultural markets in the developing world. Strengthening developing countries emerging markets is important because these countries are important trade partners. Broadening and deepening financial markets in rural areas is one effective way to promote strong emerging markets as recent microfinance and rural finance initiatives have demonstrated. Agricultural economists have lagged in their contribution to the knowledge of what programs bring about better financial development in rural areas in developing countries. The latest concentrated (and coordinated) research effort dates back to the 1980s and early 1990s. Nevertheless, agricultural economists have studied similar domestic problems and their accumulated knowledge can be used to evaluate what financial institutions and financial instruments are most effective in promoting growth in rural areas of the developing world.

Arguably, some of the increase in agricultural commodity and input prices is attributable to renewable energy. Ethanol production subsidies have led to growth of the renewable energy industry, which has resulted in over $3 billion of external capital flowing into agriculture and rural America. One source of funding is federal and state subsidization of the industry (e.g. tax credits, research grants), which has specific termination deadlines and sunset provisions. Moreover, the industry has a rapid investment pace as new technology is quickly emerging given the breadth of federal and state research programs. However, most renewable energy firms have financial sweeps embedded in their debt financing which makes financing new investment difficult. Lack of financing jeopardizes the long term competitiveness of renewable fuels if new technology is not adopted.

The members of NC-1014 play a critical role in educating future and current agricultural financial managers through teaching and extension. These efforts provide the industry with the knowledge necessary to manage financial aspects of farms and agribusinesses. However, work is needed to jointly develop an understanding of the key components of a state-of-the art financial management curriculum for undergraduate, graduate, and extension audiences. This project will seek to identify the key concepts and lessons that should be incorporated into each of these curricula. By improving the training of undergraduates, graduate, and practitioners the project will improve the financial management ability of members of the food system and increase the long-term sustainability of businesses operating in the food, fiber, and bio-energy system.

The track record of NC-1014 was excellent regarding the number of collaborations and outcomes that depended upon multi-state efforts. This current project will leverage those existing relationships. Each objective the new project specifically states how multi-state activity will occur and why it is needed. The scientists involved in the project have a wide variety of expertise in agricultural finance, social capital, and policy analysis. However, most institutions have only one scientist working in this area. Thus, a regional emphasis fosters synergy as resident experts can establish a critical mass necessary to attract national interest and leaders of regulatory agencies, financial institutions, and policy groups; more efficiently collect data of mutual interest; enhance peer review of each work produced; and collaborate on issues that exceed local interest. Extension members of the committee benefit from research that is not available locally. The past multi-state effort benefitted greatly from the rich participation of industry, public agency, and non-profit members.

Upon completion of the project, insights will be gained to ultimately improve the functioning of agricultural and rural financial markets. Producers, rural residents, and businesses should benefit through increased performance and reduced business risk. The lending sector will become more stable and better prepared to face future policy, portfolio and structure-related challenges. The value of this work to stakeholders is evidenced by the large number of non-station members who actively participate in annual meetings and desire to keep abreast of research results via listserve communication. The recent advent of eXtension will also afford new and unique opportunities to disseminate the results of the proposed research project to a larger audience.

There are no apparent barriers hindering the technical feasibility of the proposed research project.

Related, Current and Previous Work

The project is a continuation of NC-1014, which itself was a replacement for NC-221 and NCT-194. The projects membership is drawn largely from the membership of NC-1014. It is notable, however, that much turnover has occurred among agricultural finance researchers and several members have been a part of the project only recently. This has resulted in a reinvigorated interest in broad collaboration to identify and evaluate many rural and social issues. It is also notable that the project involved participants from a variety of government agencies and has also been actively engaged with industry participants. There are currently no other active regional projects that deal with the financing of agriculture and rural America.

NC-1014 has had four objectives for the last five years:

1. Determine the effects of changes in international competitive balance and federal and state policies affecting agriculture on the financial and economic performance of farms, agribusinesses and rural financial markets;

2. Determine the effects of market, policy, and structural change in the agricultural and financial market sectors on the financial soundness, safety, and management of financial institutions that supply capital to agriculture;

3. Evaluate the management strategies, capital needs, and financial performance required for the long-term sustainability of firms in the food and agribusiness sector;

4. Social Capital and Rural Entrepreneurship.

The project produced a great deal of knowledge regarding the various objectives related to financing agriculture and rural America. Project members addressed the objectives through a variety of collaborations. Much of the research addressed individual objectives. Collectively the group has generated more than 100 peer-reviewed publications during the five years of the NC-1014 project. It has also sought and secured additional funding of research.

Objective 1

With regard to the first objective, the members of NC-1014 have completed analysis related to several national and international policies that impact world agricultural competitiveness. Domestic issues included market structure, patents in agribusiness, and crop and revenue insurance programs among others. International issues included the performance of food and agriculture markets abroad as well as the impact of domestic agricultural subsidies on trade negotiations.

With regard to agribusiness competitiveness, market structure was evaluated for several subsectors of the food and agriculture industries. For example researchers found evidence that the behavior of potato-processing firms is much closer to price taking than to collusion. The researchers also noted that price distortions due to oligopsony in the purchase of potatoes are smaller than oligopoly price distortions in either the potato chips or the frozen French fries sectors.

Another important investigation of market structure was with regard to the segmentation of corn based on the need for non-genetically-modified grains to meet European demand. The discovery of StarLink corn in U.S. food products caused considerable disruption in corn markets in 2000 and 2001. Segregation costs were incurred by the U.S. grain-handling system in order to ensure that domestic and export sales of food corn and export sales of non-food corn to Japan meet stringent tolerance levels. These costs reduced the revenue that U.S. corn producers would have received in the absence of StarLink. Researchers estimated that revenue loss at between $26 and $288 million.

Researchers also found evidence that optimal intellectual property protection is greater than intellectual property protection in the U.S. seed corn market, but lower than the intellectual property protection that could be attained with genetic use restriction technologies. Optimal intellectual property protection is much higher than intellectual property protection achieved under open-pollinated crops or where legal intellectual property protection is limited.

Given that the federal government has shown interest in encouraging participation in crop insurance, many members have evaluated these programs. One project found that simpler internal business structures and more dominant farmertenant leasing position can increase the probability of submitting a prevented planting claim. Another project found evidence that, depending on farmer risk aversion, federal risk management programs can either decrease optimal fertilizer application rates. Another study considered holistic health insurance as an alternative. The results indicated that farmers prefer higher levels of coverage and are price sensitive. A sample of farmers did not prefer the subsidy switch. However, the subsidy switch is preferred by older farmers, those with higher health care spending, and farmers who have experienced major health problems.

Several important issues regarding international competitiveness were considered. Evaluation of some international agricultural market structures was undertaken. Researchers used data from case studies, interviews, and surveys are used to explore the emergence, growth, and likely consequences of new agricultural operators (NAOs) in Russia. The case studies suggested that entry motives and patterns vary widely, but most NAOs are responding to real profit opportunities. Another case study of Telesignos, a fruit producer and exporter in Guayaquil, Ecuador considered the vertical integration opportunities with an American firm to deliver fresh cut pineapple.

In addition, because of the sensitive nature of agriculture subsidies in trade discussions, the decoupling of production decisions from subsidies was considered. Members have found additional evidence that any effects of direct payments on acreage are likely to be modest. Furthermore, there is evidence that farmers who previously were unable to adjust production due to credit constraints are able to move to more optimal means of production after receiving the payments.

Several other projects considered specific agriculture programs. Members found that the governments allocation of country-guarantees is risk-inefficient, and make recommendations for allocations based on the size of the program. Members also found that the peanut quota in the 2002 Farm Act had small impacts on inefficiency likely because of limitations in the transferability of the quota to more productive areas.

Objective 2

The financial strength and performance of agricultural lenders is important in ensuring a healthy rural credit market. The efficient performance of commercial banks, the associations of the farm credit system, and federal government loan programs has always been of interest to the NC-1014 membership. In the recent years researchers have evaluated the implementation of the New Basel Accord in agriculture, the profitability of lending relationships, the default probability of agricultural borrowers, and the performance of international lending institutions.

The results show that the necessary capital for agricultural lenders under the New Basel Accord varies substantially depending on the riskiness of the portfolio, which is not surprising. Grouping borrowers together based on their riskiness, however, can improve the lenders understanding of how much capital is necessary. Such successful practices typically permeate a financial system with modifications to fit institutional size and resource base. Vendors offering fee-based capital services, further consolidations among financial institutions, data sharing arrangements, and experience gained by the industry and its regulators will hasten the permeation process and enable community banksas well as the internationally active onesto utilize internal ratings-based approaches and economic capital concepts in their risk management.

In order to improve the ability of agricultural lenders to implement many of the New Basel Accord guidelines, a better understanding of the agricultural lending relationships is needed. In particular lenders need greater detail on the default risk of borrowers, loss when default occurs, and in general the profitability of agricultural lending relationships. Many lenders have defaults infrequently, making the assignment of default probabilities and incidences difficult. Greater access to computing technology has helped to overcome this hurdle, but has not eliminated it.

Researchers have identified several datasets that can help in aggregating the default occurrences among many borrowers. Furthermore, members also proposed methodology that could incorporate the extent of agricultural borrower market segmentation and factors affecting agricultural mortgage terminations in new loan products. It is likely that this has resulted in improved understanding of defaults in rural and agricultural lending. Researchers found credit scores are often not the best predictors of default risk and that agricultural lenders will need to consider character, capacity, and collateral in the lending decision. Furthermore, researchers found evidence of size economies in agricultural lending, though only to a certain point. As loan relationships became very large, the concentration of risk may have begun to outweigh the benefits of size.

An interesting event occurred in the agricultural credit markets during the life of the NC-1014 project. Rabobank International, a privately-held commercial bank, offered to buy one of the largest Farm Credit Associations. Members evaluated this proposed buy-out as well as raised some issues that became apparent as a result of the offer; not least of which was the need for government intervention to improve competitiveness of the rural market in an era of modern communications technology. The Farm Credit System is government sponsored enterprise operating in a manner similar to Fannie Mae and Freddie Mac before their buyouts. In addition, The Farm Service Agency (FSA) direct farm loan program provides credit to family-sized farms including those operated by beginning farmers and socially disadvantaged applicants. Approximately 37% of all U.S. farms are estimated to be eligible for FSA direct loans when farm size, credit needs, farming experience, and occupation are taken into account. Despite the efforts of the government, researchers identified room for more of both farm and nonfarm lending in the rural Midwest.

NC-1014 research helps improve the design of FSA programs using evaluation of USDA Farm Loan Program aspects including cost effectiveness and lender participation in FSAs direct and guaranteed loan programs as well as the use of FSA commercial bank interest assistance. The group evaluated the performance of the Loan Programs for the Farm Service Agency and Non-Traditional Financial Institutions. Policy recommendations were made regarding program performance and efficiency.

Researchers have found that FSA market penetration rates for various borrower cohorts range from 0.8% to 4.6%. In general, beginning farmers have weaker financial characteristics than non-beginning farmers. Yet, the same result is not found when comparing socially disadvantaged farmers with non-socially disadvantaged farmers, such that there are few significant differences or the differences in financial characteristics are mixed. Overall, results indicate FSA direct farm loan borrowers have weaker financial characteristics than eligible, non-FSA direct farm loan borrowers, implying FSA is serving farmers likely to be denied credit by commercial lenders. In another study, results found that there was no convincing evidence that the FSA engaged in racial discrimination in response to a 1997 lawsuit. Members of the group assessed the factors that influence financing choices among agricultural producers. In particular, researchers found that female borrowers are more likely to submit successful applications to the Farm Service Agency.

Researchers also evaluated the performance of microfinance institutions in developing countries. The results indicate that performance-based compensation of managers is not associated with better-performing MFIs. There was also evidence that lower wages suggested for mission-driven organizations worsen outreach, while managers experience improves performance. The results provide strong support for independent boards with limited employee participation. In the study region, external governance mechanisms seemed to play a limited role.

Objective 3

The members of NC-1014 have a long history of investigating the borrowing and financial behavior of agricultural producers and agribusinesses. Researchers have considered the access and use of agricultural credit important for a healthy rural economy. Thus, understanding the producers use of credit is important when evaluating the success of government sponsored lending programs and the competitiveness of the rural credit market.

Researchers have found evidence that gross farm income, risk management strategies, and operator's age and risk aversion had significant influences on the likelihood of farm credit use by rural residence, intermediate, and commercial farms. Researchers also found weak evidence graduates of counseling had lower default hazard, but that their default behavior was more optimal. Overall, credit counseling seems to affect lenders profits, but the net effect should be evaluated both in terms of prepayment and default.

Another study considered the types of management approaches in the production of cash-grains. Exploratory factor analysis identified three groups of managers: price negotiation, long-term cost control, and input adjustment. Farm operators using the price-negotiation approach are generally older, well-educated, risk-averse, and fulltime farmers who operate the largest and most specialized farms. Long-term cost control is adopted more typically by younger producers that are risk takers that farm diversified operations. Input adjustment was adopted by either older retiring producers or young producers trying alternative enterprises.

Researchers also considered profitability and its variability for agricultural producers. Results indicate that regional profitability of agriculture production can have important policy implications. For example, there is evidence that farms and ranches are more likely to disappear from areas in which agriculture is more important in the local economy. In areas where agriculture is a small-part of the economy there are relatively more abundant opportunities to supplement farm profits with off-farm income and capital gains. Results of another study were also tempered by regional considerations. Researchers found that overall higher government payments would lessen wealth dispersion, though in two of ten regions the opposite was true.

Members of the group identified opportunities for financial improvement among producers by eliminating risk in their operations. Specifically, researchers evaluated the usefulness of economic forecasts in decision making and the impact of reducing business risk on the financial-risk bearing capacity of a firm. In another research project researchers found evidence that diversified crop/livestock farms had a diversification discount of 5.8% in comparison with specialized crop or livestock farms from 1999 to 2001. Commodity diversified farms had a diversification discount of 9.4% in comparison with commodity specialized farms.

Of interest to the members of NC-1014 is how off-farm income influences on farm behavior and profitability. One study found that producers with more off-farm income were more likely to adopt new technologies such as herbicide-resistant soybeans. Research also found that farms with non-farm business income had higher, non-farm net-worth and higher total household incomes. Many of these types of producers are beginning farmers with less than $100,000 gross farm sales, suggesting that they are successful business owners considering agriculture as an additional enterprise.

Objective 4

Of course the value of rural land is of great importance to agriculture given that it is the largest asset on the agricultural balance sheet. As a results, many NC-1014 members spend time considering rural land value, social capital, and rural entrepreneurship.

Always of interest is the impact exogenous variables have on the value of rural lands. One research project found that Illinois farmland values decline with parcel size, ruralness, distance to Chicago and large cities, and swine farm density, and increase with soil productivity, population density, and personal income. Another group identified the positive impact that ethanol plants and the rise in housing prices have on rural land values.

Members also assessed the value of rural social capital producers. In one study, there was evidence that when inputs were purchased locally and social capital was generated, the distribution of year-end funds has a slightly lower mean and longer left tail. The longer left tail results from additional borrowing arising from credit forbearance. If this forbearance were not available, the firm would be bankrupt. Members of the group identified the impacts capital moving from rural areas to urban areas. In particular, evidence showed that rural growth would benefit from an inflow of capital.

Related and Current Work

Current federal agricultural policy was recently modified by The Food, Conservation, and Energy Act of 2008. Research is critical to understand the implications of this new farm bill for producers, agribusiness, lenders, and rural America. The impacts of this legislation need to be considered by a national committee to insure that the regional impacts of the bill are well understood. In addition, it is important that research be conducted to improve and develop efficient agricultural policy for the future. In addition to the continuing need to examine the impact of federal policy on agriculture, there is an emerging need to examine the international competitive position of the U.S. agricultural system. Such studies need to examine the influence of policy on international competitiveness as well as the economic fundamentals that influence international competitiveness.

One of the more recent developments that might impact agriculture is the rapid adoption of biofuels. Spurred by federal policy that encourages the use of renewable fuels, the construction of ethanol plants has been a boon to rural communities. This has impacted the volatility of many commodity prices and in particular agricultural commodities. Many of these operations are producer financed via cooperatives. Although there are several studies that consider the energy efficiency of such fuels, only a handful of researchers consider the economic efficiency. In addition very few studies have measured the impact of this new sub-sector on rural land prices, commodity volatility, rural social capital, or production decisions.

Objectives

1. Examine the impact of recent fluctuations in capital and commodity markets on the performance, management, and regulation of agricultural financial institutions
   
2. Evaluate the management strategies, capital needs, and policy impacting the financial performance and long-term sustainability of firms in the food and agribusiness sector
   
3. Identify financial institutions and services that benefit agricultural producers and rural communities and expand agricultural markets, especially those producers that are beginning, young, from socially disadvantaged groups, and/or involved in producing specialty crops
   
4. Investigate capital structure, financial performance, and investment strategies of firms producing renewable energy in context of long term climate change. Implications of these findings for agriculture and rural communities will be delineated
   

Methods

For each objective the research leaders will be responsible for the design of the project, the identification of appropriate methodologies, data collection, and analysis and interpretation. Lead institutions will also be responsible for the development of the ultimate outputs of the project. Participation from non-lead states is expected in each objective. In most cases, involvement of non-lead participants revolves around identifying key issues and unique aspects of their region, data collection within their region, interpretation of regional data, and dissemination of the results within their region.

Objective 1: Examine the impact of recent fluctuations in capital and commodity markets on the performance, management, and regulation of agricultural financial institutions.

Many financial institutions have been severely impacted by the recent financial crisis. Credit markets are tightening, which is leading to a liquidity crunch for both lenders and borrowers. Bailout monies are being supplied by the U.S. government (e.g., the $700 billion bailout package) and by other financial institutions to lenders (e.g., the Farm Credit System providing $60 million in capital to Farmer Mac) in an attempt to resume the flow of credit and to pull the U.S. economy out of its economic downward spiral. In addition to this credit crisis, commodity markets have seen significant increases in volatility and land values are at record high levels. All of these factors have led many to believe there is a significant increase in systemic risk in the agricultural sector. Because systematic risk is inherent to the system it can be diversified away and poses a serious threat to the long run success of firms. This systemic risk is evident by the recent sharp declines in agricultural output prices, the potential for a drop in agricultural land values, a global recession impacting agricultural exports, etc. While the agricultural sector, in particular agricultural financial institutions, have not experienced the catastrophic effects systemic risk can be bring (e.g., the bank foreclosures across the U.S.), it would be naïve to say agricultural is completely immune to the short-run and long-run effects of this increase in systemic risk or the increase in the volatility of capital and commodity markets. Research of the widespread effects of the capital and commodity markets fluctuations on the performance, management, and regulation agricultural financial institutions is the focus of this objective.

Most of the issues outlined above are national in nature but fully understanding and analyzing the implications of this objective requires an analysis at a regional level. Agricultural financial institutions are just as diverse as their agricultural borrowers and as agricultural borrowers' demographics and production changes, so does the different types of risk an agricultural financial institutions faces. For example, Midwest states are dominated by grain farmers that have seen agricultural land values reach as high as $6,000/acre. While this makes balance sheets strong for these farmers, it creates additional financial risk for agricultural financial institutions or agricultural banks. If land values were to fall, similar to what we have seen in the U.S. housing market and the 1980s farm bust, many agricultural banks may find themselves with under collateralized loans and an inability to loan additional funds. Agricultural bankers in the South have seen an increase in land values as well but this increase is dwarfed by the run-up in land values experienced in the Midwest. Thus, the inherent risks are different for agricultural banks across the U.S. due to differences in land values as well as difference in agricultural production. In addition to differences created by the type of agricultural production that dominates their region, the size, scale, and commitment to agricultural lending varies considerably across the country. For example, the Northeast is characterized by relatively large banks while the Midwest has a larger number of smaller community banks focused on agricultural lending.

The work on this objective will involve participants from nearly every participating institution and will be completed in stages. The first activity of this objective is to conduct a literature review and initial data analysis to highlight many of the most relevant research issues. This work on this objective will be led by researchers at the University of Florida, Cornell University, the University of Illinois, Iowa State University, and the Federal Reserve Bank of Kansas City. These participants will collect, analyze, and synthesize data regarding the strength of agricultural lending institutions. The analysis will be used to understand the key factors that influence the strength and adequacy of the reserves of agricultural banks and farm credit associations.

The work will lead into the development of stress tests and scenario analysis that can be used to evaluate the financial health of agricultural lenders and borrowers. This work will begin with an invited paper session at the 2009 Annual Meeting of the Agricultural and Applied Economics Association will result in a series of papers published in the American Journal of Agricultural Economics. As such, this work will be used to develop additional research projects at the first meeting of the group in 2009.

While several of the additional studies will be developed based upon the research ideas identified in the initial work highlighted above, some of the work is already planned. In particular, members of the project will collaborate to identify, collect, and interpret the relevant data for the agricultural financial conditions in their specific state and region. Multi-state collaboration is critical because the markets are very different across regions. For instance, land values in the Midwest tend to be dominated by the potential returns to cropping enterprises whereas those in areas such as the Northeast are strongly influenced by the economic situation in the dairy industry as well as from pressures related to conversion of farmland for other uses.

It is expected that nearly all participants will play a role in providing and interpreting this data but the overall effort will be led by Cornell, Florida, Illinois, and the Federal Reserve Bank of Kansas City. This research is expected to produce journal articles, extension presentations and outlets, and presentations at professional meetings.

Additionally, the University of Arkansas, the Farm Service Agency, the National Agricultural Statistics Service, and the Economic Research Service plan to conduct studies that examine the outlook for and impact of changes in interest rates, unemployment, exchange rate, export, production expense, and farmland value situation for farmers. These studies will provide guidance to policymakers and farmers as they make decisions in the post-financial crisis global marketplace. The financial crisis has heightened the awareness of regulation. Researchers from Illinois and the Farm Credit Administration will examine the relationship between existing capital regulations and emerging Basel II style models on the levels and implied degree of associated insolvency risk for financial institutions in the farm credit system. In addition, based upon the findings of the initial study and significant potential for new regulations to emerge, several follow-up studies are anticipated. All of these studies will provide lenders and farmers information on how to adapt to a potentially different regulation environment. This will be accomplished through various articles and presentations.

NC-1014 and its members have a long history of working through these types of problems faced by agricultural financial institutions. For example, the University of Illinois, Purdue University, and Cornell University were leaders in researching the implications of the 1980s farm crisis and its subsequent effects on U.S. agriculture at a national and regional level. This was accomplished by pooling of state-level data and different experts at universities across the U.S. bringing their regional expertise to analyzing this pooled data. Many of these previous experts as well as new experts in the proposed renewal of NC-1014 will continue to pool data (such as income and call reports for banks) and conduct collective analyses to address the increase in systemic risk for agricultural financial institutions.

As mentioned earlier, the types and financial characteristics of agricultural producers vary in across the U.S. Each type of producer has a different set of business and financial risks, which impact those that lend them money. Given these differences and the recent credit crunch, many banks are raising their lending standards as well as necessary documentation to receive a loan. For example, dairy operations located in New York have different credit needs than an orange grove located in Florida. While these differences in credit needs as well as credit reserves exist, synthesizing what is being asked of all producers in terms of loan documentation will lead to better and more sound financial management educational programs. In addition, information on failures and successes of agricultural financial institutions will be collected that will benefit not only specific states and regions but the nation as a whole.

Objective 2: Evaluate the management strategies, capital needs, and policy impacting the financial performance and long-term sustainability of firms in the food and agribusiness sector

Efforts in this objective will be directed toward issues related to capital supply and demand in agriculture, financial management of agricultural businesses, and the impacts of public policy on capital availability and its use in the agricultural system.

Researchers at Kansas State University, Louisiana State University, and the University of Florida will lead the effort to design, test, and implement a survey of food and agricultural firms to assess the human resource needs of the sector in the coming decade. The survey will focus on a skill gap analysis to identify critical skills and areas of shortcomings. The researchers will also survey students to measure their perceived strengths and weaknesses. The initial focus of the survey will be on the agricultural credit sector. The results will be presented at the meetings of Agricultural and Rural Finance Markets in Transition research group and will be disseminated as widely as practical. Work on this project will begin during the first year of the project when initial literature reviews will be completed and data collection methodologies will be developed. During the second year of the project the survey will be administered and data collected and summarized. It is expected that participants from all universities will participate in sending the survey and collecting data in their respective states. The lead institutions will work to aggregate and synthesize the data. Results of the study will be developed and disseminated during the second and third years of the project.

Work will also be conducted to develop a study on whole farm planning and record keeping in order to improve farmer production and financial management. This work will be led by researchers at the University of Arkansas and the Farm Service Agency. The objective is to develop a computer program to provide knowledge, skills, and tools to beginning farmers and improve their decisions in a turbulent environment. Researchers from all participating institutions will work to customize the tool for relevance with the particular agricultural industries in their respective states and will also disseminate the results of the study.

The relationship between labor management and the financial health of the farm is a clear. This effort will be led by the University of Georgia. Members of the group will work to build and extend on a current study being conducted by the University of Georgia that analyzes differences in farm labor management strategies of organic and conventional farms in the Southeast as stricter enforcement of immigration laws restricts the supply of unskilled farm labor. Complimentary to this research is a project led by the University of Nevada that seeks to understand the role that housing price declines have had on rural labor mobility. These project leaders will work to identify synergies and key differences between the labor markets and strategies used in the Southeast and Southwestern U.S. This research is expected to produce informational bulletins for dissemination to various interested commodity and academic groups, a journal article and several presentations at industry and professional conferences.

The problems identified in this objective are all national in nature. In developing a sound federal policy, it is critical that regional perspectives inform the analysis. For instance, the banking and agricultural credit sectors differ considerably amongst the regions of the US. The work on financial education must also consider the full extent of financial management knowledge and programming currently underway throughout the country. While, almost every state has operators whom produce a diverse set of agriculture outputs, the type of farming operations tend to be concentrated regionally. For example, corn and soybean production tends to be concentrated in the Midwest and dairy production in the Western states, the Northeast and Midwest. As a result, educators in these regions have developed outstanding financial management education programs for these types of operations. By combining and summarizing the knowledge developed in these regions across the country producers of these commodities in non-traditional production regions can benefit from the work developed in more traditional production regions. In short, by summarizing and building upon this knowledge a coherent and useful financial management research and education program can be developed to achieve the greatest benefit to agricultural producers in all regions of the country.

Objective 3: Identify financial institutions and services that benefit agricultural producers and rural communities and expand agricultural markets, especially those producers that are beginning, young, from socially disadvantaged groups, and/or involved in producing specialty crops.

The turbulent economic situation has severly curtailed the avialbe credit. This reduced flow of credit is likely to have a more dramatic impact on those that are most in need of credit. Thus, producers that are considered to be young, beginning, and small (YBS), socially disadvantaged, and/or produce specialty crops will benefit from additional efforts to ensure adequate credit. These farm groups can play a vital role in maintaining and growing rural communities in the U.S. Ensuring that YBS farmers as well as socially disadvantaged farmers receive credit is one of the missions of the Farm Service Agency within the U.S. Department of Agriculture. In addition, the Farm Credit System is charged with providing credit to YBS farmers. The NC-1014 group has strong ties to these two government agencies and sharing data between these groups has improved lending and financial service practices to YBS farmers, socially disadvantaged, and/or specialty crop producers. An example of this is the research completed by Oklahoma State University, Purdue University, and the Farm Credit Administration (regulator of the Farm Credit System) on the importance of credit to YBS farmers that operate nonfarm businesses.

Researchers at the University of Arkansas, USDA Economic Research Service, and the Federal Reserve Bank of Kansas City will lead the effort to evaluate private and government loan programs that aim to serve agricultural producers, especially those producers that are beginning, young, from socially disadvantaged groups, and/or involved in producing specialty crops. This includes the functioning of the Farm Service Agencies loan guarantee programs, the success of the Farm Credit Systems beginning farmer and rancher programs, and the success of agricultural banks programs. The results will be presented at the meetings of Agricultural and Rural Finance Markets in Transition research group and will be disseminated as widely as practical. The target outlet for research publications is the AAEAs newly refocused Applied Economic Perspectives and Policy.

The University of Arkansas and the Farm Service Agency will also collaborate on measuring direct farm loan program subsidy rates and factors relating to loan loss likelihood for beginning and socially disadvantaged farmers. Another study will analyze borrower and lender use of the FSA interest assistance program by beginning and socially disadvantaged farmers. These studies, and others, will result in presentations at professional conferences, journal articles, and M.S. theses.

The University of Georgia and North Carolina State University will conduct a study on the farm lenders assessment of the credit risks of organic farm systems to determine conformity with and deviations from traditional credit risk models developed using the conventional farming paradigm. This project will result in outreach bulletins and presentations, as well as journal articles and presentations at professional conferences.

The methods of these objectives have focused on domestic issues however, the agricultural supply chain is now a global supply chain and international impacts of this global financial crisis must be considered. In effect, expanding agricultural markets must consider the implications of the international financial crisis. Motivation for international research is noted by world leaders convening in a 'post-Bretton Woods' type meeting to discuss the global financial situation and ways to remedy these problems. Of course, the fixed exchange rate regime established by the Bretton Woods Agreement failed but world leaders are considering, as they did at the first Bretton Woods meeting in 1944, rewriting the rules of international finance. Without a doubt, the discussions and outcomes of this and other meetings concerning international finance will impact our global economy. Given the globalization of agriculture and the global supply chain, changes to the rules of international finance will likely impact U.S. agricultural producers. For example, agricultural export markets are important to the financial health of U.S. agricultural producers and these export markets will undoubtedly be impacted by the new rules of international finance.

Producers will need to quickly understand the potential ramifications of changing the rules of international finance on their farm business. Delivering this information to farmers should help them compete in a global economy. However, obtaining, analyzing, and delivering this information is a large and substantial task. Most universities have few faculty that specialize in agricultural finance and/or international trade. In addition, agricultural production varies across geographic regions and this variation in crop and livestock production may be impacted differently by these new international finance rules. Therefore, an effort to pool resources is needed to address the timely issue of international finance. Pooling of resources will be accomplished through a multi-state effort. Cornell University and Auburn University have faculty members that are experts in the area of international agricultural finance. In addition, the Agricultural Finance Review has shown a recent commitment to publishing work in the area of international agricultural finance as evident by a recent special issue on similar international agricultural finance topics.

Objective 4: Investigate capital structure, financial performance, and investment strategies of firms producing renewable energy in context of long term climate change. Implications of these findings for agriculture and rural communities will be delineated.

Researchers at North Dakota State University, the University of Kentucky, and the Federal Reserve Bank of Kansas City will lead the effort to evaluate the immediate impacts of the ethanol boom on agricultural land values and the long-term sustainability and profitability of renewable energy production as it competes with food productions for land and input resources. The researchers will use models of farm profitability, methods of discounted cash flows, and real options models to analyze the rapidly growing and changing industry. The research outputs will be made available in traditional agricultural economics journals, but should also be suitable for publication in related energy outlets. The researchers will aim to create a set of research papers for presentation at professional meetings.

North Dakota State University will also research development of a new sugar to biofuel industry a special focus on capitalization in an era of turbulent financial markets. In addition, they will evaluate how lender imposed rules affect the biofuel industrys ability to adopt new renewable fuel technology. To enhance this research, North Dakota State University agricultural economists will collaborate with agricultural engineers to enhance their research outputs and extension reports.

The Federal Reserve Bank of Kansas City will research how viable the ethanol industry is without government payments. With a growing federal deficit and farm program payments under scrutiny, the ethanol industry may have to be more market based in the future. The question is can this industry operate in a free market. The Federal Reserve Bank of Kansas City will lead this research, but given its broad appeal and affect on different regions, it is expected that others will enhance this research. To start this research, the Federal Reserve Bank of Kansas City plans to write an article on what it will take for ethanol to be more market driven as opposed to government supported during the first year.

Measurement of Progress and Results

Outputs

• The development of an agricultural finance community of practice on eXtension
• Refereed journal articles
• Multi-state research bulletins
• Extension publications (e.g., fact sheets, bulletin updates, etc.)
• Popular press articles
• Output 6 Papers presented at professional conferences<p> Output 7 Extension presentations delivering research findings and educational material<p> Output 8 The organization of special conference sessions at professional meetings <p>

Outcomes or Projected Impacts

• A strengthened network of scholars and industry participants economists capable of examining specific financial market policies affecting rural areas. Participants will discern local impacts of transition and change in financial markets. Impacts will likely differ across regions.
• A standardized set of investigative methodologies and assessment tools for analyzing the social, economic, and fiscal impact of the global financial crisis on rural financial markets.
• Publications and educational materials for public and private policymakers, financial industry and agribusiness leaders, and farmers and rural citizens that will help them understand this global financial crisis and what it means for themselves and their associated business and rural communities.

Milestones

(2010): Organizational meeting to identify and prioritize the topics to be addressed under each objective. Development of detailed literature reviews for each objective. Development of current data inventory and data needs for the project. Report summaries from each objective and interim data development reports and analyses

(2011): Descriptive summaries and analysis of preliminary data collected.

(2012): Development of results and bulletins from data analysis. Development of symposium at professional meetings and completion of edited volume of results of initial analyses. Development of refereed publications and dissemination to lay audiences. Identification of additional priorities for each objective for further analysis.

(2013): Final development and implementation of community of practice for eXtension.org. Initial analyses of priority projects identified in 2012

(2014): Development of final reports and summarization of key findings. Updates to eXtension.org Research dissemination through refereed journal articles and to lay audiences.

Projected Participation

View Appendix E: Participation

Outreach Plan

The nature of the collective research undertaken in this project places a premium on communicating and disseminating research results to academic professionals, policymakers, farmers, financial institution managers, agribusiness managers, and leaders in local communities. In addition to the usual channels through extension and professional publications, NC-1014 is connected to government and industry leaders, which will provide an immediate transfer of knowledge beyond normal academic outlets. This is evident by the 2008 annual NC-1014 meeting being coordinated with the National Agricultural Credit Committee at the Federal Reserve Bank of Kansas City. Coordinating future meetings by both NC-1014 and the National Agricultural Credit Committee was discussed by participants at this previous meeting and, if schedules work, something planned for future meetings.

In addition, information bulletins in non-technical language as well as two-page summaries of research results will be prepared and disseminated. Sessions will be organized for professional meetings of the American Agricultural Economics Association and several regional science associations. Project annual reports, symposia programs, and related materials will be provided to the public via the NC-1014 website along with summaries of research results. Another component of the outreach plan is the development of an agricultural finance community of practice for eXtension.org.

Organization/Governance

The recommended Standard Governance for multistate research activities include the election of a Chair, a Chair-elect, and a Secretary. All officers are to be elected for at least two-year terms to provide continuity. Administrative guidance will be provided by an assigned Administrative Advisor and a CSREES Representative.

The membership is divided into sub-committees by project objective. Each group has responsibility for coordinating its work. The vice-president has overall responsibility for synthesizing the project's work product and results at the end of the project, including completion of the termination report.

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Attachments

Land Grant Participating States/Institutions

AL, AR, FL, GA, IA, IL, IN, KS, KY, LA, MI, MN, MS, MT, NY, OH, SD, TX, UT

Non Land Grant Participating States/Institutions