Duration: 10/01/2004 to 09/30/2009

Administrative Advisor(s):

NIFA Reps:

Non-Technical Summary

Statement of Issues and Justification

(This is a revision of proposal submitted last year. See Attachment for discussion of how MRC review comments were addressed.)

U.S. financial markets are undergoing significant change in response to international (Basel) policy changes, accounting scandals, and advances in lender risk management technology. Implications for agricultural and rural financial markets are unknown as they are also experiencing consolidation of production, agribusiness, and lending sectors. Producers have seen a safety net evolve that reduces production risk through price supports and subsidized crop insurance, but net responses in terms of business risk and management strategies have not been thoroughly delineated. Limited resource, mid-sized, and specialty-crop farms have identified voids in coverage.

As agribusinesses consolidate, they play an increasing role in providing capital and financial services to agriculture, but also demand more capital themselves. Limited attention has been devoted to their activity and impact. Financial institutions have traditionally facilitated the distribution of capital to both producers and agribusinesses. However, net impacts of impending financial market, agricultural and rural policy change coupled with a new risk management environment are not well understood. Financial institution numbers have been greatly reduced as well, leading producers and agribusinesses to be concerned about sources of capital and financial services. Outside observers have noted that the consolidation across the different sectors has perhaps created an environment with reduced transparency of the sectors financial situation. Economic Research Service, Federal Reserve Bank, and lending regulators have been regular collaborators in the former project, and have provided insights into the needs of agricultural and rural financial markets.

The past project focused primarily on agriculture, given its dependance on high levels of financial capital. However, rural areas are often quite dependent on farm and ranch income for sustainability. Access to fairly priced capital can reduce financial swings and stabilize the well being of the rural economy, and in turn, agriculture. Moreover, farmers are increasingly concerned about access to rural services and amenities. Failure to understand the full effects of policy change and the intertwined responses of producers, rural residents/firms, and lenders may lead to inefficient capital flows, unnecessarily constrained credit, and ultimately greater volatility in rural financial markets. This expanded focus will be an important dimension of the new project.

Moreover, the committee feels compelled to expand beyond economics, especially with the expanded emphasis on rural issues. Many financial arrangements are based on social practice instead of economic merit. Informal methods of credit evaluation, cooperative borrowing relationships, and peer/family repayment obligations all affect market dynamics. The recent meeting of NCT-194 highlighted these issues and formally adopted a research strategy to expand involvement of rural sociologists and family economists in the project.

The track record of NC-221 was excellent regarding the number of collaborations and outcomes that depended on multi-state efforts. This project will leverage those existing relationships. Each objective of 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 efficently 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.

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

Related, Current and Previous Work

This project is a replacement for NC-221 and NCT-194. Its membership is drawn largely from the membership of NC-221. However, a specific effort was made to expand the committee, given it's new emphasis on rural and social issues. A survey of AAEA members and key personal contacts has resulted in a number of new committee members with additional breadth. There are currently no other active regional projects that deal with the financing of agriculture and rural America.

NC-221 had three objectives: (1) Determine the effects of changes in federal and state policies affecting agriculture on the financial and economic performance of farm and rural non-farm businesses and rural financial markets, (2) Identify and evaluate the costs and benefits of structural changes in production agriculture, rural non-farm businesses, and rural financial markets, and (3) Measure the effects of technical change on rural financial products, services, and firm decision making.

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. One important output of the project was participation by many of the members of the project in the edited volume, Financing Agriculture into the 21st Century. This book was devoted to understanding the financial needs of rural America and production agriculture. It was edited and largely written by research project members. This book dealt with many of the issues identified in the project objectives.

Consistent with objective 1, project members collaborated to answer questions regarding federal agricultural policy. Much of this work related to assessing the impact of provisions of the Federal Agricultural Improvement and Reform (Fair) Act. Work on the FAIR Act examined issues ranging from crop insurance design, farmer assessment of crop insurance programs, development of farmer decision making tools and aides, to the impact of government programs on behavior in the rental market. In addition, members worked to evaluate the impact of changes in other federal policies such as tax reform and bankruptcy laws.

Among the initial intents of the FAIR Act and a continuing interest of many legislators and agricultural industry participants was to increase the use of insurance products by farmers and substitute insurance for government payments. The limited success of crop insurance programs to date has resulted in considerable research by project members on ways to make crop insurance more effective and to design new insurance products, such as revenue insurance. To help understand the risk management characteristics farmers desired in insurance contracts, researchers investigated the variability (distributions) of farm commodity prices and farm revenues, the risk management decisions, preferences and behavior of farmers, and criteria for comparing risk management strategies. As a result, optimum insurance program designs and appropriate premiums for policies with alternate risk management characteristics were identified. Particular focus was given to the systematic risk issues in crop and revenue insurance programs. In addition, project members made major contributions in the development of models designed to allow farmers to compare the value of various policy/program characteristics to identify the best products for them. The outputs of this work were widely disseminated across regions of the country. One example of this effort was FARMDOC.com housed at the Univ. of Illinois. This collaborative effort involved both research and Extension members of the committee.

The impact of various lease arrangements on lessor risk and the farmers ability to mitigate price volatility were studied. Special focus was placed on how FAIR act provisions might alter behavior in the rental market. Changes in land control contracts and leasing arrangements were found to be driven by risk sharing considerations, transactions costs and property rights.

Several studies of federal tax and bankruptcy policy reform were conducted to assess their impact on the farm sector. Studies of fundamental tax reform found variability in the effect on farmers. A flat tax would reduce the taxes paid by farmers, but would also significantly change investment incentives. On the other hand elimination of the estate tax would affect relatively few farmers. Sunset provisions of the Chapter 12 bankruptcy instigated study of the factors influencing filings and the potential value of this chapter to farmers.

The second project objective was to understand how structural changes occurring in agriculture impacted the farm sector, the rural non-farm sector, and rural financial markets. Studies were conducted to examine the delivery of credit to agriculture by non-traditional lenders, the factors that influence agribusiness demand for capital, and the determinants of long-run financial performance of farms.

The increasing role that non-traditional lenders play in providing credit to agriculture was documented and a survey of their characteristics and lending standards was initiated. Non-responsive lenders slowed the data collection process and the effort continues.

Financial asset demands of agribusiness firms and methods of assessing the financial performance of food industry firms were identified. Following this, the effects of intra-industry diversification and capital structure decisions on financial performance were studied. The developed model of agribusiness capital structure indicates that firm profitability, size and growth opportunities are important determinants of capital structure.

In order to improve the performance of farms in the face of structural change, studies were conducted to understand the factors that influence the long-term financial performance of farms. One study used a fixed-effects panel data model to examine the factors that influence the long-term performance of farms. Financial management factors, such as accounting system used and debt use, as well as production management factors were important determinants of long-run rates of return. Financial performance of farm businesses under new risk management and the effect of the structural characteristics of farm businesses on risk were explored. ARMS data provided by USDA/ERS were important source of information for this effort.

The third objective of the project was to examine the how technical change impacted the decision making and credit delivery to the agricultural sector. Several major technological innovations have impacted the delivery of credit to agriculture. These innovations include information technology, electronic banking, credit risk assessment, and securitization of agricultural mortgages. Several studies were undertaken to understand how these innovations impacted the supply of credit to agriculture, the factors that influence adoption of these innovations, and how to improve these innovations.

A national study of information technology used by commercial banks serving agriculture investigated regional differences in adoption and the adoption rates of rural versus urban lenders. The study found relatively high levels of adoption of many technologies in most regions. The motivation for adoption was generally to improve market share and image rather than to improve service to existing clientele. USDA/ERS actively collaborated on this effort.

Changes in technology have improved data collection and processing and have allowed lenders to alter their credit scoring practices. A national survey of credit scoring practices of agricultural banks investigated the change in credit scoring practices used since a similar survey conducted by the same authors ten years earlier. Credit scoring use had increased and models used had retreated somewhat from the cash flow lending philosophy to asset based lending. Use of recursive partitioning as a credit scoring methodology was also assessed.

Considerable effort was expended in studying the effects of structural changes occurring in lending institutions as the result of the high level of mergers of both commercial banks and Farm Credit institutions. Areas investigated included lending concentration, deposit control, economic growth, management risk preferences, bank efficiency, and the effect of structure on lending to agriculture. The role of the Federal Home Loan Bank System as a source of funding for agricultural loans by commercial banks and methods of improving risk-rating models used by banks were also investigated.

Unlike the housing market mortgage-backed securities for agricultural real estate loans have a very short history. Farmer Mac was handicapped by having little information on prepayment rates. This created a need for research on valuing Farmer Mac securities and careful assessment of their prepayment penalties.

Study of the determinants of the loss claim rates on guaranteed Farm Service Agency loans found that the financial characteristics of farm operators, structural characteristics of the farm economy and the level of off-farm work all contributed to loss rates. The interest rate on loans and the lenders level of involvement in agricultural lending influenced loss levels. Valuation of export guarantees and construction of an optimal guarantee portfolio were examined to assist exporters of agricultural commodities. USDA/FSA actively participated in this project.

The new Basel accords reflect a significant change in the assessment of portfolio risk. Initial studies were conducted to explore some of the issues involved in risk based capital. Credit risk migration of farms using credit scoring risk measures indicate greater migration between risk classes than found in non-agricultural literature.

The members of NC-221 used the research project as an important mechanism in coordinating the research efforts of professionals from across the country. The members collaborated to address the objectives of the original project. Although a great deal of progress was made by addressing the objectives of the project, a number of research questions remain. The most obvious of which is the continuing need to address issues related to the impacts of federal and state policy on the economic performance of farms, agribusinesses, and rural financial markets.

Current federal agricultural policy was recently modified by The Farm Security and Rural Investment Act of 2002. 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.

In order for the agricultural sector to remain competitive internationally, it is critical that the members of the sector have access to adequate and competitively priced capital. Further work is needed to understand how management, policy, and structural change impact the supply of capital to agriculture. With respect to management, the cost of delivering credit to various sizes and types of farms is not well known. Because credit is critical to the establishment and operation of efficient farm businesses, it is important to examine the costs and returns of delivering credit to various sizes and types of agricultural borrowers. This information will help the management of lending institutions more effectively deliver credit to all types of borrowers. For instance, there are currently several public policy programs that subsidize lending to various types of farmers including, Farm Service Agency guaranteed loan programs, and interest assistance programs. Additional research is needed to determine how these programs impact the cost and returns of lenders.

Lenders are also influenced by the structural changes in agriculture. These changes impact the types, organizational structure, and risk of the businesses to which they lend. In addition, changes in technology continue to alter the competitive position of traditional and non-traditional lenders. It is important that these changes are understood and that their implications for the cost and supply of credit to agriculture are examined.

The risk-based capital requirements of the New Basel Accord will profoundly influence institutional risk management for years to come (Barry). As these accords are applied, the viability and competitive position of lending institutions serving agriculture could be greatly influenced by the uniqueness of agriculture and its risk characteristics. Research is needed on the affect of agricultures small scale, capital intensity, geographically dispersed organization, long production cycle, diversity in structural characteristics, relationship based and specialized financing programs on the risk characteristics of lender portfolios. A clear understanding of the real underlying risk of agriculture and its affect on internal risk-based capital systems is necessary for lenders to insure actuarial soundness in their evaluation of capital adequacy.

Structural changes present lenders with several challenges as well. Lence reports that the number of banks declined by 34 percent from 1980 to 1994. Likewise, there have been major structural changes within the Farm Credit System (Freshwater). Additionally, the structural changes occurring in the production sector impact lenders as well. For instance, the value of a contract or relationship with an integrator or another member of the value chain is potentially one of a farm producers most important assets. These soft assets are not easily financed with debt because they have little collateral value. Research is needed to determine how structural change influences the demand for debt capital, the relationship between the borrower and lender, the potential sources of capital, and the demand for new financial products and services.

Recently, numerous value-added cooperatives have come into existence. The capital structure decision for cooperatives is also an important area for future research. The rapidly changing agricultural environment has placed many strains on the existing cooperative systems in the United States. There is a continuing need to examine the financial impacts, advantages, and disadvantages of cooperatives and other methods of vertical integration and coordination. The long-term economic consequences of vertical coordination for the various members of agricultural industries are not clear.

One of the more recent developments that might impact the delivery of credit to agriculture is the increased risk of catastrophic events such as bio-terrorism. Such an event would dramatically alter the collateral and capital base of the food system and could significantly alter the flow of capital to the sector. It is critical that research efforts are devoted to understanding how the agricultural sector might be recapitalized after such an event and how the likelihood of such an event might alter the supply of capital to agriculture.

The project has previously tended to focus on the management strategies, capital needs, and financial performance of the farm sector. However, the group desires to expand the focus to rural residents and firms. Farm and rural business owners face similar impediments with respect to access of modern financial services and capital. Group members have previously examined capital flows and structure non-farm agribusinesses tangentially. Additional and new work is needed in this area.

Moreover, past research methods have emphasized economic aspects. Special sessions at the 2003 AAEA and NCT-194 annual meetings focused attention on the need to consider social capital and other informal credit arrangements when evaluating financial policy and market performance. This is pathbreaking research in which previous research is limited.

The members of NC-221 effectively used the regional research group to address many important national issues in agricultural finance. However, the continuing changes in the international competitive balance, federal and state policies, and structural change in rural areas all have the potential to significantly alter the economic behavior of both firms involved in agriculture, and non-agricultural firms located in rural areas. Additional research is needed to understand the international competitive balance, the impact of current and potential federal and state policies, and the impact of structural changes on the performance of rural financial markets.

Objectives

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
   
5. 
   

Methods

Objective 1 1. Risk management policy Need for research: Crop support programs as a method of controlling risk on farms is becoming very expensive. One method of controlling risk, which may require lower budget outlays, is to encourage farmers to develop their own risk mitigation programs, similar to those used in Canada and Australia. These programs need to be modified to avoid the shortcomings found in other countries. Evaluation of these programs requires investigation of the impact of program design and provisions on all types of farms from the various regions of the country. Method: Cornell, Illinois, Kansas, North Dakota and the Economic Research Service (ERS) will collaborate to investigate alternate savings account programs. Each of the four states has individual farm data on the same farms for a number of years for various farms types. Although these data are confidential, University personnel can use them for research purposes. ERS will obtain data from tax returns for a panel of farms. The participating institutions will develop a common set of program designs, provisions and analysis techniques. Why multi-state? This project requires multi-state cooperation because each participant has a data set that is not public and any assessment should include a variety of farm types and regions of the country. Outcome: These results will then be aggregated and integrated to generate assessments of various program provisions for the nation. From these, a set of policy recommendations will be published. 2. Agricultural policy Need for research: The 2002 farm bill represented a clear about-face in the safety net provided for agriculture. The changes modified the character of the safety net and change the risk environment faced by individual farmers. These changes influence the viability of farms with various characteristics. Farmers need a better understanding of the risk environment they face and policy makers need to know how these farm bill provisions modify the financial position of various farm groups. Method: Risk simulation models have been developed at the University of Illinois, Iowa State and other Universities. The developers of these models from Arkansas, ERS, Georgia, Illinois, Iowa State, Kansas State and the Swedish University of Agricultural Sciences will integrate their experience and models to identify a model or set of models to use in evaluating the influence of farm bill provisions on individual farms and all farms in the aggregate. Farm business summary records from a number of states (Illinois, Kansas, Nebraska, North Dakota, Cornell) will be used in the models to project risk profile, income level and government policy impacts on farm firms. These model results will be compared and joined in an optimization model to determine optimal capital structure under different farm program and over time. Why multi-state? Multi-state cooperation will allow collaboration by people in the various states that have worked on risk simulation models. Such collaboration will improve the quality of models used and reduce the inefficiency of model development. Data sets that are maintained by a number of states and the ERS to be used to provide a nationally representative assessment of policy. Outcome: Delineation of optimal risk-based capital structures under alternative policy designs. 3. Risk migration Need for research: For lenders to remain viable and provide strong service to the agricultural community they must remain profitable and avoid large losses. The losses sustained by lenders during the agricultural downturn of the 1980s made it clear lenders needed to improve their loan evaluation methods. To support that effort considerable research was done on credit scoring methods and models. A recent development has focused attention on the migration rates among rating and performance classes for loans. Such an approach has achieved some success in some non-farm sectors. Given the potential of this approach, it needs to be evaluated for agricultural loans. Method: Models for development of empirical measures of stability in rating migrations over longer time-averaging periods and for credit score criterion versus ROE and repayment measures will be developed. In addition, transition probabilities will be estimated and related to farm structure, business risk and risk-reducing. The results of these analyses will be aggregated to provide an assessment of the value and applicability of risk migration as a loan evaluation technique. This effort will involve researchers from Illinois, Georgia, Cornell, Farmer Mac . Why multi-state? The initial research on risk migration has been done at a number of states (Illinois, Georgia, Farmer Mac, Cornell). These researchers need to collaborate on model and evaluation criteria development for efficient advancement of research on this topic. Because the value and characteristics of risk migration may vary regionally, analyses need to be done in a number of states using record-keeping data from that state. For the maximum benefit from the research, the models and criteria used need to be the same in all regions (states). Outcome: Improved loan evaluation methods for lenders. Objective 2 1. Risk Migration and Capital Risk of Lending Institutions Need for research: For lenders to remain viable and provide strong service to the agricultural community they must remain profitable and avoid large losses. The losses sustained by lenders during the agricultural downturn of the 1980s made it clear lenders needed to improve their loan evaluation methods. The effects of new international risk-based capital requirements (Basel Accord) on the agricultural loan portfolios and capital position of agricultural lenders will be investigated. Method: Lender portfolio data and farm business record data from state record keeping systems will be used to determine credit migration rates and ultimately, the risk-based characteristics of agricultural portfolios and optimal capital management of lenders. Time series measures on the state of the economy along with regional measures such as agronomic, climatic, or production conditions will be included in the models. This effort will involve researchers from Illinois, Georgia, Cornell, Farmer Mac. Why Multi-State? The initial research on risk migration has been done at a number of states (Illinois, Georgia, Farmer Mac, Cornell). These researchers need to collaborate on model and evaluation criteria development for efficient advancement of this research as the value and characteristics of risk migration may vary regionally. Outcome: The results of these analyses will be aggregated to provide an assessment of the value and applicability of risk migration as a loan evaluation technique. 2. Evaluating and Financing Emerging and Underserved Markets Need For Research: The changing structure of agriculture and financial markets in agriculture presents ongoing policy debate regarding potential credit gaps in agriculture and rural business. Serving the financial needs young and beginning farmers and socially disadvantage groups needs monitoring as the structure of rural America changes. Moreover, as agriculture evolves, nontraditional types of businesses are also emerging. Many traditional lenders have limited experience in financing these businesses. Method: The Farm Services Agency (FSA) guaranteed loan program has been granted expanded lending authority. One aspect of the program is to increase credit availability to socially disadvantaged groups (SDA) and beginning farmers. Research will be undertaken that identifies lending institutions that have used loan guarantees in making agricultural loans and compared with banks that have not. Identifying the needs of emerging businesses in rural areas will involve identifying case regions across the U.S. where regional economic business centers have evolved. A survey instrument will be created and used to determine lender and business perspectives on the financing needs and risks of the businesses. ARMS data from ERS will be used to investigate and compare the source of financing young and beginning farms among traditional financial institutions. Why Multi-State? Collaborators on the studies include Arkansas, Economic Research Service, Illinois, North Dakota and the Kansas City Federal Reserve. Local (individual state) expertise is needed to identify the economic regions as well as other specific information regarding the impact these businesses have on the local economy. Moreover, much of the emerging business survey will involve one-on-one contact and local expertise. Outcome: Policy recommendations regarding program performance and efficiency. 3. Changing Structure of Rural Financial Markets. Need for Research: Commercial bank mergers have profoundly altered the urban credit marketplace and are positioned to do the same for the rural credit marketplace. Traditionally, rural commercial banks have been the primary providers of credit to farms, small businesses, and households in rural America. But the commercial bank merger environment raises questions about the ability of rural banks to supply rural credit needs in the future. Method: Research will identify commercial banks that have been involved in mergers and acquisitions and document what has happened to their agricultural and rural lending concentration as the result of merger and acquisition. These data will be compared with data from commercial banks that have not merged or acquired. The changing structure of deposit markets will also be investigated. Rural banks are continuously challenged by the movement of rural bank deposit funds to mutual funds and other metro financial institutions. This study identifies banks and banking markets that have observed changes in deposit levels over a period of time. Econometric methods are used to identify factors related to the changes and the differences across institutions and markets. Why Multi-State? Collaborators on studies in this sub-objective include Arkansas, Illinois, Kansas State, ERS, North Dakota. Local impacts of consolidation vary because of the variation in economic sectors and population density. Outcome: Quantified measures of credit shortfall and efficiency in rural America. Objective 3 1. Management strategies and financial performance. Need for research: The members of NCT-194 propose to conduct a multi-state study addressing the financial management practices of farm managers. The study will estimate the adoption of financial management practices employed by farmers and how these practices influence profitability. A second aspect of this research project is to develop reliable financial benchmarks or performance indicators. A nationwide research project that utilizes all available data is necessary to understand which financial measures are the most reliable indicators of financial performance. This information can be used to help farmers identify better measures or targets and can be used by lenders to assess a farms creditworthiness and repayment capacity. Method :The project will utilize several data sources and methodologies. The project will use a panel data set from existing university sponsored farm management data programs: Illinois, Kansas, and Cornell. These data will be summarized and analyzed with econometric techniques. The project will also use a survey instrument to collect data on records use, attitudes, and perceptions. Data will also be collected from a survey of lenders. These data will provide information that will help assess how financial management practices impact the lenders perspective on a farms creditworthiness. The final data collection procedure will use an experimental setting to how producers evaluate, utilize, and value information provided by farm records. Why Multi-state? Illinois, Kansas State, and Cornell will develop data sets from each universitys farm record keeping association. Illinois State and Purdue will help develop the conceptual framework and template describing the specific data required for the analysis. Purdue, Illinois State, Cornell, Illinois, and Kansas State will conduct the basic data summarization. Iowa State and Cornell will work to resolve econometric methodology issues related to using profitability data to determine the value of farm record keeping practices Cornell University will serve as the project coordinator for the farm and lender surveys. Purdue University will serve as the coordinators of the final component of the study. Outcome: Members in each state will use the results to develop multi-state research reports and extension bulletins. The results will be used to develop a series of extension bulletins that will be collected to form a basic guide to financial management. Financial ratios and business analysis results will be disseminated at state banking schools run by collaborators. Finally, results of the study will also be disseminated through the FARM.DOC website, administered by Illinois. 2. The financial performance of agricultural cooperatives Need for Research: In light of the recent bankruptcy filings of Farmland Industries and Agway, it can be argued that the regional supply and marketing cooperative structure is in disarray. Because the agricultural supply and marketing cooperative system is regional in nature, it is important that various regioal perspectives are utilized in developing and conducting a research project to study the performance of this system. Method : The study will utilize secondary data regarding recent cooperative failures to analyze the situation and factors that led to the bankruptcy filings of Farmland Industries and Agway (Securities and Exchange Commission reports). The entire cooperative system will be evaluated by gathering secondary data on every major agricultural cooperative in the United States. Researchers in each state will collect the annual reports from agricultural cooperatives headquartered in the state and then make a comparison of the relative performance of the cooperative businesses and a peer group of investor owned businesses. Why Multi-state? Kansas State University, North Dakota State University, and Swedish University of Agricultural Sciences will participate in collecting and analyzing the data. Kansas State University will serve as the project coordinator and will conduct the analysis in the first phase of the project. Outcome: Insight into strategies that lead to sustained cooperative financial performance. Objective 4 Need for Research: The chronic depopulation of rural and agricultural communities has led to a growth gap between urban and rural communities throughout the United States. To mitigate depopulation rural communities need to consider innovative entrepreneurial activities and revitalized social and community networks. Social capital, a person or group's sympathy for or sense of obligation to another person or group is a resource that can be used to achieve these goals. A growing body of literature has documented that social capital is correlated with positive individual and collective outcomes in areas such as better health, lower crime, better educational outcomes, economic development and good government. However, little research has examined the link between social capital and the economic vitality, stability, and entrepreneurial activity in the rural agricultural sector. Method: The members of regional project plan to develop a diverse cross state research initiative to measure and assess the impact of social capital on the economic development and performance of agricultural and rural communities. 1.The project will build on primary Census data such as the nationwide American Community Survey, which provides basic information on demographic, housing, social, and economic characteristics for all states, as for all cities, counties, metropolitan areas, and population groups of 65,000 people or more. Measures of social capital and social trust will be investigated in collaborative research program using surveys developed by political scientists. The expertise of agricultural economists will be required to analyze surveys on the financial performance and management strategies of farmer and ranchers. 2. Interdisciplinary approaches to defining the sources of social capital, its key features, and the its impact of the opportunities and financial performance of rural communities will be addressed. . Political scientists and sociologists have expertise in developing statistical models for multilevel data which brings together information at the county and community levels. Collaborating agricultural economists are familiar with panel data methods to identify causal relations and for dealing with measurement error in surveys. The linkage between social capital measures and social and economic performance and development indicators at the community level will be investigated. 3. Research is required to understand the very basic problem of whether rural entrepreneurship requires different financing than counterparts in urban areas. If social capital is an important variable in rural communities, then lender credit scores or risk rating systems based on objective variables may be ignoring a significant variable affecting creditworthiness. Why Multi-state? Collaboration with other social scientists will be fundamental to effectively implementing the research design. The research objective builds on interdisciplinary sessions established at the AAEA annual meetings with rural sociologists. Political scientists, rural sociologists, and geographers have been identified in: Rutgers University, University of Georgia, North Dakota State University, Michigan State University, University of Illinois, and Cornell University. Outcomes: A solid understanding of the role of social capital will allow project researchers to provide feedback and broaden the modeling approaches of other project objectives. One emerging issue is the impact of social capital on financial performance and stability of agricultural and community banks. Building on the financial performance indicators developed for agricultural banks, the role of social capital in the long term sustainability and efficiency of agricultural banks will be assessed.

Measurement of Progress and Results

Outputs

• A comprehensive research base that contains performance and benchmark financial information on farm, agribusiness, lender, and rural capital markets
• Research disseminated through publications in refereed journals, popular periodicals, and professional conferences.
• The members of this committee have strong records of scholarly publication; as a result we anticipate that the results of the research will be disseminated widely. Four members of this committee have partial or total extension appointments.

Outcomes or Projected Impacts

• A strengthened international network of 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
• A standardized set of investigative methodologies and assessment tools for analyzing the social, economic and fiscal impact impacts of transition and change in rural financial markets.
• Publications and educational materials for public and private policymakers, financial industry and agribusiness leaders, and farmers/rural citizens that will help them understand impending changes in financial markets, assist them in strengthening their l
• Insight into research venues including rural finance and social capital

Milestones

(2004): Organizational meeting to identify and prioritize impending structural, technological, and policy changes that will be of greatest significance to farmers, agribusinesses, lenders, and rural citizens. Selection of methodology and empirical approach to be utilized.

(2005): Descriptive summaries and analysis of preliminary data collected.

(2006): A symposium to report preliminary project discoveries to professional and industry colleagues.

(2008): Coordinated publication of key project discoveries in professional journal. Research findings disseminated to lay audiences.

(0):0

Projected Participation

View Appendix E: Participation

Outreach Plan

The nature of the research undertaken in this project places a premium on communicating and disseminating research results to academic professionals, the policy community, farm and agribusiness leaders, and local citizens. In addition to the usual channels through Extension and professional publications, we view our utilization of government and industry participants as providing an immediate transfer beyond the academic community. Specific outputs include:

-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 posted at the NC-221 website and summaries of research results made available to a broad audience.

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.

Literature Cited

Acheampong, Y. Assessing financial performance of international food industry firms: a stochastic varying coefficients approach. Department of Agricultural and Applied Economics, Univeristy of Georiga, Ph.D. dissertation. 2001

Ahrendsen, B.L., Dixon, B.L., and Lee, L.T., Independent Commercial Bank Mergers and Agricultural Lending Concentration, Journal of Agricultural and Applied Economics, Vol. 31, No. 2, Aug. 1999, pp. 215-227.

Babetskaya, L. Enhancing the Performance of Risk-Rating Models at Community Banks. Unpublished M.S. paper, University of Minnesota.

Bard, S.K., P.J. Barry, and P.N. Ellinger Effects of Commercial Bank Structure and Other Characteristics on Agricultural Lending, Agricultural Finance Review, (2000): 17-32.

Barry, P. J. "Modern Capital Management by Financial Institutions: Implications for Agricultural Lenders" Agricultural Finance Review, 61(2001): 103-122.

Barry, P. J. Modern Capital Management by Financial Institutions: Implications for Agricultural Lenders Agricultural Finance Review, 61(2):103-122.

Barry, P.J. and C. Escalante. Structural Changes in Agricultural Banking, Journal of Agricultural Lending, 12(Fall 1998):22-28.

Barry, P. J., C. L. Escalante, and S. K. Bard. "Economic Risk and the Structural Characteristics of Farm Businesses" Agricultural Finance Review, 61: 73-86.

Barry, P. J., C. L. Escalante, and P. N. Ellinger. "Credit Risk Migration Analysis of Farm Businesses" Agricultural Finance Review, 62(2002): 1-12.

Bierlen, Ralph, Bruce L. Dixon, Bruce L. Ahrendsen and Lucas D. Parsch. The 1996 FAIR Act: Measuring the Impacts on Land Leasing. American Journal of Agricultural Economics 80(December 1998):1186.

Bierlen, R., L.N. Langemeier, B.L. Ahrendsen, and B.L. Dixon. Land Leasing and Debt on Farms: Substitutes or Compliments? Quarterly Journal of Business and Economics 39,2(Spring 2000):18-38.

Bierlen, R., L.D. Parsch, B.L. Dixon and B.L. Ahrendsen. The 1996 FAIR Act: Measuring the Impacts on Land Leasing. Review of Agricultural Economics 22,2(Fall/Winter 2000):336-54.

Boumtje, P. I., P. J. Barry, and P. N. Ellinger. "Farmland Lease Decisions in a Life-Cycle Model" Agricultural Finance Review, 61(2001): 167-180.

Brinch, Brian M. and Jeffrey R. Stokes. "Quantifying the Impact of Farmer Mac Prepayment Penalties," Agricultural Finance Review, 61 (2001): 141-166.

Brinch, Brian M., Jeffrey R. Stokes, and Robert D. Weaver, Financial Performance and New Risk Management: An Application to Pennsylvania Dairy Farms, 1999 NC-221 Conference Proceedings.

Collender, R.N., and Shaffer, S.L., Local Bank Office Ownership, Deposit Control, Market Structure, and Economic Growth, Technical Bulletin No. 1886, May 2000, 30 pp.

Dixon, Bruce L. and Daniel M. Settlage. Arkansas Bankruptcies: Trends in Recent filing Rates and Implications for Farmers. Farm Management and Marketing Newsletter. Arkansas Cooperative Extension Service, University of Arkansas. 6(October 1998):1-3.

Dodson, C., and Duncan, M., Does FCS Association Size Affect Credit Availability? American Agricultural Economics Association, Salt Lake City, UT, Aug. 2-5, 1998, 12 pp.

Dolan, J.A., and Collender, R.N., Agricultural Banks and the Federal Home Loan Bank System, Agricultural Finance Review, Vol. 61, No. 1, Spring 2001, pp. 57-71.

Duncan, M., and Stam, J.M. (eds.), Financing Agriculture into the Twenty First Century, Westview Press, Boulder, CO, 1998, 219 pp.

Durst, R.L., and Monke, J., Federal Tax Policy and the Farm Sector, Agricultural Outlook Forum, Arlington, VA, Feb. 22-23, 2001, 12 pp.

Elffner, D.D., A.M. Featherstone, and C.A. Cole. The Effects of a Federal Flat Tax on Kansas Agriculture Financing Agriculture and Rural America: Issues of Policy, Structure and Technical Change. Proceedings of NC-221

Ellinger, P., E. LaDue, D. Leatham, and J. Stokes, Financing Agriculture: Information Technology and Credit Scoring Use, 2000 NC-221 Conference Proceedings, Minneapolis MN.

Escalante, C. L. and P. J. Barry. "Business Growth Strategies of Illinois Grain Farms" Agricultural Finance Review, 62(2002): 59-68.

Featherstone, A.M. and T.L. Kastens. Non-Parametric and Semi-Parametric Techniques for Modeling and Simulating Correlated, Non-Normal Price and Yield Distributions: Applications to Risk Analysis in Kansas Agriculture. Journal of Agricultural and Applied Economics, 32(August 2000):267-81.

Freshwater, D. Competition and Consolidation in the Farm Credit System. Review ofAgricultural Economics, 19(1): 219-227.

Gloy, B.A. and T.G. Baker. "A Comparison of Criteria for Evaluating Risk Management Strategies." Agricultural Finance Review, 61:1(Spring 2001):37-56.

Gloy, B.A., J. Hyde, and E.L. LaDue. "Dairy Farm Management and Long-Term Farm Performance." Agricultural and Resource Economics Review, 31(2):233-247, October 2002.

Hansen, D. and G. Pederson. Price Risk Management Decisions of Farmers in Southern Minnesota, Minnesota Agricultural Economist, No. 691, Winter 1998.

Kagan, Albert, and Neilson C. Conklin, "Rural Banking and Information
Technology: A Community Bank Perspective" The RMA Journal, pp 88-4,
Feb. 2001

Koenig, S.R., and Dodson, C.B., A Look at FCS Participation in FSAs Guaranteed Lending Programs, Journal of Agricultural Lending, Vol. 11, Issue 3, Spring 1998, pp. 45-53.

LaDue, E.L., Cuykendall, C. H. and Stokes, J.R. 2001. Information Technology and Credit Scoring at Agricultural Banks in the Northeast and Eastern Cornbelt. R.B. 2001-2. Department of Applied Economics and Management, Cornell University 27p.

Lence, S. H. Recent Structural Changes in the Banking Industry, Their Causes and Effects: A Literature Survey. Review of Agricultural Economics, 19(2): 371-402.

Lence, S. H., and D. J. Hayes. U.S. Farm Policy and the Variability of Commodity Prices and Farm Revenues. In Proceedings of the NCR-134 Conference: Applied Commodity Price Analysis, Forecasting, and Market Risk Management, Chicago, IL, April 17-18, 2000.

Mason, C., D. J. Hayes, and S. H. Lence. "Systemic Risk in U.S. Crop and Revenue Insurance Programs." Center for Agricultural and Rural Development (CARD) Working Paper 01-WP 266 (March 2001), Iowa State University, Ames, Iowa.

Moss, L.E. and P.J. Barry. Leasing Contract Choice: Do Transaction Characteristics Matter? Selected paper presented at the Annual Meeting of NC-221  Financing Agriculture and Rural America: Issues of Policy, Structure and Technical Change, McLean, VA, October 1-2, 2001.

Moss, L.E., P.J. Barry, R.E. Westgren, and G. D. Schnitkey. A Transaction Cost Economics and Property Rights Theory Approach to Farmland Lease Preferences, Selected paper presented at the American Agricultural Economics Association Annual Meeting, Chicago, IL, August 3-8, 2001.

Moss, L. E. and B. L. Erven. Managing Landlord-Tenant Relationships: A Strategic Perspective. Ohio State University Extension Fact Sheet FR-0004-01, Farm Rental Series.

Novak, M. P. and Eddy LaDue, "Application of Recursive
Partitioning to Agricultural Credit Scoring", Journal of Agricultural and Applied Economics, 31,1(April 1999):109-122.

Park, T.A. and B. Armah Agricultural bank efficiency and the role of managerial risk preferences. Proceedings of NC-221: Financing Agriculture and Rural America: Issues of Policy, Structure, and Technical Change. Fairfax, VA. 2001.

Park, T.A. and M. Holmes, Modeling Financial Asset Demands of Small Agribusiness Firms: A Portfolio Theory Approach. Department of Agricultural and Applied Economics, University of Georgia 2001.

Robison, L.J., A.A. Schmid, and M.E. Siles. "Is Social Capital Really Capital?" The Review of Social EconomyI, 60, 3(Spring, 2002):1-21.

Robison, L.J., R.J. Myers, and M.E. Siles. "Social Capital and the Terms of Trade for Farmland." Review of Agricultural Economics, 24(1):44-58.

Settlage, L., S. Koenig, B. Dixon, and B. Ahrendsen. What is the Loss Experience for FSAs Guaranteed Farm Loans? Journal of Agricultural Lending 14,1(Fall 2000):4-10.

Sherrick, B.J., Emerging Nontraditional Capital Suppliers, in Financing North American Agriculture into the 21st Century, edited by M. Duncan and J. Stam, Westview Press, 1998, pp.163-82.

Sherrick, B.J., P.J. Barry, and P.N. Ellinger, Valuation of Credit Risk Insurance, American Journal of Agricultural Economics, 1999

Sherrick, B. J., P. J. Barry, G. D. Schnitkey, P. N. Ellinger, and B. C. Wansink. "Conjoint Analysis of Producers' Preferences for Crop Insurance" Review of Agricultural Economics.

Sherrick, B. J. and G. D. Schnitkey. I-Farm - The Illinois Farm Analysis Risk Management Model. Evaluates Crop Insurance alternatives for all products by available election levels, for corn and soybeans, for all counties in Illinois. Output available at farmdoc website (url: www.farmdoc.uiuc.edu), 2001.

T. L. Sporleder and L. E. Moss. Capital Structure Decisions of U.S.-Based Food Processing Firms. Selected paper presented at the Annual Meeting of NC-221  Financing Agriculture and Rural America: Issues of Policy, Structure and Technical Change, McLean, VA, October 1-2, 2001.

Stam. J.M., Farmers and Bankruptcy Law Reform, Journal of Agricultural Lending, Vol. 11, No. 4, Summer 1998, pp. 10-12.

Stokes, Jeffrey R., "A Derivative Security Approach to Setting Crop Revenue Coverage Insurance Premiums," Journal of Agricultural and Resource Economics, 25(2000):159-176.

Stokes, Jeffrey R., and Brian M. Brinch, An Analysis of Farmer Mac Prepayment Penalty Designs, 2000 NC-221 Conference Proceedings, Minneapolis MN.

Stokes, Jeffrey R. and Brian M. Brinch. "Valuing Agricultural Mortgage-Backed Securities," Journal of Agricultural and Applied Economics, 33 (2001): 493-511.

Stokes, Jeffrey R., Keith H. Coble, and Robert M. Dismukes, "Producers Behavior in the Presence of an Income Stabilization Program," Agricultural Finance Review 60(2000):33-59.

Wilson, Christine A., Intra-Industry Diversification and Threshold Effects in Food and Agribusiness Stocks. Ph.D. Dissertation, April 2001, Co-major professor with Terry Kastens.

Zanini, F. C., B. J. Sherrick, G. D. Schnitkey, and S. H. Irwin. "Crop Insurance Valuation Under Alternative Yield Distributions" Proceedings of NC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management., St. Louis, IL, April 2001: 39 pgs.

Attachments

Land Grant Participating States/Institutions

AL, AR, FL, GA, IA, IL, IN, KS, LA, MI, MN, MT, ND, NV, NY, OH, SC, SD, TX

Non Land Grant Participating States/Institutions

Federal Reserve Bank of Kansas City, Illinois State University, USDA, USDA/ERS