Brief Summary of Minutes of Annual Meeting

The annual 2008 meeting of the NC-1014 Ag Markets in Transition group was called to order at 8 am on Thursday, September 25th. The meetings were held at the Federal Reserve Bank of Kansas City in Kansas City, MO. Attached is the agenda of presented papers and discussions.

Much of the group discussion focused on the upcoming NC-1014 renewal. Below summarizes this discussion relative to objectives of the renewal project.

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

Discussion

- Review of how the financial crisis has impacted agriculture. Cole and Jason have an ASSA principal paper&take it further&more detail on specific impact on ag banks

- Fed regulators

- Survey of underwriting across multistate&FCA has survey in place&Bruce A. is considering this

- Credit fluctuations and impact towards young, beginning, and small farmers, ag banks, grain elevators, etc.

- FSA

- Commodity types differ across regions so impact on regulators

- Call reports and farm credit data

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.

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.

Discussion

- Global supply chains and impact on ag finance

- Lending relationship

- Informal markets

- Experimental economics&discount rates&time preferences&loans

- Development of captive financing and vendor financing

- YBS, socially disadvantage people, etc.

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.

Discussion

- Finance growth

- Spillover effects and bubble effect

- Survey of different states

- Pool knowledge of information across different states

- Potential for dynamics

A short business meeting concluded the annual meeting where Paul Ellinger nominated Brent Gloy to serve as secretary for NC-1014 next year. This nomination was seconded and approved unanimously. Brian Briggeman will coordinate next years NC-1014 meeting, which will be held either late September or early October in New York City. Finally, the renewal writing team consists of Michael Gunderson, Brian Briggeman, and Brent Gloy.

Meeting was adjourned at 12 pm on Friday, September 26th.

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. 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.

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