Farm Service Agency Direct Farm Loan Program Effectiveness Study

The three primary objectives of the Effectiveness Study are to: (1) identify groups being served by FSA direct farm loan programs, (2) examine the length of time borrowers remain in the programs and the proportion of borrowers who exit or 'graduate' from the programs, and (3) measure and identify ways of reducing loan subsidy rates. The study found that direct Farm Loan Programs (FLPs) appear to be serving their intended clientele. Recent FLP borrowers are more financially stressed than non-borrowers and would be generally considered as family farms. About 78 to 92 percent would qualify as small family farms using USDA's Small Farms Commission definition. FLP credit market penetration is relatively high among farms likely to be eligible for these credit programs, despite the fact that these programs represent a relatively small proportion of total outstanding agricultural debt. Increasing market penetration or the share of farms served by the program would require greater obligation funding and hence greater budgetary costs. Conversely, implementing more rigorous loan eligibility criteria would likely lower the number of operators receiving loans and hence loan loss occurrences and subsidy rates would likely fall. The majority of FSA Direct borrowers from FY 1994-1996 used FLPs as a transitional tool. At time of origination, FSA Direct borrowers had fewer years of farming experience than the farming population at large. More than half of these borrowers no longer had active FLP loans by the end of November 2004. So for the majority of borrowers, FLPs are not a lifetime credit source. FLPs are helping farmers move to commercial credit or aiding farmers who subsequently leave farming completely, as is common among U.S. farmers. Not surprisingly, farmers in stronger financial condition originating FSA Direct loans are more likely to exit and have fewer outstanding loans with FSA. FSA experiences higher loan loss rates than conventional agricultural lenders. This is to be expected because commercial lenders can be more selective in choosing borrowers and price loans to match risk profiles which FSA does not do. In essence, FSA's mission is to provide credit to riskier 'creditworthy' borrowers. The agency is accomplishing this goal. The natural consequence is that FSA loan loss rates are higher than for conventional lenders. Whether the current borrowers are too risky or should even riskier borrowers be included are policy questions. The analysis indicates that attempts to cut losses systematically would imply denying credit to some current borrowers.


Issue Date:
2005
Publication Type:
Report
PURL Identifier:
http://purl.umn.edu/15772
Total Pages:
136
Series Statement:
Arkansas Agricultural Experiment Station Research Report 977




 Record created 2017-04-01, last modified 2017-08-24

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