New Clues On Impact of Implement Dealer Financing on Financial Stress

Posted on 05/29/2018 8:13 PM

Is there a hidden ag financial crisis looming due to implement dealer financing? Recent data suggests that may not be the case.

Farmers who rely more heavily on implement dealer financing than traditional financing for non-real estate debt appear to be at no more risk of having their mortgage loan called and, thus, selling farmland than farmers who rely on traditional financing. That's our analysis of research conducted by USDA's Kevin Patrick, the University of Illinois's Todd Kuethe and Cornell University's Jennifer Ifft. There data in summarized in the table below.

The concern was farmers relying on implement dealer financing might be suffering greater financial stress than farmers using traditional financial due to the collapse in commodity prices and farm incomes. Meanwhile, there was no transparency on the extent of the nontraditional financing and the financial condition of those relying on dealer financing. The research by Patrick, Kuethe and Ifft shines a light on that data.

The researchers dug into data pulled from the Agricultural Resource Management Survey (ARMS), which is jointly produced by USDA's Economic Research Service and National Agricultural Statistics Service. The annual ARMS survey asks farmers detailed information on the terms, age, interest rate, and lender type for (up to five) outstanding loans. "It is important to note that the lender type is reported by ARMS' farmer-respondents," the researchers note.

The results of the survey show dealer financing increased from about 11% of long-term non-real estate lending in 2003 to 27% in 2016. They also found farmers relying on implement dealer financing are subject to about the same level of financial stress as farmers who use traditional financing (Farm Credit and banks). This is key as farmers are generally suffering financial stress through a sharp reduction in working capital. This suggests agriculture in general still has time to work through the adjustment to sharply lower net farm incomes without resulting in a large round of forced farmland sales.

Table of key financial health ratios
USDA ERS

 

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