Capital and credit demands in U.S. agriculture: projections for alternative economic and policy environments

Mark Richard Drabenstott

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: Capital and credit demands in U.S. agriculture are projected for alternative policy and economic environments. The primary objective is to incorporate a finance sector in a sequential, econometric simulation model of U.S. agricultural production. Capital and credit demands are projected for the period, 1980-2000. The simulation model used is maintained by the Center for Agricultural and Rural Development. Structural equations in the finance sector estimate annual capital flow demands for real estate, buildings and land improvements, machinery, commodity inventories, livestock inventories, and financial assets. The model estimates annual net farm income. Given total capital demand and income estimates, internal and external (debt) capital financing may be derived;The base simulation project average annual total capital flows in 1996-2000 of 40.2 billion. Average net farm income stands at 35.4 billion in 1996-2000. The ratio, real stock of physical assets/real total debt outstanding, is projected to be 0.70. This suggests a farm sector which moves toward a much higher degree of financial leverage. Projections are also made assuming alternative future commodity export levels, different commodity price support programs, alternative energy price trends, and restrictive credit ceilings. Many of these alternative projection scenarios suggest an intense future conflict between the expansion of farm sector debt and the income flows which must service that debt;While these projections are made with certain limitations, the results carry several implications for U.S. agriculture. Increasing amounts of external financing imply that the farm sector will increasingly feel the effects of monetary policy. Also, U.S. agriculture will have to compete for credit with other industries in national money markets to an increasing extent. Finally, if the capital necessary to finance an optimum size farm in the U.S. exceeds the debt-carrying capacity of an individual farmer, then incentives will exist for nonagricultural equity capital to enter the farm sector.

Date: 1981-01-01
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