Organic Farms' Credit Access and Farm Lenders' Assessment of Organic Farms' Credit Risks

Organic Farms' Credit Access and Farm Lenders' Assessment of Organic Farms' Credit Risks

Summary

On its final (fourth) year after being granted a one-year no-cost extension, the project boasts of a couple of Master’s thesis completed that probed more deeply into the credit access and credit risk issues that need to be resolved between organic farm borrowers and their farm lenders. One thesis used survey data intended as a project evaluation tool. Results indicate increasing loan reliance among certain categories of borrowers, although the overall loan reliance rate is only about 20%. Frustrating experiences and loan packaging terms were also scrutinized to lend support to the research issues being investigated on by this project. The other thesis focuses on the predicament of African American female farmers. Case studies on these farmers elucidate their struggles, including difficulty in credit access, in their efforts to operate viable farm business operations. Outreach efforts to academic and industry audiences were also pursued to further disseminate the findings of this project.

Objectives/Performance Targets

1. To provide a better understanding of the sources of credit risks peculiar to organic farming systems and compile a representative collection of issues perceived by organic farms as significantly affecting their access to credit.
2. To determine lenders’ perceptions of organic farming risks, identifying whether any preconceived notions define their attitudes towards organic farm loan requests vis-à-vis their regular farm borrowers, analyze the relevance of their existing credit risk assessment models to the organic farms’ peculiar operating environments, and elicit their opinions and perspectives in improving credit access of potential organic farm borrowers.
3. To reconcile the farmers’ and agricultural lenders’ perspectives on credit risk assessment and credit access as collected in (1) and (2), and use such findings to formulate suggested strategies to resolve any credit access issues as well as any lenders’ divergent issues in credit risk assessment not properly attuned to organic farmers’ business conditions.
4. To implement a two-pronged outreach program directed towards lenders for the sake of clarifying credit risk assessment approaches more attuned to organic farmers’ conditions and towards farmers for the sake of helping them understand lenders’ credit risk assessment methods, consider strategies to improve their credit risk ratings, and realize the role of external debt in promoting business growth and expansion.

Accomplishments/Milestones

On the final year of this project’s implementation (the 4^th year as an approved no-cost extension of the original three-year project term), most efforts were focused on completing the remaining major outputs of this project as well as taking advantage of additional outreach or dissemination opportunities. Two Master’s theses were completed in the summer term of 2014 that both deal with important issues relevant to this project and feature results with relevant and significant implications to this project’s research objectives. Ghangela Jones’ thesis “Do Farm Lenders’ Attitudes and Risk Assessment Models Encourage Organic Farmers’ Demand for Microloans?” utilized a primary dataset of survey responses that actually were meant to be an evaluation or project feedback survey for this research. Adenola Osinubi’s thesis “Farm Business Challenges and Survival of Socially Disadvantaged Farmers: The Case Study of Georgia’s African American Female Farmers” may have a distinct socio-economic focus, but her research dealt mainly with small farms (sustainable operations) and credit access/risk measurement was a major theme in her thesis.

A manuscript based on Ghangela Jones’ thesis research has already been completed and submitted for publication consideration at the Agricultural Finance Review. Another manuscript based on Adenola Osinubi’s thesis is currently being finalized for submission to Choices or Applied Economic Perspectives and Policy journal.

This research project also provided very interesting materials/findings that were extensively used in the classes taught by the project proponent. Among these classes were the graduate level courses AAEC 8020 (Advanced Agribusiness Management) and CRSS 4010 (Principles of Sustainable Management) where he was the major instructor and guest lecturer, respectively. These classes were offered in the Spring 2014 semester.

Other dissemination opportunities pursued were two contributed papers presented at the 2014 annual meeting of the Agricultural and Applied Economics Association held in Minneapolis, MN in July and at the annual meeting of the regional agricultural finance hatch research group NC-1177 held at the Federal Reserve Bank office in Kansas City last October. The latter event was also a joint meeting with the National Agricultural Credit Council that gave the proponent’s presentation and this research project greater visibility and wider dissemination among officers and directors of key farm lending institutions in the country.

In July 2014, the project proponent was also interviewed by Melaina Juntti who wrote an article on the USDA microloans program and organic farms in the Nutrition Business Journal.

Currently, another student (Hofner Rusiana) is working on his thesis research on the application of the credit migration framework to analyze the changing credit risk quality of young, beginning and small farmers. His research also addresses this project’s interest in credit risk measurement issues as they affect small farm businesses. Hofner Rusiana expects to complete his thesis research in the summer of 2015.

Impacts and Contributions/Outcomes

The two Master’s theses produced during the last year have explored the issues of credit access and credit risk measurement more extensively. Ghangela Jones’ thesis analyzed the results of the project’s follow-up survey conducted among organic farmers in Georgia two years after this study commenced. Even with the low response rate (34 responses out of 550 survey requests made), the data collected offer many important trends and implications. In terms of loan reliance (preferring to use loans as a financing recourse), respondents that are involved in non-single proprietorships, more educated, and farming full-time tend to rely a little more on loans than the other respondents in their respective categories. Male respondents farm more acres of land, earn higher farm income and tend to rely more on loans. White farmer respondents claim more farm income and more value in assets in addition to higher reliance on loans than non-white respondents. Interestingly, even with such statements on stronger loan reliance, the overall loan reliance figure is actually only about 20% (meaning farmers still use equity funds for 80% of their financing requirements).

The follow-up survey also looked into the farmers’ frustration levels, which are indicated by the number of times loan requests were not approved. For example, respondents were asked to record the number of times they applied for a loan followed by the number of times the loan applications were approved. Results indicate that those belonging to non-single proprietorship businesses have applied for a loan about 4 times while requesting an average amount of $72,000. Part-time farming respondents appear to have slightly more loan rejections than full-time, requesting a smaller average amount of $20,000.

Non-white operators appear to have experienced more loan frustrations than white operators. Non-white operators indicated they have requested an average of 6 loans, all resulting in disapprovals. Their disapproved amount requests have accumulated up to approximately $116,666.67.

On the other hand, some farmer respondents experienced success in their loan requests. For these successful farm borrowers, the loan packaging terms (loan amount, maturity rate and interest rate) were further scrutinized.

Although single-proprietorships requested a higher loan amount, they were assigned a lower loan maturity of about 3 years. Respondents that farm part-time applied for approximately $17,000, but repayment was expected within 2 years. Female farm operators requested loans for nearly $100,000 while repayment was anticipated within 2 years; compared to male operators who requested a smaller loan amount, but with a 7 year repayment plan.

With the launching of the new microloan program in January 2013, the follow-up survey fielded questions related to this new program. Overall, most farmers were not aware of the program considering it was a fairly new financing option to farmers from the Farm Service Agency. Among the new microloan program’s features, financing options and a lower interest rate appear to be the most attractive features for most farmers.

Specific preferences of certian categories of respondents indicate that those with higher education (at least college degree) consider financing options, less paperwork and lower interest rates as the most attractive features of the program. Full-time farm operators are the most unaware of the microloan program, but they feel that financing options and lower interest rate are the striking features of the loan program. Financing of operating capital, minor farm improvements, and farm supplies (financing options) and low interest rate appear to be the most appealing component of the microloan program to both female and male operators. Non-white farmers consider low interest rate and credit-scoring sufficiency as the most favorable facets of the program.

Adenola Osinubi’s thesis research focused more on African American female farmers operating organic or naturally grown farm operations in Georgia. Using the case study method, her research found that African American female farmers are more involved in alternative and sustainable agricultural practices like organic or naturally grown methods. For some this may be because of the difficulties they have experienced entering the conventional farming industry. These difficulties can be attributed to historical and structural inequities in farm organizations and federal and state laws. Moreover, she also identified some barriers that may have hindered many African American female farmers from running more successful farm business operations. These barriers include access to credit and land, marketing, awareness and understanding of the different types of credit programs available for them, loan qualifications, and access to Farm Service Agency loan service centers, among others. Since many of them have small scale farm operations, they find it difficult to assert themselves as legitimate farm business operations.

In addition to the case studies, Osinubi also worked with secondary data provided by the Farm Service Agency consisting of approved farm loan application information from 1999 and 2013. Osinubi focused her analyses on the differences in loan packaging terms among different racial and gender classes. Her results indicate that female African American farmers with approved FSA loans have usually been charged higher interest rates, have lower loan maturity terms, but provided with larger loan amounts relative to those given to other racial and gender groups.

Rusiana’s forthcoming Master’s thesis (hopefully to be completed by the expiry of this grant in August this year) will provide an interesting perspective of the credit access and credit risk issues from the perspective of beginning, young and small farm operators.

Collaborators: