NC1014: Agricultural and Rural Finance Markets in Transition (NC221, NCT-194)
Statement of Issues and Justification
(This is a revision of proposal submitted last year. See Attachment for discussion of how MRC review comments were addressed.)U.S. financial markets are undergoing significant change in response to international (Basel) policy changes, accounting scandals, and advances in lender risk management technology. Implications for agricultural and rural financial markets are unknown as they are also experiencing consolidation of production, agribusiness, and lending sectors. Producers have seen a safety net evolve that reduces production risk through price supports and subsidized crop insurance, but net responses in terms of business risk and management strategies have not been thoroughly delineated. Limited resource, mid-sized, and specialty-crop farms have identified voids in coverage.
As agribusinesses consolidate, they play an increasing role in providing capital and financial services to agriculture, but also demand more capital themselves. Limited attention has been devoted to their activity and impact. Financial institutions have traditionally facilitated the distribution of capital to both producers and agribusinesses. However, net impacts of impending financial market, agricultural and rural policy change coupled with a new risk management environment are not well understood. Financial institution numbers have been greatly reduced as well, leading producers and agribusinesses to be concerned about sources of capital and financial services. Outside observers have noted that the consolidation across the different sectors has perhaps created an environment with reduced transparency of the sectors financial situation. Economic Research Service, Federal Reserve Bank, and lending regulators have been regular collaborators in the former project, and have provided insights into the needs of agricultural and rural financial markets.
The past project focused primarily on agriculture, given its dependance on high levels of financial capital. However, rural areas are often quite dependent on farm and ranch income for sustainability. Access to fairly priced capital can reduce financial swings and stabilize the well being of the rural economy, and in turn, agriculture. Moreover, farmers are increasingly concerned about access to rural services and amenities. Failure to understand the full effects of policy change and the intertwined responses of producers, rural residents/firms, and lenders may lead to inefficient capital flows, unnecessarily constrained credit, and ultimately greater volatility in rural financial markets. This expanded focus will be an important dimension of the new project.
Moreover, the committee feels compelled to expand beyond economics, especially with the expanded emphasis on rural issues. Many financial arrangements are based on social practice instead of economic merit. Informal methods of credit evaluation, cooperative borrowing relationships, and peer/family repayment obligations all affect market dynamics. The recent meeting of NCT-194 highlighted these issues and formally adopted a research strategy to expand involvement of rural sociologists and family economists in the project.
The track record of NC-221 was excellent regarding the number of collaborations and outcomes that depended on multi-state efforts. This project will leverage those existing relationships. Each objective of the new project specifically states how multi-state activity will occur and why it is needed. The scientists involved in the project have a wide variety of expertise in agricultural finance, social capital, and policy analysis. However, most institutions have only one scientist working in this area. Thus, a regional emphasis fosters synergy as resident experts can establish a critical mass necessary to attract national interest and leaders of regulatory agencies, financial institutions, and policy groups; more efficently collect data of mutual interest; enhance peer review of each work produced; and collaborate on issues that exceed local interest. Extension members of the committee benefit from research that is not available locally. The past multi-state effort benefitted greatly from the rich participation of industry, public agency and non-profit members.
Upon completion of the project, insights will be gained to ultimately improve the functioning of agricultural and rural financial markets. Producers, rural residents, and businesses should benefit through increased performance and reduced business risk. The lending sector will become more stable and better prepared to face future policy, portfolio and structure-related challenges. The value of this work to stakeholders is evidenced by the large number of non-station members who actively participate in annual meetings and desire to keep abreast of research results via listserve communication.
There are no apparent barriers hindering the technical feasibility of the proposed research project.
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