AN ANALYSIS OF THE LOAN DELINQUENCY OF MICHIGAN CASH GRAIN FARM BORROWERS

The 1970's were characterized by growth in agriculture. There were increases in agricultural exports and prices received by farmers. Cash and feed grain production expanded in response to these price signals. Gross farm income rose from $58.8 billion in 1970 to $167.9 billion in 1981. In Michigan, the value of farmland and buildings grew from $326 per acre in 1970 to a peak of $1,289 per acre in 1981. Increasing asset values enabled farmers to use unrealized capital gains on assets as collateral for loans. Farm real estate debt in Michigan increased from $667 million in 1970 to $2,058 million in 1981. Total U.S. farm debt increased from $48,928 million in 1970 to $170,030 million in 1981. The rationale for the increased use of debt financing in the 1970's was "buy now before the price goes up" and paying off current debt with "cheaper" dollars of the future. Farms could service their debt and continue their growth as long as the assets generated returns that exceeded the cost of servicing the debt on those assets. In 1978, 50 percent of total capital purchases were made with debt financing compared to only 17 percent of total capital purchases in 1950. With the rising use of debt financing, farmers increased their financial risks. Changes in asset values, prices received, and production expenses affected returns to assets. Farmers began to experience problems dealing with the financial risks of debt financing when real interest rates rose and asset values and product prices declined. Several factors are associated with the end of the 1970's boom period. Changes in monetary policies contributed to the decline of inflation and the increase in real interest rates. The high value of the dollar weakened agricultural export markets. The shift in demand, combined with excellent crop production in recent years excepting 1983, resulted in reduced prices received by farmers. With the decline in prices and profitability, farm asset values began to decrease. The average value per acre of farm real estate declined 18 percent in Michigan from 1981 to 1985. The loss of equity due to the decline in asset values has been a serious problem for farmers who used leverage during the 1970's for rapid growth. The high variability of farm incomes along with the high cost of debt servicing obligations has caused cash flow shortages for many farmers. Since 1982 there has been an increase in the number of farm loan delinquencies. Many loans with collateral based on the unrealized capital gains of the 70's are undersecured at current asset values. As farm loan losses have increased, lenders have tightened agricultural credit in response to the increased risk. Changes in the rates and terms of loans have shifted more risk to the borrower and have increased the cost of debt financing. Many farmers have not been able to make their payments. Several factors can be analyzed to identify the cause of farm loan delinquencies. The purpose of this study is to analyze the causes of farm loan delinquency in Michigan. Such information should be useful to lenders in the evaluation of loan applications and loan servicing. It also provides guidance to farmers making decisions on the use of debt financing in their operation