The evaluation of beginning farmer program financing on Texas corn, cotton, and sorghum operations

Abstract

Increased capital requirements and reduced profit margins have restricted farmers' borrowing and repayment capabilities. Many states have initiated beginning farmer financial assistance programs targeted towards potential farmers having difficulty obtaining debt capital from traditional sources. Such programs provide easier access to credit for beginning farmers through lower-cost credit and reduced principal obligations. The primary objective of this study is to evaluate the effects of beginning farmer operating loan financing versus conventional lending on Brazos and Jackson County farm operations. Measures used to evaluate the financial performance of the various scenarios include: expected ending equity position, variability of ending equity position, expected profitability, variation of expected profitability, loan performance, and probability of failure. FmHA's special beginning farmer operating loan is chosen to evaluate beginning farmer financing since it incorporates common characteristics of the state programs and is applicable to Texas farmers. The main differences between FMHA and conventional financing are lower interest costs and the availability of funds. The recursive, whole-farm, simulation model, ARFSIM, is selected for use in the study. The results indicate that FMHA financing benefit both the Brazos and Jackson County operations by improving availability of credit and reducing interest expense, thus allowing them to achieve higher net income levels, ending net worth levels, credit scores and greater probability of survival. Two sensitivity analyses are also performed. When the operations are supported with non-farm income, chances of survival are increased and overall performance improves. There are only slight differences between FMHA and conventional financing results under this scenario. When the farms incur a decrease in the overall level of prices, their chances of survival greatly decrease making it difficult for the operations to be profitable under either financing option. The use of FMHA financing results in better financial performance and chances of survival than with conventional financing. However, decreases in agricultural commodity price levels may reduce profit margins to a level that limits the sustainability of new entrants in production agriculture regardless of financing alternatives.