Lender Response to Federal Crop Insurance: Their Effects on Farm Business Performance (Survey, Simulation Model)
Pflueger, Burton Wayne
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https://hdl.handle.net/2142/69867
Description
Title
Lender Response to Federal Crop Insurance: Their Effects on Farm Business Performance (Survey, Simulation Model)
Author(s)
Pflueger, Burton Wayne
Issue Date
1985
Department of Study
Agricultural Economics
Discipline
Agricultural Economics
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, Agricultural
Abstract
Prior research has explored the benefits of farmers' participation in the Federal Crop Insurance program. Generally, these studies have implicitly assumed independence between participation in the program and the firm's financial organization. The objective of this study is to explore if a relationship exists and the possible effects on the financial performance of farm businesses.
A survey of lenders based on a simulated borrowing situation was conducted to provide quantitative estimates of lenders' responses to a borrower's participation in the crop insurance program. The survey focused on the credit responses of non-real estate lenders. Two case loan requests, one considering the use of crop insurance and one not considering its use, were presented to the lenders who were asked to indicate how much and at what terms credit would be extended for each case.
The responses of the lenders were incorporated in a farm-level simulation model. This model was used to analyze the likely impacts on farm performance of the crop insurance program and the lenders' responses thereto. Comparisons of the model results from different scenarios indicated the direction and magnitude of those impacts.
Analysis of the survey responses showed that the use of crop insurance allowed lenders to loan significantly greater amounts of operating and capital credit. In the absence of crop insurance lenders granted 82.67% of the operating credit and 22.33% of the capital credit requested. The use of crop insurance allowed them to grant 95.33% of the operating and 29.01% of the capital credit requests. The responses of lenders were also categorized and compared by type of institution and location. Location in different variability areas was not shown to be a significant factor in the magnitude of the lender response. Thus, the use of crop insurance, at least from the lenders' viewpoint, reduced the business risk of the firm enough to warrant the operation being subjected to an additional amount of financial risk associated with the greater amounts of credit extended to the borrower.
The results of the simulation model showed that the use of crop insurance improved the level and stability of a firm's profitability and liquidity positions. The use of crop insurance was also shown to decrease the solvency-risk position of the firm, and consideration of the lender response resulted in a further improvement (decrease) of the solvency-risk position of the firm.
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