Financial risks and factors affecting them on Finnish farms

As a consequence of rapid structural change and new investment support scheme agricultural debts have increased and concentrated heavily in Finland. In addition, New Basel Accord (Basel II) regulating the bank business requires more in-depth credit risk assessment from banks. Therefore, there are both endogenous and exogenous reasoning for researching the agricultural credit risks. The purpose of the study is to find out the factors that affect financial risks in agriculture as well as possible change in credit risks. Credit scores depicting the magnitude of financial risk for 664 Finnish FADN farms are calculated and an econometric model is applied to clarify which farm specific factors influence the credit score. According to the study increasing farm size decreases financial risks. Furthermore, higher yields that also reflect higher professional skills of the farmer decreases financial risks. In contrast, increasing debts also increase credit risks. In addition, cereal farms tend to have higher credit risks than animal farms. The latter is due to negative profitability development as a consequence of deteriorated grain prices. Even though credit risks in general have increased the number of farms facing substantial financial problems has not increased. However, given the perpetual economic development and structural change in Finnish farming industry the agricultural credit risks will increase. Hence, the lenders would be condemned to apply stricter criteria when granting loans and debt will not be granted to some smaller farms.