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Ability to Pay and Agriculture Sector Stability

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  • Hardin, Erin M.
  • Penson, John B.

Abstract

The recent reduction in commodity prices and farmland values following the substantial growth in the agriculture sector has called into question the risk profile of agricultural enterprises. Following the boom witnessed in the 1970’s, the sector witnessed a contraction in prices, demand for goods, and asset values that led many farm enterprises and commercial, agricultural banks to bankruptcy. Many factors of the current evolution of the sector have proven different than those of previous sector cycles yet understanding the reoccurring timeline of events and considering possible causal relationships between major drivers of stability prove pertinent to the continued operation of the most vulnerable farm operations and agricultural lenders. Substantial debt accumulation and repayment capacity have been a precursor and likely catalyst of the previous so called “busts” of farm sector cycles. The analysis performed will address drivers of debt accumulation and the ability of the agriculture sector to service debt. Specifically, the leverage ratio, debt relative to assets, and the debt-burden ratio, debt relative to income, are analyzed. These ratios signal vulnerability to changes in performance of a sector or a specific enterprise’s ability to endure a downturn in the market.

Suggested Citation

  • Hardin, Erin M. & Penson, John B., 2017. "Ability to Pay and Agriculture Sector Stability," 2017 Annual Meeting, February 4-7, 2017, Mobile, Alabama 252829, Southern Agricultural Economics Association.
    • Handle: RePEc:ags:saea17:252829
    DOI: 10.22004/ag.econ.252829
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    References listed on IDEAS

    as
    1. Jason Henderson & Nathan Kauffman, 2013. "Farm investment and leverage cycles: will this time be different?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 89-114.
    2. John B. Penson & Robert F. J. Romain & Dean W. Hughes, 1981. "Net Investment in Farm Tractors: An Econometric Analysis," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 63(4), pages 629-635.
    3. John B. Penson & Dean W. Hughes & Glenn L. Nelson, 1977. "Measurement of Capacity Depreciation Based on Engineering Data," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 59(2), pages 321-329.
    Full references (including those not matched with items on IDEAS)

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    Keywords

    Agribusiness; Agricultural Finance; Financial Economics; Land Economics/Use; Risk and Uncertainty;
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