Agricultural loan evaluation with discriminant analysis
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As each year passes, the farmers' needs for adequate credit adapted to their particular type of businesses, become more evident, The shift in the past half century to a mechanized agriculture has greatly increased farm credit needs. The total real estate assets of farmers have increased from a low of $30.7 billion in 1933 to a value of $202.6 billion in 1969. In addition, non-real estate assets (machinery, livestock, feed, fertilizer) totaled $72.4 billion in 1969 compared with $27.8 billion in 1945. Furthermore, the average value of machinery per farm has increased from $394 in 1940 to $7,690 in 1967. Meanwhile, in the same 27-year period, the value of livestock on each farm increased from $803 to $5,933. These tremendous increases have resulted not only from increased mechanization and expanding farm businesses, but also from rising costs of all farm production inputs. The rising costs of farm inputs (land, labor, capital) have caused the average farm size to increase in order to reduce unit costs of output. With the price of land rising, farm mortgages become increasingly larger when farms are purchased. In addition, the farm family standard of living has risen steadily. In 1945, the total debt for all farm operators was $8.3 billion. By 1969, the total debt had soared to $54.7 billion.^l In contrast, the number of farm workers has shown a steady decrease. Since 1945 the number of workers employed on farms has declined from 10 million to 4.3 million in 1969. Thus, the total debt load of the farm sector is not only increasing but increasing at a more rapid rate for each farm owner-operator. The biological nature of agriculture affects credit. Agriculture is characterized by relatively small production units owned individually. The production is both seasonal and cyclical. The production periods are long and the capital turnover is slow. The production process is unable to make rapid adjustments in output to meet changes in demand. Conversely, industry is characterized by large corporately-owned units. The production process operates continuously if the market is favorable. There is much larger return on capital than in farming and the capital turnover is quick. Moreover, industry can make relatively rapid adjustments in production to meet changes in consumer demand. Successful farming requires the use of resources— management, labor, land, and capital— in the best possible combination. To attain maximum profit, resources should be combined to the point where the ratio of the marginal value product (MVP) of input A to the marginal factor cost (MFC) of input A is equal to the same ratios for all other resources MVP A/MFC A = MVP B/MFC B = ... MVP N/MFC N. The function of agricultural credit is to help the farmer attain the optimum combination of resources by making it possible for him to gain control of resources which otherwise would be out of the reach financially. More specifically, three main functions of credit used on a farm can be distinguished: (1) Credit enables a farmer with limited capital resources of his own to acquire more qssets than otherwise possible. This allows him to achieve a better combination of resources permitting greater production efficiency. (2) Because credit enables the farmer to have control over more resources (expanding the size of the farm business) the income stream can be increased. (3) Credit assists in increasing the standard of living of the farm family through increases in gross income and allowing purchases of consumer goods before the income stream has increased enough to pay cash for them. Having established the need for the function of a source of sound credit both for long-range investments and short-run expenditures, it becomes readily apparent that the successes and failures of farm financial management has an impact of no small magnitude on the entire agricultural industry. Hence, the evaluation and administration (by various financial institutions) of credit needs to the farm sector has an important bearing on the financial welfare of the individual farm operators and on the efficiency of resource use. Therefore, the analytical tools credit institutions use in evaluating and rating loan applications for farmers must be geared to the input requirements and specific characteristics of today's capital-intensive agriculture, if borrowed capital is to be efficiently allocated.
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