FSA Direct Farm Loan Program Graduation Rates and Reasons for Exiting

Article excerpt

Farm Service Agency (FSA) direct loans are intended to provide transitory credit to creditworthy borrowers unable to obtain conventional credit at reasonable terms. Farm loan program (FLP) effectiveness is measured in part by how readily direct loan borrowers graduate to conventional credit. A survey of FSA borrowers originating direct loans during fiscal years 1994-1996 is used to estimate graduation rates. A majority of 1994-1996 loan originators did exit the direct FLP by November 2004. A multinomial logit model indicates financial strength at origination resulted in greater likelihood of farming without direct loans approximately 9 years after loan origination.

Key Words: direct loans, Farm Service Agency, graduation, multinomial logit

JEL Classifications: G20, G28, Q12, Q14

The U.S. Department of Agriculture's Farm Service Agency (FSA) administers direct and guaranteed farm loan programs (FLPs) designed to provide credit to family-sized farms "unable to obtain credit from conventional sources at reasonable rates and terms" despite having sufficient cash flow to repay and an ability to provide security for the loan (Dodson and Koenig, p. 1). Under the Food security Act of 1985 (P.L. 99-198), the FSA (then the Farmers Home Administration) was mandated to emphasize guaranteed lending over direct lending.1 This was done for budgetary reasons as well as the belief that private sector lenders could administer loans more efficiently. Even though guaranteed loans are preferred by policy makers relative to direct loans, the direct FLP continues to serve farmers whose creditworthiness status disqualifies them from guaranteed loans.2

The emphasis on guaranteed loans with the continued existence of direct loans indicates that direct loans should only be a transitory step for borrowers. The goal of moving borrowers out of direct loans is reflected in the Food, Agriculture, Conservation, and Trade Act of 1990 (P.L. 101-624), which established a placement program for those borrowers eligible to graduate from direct loans to guaranteed loans. To improve graduation rates, lifetime eligibility limits for FSA borrowers were established for operating (OL) loans. Borrowers became ineligible for direct OL assistance after receiving OL loans for 10 years and ineligible for guaranteed assistance after 15 years (USDA/ERS 1993). The Farm security and Rural Investment Act of 2002 (2002 Farm Act, P.L. 107-171) enacted changes in the FSA direct FLP to make borrowing easier. The eligibility time limits for direct OL loans have been waived to provide longer access to FSA funded farm programs (USDA/FSA 2005a). But the goal of borrowers moving from direct loans to commercial loans persists. The FSA information website on direct loans states, "FSA provides temporary credit to its direct loan borrowers; therefore, all borrowers are required to refinance their loans with a private, commercial lender when they are financially able to do so."3

To evaluate the efficacy of the FSA direct FLP, it is necessary to analyze actual borrower graduation rates and individuals' reasons for exiting the direct FLP. The analysis presented in this study uses data from a nationwide survey of borrower appUcations for direct loans originated in federal fiscal years (FY) 1994-1996. In late 2004, Farm Loan Managers (FLMs) at the field office level were surveyed to provide data on a sample of loans originated in their offices. One question asked the reason why a borrower no longer holding an active direct loan had exited the direct FLP.4

In increasing program effectiveness, which can be partially measured as increasing the proportion of borrowers who exit the direct FLP and continue farming (graduate), it is important to know the characteristics of borrowers at the time of loan origination. Borrower characteristics may be used as indicators of the likely disposition of the borrower in the future. Such analysis is provided here by using a multinomial logit model that estimates the probability of a given type of borrower outcome as a function of observable characteristics at the time of loan origination. …