Credit Preference of Farmers when Purchasing Farm Inputs

Alexander Robinson, Purdue University

Abstract

The agriculture industry relies heavily on credit to facilitate investments in essential inputs such as equipment, seeds, and fertilizers. Traditional sources of credit, including commercial banks and the Farm Credit System (FCS), have long served as the primary options for farmers. However, nontraditional lenders like agricultural retailers have emerged as viable financing alternatives. This study examines how farmers utilize the FCS, commercial banks, and agricultural retailers to finance capital and expendable goods. Additionally, factors such as age, education, farm size, and managing preferences are evaluated to understand their impact on financing choices. An ordered logit regression model is employed to analyze the data and investigate the factors influencing farmers' decisions. The results reveal that as farmers age, they are more likely to finance capital goods through vendors/retailers due to established long-term relationships. Smaller farms tend to finance a higher percentage of capital costs, driven by the relative price per unit of capital goods. Farmers who prioritize cost control are inclined to rely less on agricultural retailers, aiming for a lower debt-to-asset ratio. The study findings also indicate that analytical decision makers borrow less from dealers compared to intuitive decision makers. Notably, as farm size increases, farmers are more likely to finance a larger portion (76-100%) of capital and expendable goods through dealer financing. This suggests that larger and more successful farms possess a more diverse portfolio and valuable assets, enabling greater borrowing capacity. Young and beginning farmers often use vendor financing to enhance credit and expand their collateralizable assets. However, participant bias and missing data on several variables limit the study's scope. Future research could delve deeper into the relationship between analytical decision makers and farmers' lending preferences. Additionally, given the growing shift toward online banking in the lending and finance industry, exploring farmers' online banking usage and predictions for future usage would provide valuable insights into their lender selection process.

Degree

M.Sc.

Advisors

Brewer, Purdue University.

Subject Area

Agriculture|Agricultural economics|Economics

COinS