The purpose of this paper is to investigate the market microstructure related to the Farm Credit System (FCS), Commercial Banks (CB) and Farm Services Administration (FSA). The commercial banks frequently call out the FCS as having an unfair advantage in the agricultural finance market place due to tax exempt bonds, and an implied guarantee of those bonds. This paper addresses the issue by examining the interrelationships since 1939, while addressing the historically distinctive roles that the FCS, CB and FSA have played in the US agricultural credit market.
There are two components to our model. The first is the estimation of short and long run credit demand elasticities, as well as land elasticities. These are estimated from a dynamic duality model using seemingly unrelated regression. The point elasticity measures are then used as independent variables in least square regressions, combined with farm specific and related macro variables, for the Cornbelt states. The dependent variable is the year-over-year changes in paired FCS, CB and FSA loans.
The genesis of the FCS was to provide credit to farmers in good and bad years. Therefore, we expected to see a countercyclical relationship between FCS and CB. This is found for the farm crisis years in the 1980s but is not a continuous characteristic of FCS lending. In good times the FCS and CB appear to compete, albeit with differentiated market segmentation into short- and long-term credit. The FSA, which was established to provide tertiary support to both the FCS and CB, appears to be responding as designed, with greater activity in bad years. The authors find the elasticity measures to be economically significant.
The authors conclude that the market microstructure of the agricultural credit market in the US is important. Our analysis applies a broader definition of market microstructure for institutions and intermediaries and reveals that further research examining the economic frictions caused by comparative bond vs deposit funding of agricultural credit is important.
The authors believe that this is the first paper to examine agricultural finance through the market microstructure lens. In addition our long-term data measures allow us to examine the economics through various sub-periods. Finally, we believe that our introduction of credit and land demand elasticities into a comparative credit model is also a first.
Calum G. Turvey is the W.I. Myers Professor of Agricultural Finance and Amy Carduner is formerly an MS student in the Charles H. Dyson School of Applied Economics and Management, S.C. Johnson College of Business, Cornell University. Jennifer Ifft is associate professor, Kansas State University. The authors would like to thank editor Todd Kuethe and anonymous referees for helpful guidance on the final preparation of this paper. Financial support was provided in part by the W.I. Myers endowment, Cornell University.
Turvey, C.G., Carduner, A. and Ifft, J. (2021), "Market microstructure and the historical relationship between the US farm credit system, farm service agency and commercial bank lending", Agricultural Finance Review, Vol. 81 No. 3, pp. 360-385. https://doi.org/10.1108/AFR-06-2020-0089
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