Competing risks models of Farm Service Agency seven-year direct operating loans

Bruce L. Dixon; Bruce L. Ahrendsen; Brandon R. McFadden; Diana M. Danforth; Monica Foianini; Sandra J. Hamm

doi:10.1108/00021461111128138

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Agricultural Finance Review

ISSN: 0002-1466

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Competing risks models of Farm Service Agency seven-year direct operating loans

Document Information:
Title:	Competing risks models of Farm Service Agency seven-year direct operating loans
Author(s):	Bruce L. Dixon, (Division of Agriculture, University of Arkansas, Fayetteville, Arkansas, USA), Bruce L. Ahrendsen, (Division of Agriculture, University of Arkansas, Fayetteville, Arkansas, USA), Brandon R. McFadden, (Oklahoma State University, Stillwater, Oklahoma, USA), Diana M. Danforth, (Division of Agriculture, University of Arkansas, Fayetteville, Arkansas, USA), Monica Foianini, (Division of Agriculture, University of Arkansas, Fayetteville, Arkansas, USA), Sandra J. Hamm, (Division of Agriculture, University of Arkansas, Fayetteville, Arkansas, USA)
Citation:	Bruce L. Dixon, Bruce L. Ahrendsen, Brandon R. McFadden, Diana M. Danforth, Monica Foianini, Sandra J. Hamm, (2011) "Competing risks models of Farm Service Agency seven-year direct operating loans", Agricultural Finance Review, Vol. 71 Iss: 1, pp.5 - 24
Keywords:	Farms, Loans, Risk analysis, United States of America
Article type:	Research paper
DOI:	10.1108/00021461111128138 (Permanent URL)
Publisher:	Emerald Group Publishing Limited
Acknowledgements:	This research is based upon work partially supported by the USDA Cooperative State Research, Extension, and Education Service Award No. 2004-39528-14476 between the Farm Service Agency and the Department of Agricultural Economics and Agribusiness at the University of Arkansas at Fayetteville, Division of Agriculture. The views expressed herein are those of the authors and do not necessarily reflect the views of the University of Arkansas, Division of Agriculture, Oklahoma State University or the USDA.
Abstract:	Purpose – The purpose of this paper is to apply duration methods to a sample of Farm Service Agency (FSA) direct, seven-year operating loans to identify those variables that influence the time to loan termination and type of termination. Variables include both those known at time of loan origination and those that characterize the changing economic environment over the life of the loan. Also, to examine the impact of various FSA programs promoting policy objectives. Design/methodology/approach – A systematic sample of 877 seven-year, FSA direct loans originated between October 1, 1993 and September 30, 1996 was collected. Cox regression, competing risks models are estimated as a function of borrower and loan characteristics observable at loan origination. Economic indicator variables emphasizing the farm economy and observed quarterly over the life of the loan are also included as explanatory variables. Findings – Loan characteristics, borrower financial characteristics and degree of borrower interaction with FSA observable at origin are significant variables in determining type of loan outcome (default or paid-in-full) and time to outcome. Changes in the economic environment and farm economy during the life of the loan are significant. Research limitations/implications – The sample consists only of FSA direct loans which implies borrowers are at financial margin. Application of method to agricultural loans from conventional commercial lenders could identify different significant factors. Practical implications – Using length of time to loan termination instead of just type of outcome provides for a richer analysis of loan performance. Loan performance over time is influenced by the larger economy and should be incorporated into loan performance modeling. Originality/value – The study described in the paper demonstrates use of competing risks models on intermediate agricultural loans and develops how this technique can be used to learn about dynamic aspects of loan performance. Sample consists of observations on individual FSA direct loan borrowers. The FSA direct loan program is the major source of credit for agricultural borrowers at the financial margin.