Reconciling information gaps in organic farm borrowers’ dealings with farm lenders

Abstract

Purpose

Organic outputs have been increasing at much lower rates than growth in consumer demand. Organic farmers’ debt aversion hinders them from obtaining business funds through borrowing. The purpose of this paper is to clarify that the farmers’ reluctance to use debt as a funding option can be more attributed to gaps in existing borrower-lender relationships, beyond sustainability principles.

Design/methodology/approach

Empirical evidence collected from organic farmers and farm lenders establish differing expectations and perceptions that reinforce the organic farmers’ debt aversion. The farm lender survey data set was analyzed using the Heckman approach applied to two lenders’ decisions: their interest in lending to organic farm borrowers and loan amounts approved for successful loan applicants. The econometric results were reconciled with the compiled inputs provided by organic farmers interviewed.

Findings

Results validate the farmers’ lower reliance on loans due to suspicions that lenders lack knowledge and consideration of organic farming conditions and principles. Farm lenders must depart from employing a uniform credit risk appraisal model and adopt borrower-specific versions of the model, but not necessarily delineating organic-conventional farming dichotomy that may not substantially affect credit risk measurement. Organic farms, on the other hand, need to better understand the credit risk appraisal principles and use their inherent business strengths to compete for loans with conventional farms without any special consideration.

Practical implications

Borrower-lender relationships can improve if information gaps between lenders and borrowers can be minimized with more extensive outreach education efforts. Better relationships would increase organic farms’ credit access to effectively address an impending supply gap in an expanding industry.

Originality/value

To the knowledge, a specific focus on organic farms in understanding farm borrower-lender relationships has never been explored in literature.

Citation

Jones, G., Escalante, C. and Rusiana, H. (2015), "Reconciling information gaps in organic farm borrowers’ dealings with farm lenders", Agricultural Finance Review, Vol. 75 No. 4, pp. 469-483. https://doi.org/10.1108/AFR-01-2015-0002