Essays on farm debt use and safety net programs

Abstract

Farm debt and safety net programs are critical to effective farm management. While farm debt alleviates credit constraints, safety net programs—such as Agricultural Risk Coverage (ARC) and Price Loss Coverage (PLC)—help producers manage income volatility and potential financial losses. In this dissertation, I explore how a combination of these programs can enhance profitability and reduce profit variability. Additionally, I investigate the financial status and local credit market conditions linked to the use of multiple forms of debt in U.S. agriculture. I also examine how cash flow shocks arising from the weather impacts debt types. These underexplored areas are briefly discussed in the remainder of this abstract.

Chapter One evaluates the effectiveness of farm safety net strategies in increasing profitability and reducing profit variability. Using the relative mean of profit and the coefficient of variation, I compare counterfactual safety net strategies across a sample of 28,615 observations from 2,486 farms producing four dryland crops—corn, soybeans, sorghum, and wheat—in Kansas over nine crop years (2014–2022). A ``no safety net" scenario serves as the benchmark for each alternative strategy to determine if policy customizations are statistically different. The findings show that safety net program combinations with high profit-enhancing potential also tend to lower profit risk for dryland wheat and sorghum production. However, this relationship is not observed for dryland corn and soybean production, where low-cost strategies that boost profits do not necessarily reduce profit risks.

In Chapter Two, I analyze the issue of multiple borrowing—the practice of using multiple lenders to finance farm operations—which raises concerns for both lenders and policymakers. This chapter aims to improve our understanding of the producers who engage in this practice by developing a precise farm-level measure of multiple borrowing and exploring how financial status and local credit market conditions influence the likelihood of its occurrence. Using an extensive dataset of Kansas farm financial records spanning nearly two decades, we find that more profitable and leveraged producers are more likely to engage in multiple borrowing, with leverage being the strongest predictor. Additionally, producers in regions with a higher presence of commercial banks are less likely to rely on multiple borrowing.

Chapter Three explores how producers debt and investment respond to weather-induced cash flow shocks. This chapter focuses on U.S. agriculture, specifically Kansas, where climate change has had significant effects on productivity. I reaffirm the negative association between extreme weather and both crop income and yields. I also find that producers exposed to extreme temperature tend to use long-term debts. Additionally, the response of producers to weather-induced cash flow shocks vary depending on farm size, leverage and operator age.