A logit model of farmers' decisions about credit

Most of the research in agricultural credit in the tion about personal characteristics of the farm operator United States is related to large-scale commercial and economic aspects of the farm-firm household. farming. A number of such studies have tried to esti- The plan of the paper is as follows. Data used for mate the demand for credit (Hesser and Schuh) and/or analysis is described in the next section. The estimated supply of credit (Melichar). Other major areas of re- model is presented in section three. Empirical results search in agricultural credit have been (a) the function- are discussed in section four, while the last section ing of rural financial markets, (b) the effects of national contains a brief summary and concluding remarks. monetary and credit policies on investment and production in agriculture, (c) capital formation in agriculture as affected by national economic policy, and (d) DATA the sources-and-uses-of-funds approach in the analysis of agricultural financing. A brief review of studies re- The data used in this study were collected as part of lated to these four areas is given in Brake. However, a larger farm management study carried out in western the subject of small-farm credit in the United States has Tennessee. Since the objective of the study was to fobeen little explored. cus on the limited resource farms, only those farms A few studies which have dealt with the credit prob- whose gross farm sales were between $2,500 and lems of limited-resource (small) farms have basically $20,000 during each of the previous three years were studied their attitudes toward borrowing, without ex- included in the sample. No hobby farmer was inploring the economic validity of such attitudes cluded.' In 1979, a randomized block design was used (McManus; Otto; Snell, Hopkins, and Barnett; Spitze to select a sample of 89 limited-resource farmers who and Bevins; Spitze and Romans; Wise; Woodworth, agreed to participate in a long-term record-keeping Comer, and Edwards). The general consensus that program. The data were collected by trained enumeremerges from these studies is that relatively few op- ators who lived in the two selected counties. Every seerators of small farms use credit, and those who do use lected farm household was visited by the enumerators only small amounts. This has led some social scientists twice a month during 1980 in order to collect reliable to believe that limited-resource farmers do not want to data about farm outputs and inputs. The first and last borrow. interview, respectively, comprised an opening and Conventional methods of estimating the demand for closing inventory of all resources. Land was categocredit use information from only those farmers who rized into cropland, pasture, woodland, improvable, have actually used credit and neglect the information and waste land groups to identify the potential use of from farmers who have not borrowed. Such studies different types of land. An exhaustive inventory of all cannot account for farmers' initial decisions about farm machinery and equipment was taken. Regular whether or not to borrow; consequently, valuable in- records of all inputs used for each crop and every type formation is wasted. Omitting nonborrowers from the of livestock were kept separately. Similarly, separate sample also distorts the properties of the original sam- records were kept for outputs and farm sales. pie. Furthermore, not considering the initial decision All farmers in the sample were asked whether or not to borrow or not to borrow can lead to biased estimates they had used short-term and/or long-term credit dur(Heckman; Tobin). Fortunately, we have quite de- ing 1980. Pretesting of the questionnaire indicated that tailed information on economic aspects of the farm-firm farmers considered the amount of borrowing a very households, and on the personal characteristics of farm personal matter. Therefore, no effort was made to reoperators who have borrowed as well as on those who cord the actual amount of short-term and/or long-term have not borrowed. Therefore, the objective of this credit used by the individual farmers in the sample. study was to predict the odds of a farmer using short- Only yes or no answers were recorded. However, the term and long-term credit, conditional upon informa- farmers who indicated that they had used short-term