Some evidence on the relationship between loan insurance and the supply of agricultural credit from commercial banks.

Insured farm loans have evolved to be an public program is creating indirect costs to important component of the federal role in the regular agricultural borrowers. agricultural credit subsector. Currently, agri- The Georgia Development Authority (GDA) cultural credit is supplied by three sets of insti- provides a unique opportunity to explore tutions: (1) private firms and individuals, (2) empirically the policy issues related to publicly the quasiprivate cooperative Farm Credit Sys- insured farm loan programs. The GDA was tem, and (3) the federal public programs of the created by the State of Georgia in 1954 as a Farmers Home Administration (FmHA) and public nonprofit corporation. Its original capitSmall Business Administration. Statuatory alization was provided by the assets of the authority currently limits federal programs to Georgia Rural Rehabilitation Corporation. The a residual role of lending to borrowers who function of the GDA is to insure and service cannot receive credit from the other segments. long-term loans secured by farm real estate for Though a large component of public programs commercial banks and other credit instituconsists of emergency loans in areas of tions. Total insured loans are limited to 15 pereconomic disaster, the FmHA also makes farm cent of the GDA's capitalized assets, and operating and real estate loans to farmers who public appropriations or money market instrumeet the statuatory requirements. The source ments cannot be a source of operating or loan of funds for some FmHA loans is federal ap- funds. Unlike the Farmers Home Administrapropriations and money market certificates. tion, the GDA makes its program available to However, guaranteed loans have become an all owners of farm real estate. 2 The GDA enimportant component of FmHA programs. ables us to analyze the impact of insured loans These loans are made in cooperation with other on the aggregate supply of farm credit without agricultural finance agencies. The public considering the limited eligibility for loans agency insures or guarantees repayment of the associated with federal programs. loan. The cooperating firm negotiates the loan The purpose of our article is to present some and provides the funds. Usually the interest empirical research on the impact of insured payment is below the current market interest credit on the aggregate supply of agricultural rate structure.' credit. Specifically, the alternative hypotheses An important issue concerning the guaran- concerning redistribution of or increase in the teed loan program is whether it effectively in- supply of agricultural credit by agricultural creases the aggregate supply of agricultural banks are tested with reference to the GDA credit or only redistributes loanable funds program. A cross-sectional econometric model from regular farm borrowers to marginal farm of agricultural credit supply by banks in Georborrowers. Redistribution of loanable funds gia is developed and estimated. This model can be justified by public objectives related to provides evidence on the policy hypotheses as income redistribution and facilitation of entry well as other hypotheses pertaining to agriculinto farming. Our investigation does not pur- tural credit. sue the desirability of these objectives; instead it focuses on the extent to which the insured CONCEPTUAL FRAMEWORK loan program increases agricultural credit. Increasing the aggregate supply would Recently, Robison and Barry conceptualized contribute to these objectives without trans- the portfolio decision of a bank in an expected ferring capital away from farmers who can ob- utility framework. Their model was an applicatain loans from other sources. Research on this tion of modern portfolio theory that explains issue would help to determine whether the the asset composition of portfolios on the basis