The Effects of Change in Farmland Prices on Loan Repayment in the U.S. Farm Sector

The collateral value is always measured by the value of farmland. By using the market price of an acre when determining its value as collateral, farmers' lenders took excessive risks as land prices fell, many farmers found themselves with land worth less the amount of mortgage principal still to be paid. Default was often the rational choice for these farmers. The inability of many farmers to repay debt obligations and the resulting bank failures and their farm loan losses-due to falling commodity prices, stagnant farm income, and declining farmland values used as the collateral securing much of the debt-were the clearest example of the extend of the financial crisis of the early and mid-1980s in U.S. farm sector. This study reviews the bottom line of the 1980's farm credit crisis: farmers' loan defaults and lenders' subsequent loan losses through the medium of change in farmland prices. Empirical evidence shows that change in farmland prices plays a key role in the boom-bust spiral of the farm credit conditions.