630.7 I6b no. 688 cop. 8 , UNIVERSITY OF CfRCUL'ATTNG COPY AGRICULTURE LIBRARY EFFECTS OF LENDER DECISIONS ON FARM FINANCIAL PLANNING Some solutions to problems arising from credit limitations set by commercial lenders G. D. IRWIN and C. B. BAKER BULLETIN 688 UNIVERSITY OF ILLINOIS AGRICULTURAL EXPERIMENT STATION CONTENTS Page THE PROBLEM 4 The cash-grain situation 4 The livestock situation 6 Borrowing alternatives 6 PLANS FOR THE GRAIN-AREA FARM 10 Effects of lender liberalism or conservatism 11 Effects of varying lender differentiation by purpose 12 Effects of lender experience 12 Effects of seasonal needs for funds 13 PLANS FOR THE LIVESTOCK-AREA FARM 13 Effects of lender liberalism or conservatism 14 Effects of varying lender differentiation by purpose 15 Effects of lender experience 15 Effects of seasonal needs for funds 15 PLANS ASSUMING DIFFERENT FIXED PAYMENTS 16 SUMMARY AND CONCLUSIONS 18 LIMITATIONS 20 BIBLIOGRAPHY 20 APPENDIX. ..21 Urbana, Illinois November, 1962 Publications in the Bulletin series report the results of investigations made or sponsored by the Experiment Station Effects of Lender Decisions on Farm Financial Planning G. D. IRWIN and C. B. BAKER* LAN LIMITS obtained in a survey of commercial banks and produc- tion credit associations for each of five loan purposes were re- ported in Bulletin 671, "Effects of Borrowing From Commercial Lenders on Farm Organization." They were for a farmer dependent on loans in the cash-grain area of east-central Illinois and for one in the livestock area of west-central Illinois (Fig. 1). The effects of these loan limits on profitable changes in farm organization are reported in the present bulletin. Specifically, starting from the present farm or- ganization, the use of credit available to the farmer was allocated among fertilizer, general operating expenses, and feeder cattle purchases so as to use the credit most profitably considering lender limits on loans for these purposes. The financial position of the farm in each area is summarized in Table 1. The similarity in aggregate financial position allows compar- Location of cash-grain and livestock areas. (Fig. 1) 1 G. D. Irwin, Assistant Professor of Agricultural Economics, Michigan State University, formerly Graduate Assistant, University of Illinois; and C. B. Baker, Professor of Agricultural Economics, University of Illinois. Part of the data on which this report is based was obtained in a study partially financed under contract with the Tennessee Valley Authority. BULLETIN No. 688 [November, Table 1. Financial Summaries Used in the Lender Survey Cash-grain area Livestock area Assets Cash $ 1,431 $ 250 Cash value of life insurance 910 279 Farm feeds 1,571 1,935 Market livestock 6,784 8,688 Current assets 10,696 11,152 Other livestock 398 1 ,040 Machinery and equipment 8,492 7,394 Working assets : 8,890 8,434 Real estate 38,125 38,125 Total assets 57,711 57,711 Liabilities Open account (grain elevator) 620 1 , 152 Note on cattle 5,500 5,500 Fertilizer loan 282 206 Current liabilities 6,402 6,858 Machinery purchase contract 3,125 2,669 Real estate mortgage 19,684 19,684 Total liabilities 29,211 29,211 Equity Net worth 28,500 28,500 Current worth 4,294 4,294 Intermediate worth #10,059 #10,059 isons between areas. Thus, while financial positions differ slightly in detail, they yield the same current, intermediate, and net worth figures. To be consistent with farming dominant in each area, the farm organi- zation and operation also differ in detail though they are similar in most respects related to additional financing. THE PROBLEM The cash-grain situation A 31-year-old cash-grain farmer is assumed to have just bought 80 acres of land adjoining 160 acres he rents on a crop-share lease. Of the 225 acres of cropland, 145 or 64 percent are in corn and soybeans; 40 acres or 18 percent are in small grain; and 40 acres are in standover legume. He has been feeding 3,250 out of 6,150 bushels of feed grains, his share of crops, to 10 litters of hogs (5 sows farrowing twice a year) and 40 steers. This fixed organization, which serves as a starting point for this report, is summarized in Tables 1, 2, and 3. A quarterly summary of receipts and expenses (Table 2) shows the amount of cash available each quarter to meet operating expenses and 1962] EFFECTS OF LENDER DECISIONS ON FARM FINANCIAL PLANNING 5 Table 2. Cash Balances Available to Cash-Grain Operator, by Quarter Item Jan. -Mar. Apr.-June July-Sept. Oct. -Dec. Receipts Cash balance, Oct. 1 $919 (919) 915 (915) 4 120 80 187 194 170 (751) -747 -3747 Cash position 310,920 (0) (10,920) $ 945 1,717 5,775 915 915 (3,577) (6,690) -3,577 4,230 Operating expenses 505 312 321 161 320 320 155 250 160 172 (1,461) (1,215) Net balances -5,038 3,015 -35,785 -32,770 31,504 1,029 2,280 (4,813) 296 1,001 915 (2,212) 2,601 312 583 161 71 160 (1,287) 1,314 -31,456 From hogs From soybeans From steers Total Obligations and living expense Fertilizer bill due Machinery payment Real estate payment Cattle loan payment Family living expenses* Total Cash balance available for oper- ating expense, fertilizer and feeder cattle Machinery repair Machinery hire Gasoline and oil Taxes Livestock feed and medicine Cash rent and miscellaneous Total operating expenses 1 " Cash surplus Cumulative surplus Based on 1956 expenditure level for low-income farm families (Tompkins (5) p. 127, p. 40), adjusted to 1959 level with use of BLS consumer price index. b Illinois Farm Bureau Farm Management Service records for farms with less than $5,000 returns to capital and management in 1957. Table 3. Labor Use on the Cash-Grain Farm Item Jan.-Mar. Apr.-June July-Sept . Oct.-Dec. Total hours available* 780 113 7 14 7 90 121 352 428 780 780 158 164 251 27 86 6 24 47 30 17 28 68 77 93 83 697 462 83 318 780 135 135 34 19 65 103 491 289 Already committed Annual overhead'' To fixed enterprises Corn, 105 acres Soybeans, 40 acres Oats, 26 acres Wheat, 14 acres Hay, 15 acres Hogs, 5 sows (2 litters) Steer calves, 40 on pasture . . Total committed Available for allocation Assumes 26 ten-hour days per month for one man. b Total taken from Hinton (2); seasonal distribution based on Von Lanken (6, Table 5, page 42). c Based on Hinton (2), (3). 6 BULLETIN No. 688 [November, to buy fertilizer and additional feeder cattle. The cash surplus or deficit during the year for other income and expenses, including living expenses of $305 per month for the family, are shown below the quarterly operating expense figures in Table 2. When account is taken of debt commitments and living expenses, the unchanged organization results in a cumulative deficit over the whole period of $1,456 (Table 2). The deficit can be met by selling the stored corn, and by reorganizing with the added land and borrow- ing to expand the use of fertilizer and the cattle-feeding enterprise. The labor situation and surplus labor available are shown in Table 3. The livestock situation Comparable with the cash-grain farmer, a 31 -year-old livestock farmer is also assumed to have just bought 80 acres of land adjoining 160 acres he rents on a crop-share lease. Of 172 cropland acres, 120 or 70 percent are in corn and soybeans; 40 or 23 percent in oats; and 12 or 7 percent are in standover legume. He has been feeding 5,560 bushels out of 6,150 bushels of feed grains, comprising his share of crops, to 32 litters of hogs and 40 steers. This fixed organization is summarized in Tables 1, 4, and 5. A quarterly summary of receipts and expenses (Table 4) shows cash available to meet outlays for operating expenses (shown in the lower portion of the table) and to buy fertilizer and additional cattle. Cash surpluses and deficits are shown by quarters and cumulatively. After meeting labor requirements for the fixed part of the farm or- ganization, the livestock farmer has labor available as shown at the bottom of Table 5. Borrowing alternatives The operator in each area can borrow to finance more steers, or fertilizer, or to manage the seasonal surpluses and deficits from enter- prises already decided upon. Since he is heavily in debt, these de- cisions are especially dependent on the nature and amounts of financ- ing available from lenders. These limits are summarized in Table 6 for three purposes. It is assumed that funds borrowed for a purpose must be used for that purpose. For example, money can not be borrowed for feeder cattle and then actually spent for fertilizer. The reason is that the cattle proposed to be purchased are to serve as chattels for the loan. On the other hand, to borrow for cattle may release some of the opera- tor's cash for fertilizer and for operating expenses. Even so, farm organization may be affected if the total amount of funds available and borrowed come to less than is required to reach an optimum farm organization. The loan limits in Table 6 presume that each purpose is considered separately. Therefore, when reading the limit attached 1962] EFFECTS OF LENDER DECISIONS ON FARM FINANCIAL PLANNING 7 Table 4. Cash Balances Available to Livestock Operator, by Quarter Item Jan.-Mar. Apr.-June July-Sept. Oct.-Dec. Receipts Cash balance, Oct. 1. From hogs From soybeans From steers Total . . Cash position Obligations and living expense Fertilizer bill due Machinery payment Real estate payment Cattle loan payment Family living expense* Total . . Cash balance available for oper- ating expense, fertilizer, and feeder cattle . . 3,150 (3,150) 915 (915) 2,235 (0) 807 1,717 915 (3,439) 10,920 (10,920) 5,775 915 (6,690) -3,439 4,230 Operating expenses $ 250 3,528 703 (4,481) 216 854 915 (1,985) 2,496 Machinery repair 100 406 252 295 147 320 320 241 389 180 202 1,442 1,310 Net balances -4,881 2,920 -$3,471 -$551 252 583 147 257 180 1,418 1,077 $ 426 Machinery hire Gasoline and oil 147 Taxes 170 Livestock feed and medicine Cash rent and miscellaneous Total operating expense 1 * 308 200 925 Cash surplus 1,310 Cumulative surplus . $1,310 Based on 1956 expenditure level for low-income farm families (Tompkins (5) p. 40, 127), adjusted to 1959 level with use of BLS consumer price index. b Illinois Farm Bureau Farm Management Service records for farms with less than $5,000 returns to capital and management in 1957. Table 5. Labor Use on the Livestock Farm Item Jan.-Mar. Apr.-June July-Sept. Oct.-Dec. Total hours available" 780 780 780 780 Already committed Annual overhead 6 113 158 164 135 To fixed enterprises Corn, 105 acres 7 251 27 135 Soybeans, 15 acres 5 32 2 13 Oats, 40 acres 11 37 72 Hay, 12 acres 14 22 Hogs, 16 sows (2 litters) .... 172 132 147 125 Steer calves, 40 on pasture . . 121 93 83 103 Total committed 429 717 517 511 Available for allocation 351 63 263 169 Assumes 26 ten-hour days per month for one man. b Total taken from Hinton (2); seasonal distribution based on Von Lanken (6, Table 5, page 42). e Based on Hinton (2), (3). BULLETIN No. 688 [November, Table 6. Maximum Borrowing Limits, by Type of Lender and Proposed Use of Loan Proceeds: East-Central Cash-Grain Area and West-Central Livestock Area, 1959* I 'urpose of loan Area and agency Operating expense Fertilizer Feeder cattle Grain area Small banks , 52,167 $ 934 $5,944 Large banks 1,837 1,591 4,975 PCA 1,775 1,375 7,000 All agencies 1,966 1,268 5,776 Livestock area Small banks 1,478 624 6,128 Large banks 2,212 875 7,581 PCA 2,500 972 6,000 All agencies $1,952 $ 786 $6,657 * Source: Baker and Irwin (1, p. 19). to any single purpose, it must be assumed that no borrowing occurs for either of the other two purposes. This means that the total amount the farmer could borrow is something less than the total of maximum loans reported for all purposes in Table 6. To estimate capacity more realistically, two concepts were denned: (1) borrowing reserve and (2) lender discounts. Borrowing reserve of a farm equals the largest amount that can be borrowed for any purpose. In this study, borrowing reserve is equal to the number of dollars that can be borrowed for feeder cattle. Borrowing reserve can be imagined as the number of "units" of the business that the lender is willing to take in exchange for a cash loan. For a cattle loan, he will provide $1 cash for every "unit" of borrow- ing reserve turned over. For fertilizer or operating loans, he is willing to loan fewer dollars, so more "units" of borrowing reserve are re- quired for each dollar loaned. The discount factor for a loan is the number of additional units that must be provided to obtain $1 cash loan for the purpose. Dis- counts for each type of lender are presented in Table 7. The method of computing them is reported in footnote a. In the grain area, by definition, one "unit" of borrowing reserve will exchange for $1 of cattle loan. To get $1 for fertilizer from small banks, an additional 1.743 units are required, making a total of 2.743 units for each dollar of operating loan. Actually, four sets of discount factors were used in the present study. One set is based on responses obtained on the average from lenders in the cash-grain area; a second, from lenders in the livestock area; a third, for the type of lender found to differentiate most between 1962] EFFECTS OF LENDER DECISIONS ON FARM FINANCIAL PLANNING Table 7. Discount Factors by Purpose of Loan* Purpose of loan Area and agency Operating expense Fertilizer Grain area Small banks b 1 . 7430 5.3640 Large banks b 1 . 7082 2.1270 PCA 2.9437 4.0909 All agencies 1.9379 3.5552 Livestock area Small banks b 3.1460 8.8205 Large banks b 2.4272 7.6640 PCA 1.4000 5.1728 All agencies 2.4103 7.4694 Source: Baker and Irwin (1). Amounts shown are derived from arithmetic means for lenders of type and area indicated, as the maximum loan for cattle less the maximum loan for the purpose indicated, the difference divided by the latter maximum. So defined, there is, of course, no discount applicable for cattle. b "Large banks" are defined as banks in towns with either another bank or with a pro- duction credit association. "Small banks" are those found in a town without another bank or production credit association. feeder cattle and fertilizer loans (small banks in the livestock area); and a fourth, for the type of lender that differentiated least between feeder cattle and fertilizer loans (large banks in the cash-grain area). Lenders of all types in each area discriminated more sharply (by requiring more units per dollar borrowed) against fertilizer than against operating expense loans and against both relative to feeder cattle. The maximum discrimination is noticed in small banks in the livestock area, where to finance fertilizer uses the farmer's borrowing reserve at 8.8 times the rate it is used when cattle are financed. It is interesting to note that, on the average, lenders in the livestock area discriminate against fertilizer loans far more heavily than do lenders in the cash-grain area. Moreover, while large banks discrim- inate less than the average in the cash-grain area, they discriminate more than the average in the livestock area. Much less difference is observed in discrimination against loans for operating expenses than against fertilizer loans. It is assumed the farmer in each area will select alternatives that contribute most to his net income. The situation and borrowing alter- natives, however, differ between areas. Finally, variations may occur in ability of farmers to defer operating expenses incurred throughout the year. Some farmers may have and use open-account credit rather freely; others may not. Since no information was obtained on this point, most profitable solutions have been worked out on several as- sumptions in each area. The following discussions deal with varia- tions in discounts and borrowing reserve and changes in seasonal debt commitments. 10 BULLETIN No. 688 PLANS FOR THE GRAIN-AREA FARM [November, Profit-maximizing plans for seven variations of the grain-area situ- ation are summarized in Table 8. The figures represent changes from the beginning situations (Tables 1, 2, and 3). For example, Plan 1 adds 5 feeder cattle to the 40 head in the base organization. No fertilizer is used in this Plan. Most of the corn is sold to meet real estate and machinery payments due in the second quarter. A small amount of corn is required to feed out the additional 5 head of cattle. Much of the operating expense in the first and second quarters must be met by borrowing, since the sale of corn and cash on hand are the only sources of funds for this purpose. In fact, the enterprise and financial organization are highly inter- Table 8. Optimum Plans for Grain-Area Situations Quarterly payment of operating expenses Annual payment of operating expenses Item Hi Average loan discounts diff ghly Low eren- differen- ced tiated tan loan is- dis- ints counts Live- stock- area discounts Mean loan limit High Low Ic loan loan c limit limit co Plan number 1 5 275 2,625 $ 470 $ 317 $1,490 C C.B B C $1 ,285 $ 826 $2,313 $ 470 $.1843 -$1,456 $3,299 $ 636 $2,750 -$ 87 3 4 14 770 2,130 $1,457 $ 155 $ 840 $1,550 , C.B C.B j C,B C j 4 $1 ,380 ' $1,384 $ $3,986 $1,457 $2,529 -$1,456 $3,985 $1,973 $2,193 -$ 181 I 1 i j I j *J i I : i ! .! > 4 i ; ! ' i i > < ; *, 1 13 69 2 110 2,790 $ 179 $ 414 $ 116 $1 ,473 , i C C.B ^ B /-* i C $1,303 $ 662 ; o $2,560 $ 593 $1,967 -$1,456 $3,423 $ 243 $2,915 $ 338 -$ 73 10 2 110 2,790 $ 229 $ 152 $1,475 C C.B B C $1,300 $ 690 $2,904 $ 229 $2,675 -$1,456 - $3,131 $ 310 $2,886 -$ 65 - 2 36 1,980 33 935 $3,680 $ 262 $ 225 $ 226 C.B C.B C.B C $2,601 $2,605 $7,886 $3,680 $4,206 -$1,456 $5,662 $4,980 $ 935 -$ 253 Enterprise organization Corn fertilized, acres Feeder cattle added, head Disposal of surplus corn, bushels Fed Sold Borrowed for Cattle Operating, Quarter 4 Operating, Quarter 1 Operating, Quarter 2 Operating, Quarter 3 Source of operating funds* Quarter 4 Quarter 1 8 uarter 2 uarter 3 Cash transfers 8 uarter 4 to 1 uarter 1 to 2 Quarter 2 to 3 Income after change Less payment of cattle and fertilizer loans Net income after change .... Net income from fixed organ- ization Increase from change Source of change: Cattle Corn Fertilizer Less interest * C is cash; B is borrowing. 1962] EFFECTS OF LENDER DECISIONS ON FARM FINANCIAL PLANNING 11 related. The number of cattle added depends on both the grain that must be sold to pay debts and on the borrowing capacity that remains after necessary borrowing for operating expenses. Cattle, rather than fertilizer, use the remaining borrowing capacity because the lender discounts allow a cattle enterprise that produces a higher total return, even though the marginal return on a dollar spent for fertilizer is higher. One dollar spent on fertilizer uses 4.555 units of the scarce borrowing capacity (the discount factor plus 1), while a dollar spent on cattle uses only 1 unit of borrowing capacity. 1 Total borrowing capacity is exhausted only in the second quarter, with borrowings for cattle, operating expenses in the first quarter, and operating expenses in the second quarter charged against it. Operating loans are repaid in the third quarter with receipts from the sale of cattle. In interviews, lenders often mention the undesirability of seasonal peaks in debt commitments. The dominance of fixed commitments for real estate and machinery debts requires sizable transfers of cash into the second quarter from the preceding two quarters. In the first quarter, it is necessary to borrow for part of the operating requirements to meet this drain in cash, to conserve owned funds in a non-earning capacity, and to sell most of the corn before the seasonal price rise. The procedure used to solve for the optimum plans also gives the amount of income left after all expenses are paid, including interest, and after repaying any operating loans. These are the amounts shown as "Income after change" in Tables 8 and 9. "Net income after change" is derived by subtracting the amounts required to repay any loans for cattle or fertilizer. In all grain-area plans, the original deficit of $1,456 is changed to a surplus, the increases shown as "Increase from change." The sources of the increases are given in the last sec- tion of the tables. In all grain-area plans except Plan 2, much of the increase comes from sale of corn, an alternative that actually is pos- sible with no organizational change. Effects of lender liberalism or conservatism Plan 3 in Table 8 is the solution for a farmer served by a lender making "larger-than-average" loans, while Plan 4 is the solution for a farmer served by a lender more conservative than the average. In both cases, the differentiation between loan purposes is assumed to be average for the cash-grain area (Table 7). With a conservative lender, it is not possible for the farmer to pay 1 See Footnote a, Table 7. 12 BULLETIN No. 688 [November, all his third quarter operating expenses (Plan 4). Were it possible to delay payment of operating expenses or obligations or both for one quarter, however, the business again becomes solvent as funds from cattle sale are available. Thus, it appears that a tight financial situation can force insolvency if it makes the lender react conservatively. Plan 3 represents the results if a lender is prepared to back the borrower's business liberally. The farmer could not only avoid in- solvency in a part of the year, but also obtain a much larger return than when average loan limits are available, $3,986 instead of $1,843. The cattle enterprise is increased by 14 head instead of 5 (to 54 instead of 45) because borrowing for operating expense both relieves the pres- sure to sell corn in the second quarter and, in addition to the increase in operating loan, makes a larger cattle loan possible. The reduced corn sale is reflected in larger cash carry-overs between quarters, and a con- sequent necessity to borrow more for operating expenses in the first two quarters. Much more interest is paid, but the net return is also increased. Effects of varying lender differentiation by purpose The discount factors represent units of borrowing reserve (or "credit") that must be exchanged for $1 borrowed for a purpose. Thus the high discount situation of Plan 11 indicates that small operating and fertilizer loans are available in relation to cattle loans. The low dis- count plan represents a lender with least discrimination. Both plans assume the total borrowing reserve that was used in Plan 1. When high discounts are used by lenders, it is impossible to borrow enough to meet both operating expenses and fixed debt payments. Unless added funds can be obtained from some outside source to meet expenses in the second quarter, the business becomes insolvent in this period. Low discounts on the other hand offer a drastically different pic- ture. They favor fertilizer relatively and the change is enough to enable the farmer to fertilize all 69 acres at an intermediate level of fertilization. In other respects, total borrowing, interest paid, and cash transfers do not differ greatly from Plan 1. The favorable borrowing terms for fertilizer and operating expense are reflected in a slightly higher return than was found in Plan 1. Effects of lender experience For conditions that result in Plan 10, it is assumed that a livestock- area lender is suddenly moved into a grain-area situation and in his new situation applies loan discounts that are average for the livestock 1962] EFFECTS OF LENDER DECISIONS ON FARM FINANCIAL PLANNING 13 area. Since the livestock-area discounts are intermediate between the grain-area discounts that are average and those that are high, Plan 10 is similar to Plan 1. Unlike Plan 11, there is a solution in Plan 10, but barely so. Plans 1, 10, and 11, representing adjustment to lender attitudes favorable to cattle loans at the expense of operating and fer- tilizer loans, suggest that lender background may well have an im- portant influence on farm planning. These highly differentiating discounts can also be considered as representative of collateral-con- scious lenders generally. Clearly, a collateral-conscious attitude can affect decisions made by profit-maximizing farmers. Effects of seasonal needs for funds In Plan 2, it is assumed that operating bills, machinery repair and hire, fuel, and livestock expenses other than feed, can be carried on open account or otherwise postponed with promise to repay at the end of a year, or, perhaps, when the feeder cattle are sold. Considering the limited number of alternatives assumed available in the model, the results are startling. Cattle numbers increase by 36 head and income increases to $4,206, a figure which could justify pay- ing a substantial charge for financing operating expense items. The surplus cash available is carried over to meet the fixed com- mitments in the second quarter, freeing corn for cattle feed. Borrow- ing capacity is no longer used for operating requirements, so the cattle can be purchased. Again, the marginal return per unit of borrowing capacity for cattle exceeds that for fertilizer, even though the marginal return for $1 used may be higher for fertilizer. PLANS FOR THE LIVESTOCK-AREA FARM Profit-maximizing plans for seven variations of the livestock-area situation are summarized in Table 9. The livestock-area farm situa- tion differs from the grain-area situation only in the magnitude of cash balances from fixed activities, amount of operating expenses required, and in corn available for disposal. Therefore, plans would be expected to be similar between areas. Reference to Plan 6 in Table 9 supports this expectation. As was the case for the grain area, the debt obligations in the second quarter require cash to be conserved, corn to be sold, and money to be borrowed for operating expenses. Consequently, borrowing capacity is not avail- able for either cattle or fertilizer loans. The feed supply for cattle is also limited. As a result, only 1 head of cattle is added to the 40 head already in the fixed part of the farm organization. 14 BULLETIN No. 688 [November, Table 9. Optimum Plans for Livestock-Area Situations Quarterly payment of operating expenses Item Average loan discounts Highly differen- tiated loan dis- counts Low differen- tiated loan dis- counts Grain- area discounts Annual payment of operating expenses Mean loan limit High loan limit Low loan limit Plan number 6 1 55 535 $ 69 $ 486 $1,446 C C,B B C $1 ,073 $2,864 $1,203 $ 179 $1,024 $ 426 $ 598 $ 93 $ 574 -$ 69 8 7 385 205 $ 744 $ 950 $1,487 C C,B B C $1 ,032 $3,246 $2,247 $ 744 $1,503 $ 426 $1,007 $1,007 $ 193 -$ 133 f j ! ! I 1 3 [ 1 [ i 1 i P *l i I C i 1 < $ 2 i I i 1 > i i > 14 69 1 55 535 $ 89 $ 414 $ 500 $1,447 C C.B B C $1,071 $2,875 $1,868 $ 503 $1,365 $ 426 $ 939 $ 121 $ 563 $ 338 $ 83 - 5 4 220 370 $ 354 $ 682 $1,464 C C.B C.B C $1 ,055 $3,025 $1,578 $ 354 $1 ,224 $ 426 $ 798 $ 480 $ 414 - $ 96 7 35 590 1,335 $3,542 $ 457 $ 216 $ 239 C B B C $1,204 $2,439 $6,977 $3,542 $3,435 $ 426 $3,009 $4,799 -$1,533 $ 257 Enterprise organization Corn fertilized, acres Feeder cattle added, head Disposal of surplus corn, bushels Fed Bought Sold Borrowed for Cattle Fertilizer Operating, Quarter 4 Operating, Quarter 1 Operating, Quarter 2 Operating, Quarter 3 Source of operating funds* Quarter 4 Quarter 2 Quarter 3 Cash transfers Quarter 4 to 1 Quarter 1 to 2 Quarter 2 to 3 Income after change Less payment of cattle and fertilizer loan Net income after change. . . . Net income from fixed organ- ization Increase from change Source of change: Cattle Corn Fertilizer C is cash; B is borrowing. The increase in net returns is smaller for the livestock-area farm than for the cash-grain-area farm. Cash transfers between quarters exceed those of the grain farm because more liquid assets are in cash and less in stored corn. Effects of lender liberalism or conservatism Extremes in size of loans that might be allowed a farmer in the livestock area are represented in Plans 8 and 9. As was found in the grain area, the low-loan limit (Plan 9) forces the business into insol- vency in the third quarter. On the other hand, the high limit (Plan 8) allows expansion of the cattle enterprise; in this case, by 7 head. Cash is freed to pay the fixed commitments because it is possible to borrow for more of the operating requirements, so that more corn can be re- 1962] EFFECTS OF LENDER DECISIONS ON FARM FINANCIAL PLANNING IS tained for feed. The extra corn, together with higher borrowing capac- ity, makes the cattle expansion possible. Effects of varying lender differentiation by purpose Plans 12 and 14 are comparable with Plan 6 except that they repre- sent different lender discounts applied to loan purposes. The high discounts (Plan 12) discriminate so heavily against operating loans that when the average loan limits are assumed the situation is insolvent in the second quarter. The same result occurred in the grain area in a similar situation. On the other hand, low discounts encourage borrowing for an in- termediate level use of fertilizer (Plan 14), just as was found in the comparable situation in the grain area. The remaining borrowing capacity and corn are more than adequate to cover operating expenses, so that enough of each is available to handle 1 additional steer. Effects of lender experience In Plan 5 it is assumed that a grain-area lender is suddenly trans- planted to the livestock area bringing with him a discount rate for operating expenses smaller than that used in Plan 6. The surplus borrowing potential thus created for the farmer allows him to buy 4 head of cattle instead of the 1 and results in a slight increase in income generated by the changed organization. The livestock-area resources include more cash, higher operating expenses, and less corn, so the added returns are less than for Plan 1 in the grain area. Plan 1 in the grain area is comparable with Plan 5 in the livestock area. Effects of seasonal needs for funds In Plan 7, payment of operating expenses is allowed to be deferred until the end of the year. This Plan allows the largest adjustment in feed and livestock. As in the case of the grain-area farm, the feeder- cattle enterprise is expanded nearly to capacity. In addition, it is found profitable to buy corn at 11 cents per bushel above the selling price and hire additional labor (70 hours) in the spring rush season. The higher income generated in Plan 7, compared with Plan 6, amply demonstrates the cost of maintaining necessary short-term fi- nancial liquidity. All borrowing capacity is available for cattle and for cattle expenses, with other operating requirements paid at the time of the cattle sale. It would be possible for the indebted farmer to pay a substantial "interest rate" to dealers or other lenders for financ- ing operating expenses to avoid seasonally binding commitments. 16 BULLETIN No. 688 [November, PLANS ASSUMING DIFFERENT FIXED PAYMENTS Careful study of plans shown in Tables 8 and 9 reveals that each solution is heavily affected by the need to meet cash deficits that occur in the second quarter (Tables 2 and 4). The cash transfers from the fourth quarter to the first and the first to the second show funds left idle to pay these debts. In each case, operating expenses must be fi- nanced by borrowing in the third quarter. It seems likely, therefore, that the relationships among plans may be affected by the dominance of debt commitments that result from the fixed part of the farm organization, primarily real estate payment of $1,717 in the second quarter and payment on machinery contract for the farm in each area. But lender limits were established with full knowledge of these commitments and presumably in consideration of them. Though the limits may, therefore, not be strictly applicable to a different set of conditions, two plans have been computed for each area using the same lender limits but with changes in the fixed re- quirements in debt payments. 1 One possibility is to change the payment on real estate debt from the second quarter to the more common situation semiannual pay- ments in the first and third quarters. Results from this change in the initial farm situation are reported in Plan 15 (Table 10) for the cash- grain-area farm and Plan 17 (Table 11) for the livestock-area farm. The other possibility is to change the payments of machinery con- tract from the previously assumed twice-per-year payments to equal quarterly payments. Results from this change, combined with the re- distributed payment of real estate amortization, are shown in Plan 16 (Table 10) for the cash-grain-area farm and in Plan 18 (Table 11) for the livestock-area farm. In all cases, it is assumed that operating expenses are paid in the quarters in which they are incurred. The redistributed real estate payments result in increased surplus income of $2,424 for the grain farm and $1,805 for the livestock farm (Tables 10 and 11). For the livestock farm, this increase exceeds the increase reached with the high-loan limits (Plan 8, Table 9), or re- duced differentials among loan purposes (Plan 14, Table 9). For the grain farm, such an increase nearly matches the increase allowed by high-loan limits (Plan 3, Table 8) and exceeds the increase reached with reduced loan differentials (Plan 13, Table 8). If, in addition, 1 It might be reasonable to suppose that these changes would "liberalize" lender behavior. Thus the following estimates are conservative. 1962] EFFECTS OF LENDER DECISIONS ON FARM FINANCIAL PLANNING 17 Basic solution Real estate payments in Quarters 1 and 3 machinery payments are redistributed to four equal quarterly pay- ments, the increase in surplus income exceeds for both farms that yielded by any plan except where operating expenses are allowed to be deferred until the end of the year. (Compare the last columns of Tables 10 and 11 with the last columns of Tables 8 and 9, respec- tively.) Table 10. Optimum Plans for the Grain-Area Farm, Assuming Different Fixed Payments Real estate payments as in Plan 15; Item solution Quarters 1 quarterly machinery payments Plan number 1 15 16 Enterprise organization Corn fertilized, acres Feeder cattle added, head 5 12 17 Corn, bushels Fed 275 660 935 Bought Sold 2,625 2,240 1,965 Borrowed for Cattle $ 470 $1,258 $1,703 Fertilizer Operating Quarter 4 Quarter 1 $ 317 $ 446 $473 Quarter 2 $1,490 $1,092 $ 913 Quarter 3 Source of operating funds* Quarter 4 C C C Quarter 1 C,B C,B C,B Quarter 2 C,B B Quarter 3 C C C Income after change $2,313 $3,682 $4,454 Less payment of cattle loan $ 470 $1 ,258 $1 ,703 Net income after change $1 ,843 $2 ,424 $2 ,751 Net income from fixed organization $1,456 $1,456 $1,456 Increase from change $3,299 $3,880 $4,207 Source of change: Cattle $ 636 $1,705 $2,305 Corn $2,750 $2,305 $2,052 Less interest -$ 87 -$130 -$150 C is cash; B is borrowing. 18 BULLETIN No. 688 [November, Table 11. Optimum Plans for the Livestock-Area Farm, Assuming Different Fixed Payments Real estate Real estate payments Basic payments in as in Plan 17; Item solution Quarters 1 quarterly and 3 machinery payments Plan number 6 17 18 Enterprise organization Corn fertilized, acres Feeder cattle added, head 1 11 22 Corn, bushels Fed 55 605 1,210 Bought 15 620 Sold 535 Borrowed for Cattle $ 69 $1,140 $2,225 Fertilizer 000 Operating Quarter 4 Quarter 1 $ 486 $ 366 Quarter 2 $1 ,446 31 ,512 $1 ,509 Quarter 3 Source of operating fund* Quarter 4 C C C Quarter 1 C,B C,B C Quarter 2 B C,B C,B Quarter 3 C C C Income after change $1,203 $2,945 $4,775 Less payment of cattle loan $ 179 $1,140 $2,225 Net income after change $1 ,024 $1 ,805 $2 ,550 Net income from fixed organization $ 426 $ 426 $ 426 Increase from change $ 598 $1,379 $2,124 Source of change Cattle $ 93 $1,543 $3,014 Corn $ 574 -$ 34 -$ 711 Less interest -$ 69 -$ 130 -$ 179 C is cash; B is borrowing. SUMMARY AND CONCLUSIONS For the credit dependent farmer, lender behavior may well limit farm planning. If the lender is concerned with the safety of loans made, differential loan limits should be expected with respect to pro- posed use of funds, depending on whether the input to be purchased can serve as collateral for the loan. Consequently, the optimal plan- ning by the farmer, as well as level of income he gets, will be affected by lender limits. This study investigated such lending limits and the farm organizational effects of adjusting to them. 1962] EFFECTS OF LENDER DECISIONS ON FARM FINANCIAL PLANNING 19 A hypothetical farm situation was developed from farm records for a cash-grain and a livestock farm in terms of financing statements, physical inventories, production plans, and personal characteristics of the farm operator and his family. The cash-grain farm and the live- stock farm were made as similar as possible, except for the setting in different areas of the state. The lender survey indicated that loans to create assets (feeder cattle, machinery, or buildings that furnish chattel security) were granted in significantly larger amounts than were loans for purposes that do not create pledgeable assets (fertilizer or operating expense). Livestock-area lenders made larger loans for feeder cattle and ma- chinery. Grain-area lenders made larger loans for buildings and fertilizer. Loans to finance operating expenses were similar between areas. A procedure incorporating both production and financial decisions and using results from the lender survey was then used to deduce the consequences of various types of lender limits. Nine plans were computed for each area with varying over-all lender optimism (as re- flected in maximum size of loan obtainable) with differing degree of seasonal demands for cash. Comparisons were made to suggest the importance of lender influence and of seasonal considerations in the situations under study. In the first seven plans for each area the optimum organizations were dominated by adjustments to meet heavy fixed commitments on real estate and machinery loans. These requirements forced a build- up of cash balances, thus subjecting the operator to lender limits that necessitated borrowing to meet a part of the operating requirements. Grain sale was necessary to help meet debt payments. Cattle numbers were limited because funds from corn were too valuable in other uses. Operating expenses were treated as seasonally fixed, and thus had first claim on borrowing capacity, cash on hand, and cash income in pre- vious quarters. In situations that allow borrowing in excess of these needs, the choice between cattle and fertilizer depended on a relation- ship between corn supplies, loan terms available, and the amount of fixed commitments to be met in the following quarters. Lender decisions influenced both the choice of enterprises and the handling of financial accounts. Where lender differentiations were high or loan limits were low, the situation became financially insolvent. Where lender differentiations were low, it was most profitable to fer- tilize at an intermediate level. In all other cases the combination of higher differentiation between purposes and heavy necessary borrow- ing for operating expenses so used up borrowing capacity that the remaining borrowing could be used more profitably for cattle. 20 BULLETIN No. 688 [November, Changing fixed debt payments allowed enlarging the enterprises, but did not change the ones chosen in the optimum plans. Reducing fixed commitments in critical periods decreased the need to borrow for operating expense, and also the need to sell corn. As a result, borrow- ing capacity was less critical as a restraint on the decision to buy more cattle. Hence, timing of debt payments was found critically important for financial success. An important final conclusion is that marginal productivities associated with the use of owned funds are not appro- priate for fund allocation decisions with the use of borrowed money, if lender discounts are met such as those found in this study. If other terms, (interest rate, length of loan) vary with purpose, this also would affect optimum allocation of resources. LIMITATIONS A number of crucial issues were ignored in this exploratory study. Several are worth further research. For example, an assumption was made that the borrowing limit for one purpose is independent of the amount borrowed for another purpose. But it is likely that total borrowing capacity depends on combinations of loan purposes. It was likewise assumed that total borrowing capacity was independent of use of secondary lenders. Finally, it was assumed the amount borrowed in one part of the year was not related to that borrowed in another part. None of the three assumptions is likely to hold. The assumptions were made in the present study to simplify the analysis and because relevant quantitative information is not now available. Additional study of these problems is underway. BIBLIOGRAPHY 1. BAKER, C. B. and IRWIN, G. D. Effects of borrowing from commercial lenders on farm organization. 111. Agr. Exp. Sta. Bui. 671. 1961. 2. HINTON, R. A. Farm management manual. Dept. Agr. Econ., Univ. 111. AE-3349. 1960. 3. HINTON, R. A. Unpublished data on monthly distribution of labor on northern Illinois hog farms in 1955. Dept. Agr. Econ., Univ. 111. 1957. 4. IRWIN, G. D. Lender behavior and farm organization. Unpublished Ph.D. thesis, Univ. 111. 140 p. 1961. 5. TOMPKINS, W. A. The effect of income change on farm and family expenditures of selected Illinois farm families, 1951-1956. Unpublished M.S. thesis. Dept. Agr. Econ., Univ. 111. 1959. 6. VON LANKEN, G. D. Classification of labor inputs on northern Illinois hog farms. Unpublished M.S. thesis. Dept. Agr. Econ., Univ. 111. 1959. 1962] EFFECTS OF LENDER DECISIONS ON FARM FINANCIAL PLANNING 21 APPENDIX The complete programming tableau for Plan 1 is shown in Table 12. In the P vector, the numbers shown in lines 1-4 are loan limits established, on the average, by grain-area lenders. Hence, these are amounts that can not be exceeded by uses made of credit in each of the respective periods. 1 No value is attached to unused credit. Hence, d is zero for each period. Each of lines 5-8 is an equation, requiring that the amount bor- rowed for operating expense be equal to the amount repaid plus the amount carried forward to the next period. An arbitrarily large nega- tive price is imposed on the slack of each of these variables to insure that it does not appear in the final solution. In each of lines 9-12, the amount shown in P is the cash available from the fixed farm organization. The negative number in line 11 necessitates multiplying each number in this line by -1 to permit solu- tion by simplex procedures. 2 Equalities for lines 9-11 have the same meaning as in lines 5-8. The inequality in line 12 permits cash trans- ferred into period 4 to be transferred to savings (via PIT). Expenses required to be met for fertilizer, cattle, and operating in each period, for the fixed farm organization, are shown in P in lines 13-18, respectively. Again, the relations are equalities. No expense is required to be met unless fertilizer or cattle enter the plan that revises the fixed farm organization. On the other hand, the amounts shown in Pj vectors of lines 15-18 indicate operating expenses that must be met, per activity unit, along with such additions thereto as are incident to the revised plan. The amounts in P , lines 19-22, are man-hours of labor available after the needs of the fixed farm organization have been supplied. The inequality in each of these lines implies the possibility of idle labor in the final solution. The Ci values of zero reflect an assumption that idle labor is worth nothing to the operator. Unused feedlot capacity for 40 head of cattle available for use in the revised plan is shown in line 23. The 69 acres, to fertilize, line 24, are in corn. Failure to use any part of the excess feedlot capacity or to fertilize the corn neither adds to nor subtracts from profit (ct =0). Finally, 2,900 bushels of corn, line 25, are available for feeding or for 1 Period 1 is October-December ; 2, January-March ; 3, April-June ; and 4, July-September. Hence these differ from the calendar "quarters" used in the text to report results. Quarters 1, 2, 3, and 4 are the same as periods 4, 1, 2, and 3, respectively. 2 The same procedure is required in line 11 for Plans 2-10, 17, and 18 and in lines 10 and 11 for Plans 15 and 16. Table 12. Program Tableau for Plan V oj $0 $10.90 $21.80 $0 SO $0 $1.09 Line Fertilizer Cattle Sell com in Period no. oi b Po Ll L2 Pi Pa P. 1234 ?4 P. Pe PT 1 Maximum loan Period 1 $5,776 head acre bUihd 2 Period 2 $5,776 3 Periods $5,776 4 Period 4 $5,776 5 -M Operating loan balance Period 1 6 -M Period 2 7 -M Periods 8 -M Period 4 9 Cash available Period 1 $2,601 10 Period 2 $ 4 $1 00 11 -M Period 3 -$3,577 $1 04 12 $1.00 Period 4 $4,230 -$263.23 -$1 11 13 -M Fertilizer ex- pense $6 00 $12 27 14 -M 15 -M Cattle expense . . . Operating ex- penses Period 1 $1,287 -$101.30 -$ 6 19 16 -M Period 2 $ 751 -$ 6.19 17 M Period 3 $1,461 $ 6 19 18 -M Period 4 $1,215 $ 6 19 19 Labor, man-hours Period 1 289 2.58 20 Period 2 428 3 02 .10 ,10 21 Period 3 83 2 32 .10 .10 22 Period 4 318 2.75 23 Feedlot capacity, head 40 1 00 24 25 $1.09 Acres to fertilize. . Corn, bushels .... 69 2,900 1.00 1.00 55.00 1.00 1.00 1.00 1.00 Cj $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Transfer cash to Line no. Ci b Fert. Cat- Operating expense, tie Period Transfer cash from Period Po 1234 P 8 Ps Pio Pu Pu PH 1-2 2-3 3-4 4-svgs. PH P Pw Pn 1 Maximum loan Period 1 $5,776 dollar dollar 2 Period 2 $5,776 3 Period 3 $5,776 4 Period 4.. $5,776 5 -M Operating loan balance Period 1 6 -M Period 2 7 -M Periods 8 -M Period 4 . . 9 Cash available Period 1 $2,601 $1 $1 $1 $1 10 Period 2 4 $1 $1 $1 11 -M Period 3 -$3,577 $1 $1 $1 $1 12 $1.00 Period 4 $4,230 $1 $1 $1 0198 13 -M 14 -M 15 -M Fertilizer expense Cattle expense . . . Operating ex- penses Period 1 $1,287 $1 $1 $1 16 -M Period 2 $ 751 $1 17 -M Periods $1,461 $1 18 -M Period 4 $1,215 $1 19 Labor, man-hours Period 1 289 20 Period 2 428 21 Periods 83 22 Period 4 318 23 Feedlot capacity, head 40 24 25 $1.09 Acres to fertilize. . Corn, bushels .... 69 2,900 Table 12. Concluded Cj -$0.06 -$0.045 -$0.03 -$0.015 -$0.03 -$0.06 Line no. Ci b Borrow for Operating expense, Period Vmmnttf Cattle PJS 1 2 Po Pu Pu 3 4 PJO Pa Pa 1 2 3 4 5 -M 6 -M 7 -M 8 -M 9 10 11 -M 12 $1.00 13 -M 14 -M 15 -M 16 -M 17 -M 18 -M 19 20 21 22 23 24 25 $1.09 Maximum loan Period 1 $5,776 $2.938 $5,766 $2.938 $2.938 $5,766 $2.938 $2.938 $5,766 $2.938 $2.938 -$1 -$1 $2,601 $ 4 -$3,577 $4,230 $1,287 $1 $ 751 $1 $1,461 $1,215 289 428 83 318 40 69 2,900 dollar $2.938 $4.555 $2.938 $2.938 $4.555 $1 $1 $1 $1 $1 $1 $1 $1 Period 2 Period 3 . Period 4 Operating loan balance Period 1 Period 2 Periods Period 4 Cash available Period 1 Period 2 Period 3 Period 4 Fertilizer expense Cattle expense . . . Operating ex- penses Period 1 Period 2 Period 3. Period 4 Labor, man-hours Period 1 Period 2 Periods Period 4 Feedlot capacity, head Acres to fertilize.. Corn, bushels .... Cj $0.045 $0.03 $0.015 $0 $0 $0 $0 $1.00 $0 $0 Line no. Ci b Repay operating loan in Period Carry loan from Trans- Purchase Period of 1 2 3 Po Pu Pss PK 4 1-2 2-3 3-4 to Corn profit Pu Pa Pa Pso Pn Pa Labor PM 1 2 3 4 5 -M 6 -M 7 -M 8 -M 9 10 11 -M 12 $100 13 -M 14 -M 15 -M 16 -M 17 -M 18 -M 19 20 21 22 23 24 25 $1.09 Maximum loan Period 1 dollar $5,776 $5,776 -$2.938 $5,776 -$2.938 -$2.938 $5,766 -$2.938 -$2.938 -$2.938 $1 $1 $1 $2,601 $1 $ 4 $1 -$3,577 $1 $4,230 $1,287 $ 751 $1,461 $1,215 289 428 83 318 40 69 2,900 dollar dollar dollar $1 -$1 $1 -11 $1 $1 -11 $1 $1 -$1.15 -$1.25 $1 Period 2 Periods Period 4 Operating loan balance Period 1 Period 2 Periods Cash available Period 1 Period 2 Period 3 Period 4 Fertilizer expense. Cattle expense . . . Operating ex- penses Period 1 Period 2 Period 3 Labor, man-hours Period 1 Period 2 Period 3 Period 4 Feedlot capacity, Acres to fertilize. . Corn, bushels .... a Values for ajj are also used for Plans 2, 3, 4, 5, 15, and 16. b M is an arbitrarily large number. c L is an abbreviation of level. 24 BULLETIN No. 688 [November, sale. If sold in period 1 (P 4 ), corn receipts add cash at the rate of $1.00 per bushel to cash available in Period 2; if sold in Period 2 (P 5 ), the receipts add to cash available in Period 3 at $1.04 per bushel; if sold in Period 3, receipts add to cash available in Period 4 at the rate of $1.11 per bushel. Finally, if sold in Period 4 (P 7 ), "profit" in- creases at $1.09 per bushel. These prices are designed to reflect sea- sonal variation in the price of corn. Production and marketing alternatives are given in Pi_ 7 , P 32 , P 33 . Pi-4 are production alternatives that require resources as indicated by coefficients shown in the columns and produce returns as shown by ai2, i, for cattle, and c 2 and c 3 (in the Cj row vector) for fertilizer. P 4 - 7 have already been explained. A series of cash transfers are provided for in P 8 -i7- In P 8 -is, the transfers are from Period 3 to meet fertilizer expense, from 1 to meet cattle expenses, and from Periods 1, 2, 3, and 4 to meet operating expense in Periods 1, 2, 3, and 4, respectively. Pi 4 -i 6 permit cash to be transferred from one period to the next. Finally, in P i7 any cash sur- plus remaining is transferred to savings (valued at $1 per dollar thus transferred, as indicated by c t in line 12). All transfers are assumed possible without cost. Hence Cj is zero in P 8 -i 7 . PIS allows the operator to borrow in Period 1 for operating expense in Period 1. He is limited to $5,776, as shown in P , line 1, and uses this capacity at the rate of $2.938 for every dollar borrowed. He also adds $1 to his loan balance in Period 1 (line 5), meets $1 of operating expense in Period 1 (line 15) and reduces "profit" by $0.06 (GJ = $0.06 in PIS). Pi9-2i are similar, except they relate to Periods 2, 3, and 4, respectively. Hence, the annual interest per dollar borrowed is reduced to account for the shorter time over which the loan is out- standing. P 22 and P 23 are also similar, except that borrowing capacity is used up at a faster rate ($4.555 per dollar borrowed) for fertilizer and a far slower rate for cattle. The values for Cj reflect the assump- tion that borrowing for fertilizer or cattle would occur in Periods 3 and 1, respectively. ?24-2 7 permit operating loans to be repaid in Periods 1-4, respec- tively. If a payment of $1 is made in Period 1 (P^}, it restores $2.938 to borrowing capacity in Period 2 (line 2), reduces operating loan balance in Period 1 (line 5) and cash available in Period 1 (line 9), and adds a credit of $0.045 to "profit" (Cj in P 24 ) because of inter- est saved for the balance of the year. P 2 5- 27 are similar, there being no savings of interest in P 27 . P28-30 permit a loan balance to be carried from one period to the next adjacent period at zero cost. In P 3 i cash is transferred from Period 4 to "profit." Finally, corn and labor are allowed to be pur- chased in P 32 and P 33 , respectively, at rates of $1.15 per bushel for 1962] EFFECTS OF LENDER DECISIONS ON FARM FINANCIAL PLANNING 25 corn in Period 1 (line 15) and $1.25 per hour for labor in Period 3 (line 21). In Table 13, changes in P that were used to obtain solutions given in Plans 2-5, 15, and 16 are given. In Plan 2, the only change is to allow operating expenses for the grain-area farm to be met in Period 4 instead of the period in which they were actually incurred. Hence, zeros appear in lines 14-17, while all operating expenses from the fixed organization cumulate in Period 4. Plan 3 is the same as Plan 1 ex- cept that the maximum amount that can be borrowed is assumed equal to the mean maximum observed in the grain area plus one stand- ard deviation of the mean. In Plan 4 the assumption is the mean minus one standard deviation. Plan 5 describes the livestock- farm situation, but the solution as- sumes loan discounts as found, on the average, in the grain area. It is included with the grain-area plans because it is a P vector for the tableau described in Table 12. In Plan 15 the real estate payment is changed from once per year (Period 3) to twice per year (Periods 2 and 4). The results are evident in lines 10, 11, and 12. The same lines are affected in Plan 16, wherein the machinery payments also are changed from twice per year to four equal payments per year. In this Plan, line 9 is also affected. Table 14 shows the changes required in relevant a^ given in Table 12 to reflect the borrowing possibilities in the livestock area. In other respects, the programming tableau for the livestock-area farm is iden- Table 13. P Vectors for Plans 2-5, 15, and 16 Plan number 2 3 4 5 15 16 Maximum loan, each period . . Operating loan balance, each riod ... $5,776 pe- $8,933 $2,601 $ 4 -$3,577 $4,230 $1,287 $ 751 $1,461 $1,215 289 428 83 318 40 69 2,900 $2,619 $2,601 $ 4 -$3,577 $4,230 $1,287 $ 751 $1,461 $1,251 289 428 83 318 40 69 2,900 $6,657 $2,496 $2,235 -$3,439 $4,230 $1,419 $ 925 $1 ,442 $1,310 169 351 63 263 40 69 590 $5,776 $2,601 -$ 855 -$1,860 $3,371 $1,287 $ 751 $1 ,461 $1,215 289 428 83 318 40 69 2,900 $5,776 $3,115 -$1,342 -$1,402 $2,884 $1,287 $ 751 $1,461 $1,215 289 428 83 318 40 69 2,900 Cash available Period 1 . 2.601 Period 2 . $ 4 Period 3 . . . -3,577 Period 4 ... $4,230 Fertilizer expense Operating expense Period 1 Period 2 Period 3 Period 4 ... $4,714 Labor, man-hours Period 1 , 289 Period 2 428 Period 3 83 Period 4 318 40 Acres to fertilize 69 2,900 26 BULLETIN No. 688 [November, Table 14. Changes in Program Tableau for Plan 1 to Reflect Average Loan Discounts in the Livestock Area and to Yield Plans 6, 7, 8, 9, 10, 17, and 18 Borrow for Line Operating expense, Period Fert- Period 1 Pl8 2 P.9 3 Pzo 4 PH ilizer Pa Pj4 2 P 3 P* 1 $3 2 $3 410 410 $3.410 -$3 410 3 $3 410 $3.410 $3.410 $8.469 -$3 410 -S3 410 4 $3 410 $3.410 $3.410 $3 .410 $8.469 -$3 410 -$3 410 -$3.410 tical to that for the grain-area farm, with exceptions in the P vector, to be noted with reference to Table 15. Plan 6 (Table 15) represents the situation in the livestock area com- parable with Plan 1 in the grain area. The P vector reflects the mean of loan limits, with operating expenses required to be met in the period in which they are incurred. The deviation in Plan 7 allows operating expenses to be deferred until the end of the year. Plan 8 reflects high loan limits in the livestock area; Plan 9, low limits. Plan 10 is the grain-area farm in the livestock-area financing setting. In Plan 17 the real estate payment for the livestock farm is made twice per year, while in Plan 18, the machinery payment is also changed to quarterly payments. Table 15. Po Vectors for Plans 6-10, 17, and 18 Plan number 6 7 8 9 10 17 18 Maximum loan, each $6,657 $2,496 $2,235 $3,439 $4,230 $1,419 $ 925 $1 ,442 $1,310 169 351 63 263 40 69 590 $6,657 $2,496 $2,235 -$3,439 $4,230 $5 ,096 169 351 63 263 40 69 590 $9,055 $2,496 $2,235 -$3,439 $4,230 $1,419 $ 925 $1 ,442 $1 ,310 169 351 63 263 40 69 590 $4,259 $2,496 $2,235 -$3,439 $4,230 $1,419 $ 925 $1 ,442 $1,310 169 351 63 263 40 69 590 $5,776 $2,601 $ 4 -$3,577 $4,230 $1,287 $ 751 $1 ,461 $1,215 289 428 83 318 40 69 2.900 $6,657 $2,496 $1,376 -$1,722 $3,371 $1,419 $ 925 $1 ,442 $1,310 169 351 63 263 40 69 590 $6,657 $2 ,935 $ 961 -$ 500 $2,956 $1,419 $ 925 $1 ,422 $1,310 169 351 63 263 40 69 590 Operating loan bal- ance, each period Cash available Period 1 Period 2 Period 3 Period 4 . Fertilizer expense .... Operating expense Period 1 Period 2 Period 3 Period 4 Labor, man-hours Period 1 Period 2 Period 3 Feedlot capacity, head Acres to fertilize Corn, bushels. . . 1962] EFFECTS or LENDER DECISIONS ON FARM FINANCIAL PLANNING 27 Table 16 shows changes required in Table 12 to obtain Plans 11 (grain area) and 12 (livestock area). These are plans attainable with high discounts; that is, sharp discrimination against loans for fertilizer and operating expenses, relative to cattle. Similarly, Table 17 gives changes required to reflect low discounts among loan purposes. These coefficients, substituted into the tableau shown in Table 12, were used, with appropriate P vectors to obtain Plans 13 (grain area) and 14 (livestock area). Table 16. Changes in Program Tableau for Plan 1 to Reflect High Loan Discounts and to Yield Plans 11 and 12 Borrow for Line no. Operating expense. Period Repay operating loan in Period 1 Pis 2 Pi. 3 4 Pio Pn Fertilizer Pa 1 P 2 P 3 P* 1 2 3 4 $4.146 $4.146 $4.146 $4.146 $4.146 $4.146 $4.146 $4.146 $4.146 $4.146 $9.821 $9.821 -$4.146 -$4.146 -$4.146 -$4.146 -$4.146 -$4.146 Table 17. Changes in Program Tableau for Plan 1 to Reflect Low Loan Discounts and to Yield Plans 13 and 14 Borrow for Line Operating expense. Period Repay operating loan in Period n0 ' I 2 3 4 Fertilizer I 2 3 Pw Pi Pa> Pii Pa P* P P 1 $2.400 2 $2.400 $2.400 -$2.400 3 $2.400 $2.400 $2.400 $3.127 -$2.400 -$2.400 4 $2.400 $2.400 $2.400 $2.400 $3.127 -$2.400 -$2.400 -$2.400 SM 11-62 77871 UNIVERSITY OF ILLINOIS-URBANA Q.630.7IL6B C008 BULLETIN. URBANA 688 1962 '3 01 12 01 953051 5