A Panel Data Analysis of the Repayment Capacity of Farmers

Using a balanced panel of 264 unique Illinois farmers from 2000 to 2004, this study identifies the most pertinent factors that explain the repayment capacity of farmers. After correcting for endogeneity bias caused by farmer-specific effects, one year lagged debt-to-asset ratio and soil productivity are both found to be significantly correlated with the coverage ratio at the 5% significance level using random effects. The finding is significant because it can enhance agricultural lenders ability to assess creditworthiness, screen borrowers, manage loan loss reserves, and price loans, thereby decreasing lenders costs associated with defaulted loans and ultimately reducing the costs borne by the government and taxpayers.