Farm Equipment Financing

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PURDTJE U N IV E R S IT Y

THIS IS TO CERTIFY THAT THE THESIS PREPARED UNDER MT SUPERVISION

BY

HOWABD

E N T IT L E D

FARÏ4

G U STA F

E Q U IFM E W T

D IE S S L IN

F IN A N G ^ G

COMPUES WITH THE UNIYERSTTY REGULATIONS ON GRADUATION THESES

AND IS APPROVED BY ME AS FULFILLING THIS PART OF THE REQUIREMENTS

FOR THE DEGREE OF

DOCTOR

OF

P H IL O S O P H Y

scala Unita Large family farms Medium family farms Small family farms Part-time farms Small holdings

9^

Nominal Units 100

50 Percent Figure 7.

Percentage of Total Farms Reporting Tractors by Economic Class, 1945«

Source:

Derived from 1945 Sample Census of Agriculture* See Table Z, Appendix A, Form power Machinery and equipment

500 400 Form Output

300 Form employment

200

100 1870 1880 1890 1900 1910 1930

1930 1940 1950

Figure 8*

Total Volume of Farm Power and Maahinery and Equipment, Farm Output, and Total Farm Employ­ ment, United States, 1870-1944» (Volume in terms of 1935-39 Dollars; Index I^umhera, 1870=100)

Source:

USDÀ, Bureau of Agrioultuial Economics^

26

avepage dollars^ tlie voltmie of power, equipment and ma­ chinery was if.77 in 1920, with the base year I87O equalling 100.

In I9I4.6 the index of the volume of farm power was $1^2.

This was only lij. percent higher than in 1 9 2 0 .

All of this

increase occurred during and sifter the war years, since 19 lfO# The total volume of equipment, which is measured in terms of 1 9 3 5 *3 9 average dollars and does not take into account the increase in horsepower accompanying the change from horses and mules to tractors, trucks and automobiles, de­ clined somewhat from I9 2 0 to 1 9 3 0 and declined even more during the depression years of the 193O* s#

The volume of

power, equipment and machinery on farms in 194-0 was nine percent below that in I920. The over-all change in the volume of farm power, equip­ ment and machinery from I92 0 to 194-5 conceals a real sind significant change in the structure of the farm power now on farms.

Based on 1935-39 average prices, the volume of

animal-power (horses and mules) per acre of cropland de­ creased 54- percent during the 2 5 years I9 2 0 to 1 9 4 5 f while the volume of farm machinery and related equipment increased 71 percent (Table 2).

This general pattern of change was

similar in all geographic regions.

Each region disinvested

in horses and mules and increased its investment in tractors, trucks and automobiles, although the extent of this change varied considerably among regions.

The South Atlantic and

East South Central regions decreased horse and mule power

27

pep crop acre by only 30 percent while the decrease in other regions ranged from 44 to 69 percent.

The net change

in the volume of all power and machinery per acre varied from a slight decrease in the West North Central and Mountain regions to an increase of 4^ percent or more in the New England and Middle Atlantic regions.

The net increase for

the country was 11 percent. Table 2.

Change from 1920 to 1945 tn the Value at 1935-39 Average Prices of Horses and Mules, Farm Machin­ ery, and Total Power and Machinery per Acre of Cropland, by Geographic Regions. Increase from 1 9 2 0 to 1 9 4 5

Geographic Region New England Middle Atlantic East North Central West North Central South Atlantic East South Central West South Central Mountain Pacific United States

in volume of Decrease from farm machinery, 1 9 20 to 19145 including tracin number of tors, trucks, farm horses automobiles,and and mules, other machinery per acre per acre Percent Percent St 60 62 30 30 50 64 69

54

103 101 92 47 66

77

110 60

Change from I9 2 0 to 1 9 4 5 in volume of all farm power and machinery per acre Percent 49 46 23 -2 10

7

85

18 -1 28

71

11

op. cit., p. i|.7.

This shift from farm-produced animal power to mechanical power and related attachments has had significant effects on

28

the structure of the entire farm business.

More cash

purchases for the farmer have been involved with a cor­ responding greater need for credit to expedite these pur­ chases.

Instead of using home grown feed and his own labor

to produce the power needed to operate the farm, the farmer bought a machine and the necessary fuel, oil, and the like, all of which were produced in metropolitan areas.

Peed

formerly consumed by horses and mules was released for pro­ ductive livestock purposes, and the farmer’s extra labor formerly used to produce and care for the animals was used for other purposes.

Effects on Productivity in Agriculture The volume of farm output per worker in the United States in 194-5 was more than three times that of I8 7 O and approximately double that of I9 IO (Figure 9 arid Table 5, Appendix A).

Gross farm pro duct ionS/per worker and pro­

duction per worker in mining and manufacturing about kept pace with each other from I9 3 O to 194-7*

From I9 IO to I92 0

farm production per worker exceeded production per worker in mining and manufacturing, but the opposite was true throughout the I92 0 ’s (Figure 9 )*

Over the entire period

of 19 1 0 through 194-5 the rate of increase has been greater in mining and manufacturing than in agriculture.

Farm pro­

duction per worker has increased at an average rate of about 2 / Gross farm production is farm output plus farm-produced

power.

29

140 Gross form production per worker

ISO

100 80 Production per worker in iufocturing and mining

60

1910 1915 1920 1925 1930 1935 1940 1945 1950 Figure 9*

Production per Worker in Agriculture and Industry, United States, 1310-47.

Source:

USDA, Pureau of Agricultural Economies,

(Posta at Average 1935-59 Pr.i cea) A Per unit

$ 125 100 75

1910 1915 1920 19 B5 1930 1935 1940

1945 1950

Figure 10.

Total Production Costs and ^oste per Unit of Farm Output, United States 1910-45.

Source:

XJSDA, Bureau of Agricultural Economies,

30

lo7 percent per year since 1910> compared with, an Increase of approximately 2 *3 percent per year in mining and manu­ facturing#

Total farm employment had decreased from a high

of 1 2 #1 million men in 19 10 to

I

Kiddle Atlantic Eaat Horth Central Vest Berth Central Senth AAXantle East South Central

H

Gross Production

HU

Capital

Vest South Central Mountain

□

1SL$_

Pacific

-17H 50

100

150

200

Percent Figure 11. Index of Gross Production and Specified Capital per Worker by Geographic Regions, 19A4—45# Sources

•Progress of Farm Mechanization*, p.12, See Table 6, Appendix A.

250

34

six million farms in the United States*

If each of these

is considered to be a business unit, farms would comprise nearly one-half of the total business units in the United States*

Hence both the selling and financing functions in

machinery distribution are compounded by the large number of small units*

When compared with commercial enterprises,

the farm business unit is relatively small, although it compares in size with many small unincorporated businesses* The ratio of fixed capital to variable or operating capital is relatively h i ^ in agriculture.

The rate of

capital turnover varies considerably among different types of farms and with changes in the price level, but agricul­ ture typically is an industry with a slow rate of capital turnover.

For example, the rate of capital turnover for

Midwest farms is normally about once every six to eight years.

This makes all kinds of agricultural financing vul­

nerable to long-time deflation or inflation. The farmer is a producer of raw materials, and his prices are subject to wide and violent fluctuations.

In

addition, output on individual farms fluctuates widely because of weather.

Although it is relatively easy for

the farmer to budget his expenses, the price and weather hazard make it difficult to estimate income with the result that income available to retire debts is unstable from year to year and difficult to estimate.

35

The majority of farms are individual proprietorships whose fortunes rise and fall with the fortunes of the in­ dividual proprietor.

A large share of the farms must be

refinanced each generation as the farms are transferred to new owners.

Likewise, equipment must also be transferred

each generation.

Farms are typically family operated units

and the farm and family income and expenses are usually intermingled.

This places the financing of farm equipment

on a somewhat different status than the financing of equip­ ment in a business where financial transactions are en­ tirely impersonal.

36

DEVELOPMENT OP FARM EQUIPMENT FINANCING

During the development of this country, agriculture lacked the necessary capital for optimum progress and ec­ onomic development*

This was true of other industries also

and has been true in practically all new countries during their development.

Credit facilities and loanable funds

were scarce and risk and uncertainty were high» with the result that interest rates were h i ^ .

This was particu­

larly true for agriculture in the more remote areas.

Al­

though capital rationing is still a major problem in agri­ culture, notably in the Southeast for example, the credit facilities and loanable funds are not nearly as limited as they were in earlier years.

Agriculture, then, as compared

with now, was largely a subsistence type of operation;

a

relatively small percentage of the farm output was sold and few goods and services were bought.

Role of the Manufacturer Inventions and innovations leading to the commercial production of agricultural equipment began in the early 1 8 0 0 *s.

Animal-powered mechanization was gaining momentum

by the time of the Civil War.

Steel plows, preparation and

37

tillage equipment, and harvesting equipment were being manufactured and sold to farmers throu^out the settled areas of the country.

Arrangements for financing farm

equipment developed simultaneously with its early manufac­ ture and sale.

In the early years, financing was provided

almost entirely by the manufacturers.

With credit facili­

ties and loanable funds scarce in the country as a whole and particularly in the agricultural regions, sales were hardly possible except when lenient credit terms were offered.

Indeed, the farm equipment industry was one of

the first major industries to sell its goods on a time basisPerhaps the most important reason for equipment com­ panies offering purchases on a time basis was the fact that it increased sales.

Their sales market was composed of a

large number of small businesses whose capital assets and credit standing were limited.

Credit broadened the market

for farm equipment, and liberal terms tended to stimulate demand in times of reduced economic activity. A second reason for offering equipment on a time basis is that this made it possible for the equipment to pay for itself over a part of its service life without substantially depleting the buyer's capital funds.

The only initial

amount that may be required is a down payment sufficient to keep the purchaser's equity ahead of the depreciation on the equipment.

38

 third factor enabling equipment sales on a time basis was the use of the equipment itself as collateral to protect the financing transaction*

A conditional sales

contract or chattel mortgage were the most common legal instruments used.

These contracts provide the seller with

title to the equipment, or a lien on it, with rights of repossession.

These conditions, by and large, have formed

the basis of farm equipment financing by manufacturers^:^ Farm equipment was sold to farmers by blacksmiths and general stores, more or less as a sideline, in the early years; it later became a typical sideline of hardware stores. It was not until the early 1Ç00' s that retail handling of equipment grew into a distinct business. Equipment was generally handled on a commission con­ tract by the dealer.

Title to the goods or the proceeds

upon resale remained with the manufacturer until settle­ ment.

The dealer usually settled with the manufacturer

once or twice a year in cash and/or farmers* notes taken in lieu of cash.

This practice was particularly typical

of manufacturers of harvesting equipment where a large initial expense for the machine was involved.

Manufacturers

of plows, tillage equipment, farm wagons and other small equipment more often sold goods on a contract of purchase 11/ See H. J. Saulnier and N. H. Jacoby, Financing Equip­ ment for Commercial and Industrial Enterprise. National Bureau of Economic Research, 1Ç44, "pp. l6-17*

39

imder which the dealer bought and paid for the goods either in cash or on relatively short terms*

The dealer had to

arrange for any credit needed by his customers or finance them himself in the form of notes or open book credits^^^ Equipment manufacturers were comparatively small, with a large number in the industry, from I850 until the early I9 OO* s.

Competition for sales was keen and terms at

times were lenient, particularly among manufacturers of harvesting equipment*

For example, in "The Century of the

Reaper," the following is noted about the early credit policy of the McCormick Company: In the early fifties the price of the reaper was 125 dollars. *.. * In practice the cash received at the time of a sale varied from ten to twenty-five percent, and the balance was collected whenever possible within the next year and a half* *.***..#* In 1856, for example, only a third of the business done was for cash and the collectible portion of the balance was secured within fourteen m o n ths!^ Collection of great numbers of farmers* notes required a special organization and large expense.

Discounting of

notes was not widely practiced by the companies.

There­

fore, the manufacturers had considerable capital chron­ ically tied up in the form of notes and receivables. Shortly after the turn of the century, many of the smaller manufacturers were combined through consolidations. 12 / Department of Commerce and Labor, Bureau of Corpora­

tions, The International Harvester Co., March, 1913»

pp. 291—È94*

—

13 / Cyrus McCormick, The Century of the Reaper, Houghton Miffin Co., 1 9 3 1 » pp. 5 0 -5 1 .

40

mergers and outright purchase so that fewer companies emerged with a more complete line of equipment.

Instead

of selling only harvesting equipment, or wagons, or tillage equipment, these companies manufactured and sold a complete line of equipment for the farm. ferred to as long-line companies.

They were generally re­ Shortly after combining

into long-line companies, nearly all of them established their own distribution system to sell equipment to indepen­ dent dealers scattered throughout the country. tribution system persists today.

This dis­

It is commonly known in

the industry as a branch house system*

Along with this

change in the ownership of the distributors, deal^^contracts with the company were generally changed from a commission or consignment contract to a purchase contract.

The manufac­

turers continued to finance both their dealers and the equip­ ment purchasers, but they had closer control of the whole operation by owning their own branch house distribution system. Although manufacturers have always offered discounts to their dealers for cash sales, they have continued to the present day to finance their sales to the dealer and the farmer.

Until World War II they financed a substantial

amount of their dealer and customer sales.

Complete data

showing the amount of equipment credit extended by manu­ facturers during the early I9 O O 's are not available, but it

kl appears that there was an upward trend In the ratio of credit sales to cash sales following the widespread adop­ tion and sale of farm tractors after World War I and con­ tinuing through the 1 9 3 O' s.

The manufacturers * business

organization has been so arranged, almost from the beginning of the industry, to include a full credit program as a per­ manent sales policy.

Typically, the credit and collection

department is under the jurisdiction of the vice-president in charge of sales and merchandising at the company level. The credit manager in each of the company branch houses is under the branch manager.

The branch manager has the final

authority concerning whether a sale may be made under the terms offered by the dealer.

Accounts receivable, including

notes, outstanding at year end averaged more than 50 percent of total sales in some of the larger equipment companies during the I9 3 O *s ; in fact, receivables outstanding were more than 100 percent of sales during some of the severe depression years of the early 1930*s.

Role of Credit Institutions Commercial Banks Banks have been the most important institutional lender in the faim equipment financing field.

They have partici­

pated in the equipment financing market in several ways. First, the larger banks have been an Important source of loanable funds for many of the companies.

Equipment

42 companies have not generally made a practice of discount­ ing their receivables; however, the added funds that were borrowed by the companies made it possible in many instances for these manufacturers to carry their own receivables. Second, banks have been an important source of funds for equipment dealers. ber of farms.

These loans to dealers appear in a num­

The loan may be directly to the dealer to

finance his inventory of goods or to enable him to carry his own receivables, or the loan may be an indirect dealer loan in which the bank discounts dealer notes and accounts. Third, direct loans to farm equipment purchasers have prob­ ably been the source from which banks have obtained their largest volume of farm equipment loans.

Commercial banks

have long been an important source of farm production loans. Farmers with established bank credit relations have borrowed to enable cash payment for equipment just as they have for other farm production purchases.

(See the next chapter for

data pertaining to the volume of equipment loans made by banks.) There have been certain limitations to commercial banks as a source of equipment credit.

Throughout the l800*s when

the equipment industry was developing, commercial banking facilities were limited in number in important agricultural regions, particularly in the newer areas, and the loanable funds of existing banks were not always adequate.

The manu­

facturer's only alternative at that time was to do his own

43

financing if he had, or could obtain, the necessary capital funds.

Other limitations inherent in commercial bank equip­

ment loans which persisted in part, through the 1930 *s in­ clude the following:

First, banks typically made loans with

short maturities - usually not more than six to nine months. This was dictated by the need for bank liquidity.

However,

farm equipment loans generally are intermediate-term loans requiring 12 to 2l|_ months for complete repayment.

Second,

there have been periods in the past when banks were not a dependable source of agricultural credit.

They have tended

to discontinue making new loans and call old loans in periods of reduced economic activity and credit stringency.

Third,

banks, as well as most other credit institutions, are slow to risk financing any new invention or innovations^ Beginning in the late 1930* s and continuing throughout the war and post-war years, demand deposits of commercial banks increased rapidly.

This increased lending capacity

encouraged bankers to find new uses for their funds, as their gross income earned on other assets had declined sharply early in this period.

Country bankers increasingly

recognized that mechanical-powered equipment was a permanent part of the farm business and that it provided a source of sound loans.

Their activities in this field developed

_l4/ Lending institutions in general were very reluctant to finance general purpose tractors which were rapidly replacing horses and mules on farms following World War I; yet they would loan farmers funds to buy horses with little or no reluctance.

kk gradually throughout this period.

Agreements between

dealers and banks for the financing of farm equipment purchases by farmers were widespread at the close of World War II.

Commercial banks are important in the over­

all retail equipment financing market at the present time (see next chapter on volume of financing) • Commercial Finance Companies Finance companies have not been active enough in the farm equipment financing market to exert any considerable effect on its development.

In 19^8 there was only one large

farm tractor and equipment manufacturer using a working agreement with a nationwide commercial finance company to handle its wholesale and retail equipment financing.

Local

finance companies scattered throughout the country do some retail equipment financing, but for the most part, this is with farmers where the risk of loss appears too high for the manufacturer, banks or PCA* s to do the financing. There are several reasons why commercial finance com­ panies have not operated extensively in the farm equipment financing market.

Of fundamental importance was the early

date when the farm equipment industry began.

In order to

remain in business, the manufacturers provided their own dealer and retail financing before specialized finance companies were in existence,

For that reason the manufac­

turer had had experience in the equipment financing market

and had developed standard terms and charges prior to the advent of the specialized commercial finance company* A second factor that has discouraged commercial finance companies is the fact that farm income is not re­ ceived uniformly throughout the year*

Hence, uniform re­

payments on a weekly or monthly basis are not possible, as a general rule.

Moreover, the weather and price hazards

to which agricultural production is subject occasionally make necessary unpredictable loan extensions.

Finance com­

panies normally operate in areas where the borrower has a regular income, barring unforseen events. In the third place, interest charged by manufacturers has usually^ been lower than that charged by finance com­ panies.

Manufacturers use a simple interest or finance

charge against the outstanding amount of the note; on the other hand, in former years at least, finance companies normally charged interest against the original amount of the note until completely repaid.

Along with this, finance

companies have an added source of income on their retail truck and automobile financing from the insurance the borrower is required to purchase.

No insurance has been

required on farm equipment financed by the manufacturers. Production Credit System This is a relative newcomer in the field of farm equipment financing since the organization has been in

k6

operation only since 1 9 3 3 î nevertheless, its total loan volume has steadily increased and it has become an im­ portant source of equipment credit.

It functions t h r o u ^

local production credit associations to provide short-term financing for all types of farm and ranch operations to those who can qualify under sound credit policies.

Loan­

able funds are obtained by rediscounting borrower notes with the Federal Intermediate Credit Banks which obtain loan funds through sale of debentures on the money market. Being cooperative credit institutions in iidiich the borrower must purchase stock equivalent to five percent of the loan, the PCA* 8 serve only as a direct source of loans to farmer borrowers.

The equipment dealer cannot discount purchaser

notes or borrow to finance his equipment inventory from these institutions.

Even so, PCA*s have become a source

of a large volume of retail farm equipment loans since their origin in 1933 (see next chapter on volume of financ­ ing).

Present Status of Equipment Financing Beginning in the late 1930 ^s a few of the larger manufacturers attempted to interest commercial banks and PCA* s in increasing their loans for farm equipment pur­ chases and thtis relieve the equipment manufacturer of some of his responsibility.

There was some growth in

k-7

Institutional equipment loans prior to our entry into the war in I9 I4-I, but manufacturers remained by far the largest source of this credit. There are several reasons why more local financing was not done during this period.

Equipment financing through

the manufacturer has been a habit with farmers for many years and they logically continue to follow the practice. Along with this, many dealers in attempting to sell farmers’ notes to banks, found the banker requesting the dealers’ endorsements on the notes.

Dealers knew the company would

accept notes without recourse and they naturally preferred to limit their liability as much as possible.

Also, many

lenders were still skeptical that tractor farming was not sound, and furthermore, many had no way of disposing of repossessed equipment because they were in no position to recondition and resell equipment. With the coming of World War II, the industry im­ mediately became a ”sellers’ market.”

The production of

equipment, although maintained at nearly pre-war levels, was controlled by the government and the equipment pro­ duced was distributed to farmers by the dealers on a rationed basis.

Net farm income improved rapidly and much

of the equipment sold was paid for in cash.

Even with

equipment production maintained at nearly pre-war levels throughout the war, the retail equipment financing needed was largely provided by institutional lenders.

For the

kô

first time in the history of most of the equipment com­ panies, their farmers* and dealers’ notes were liquidated almost completely before the end of the war.

They were

doing a cash business, even t h o u ^ their credit facilities remained in existence with practically the same organiza­ tion they had had during the pre-war period. Since the end of the war, a majority of the larger farm equipment manufacturers has made a concerted effort to encourage their retail dealers to establish financing arrangements with local lending agencies, particularly com­ mercial banks.

In so doing they hope to diminish the amount

of farm purchasers* notes they will have to finance in the future, and also reduce the amount of dealer financing necessary.

During the post-war years, 191^6 through 19l|.8,

a *’sellers* market” continued for nearly all farm equip­ ment.

Net farm income remained high and a large percentage

of the sales was for cash.

Most of the companies expanded

their production plants considerably during these three years.

In some instances, they have used the capital norm­

ally used to carry receivables to finance this plant ex­ pansion program. A survey of the 19^7 sales and credit transactions of 2 ,5 2 1 farm equipment retailers was made in April, 19lf8.

TJseable replies were received from 333 retailers.

The

lending agencies used by these retailers to finance their

k-9

customer sales in 19 ^4-7 were as follows^^^ Number Banks PCA’s Banks and PGA’s Finance companies Banks and finance companies Manufacturers Other None

11l5 5 39 iJj. 27 2 10 8if.

Percentage Lji 2 12 1 3 26

Seventy-one percent of these reporting retailers had standing agreements with banks or finance companies to finance their customer sales in 19 if-7 * By mid-19lj.9, it appeared that a ”buyers’ market” was returning in the farm equipment industry*

The majority

of the companies has made a genuine effort to promote more outside financing of equipment sales.

A fairly

large percentage of the equipment dealers throughout the country had financial arrangements with Institutional lenders to finance equipment sales, and to a more limited extent, dealer inventories.

In the meantime, the manufac­

turers still stood ready to finance dealer and purchaser sales ^ e n e v e r and wherever it was needed.

15/ This survey was taken by the National Bureau of Eco­ nomic Research In cooperation with National Retail Farm Equipment Association in April, 194-8* A ques­ tionnaire survey was mailed to 2 ,5 2 1 farm equipment retailers throughout the country which represented approximately one-seventh of the total dealer member­ ship of this association on that date. See Appendix B for a copy of the schedule used and a description of the methods used in summarizing the completed schedules.

50

V0LT3ME OF FARM EQUIPMEM? FINANCING

An attempt was made in this study to estimate the total volume of farm equipment financing and the volume of equipment receivables acquired by principal agencies active in this field, namely, commercial banks, PCA’s, commercial finance companies, and manufacturers and deal­ ers carrying their own receivables.

Two approaches were

used in attempting to derive these estimates.

First, in­

dividual surveys were taken from samples of commercial banks, PCA’s, manufacturers, and retail equipment dealers. Second, in cooperation with the Bureau of Agricultural Economics, a schedule of farm equipment purchases and credit used for such purchases was included in the 194-8 enumerative survey.

The survey was taken in late April and early May,

194 -8 , and covered purchases of new and used equipment by

farmers in 194-7*

Approximately 12,000 farms in 872 counties

were included in this sample, which was designed to obtain data representative of the entire country and of geographi­ cal regions. It was hoped that the results of the enumerative sur­ vey, along with the surveys of individual equipment financ­ ing agencies, would yield data which would make possible reliable estimates of the total volume of farm equipment financing in 194-7 and the distribution of equipment credit among lenders.

The results of these surveys, particularly

51

the enumerative survey, commercial bank and retail dealer surveys, were inconclusive and fully reliable estimates of the total are not possible.

However, certain frag­

mentary evidence bearing on various aspects of the equip­ ment financing market has been brought together and analyzed to formulate a provisional estimate of the volume of farm equipment financing. It is estimated that farmers purchased approximately two billion dollars worth of new farm equipment in 194 -7 » exclusive of trucks and automobiles.

These estimates are

based on Census data showing domestic shipments of farm equipment manufacturers, and equipment sales reported by the larger manuf acturers in a survey by the National Bureau of Economic Research.

The dollar amount of purchases was

approximately $0 percent greater in 194-7 than in 194-6 . The increased dollar purchases of equipment were the result of greater equipment production and increased prices per unit of production as compared to 194-6.

Sales of parts and

hand tools were excluded entirely from this study.

These

comprised approximately 4-00 to 5 0 0 million dollars of the total farm purchases^^^

Consequently, an estimated 1*5 to

1.6 billion dollars worth of farm machinery and equipment. 16 / This was estimated for the industry on the basis of the

. ratio of sales of parts to complete machines made by some of the larger farm equipment manufacturers re­ porting on a survey made by the National Bureau of Economic Research in early 194-9* See Table 5 for the percentage of the industry reporting.

52

as included under our definition for the purpose of study­ ing farm equipment financing, was purchased by farmers in 191^7.

Credit Purchases by Farmers in 19^-7 It should be pointed out that the ratio of faim equip­ ment financing to equipment sales in 194-7 and 194 ^ was not typical of the relationship ordinarily found under more normal economic conditions.

In both years the farm equip­

ment industry was operating in a ”sellers* market.”

Net

farm income of farmers was unusually high during these two years.

These high incomes, combined with financial reserves

which farmers had accumulated during the war when equipment shortages kept expenditures at a minimum, resulted in a high percentage of cash purchases of farm equipment.

The

change in the amount of receivables held by manufacturers from the late 1930 *s to 194-8, is an excellent Indication of the complete change from a "buyers* market” to a "sellers* market” which took place with our entry into the war (see Table 5)* A Survey of Farmers Based on the 194-8 enumerative survey, the Bureau of Agricultural Economics estimated that 74- percent of the dollar volume of new equipment purchases by farmers in 194-7 was entirely for cash or trade-in (Figure 12).

Of

53

All credit

part cash >pr trade and part eTedlt

All cash or trade-in

New Machinery and Kqulpment

All credit

19%

Part cash or!trade-in ^md part orafllt All cash or trade-in

699^

Deed Machinery and Equipment Figure 12*

Percentage of the Dollar Amount of New end Used Farm Equipment Purchased by Farmers with Cash, all Credit a':d Part Credit, United States, 1347.

Source;

Bureau of Agriciütural Economics, 1948 Enumerative Survey.

5k

tb.e remaining 26 percent of the dollar volume purchased, 1)| percent was for part cash (or trade-in) and part credit, and 12 percent of the volume was all-credit purchases*

For

used equipment, the percentage of all-credit was higher and the percentage of all-cash or trade-in lower than for new equipment*

Sixty-nine percent of the total dollar volume

of used equipment purchased was for all-cash or trade-in, 19 percent for all-credit, and 12 percent part cash (or

trade-in) and part credit*

The high percentage of cash

purchases of both new and used equipment is mute evidence of the strong cash position of farmers in 1 9 ii-7 * Relatively large amounts of credit were used for the larger, more expensive units of equipment as compared to the smaller equipment per dollar purchased (Figure 13)# For equipment purchases of $1,500 or more the credit amounted to 25 percent or more of the total cost of the equipment.

In the case of equipment purchases for less

than $100, the credit amounted to less than 10 percent of the cost*

Except for the small equipment costing less than

$100, the amount of credit used per dollar of equipment purchased was larger for used than new equipment in each size of purchase class analyzed*

Credit amounting to 20

percent of the total cost of new equipment and 26 percent of the total cost of used equipment was obtained by farmer purchasers in 19 l{_7 # Among geographic regions, the South Central regions

55

0-*

49

50-1

99

100-$

849

#

850-$

499

$

500-$

749

$

750-$

999

$

B

gg I

New Squlpmwat l

Used Equipment

#1.000>tl,499 |1,800-|S,499 $8,500 and over All, sizes

0

30

10

40

50

Percent Figure 13,

Percentage of Credit Used per Dollar of New and Used Equipment Purchased by Farmer, by Size of Purchase Class, United States, 1947,

Source:

Bureau of Agricultural Economics, 1943 Enumerative Survey. See Table 7, Appendix A*

56

used the largest percentage of credit per dollar of equip­ ment purchased.

Purchasers in the West South Central

region averaged 33 percent credit per dollar of equipment purchased, and purchasers in the East South Central region averaged 28 percent (Figure li|.).

Credit used by purchasers

was lowest in the East North Central and New England regions, averaging ll|. and l6 percent per dollar of purchases, res­ pectively,

On the basis of the tenure of the buyer, tenants

were the largest users of credit (Figure li|.),

For all

tenants purchasing equipment, 3 2 percent of the dollar volume of their purchases was in the form of credit.

This

was nearly twice the percentage of credit used by full owners and part owners and more than five times that used by managers per dollar of equipment purchased. Commercial banks loaned approximately one-half of the dollar amount of all equipment credit extended for both new and used equipment in 19^7*

The relative importance

of different equipment lenders, based on this survey of farmers is shown herewith: Lender

Percentage of total volume New equipment Used equipment

Commercial banks Retail dealers PCA«s Indi vi dual s Farmers Home Administration Finance companies Manufacturers Other

Ii-8 18 10 9 q. 4 1 6

52 2 7 2L 6 5 0 4

Commercial banks, retail dealers, PCA’s, and individuals

57

Géographie Region New England Middle Atlantic East North Central West North Central South Atlantic Hast South Central West South Central Mountain Pacific Tenure of Purchaser Full owner Part owner Manager Tenant

Percent Figure 14.

Percentage of Credit Used per Dollar of all New and Used Equipment Purchased by Far$i:ere, by Geographic Region and by Tenure of Purcliaser, 1947,

Source:

Bureau of Agricultural Econoif.ics, 1343 Snumera'ive Survey. See Table S, Appendix A.

58 loaned 85 percent of the dollar amount extended for new equipment financing in 19 lj-7 •

In the case of used equip­

ment, commercial banks and individuals together loaned more than three-fourths of the total amount in 1947#

The large

amount loaned by individuals for used equipment (2ij. percent) was in all probability an abnormally high percentage re­ sulting from the fact that a large percentage of the used equipment changing ownership in 1947 was sold directly from one farmer to another rather than through the dealer as part payment for new equipment purchased.

A survey of the 1947

sales and financing of retail dealers by the National Bureau of Economic Research indicated that only nine percent of the average dealer* s equipment sales volume was used equip­ ment.

Under more normal economic conditions, a higher per­

centage of the used equipment is traded-in as part-payment for new equipment and must be resold by the dealer.

A more

normal pattern of used equipment sales would have resulted in a larger percentage of the financing with the retail dealers and other institutional lenders than was reported in 194 . 7. A Survey of PCA* 3 The National Bureau of Economic Research conducted a questionnaire survey of PCA secretary-treasurers in the spring of 1948 in order: (a) to make an estimate of the quantity of farm equipment financed by PCA* s in 1947^ and (b) to determine certain characteristics of loans made by

59 PCA* S, namely, length of term, methods of repayment, and types of security.

A questionnaire was sent to each of

the 5 0 2 PCA* 3 in the country.

Replies were received from

2 5 5 * comprising 5l percent of the associations and repre­

senting 55 percent of the total volume of loans made by all PCA* s in 1947*

The following analysis is drawn from

that portion of the survey relating to volume of equipment financing. Farm equipment financing is a relatively important component of the total loans of PCA*s.

Approximately l4

percent of their total volume of new loans in 1947 was for equipment financing (Table 3).

The ratio of equipment

loans to total new loans ranged from 7 percent in the Pacific region to 45 percent in the Middle Atlantic region. The total dollar volume of equipment financing is highly concentrated in certain geographic regions, namely, the East and West North Central, Middle Atlantic, and West South Central regions (Figure 15).

These four groups of

states had more than 70 percent of the volume of all PCA farm equipment loans in 1947#

This concentration of

financing is to be expected, however, since nearly 75 per­ cent of the total value of implements and machinery on farms in 1945 was in these four regions (see Table 3$ Appendix A) . For all regions combined, the survey showed that 59 percent of the total equipment credit extended by PCA* s

6o

Oeographlo Region (Million dollare) N. England M. Atlantia B* N, Central W* N« Central $ 6.5

S« Atlantic.

7.5%

£• B, Central W. S, Central

Homtain Pacific 10

15 Percent

80

25

30

Figure 15.

Estimated Volume of Faiia Equipment Loans Made by Production Credit Associations and Percentage of Total by Géographie Regions, 194?.

Source:

Based on National Bureau of Economic Research questionnaire survey. See Table 3.

6l Table 3*

Total New Loans and Estimated Farm Equipment Loans of Production Credit Associations, by Geographic Regions, 1 9 4 ? »

Region New England Middle Atlantic East North Central West North Central South Atlantic East South Central West South Central Mountain Pacific United States

Farm equipment equip: loans F>ercent of Total total new new loans________ Amount___ loans_____ In thousands of dollars $ 13,482

84*881

$ 1,0?8 13»370 21,488 l4,133 6,475 5*375 10,556 6*844

7 1 ,0 3 9

5 *1 3 4

8 45 2* l4 10 11 8 8 7

$635*800

$86,453

l4

2 9 ,6 9 9

92,l40 99»l64 6 7 »420 1 2 9 ,3 7 2

a/ Èased on results of questionnaire survey. See Appendix B for coverage of survey and questionnaire used#

was for the purpose of acquiring new equipment (Table 4)* Nearly all the financing was for new equipment in the New England, South Atlantic, Mountain and Pacific regions; on the other hand, about one-half of the equipment credit ex­ tended in the North Central regions was for used equipment < In view of the abnormally h i ^ prices of used equipment relative to the list price of new equipment in 1 9 4 7 * it is reasonable to expect a relatively high proportion of used equipment financing to total equipment financing#

Also,

the high percentage of new equipment sold for cash in 1947 and the fact that the useable life of equipment was prob­ ably extended because farmers could not purchase all the

62

new equipment they wanted contributed to the relatively high proportion of used equipment financing.

The per­

centage of used equipment financing would have been much lower relative to new equipment financing under more normal supply and demand conditions within the industry. Table 4#

Estimated New and Used Equipment Loans of Production Credit Associations, by Geographic Regions, 1 9 4 ? %

Region

Loans on Loans on used equipment new equipment Amount Percentage Amount Percentage (Dollar amounts in thousands}

New England $ 930 Middle Atlantic 7*o35 East North Central 12,185 West North Central 7*289 South Atlantic 4*58l East South Central 2,879 West South Central 6,080 Mountain 4*986 Pacific 4*2l6 United States $50*781

86

57 52 52 71 à 73

14

5,734

1 1 ,3 0 3

6,844 1 ,8 9 4

43 48 48 29

L

82

1 ,0 6 0 918

27 18

59

$ 3 5 ,6 7 2

41

XJiXCiK}VX KJH XO ctU-LUO VAX O VJUVAXJXXC*.J.X"v:» a W.X Vvyjr• Jt B for coverage of survey and questionnaire used,

An estimate of the total amount of farm equipment loans acquired by all PCA* s in 194? was made on the basis of the questionnaire returns.

Approximately 86 million

dollars of farm equipment loans were acquired by all PCA* s during 1 9 4 7 ^^^ 17 / This estimate was made by first computing the ratios of

farm equipment loans acquired to total new loans made by all reporting PCA* s in the different geographic regions. The ratios were then applied to the total new loans of all PGA* 8 during 1947* and separate estimates made for PCA* 8 of each geographic region. See Table 1, Appendix B.

63

Since total new loans of PCA* s were about 20 percent higher during 1948 than during 1 9 4 7 * it can be further estimated that equipment loans acquired by PCA* s in 1948 were around 100 million dollars. Estimated Volume of Equipment Financing From the 1948 enumerative survey of farmers and the survey of production credit associations taken in 1948* it appears that the volume of equipment financing for new equipment in 1947 was between 300 and ^00 million dollars^A/ Using the midpoint of these two figures, 4^0 million dollars, the credit volume for new equipment was estimated at 20 to 25 percent of the total dollar amount of new equipment pur­

chased by farmers in 1947#

This estimate is comparable

with that made in the B.A.E. Enumerative Survey (see Figure s 12 and 13 )•

18 /The lower limit was estimated from the enumerative sur­

vey which indicated that 20 percent of the dollar volume of new equipment sales was in the form of credit* It was felt that if any bias existed in this survey, it would be a downward bias* Farmers would be more likely to report no credit used even though they had used some than they would to report credit used where they had none. The upper limit of this estimate was established on the basis of new equipment loans made by PCA* s (see Table 4) 8.8 reported in the PCA survey and the distribu­ tion of loans among lenders as shown by the enumerative survey. The PCA* s estimated their volume of new equip­ ment loans was approximately $0 million dollars in 1 9 47 and the enumerative survey indicated that 10 percent of the volume of new equipment loans was made by PCA* s. There may have been a slight upward bias in the volume of loans reported in the PCA survey due to the way in which the questionnaire was formulated.

64

The volume of used equipment financing "appears to have been approximately one-half that of. new equipment, or between l50 and 250 million dollars in 194?^^^

As­

suming 200 million dollars as the amount for used equip­ ment, the volume of credit was estimated at 25 to 30 per­ cent of the dollar amount of used equipment purchased by farmers in 1947 * No estimates were available for the total non-real estate credit used by farmers from all sources in 1 9 47 * However, it was estimated that commercial banks extended 4#2 billion dollars in the form of non-real estate loans to farmers in 1 9 4 7 ^ ^

Estimates from the enumerative sur­

vey (see Figure 15) indicated that commercial banks were the source of approximately $0 percent of the volume of all 1 9 47 farm equipment loans.

Based on our estimates listed

above, commercial banks extended approximately 3 OO million

19 /The estimates for used equipment loans admittedly are

arbitrary. Based on fragmentary evidence, it appeared that the dollar volume of used equipment purchased by farmers in 1947 was slightly less than one-half that of new equipment. Estimates from the enumerative survey indicated that approximately 26 percent of the dollar volume of purchases was in the form of credit (see Figure 13)# Thus, it was assumed that the voliame of used equipment credit in 1947 was approximately one-half that used for new equipment. 20/This estimate was made by the Agricultural Commission of the American Bankers Association based on a survey of insured commercial hanks. See Agricultural Credit and Related Data. 1949 « Agricultural Commission, American Bankers Association, 1949#

65

dollars to finance farm equipment purchases.

This repre­

sented about eight percent of their total non-real estate loans to farmers in 1 9 4 7 # The dollar volume of non-real estate loans to farmers held by principal credit institutions increased more than 20 percent from July 1, 1947 to July 1, 1948#

Assuming

this increase was also true for other lenders (namely, re­ tail dealers, individuals, and finance companies), it can be further estimated that the dollar volume of farm equip­ ment financing in 1948 was in the nei^borhood of 7 2 5 mil­ lion dollars, of which approximately two-thirds was for new equipment purchases and one-third for used equipment purchases.

Trends in Sources of Financing It is not possible to show the absolute changes in the relative importance of the individual lenders supply­ ing farm equipment credit since the middle 1930* s.

Data

relating to the volume of equipment financing for commer­ cial banks, production credit associations, retail dealers and other lenders were not available or attainable for years prior to 1947#

However, on the basis of a survey

of major farm equipment manufacturers by the National Bureau of Economic Research, it was possible to accumulate data indicating the volume of retail equipment financed by manufacturers from 1935 through 1948#

Some indication of

66 the trends in the sources of retail equipment is apparent from this survey. Manufacturers provided the bulk of the retail credit used by purchasers of farm equipment in the middle and late 1930*3

(Table 5)*

It was estimated that upwards of 100 mil­

lion dollars of farmers* notes were acquired annually from 1 9 3 5 through 1 9 4 1 * based on reports from manufacturers whose

combined sales represented more than one-half of the total farm equipment sold annually.

Total faimers* notes out­

standing at year-end likewise were estimated at more than 100 million dollars annually from 1935 through 1 9 4 1 *

As a

percentage of total equipment sales, the dollar volume of farmers* notes received ranged from 29 percent in 1 9 4 l to 48 percent in 1 9 3 5 and averaged 39 percent during this

seven year period.

The dollar volume of farmers* notes

outstanding was 23 percent of total sales in I9 4 1 * compared with 55 percent in 1 9 3 5 * and averaged 37 percent during this same period (Figure l6). Beginning in 1942* farmers* notes received by manufac­ turers and outstanding at year-end declined rapidly.

By

19 45 their dollar volume of notes received and outstandings

at year-end were less than one percent of total sales, and the volume of farmers* notes remained less than one per­ cent of sales each succeeding year through 1948 *

Many

manufacturers have not carried a single farmer* s note since 1 9 4 2 * others have had only an insignificant amount.

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69

P«ro«nt of Salsa 70

60 \ ^^y-Faimera* notes outstanding 50 Farmers* notes received 40

SO

SO

10

0 1955

1940

1945

1948

Figure 16.

Farmers* Hotes Received and Farmers* Not^s Outstand­ ing at Year End as a Percentage of Total Sales by Reporting Farm Equipment Manufacturers, 1935-1948.

Source:

National Bureau of Economic Research survey of farm equipment maiiuracturers. See Table S.

70

Although, no similar data are available for other lenders providing equipment credit from 1 9 3 5 through 194 -^, it is apparent that commercial banks became increasingly important as retail farm equipment lenders throughout this period.

As shown by the 19 I4.Q enumerative survey (see page

$6), banks extended approximately one-half of all equipment credit used by farmers in 1947#

They had assumed the posi­

tion in this financing that manufacturers held 10 years pre­ vious to 1 9 4 7 > only on a much smaller scale.

Their entry

into equipment financing on a large scale was slow during the late 1 9 3 0 *s, but throughout the war and post-war years they assumed major importance.

Increased lending capacity

resulting from expanded demand deposits exerted pressure on banks to find new uses for their funds^ particularly since gross income earned on other assets had declined sharply prior to the war.

The Agricultural Commission of

the American Bankers Association stimulated greater interest among its member banks through its educational program in this field of financing.

A bulletin, "Farm Equipment Fi­

nancing by Commercial Banks" which suggests alternative equipment dealer-banker agreements, credit terms, repayment methods and collateral security for sound equipment loans, was published in 1 9 4 ^ and widely distributed among bankers. Since the late war years, financial agreements between re­ tail dealers and commercial-banks have become widespread.

71

particularly among the smaller country b a n k s ^ ^ Production credit associations also increased in importance as a source of equipment credit, even though they extended only one-fifth the volume of equipment loans that commercial banks did in 1947*

Since their organiza­

tion in 1933, PCA* 8 have steadily increased their total volume of farm production and farm operating loans, in­ cluding loans for equipment* Summarizing, these estimates indicate two significant trends which took place between 1935 and 1948*

First,

there was a trend toward more cash purchases or, at least, a larger percentage of cash to credit per dollar of equip­ ment purchased during the last The reasons for this

seven years of this

period*

shift are apparent; favorable net farm

incomes resulting from the war-borne prosperity increased the buying power of the American farmer.

If farm incomes

had remained constant during this period, this trend toward more cash purchases,in all probability, occurred.

At least,

would not have

the trend would not have been as dom­

inant during this period if net farm incomes had remained at their normal levels.

The second trend pertains to a

shift in the lenders doing the equipment financing.

21/ See the next chapter, "Credit Standards and Credit Practices," where the more common types of financial agreements and arrangements made between lenders and retail dealers for the financing of farmers* notes are explained*

72

Equipment manufacturers had practically liquidated their holdings of farmers* notes, and commercial banks, produc­ tion credit associations and other lenders, by 1948, had assumed a much larger role in the retail financing of farm equipment. Will these two trends continue, reverse, or stabilize? On the basis of past experience, it is probable that the trend toward more cash purchases will reverse if national economic activity is stabilized even at present levels. As the "buyers* market" returns in the farm equipment in­ dustry and competition among manufacturers increases, it is likely that manufacturers will again increase their fi­ nancing of purchaser sales on a larger scale.

The larger

companies have stood ready to accept farmers* notes when­ ever necessary thi*oughout the war and post-war years.

As

farm incomes stabilize at or below present levels, manu­ facturers will be called upon to accept more farmers* notes; however, barring a major depression similar to the early

1930*3, it is unlikely that they will be required to as­ sume the responsibility for the large proportion of pur­ chaser financing which they held throughout the 1930*s. Many lending agencies have found equipment financing a profitable outlet for loanable funds, and they will not discontinue their activity in this field.

Their volume of

equipment financing undoubtedly will increase and decrease with changes in the level of economic activity and farm income from year to year, however.

73 GHABACTERISTICS OP EQtTIPMENT PINANCINO LOANS

Equipment Loan Characteristics Studied This chapter deals with the characteristics of equip­ ment financing loans to the ultimate user of the equipment* A similar detailed analysis of the characteristics of the "wholesale financing" of dealer inventories is not pos­ sible due to the fragmentary character of the information available*

However, a general description of "wholesale

financing" done by manufacturers is included in the next chapter, "Credit Practices and Credit Standards*" Loan characteristics which are analyzed in this chap­ ter are : face amount of loan, down payment provisions, terms, repayment provisions, security, and interest and finance charges* The general conditions that combine to shape the fea­ tures of equipment financing are discussed separately, along with the variations in the actual practices followed by the lending agencies engaging in this type of financing* In the latter part of the chapter the specific characteris­ tics of equipment loans made by each of the more important lenders are discussed separately* Face Amount of Loan Farm equipment is far from a standardized product from the standpoint of the cost of different or even similar

74 items.

The cost of different kinds of farm equipment

ranges from less than $100 for such things as electric motors and cream separators to more than $5,000 for selfpropelled combines and cotton pickers*

The cost for a

specific implement (tractors, for exaxr^le) may be three or four times as great for the largest as for the smallest model*

Obviously the face amount of loans to finance equip­

ment varies with its sale price, with allowances made for the required down payment* Despite the wide range in the initial cost of various types of farm equipment and the fact that farmers used more credit per dollar spent for the more expensive equipment in

1947 (see Figure 13), the face amount for the bulk of the farm equipment loans was less than $1,500 (see Figure 17)* Down Payment Provisions Several Important considerations govern the down pay­ ments required for financing farm equipment*

Among these,

the credit-worthiness of the purchaser, the nature of the equipment being financed, and the security taken on the loan, are the most important*

Whether a down payment is

necessary at all depends upon the relationship existing between the equipment borrower and the lender*

If the

lender is furnishing the credit needs of the entire farm operation, no down payment at all may be needed, provided the credit standing of the borrower and the security back of the entire loan is sufficient to safeguard the principal

75 amount.

This is a very common type of equipment loan where

the purchaser has, or can acquire, a good lender relation­ ship. Where the equipment being financed is the only loan consideration, different credit procedures apply and a minimum down payment is necessary.

Although the required

down payment essentially reflects the financing agency* s judgment of the credit strength of the purchaser, other things being equal, in all cases It is necessary to take account of the repossession value of the equipment and any recourse provided for against the seller in the event of default by the borrower.

Factors affecting the minimum

down payment include: the cost of repossessing, recondi­ tioning and reselling the equipment in case of default ; the possibility of obsolescence which is extremely difficult to assess; and, the dealer*s mark-up and any installation costs that may have been included in the original contract. There is no rule, of course, for determining the appropriate down payment.

As a rough guide, it has been suggested that

the down payment be at least twice the amount that must be deducted from the original value of the equipment in order to find its resale value immediately after installation^S^ Information from farmers concerning their 1947 pur-

22/ H. B. Lewis, "Instalment Selling of Industrial Equip­ ment," American Management Association. Industrial Marketing Series, I. M. 17, P# b.

76 chases of equipment indicates clearly that the down pay­ ment required for equipment financing falls into two gen­ eral classifications: where the equipment purchased is the only consideration, and where It is part of a larger loan#

Approximately one-half of the new equipment loans

obtained by farmers were for 100 percent of the purchase price, and more than one-half of all used equipment loans likewise required no down payment (Table 6)#

The smaller

the purchase price of the equipment, both new and used, the larger the percentage of credit purchases which involved a loan for the whole amount of the purchase price#

In cases

where the credit extended was less than the original pur­ chase price, the loan most frequently ranged from 2 5 to 75 percent of the purchase price#

These data indicated that

farm purchasers frequently made down payments considerably in excess of the minimum required in 1 9 4 7 * Manufacturers of farm equipment make loans to farm purchasers almost entirely on an equity basis*

Their

minimum down payment requirements occasionally are as low as 10 or 15 percent under special circumstances, but typically range from 20 to 33 l/3 percent#

In some agri­

cultural areas where the weather and price hazard is par­ ticularly risky, they require a minimum 4^ to 50 percent down payment# Terms Determining the maximum period of time over which the

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78

purchaser of farm equipment shall be permitted to make payments, like determining minimum down payments, is dif­ ficult, and no general rules are established*

Credit of­

ficers use one-quarter of the estimated productive life of the equipment as a general rule*

In industrial equipment

financing, for equipment on vtoich the annual savings or in­ creased earnings can be measured, the period of time neces­ sary to repay the full amount from one-third of these sav­ ings or increased earnings often sets the maximum terms&2^ With few exceptions, however, it is not possible to measure accurately the increased savings or earnings for a specific piece of farm equipment* Important considerations in establishing the maximum terms of farm equipment loans to the purchaser include: (1 ) the expected service life of the equipment and its expected rate of depreciation and; (2 ) the financial abil­ ity of the purchaser to make repayments* Although no data were obtained from farmers in the 1948 enumerative survey relating to terms for 19 4 ? equip­

ment loans, information assembled from manufacturers, dealers and lending agencies indicates that terms ranged from three months to two years for equipment loans*

Maxi­

mum terms extended by manufacturers were usually 24 months, although 3 6 month terms were extended in a few instances 23 / R* J # Saulnier and N* H* Jacoby, op^* cit ** p* 6 1 #

79

for large, specially built equipment*

Maximum terms ex­

tended by other lenders ranged from 12 to 2 4 months, but varied considerably among these lenders*

Terms extended

by some institutional lenders are limited by legal restric­ tions and tradition or custom*

Also, where the equipment

loan is part of a larger loan financing the operating needs of the farmer, other considerations besides those listed above may dictate the maximum term of the loan* Credit Arrangements and Repayment Provisions Repayment provisions for both types of credit arrange­ ments (notes and charge accounts) may be made in one lump sum, irregular instalments, or regular instalments*

The

principal considerations determining the repayment schedule eæe the amount and regularity of the income of the farmer purchaser* Farmers * notes taken by manufacturers during the years 1 9 4 6 to 1 9 48 have, by and large, been instalment notes

calling for payments at irregular intervals coinciding with income dates for the purchaser, even t h o u ^ the volume of notes taken was small*

Exceptions to this exist In

dairy areas and in some poultry areas, where regular monthly instalments are more common* Credit arrangements used in financing both new and used farm equipment as reported by farmers in 1 9 4 7 , were

80

distributed as follows&^ Arrangement

New Equipment Percentage

Single payment note Instalment contract Charge .account 0ther£2/

58 30 7 5

Used Equipment Percentage 57 23 2 l8

More than one-half of the equipment credit extended to far­ mer pur chasers was in the form of single payment notes# Single payment notes and instalment notes together made up nearly 90 percent of the new and 80 percent of the dollar volume of used equipment#

Charge account credit was of

little importance in the over-all financing in 1 9 4 7 , as indicated by the fact that only seven percent of the new and two percent of the used equipment credit was classified strictly as this type#

However, a large share of that

credit classified under "other" arrangements could be called charge account credit, particularly for used equipment, be­ cause a large percentage of this represents used machinery being sold from one farmer to another on the basis of verbal credit arrangements (see page 56)# Security Conditional sales contracts and chattel mortgages have been the most common legal instruments used as security for 24/ Based on dollar amount of credit 25 / Includes combinations of other three arrangements,

verbal promises, and arrangements not clearly des­ cribed#

81

equipment financing notes. were unsecured or endorsed.

Some equipment notes, of course, Where the equipment being fi­

nanced is the only consideration (no credit for other pur­ poses included), the conditional sales contract has been the instrument most commonly used, except in states limit­ ing or prohibiting its use entirely.

In states where the

conditional sales contract is not permitted, some form of the chattel mortgage generally has been used.

Manufactur­

ers, dealers and finance companies, in particular, use the conditional sales contract wherever possible, because it enables them to retain title to the equipment until the purchase price is completely paid. Equipment purchasers having established credit rela­ tionships of their own with institutional lenders may only be required to sign a promissory note to obtain credit, provided their credit rating is sufficiently high. In this way they can pay cash for the equipment purchased. Where the credit rating of the purchaser is low and he is unable to make any cash payment on the equipment from his own funds, the lender may advance the full amount of the money and take a lien (usually a chattel mortgage) on the equipment purchased and other assets owned by the borrower. Where the lender is financing the general farm busi­ ness operation of an equipment purchaser, security, where required, is usually in the form of a chattel mortgage on the equipment purchased along with other assets sufficient

82

to safeguard the principal amount of the entire loan. Finance Charges The wide diversity of farm equipment financing arrange­ ments makes It difficult to give a concise statement of the levels of purchaser charges in this financing.

It is

possible, however, to describe the general practices con­ cerning the type of finance charges made even though the amount of the charge varies among lenders and among dif­ ferent purchasers*

The actual charges used by selected

lenders have been obtained and are discussed in the latter part of this chapter. With few exceptions, the interest or finance charge, aside from fees, ranges from six to eight percent per annum, but is only charged against the unpaid balance of the note.

Some manufacturers, in the past at least, have

used a sliding scale finance charge varying from six per­ cent per annum for notes maturing within three months to slightly over nine percent for notes maturing in 2l\. months. This was done in an attempt to discourage long maturities* Except possibly for recording fees, there are usually no charges made other than the finance charge.

For the

most part, no insurance has been required by the lender. Fire and wind insurance would be the only type necessary for farm equipment and even this has seldom been re­ quired.

83 Equipment Loans Made by Commercial Banks

In mid - 1 9 4 7 the Division of Research and Statistics of the Board of Governors of the Federal Reserve System and the Division of Research and Statistics of the Federal Deposit Insurance Corporation made a nation-wide survey of agricultural loans outstanding in insured commercial banks. A l t h o u ^ the survey was not designed specifically to pro­ vide an estimate of farm equipment loans outstanding in mid- 1 9 4 7 , its results can be used for this purpose.

The

loans sampled were itemized in sufficient detail with res­ pect to purpose and security to provide a fairly complete description of loans made to finance farm equipment pur­ chases.

A duplicate set of punch cards on the individual

commercial bank loans included in the survey was provided by the Board of Governors of the Federal Reserve System for use in this study of farm equipment financing# However, there are several features of the survey data that limit their use in our analysis of farm equipment financing.

First, the survey includes loans made for the

purpose of buying trucks and automobiles, and these un­ doubtedly made up a fairly large proportion of the total. Second, the loans for financing new and used equipment could not be separated so that no analysis could be made of the relative importance, or of the different character­ istics, of the two types of equipment loans*

Third, the

8!^

survey listed only the amount outstanding on the date of the survey, so that no analysis could be made of the orig­ inal amounts of individual loans. It was estimated that 731,000 short-term loans ag­ gregating $ 740,000,000 were outstanding in insured com­ mercial banks in the United States in mid-1947, that had been made for the purpose of financing the purchase of live­ stock and equipment.

Approximately I8 percent of these

loans (135,000), aggregating l4 percent of the total amount (100 million dollars), were secured by machinery (Table 10, Appendix A).

It was assumed that a major proportion of the

loans secured by equipment were made for the purpose of financing farm equipment purchases; hence it is only those loans that have been included in the following analysis. All unsecured and endorsed loans, and loans secured by anything other than, or in addition to, equipment were ex­ cluded, since it was not possible to separate the equip­ ment loans from the livestock loans in these groups. Face Amount of Loans Loans with balances of from $500 to $999 outstanding comprised the largest size group.

Nearly three-fourths

of the loans had outstanding balances of less than $1,000, although loans with an outstanding balance of $1,000 or more included 62 percent of the aggregate amount outstand­ ing (Figure 17),

8^

Size of Loan

Under $250

$250-1499 $500-$999

$1,000-$1,499

$l,500-$2,499

$2,500-44,999

I

I Number

Amount $5,000 and more

Percent Figure 17.

Percenoa ,e Distribuxion of Gommsrcif1 Benk Equipment Loans by Sloe of Loan Outstanding, United Stater, mid-1947»

Source:

Survey Dy Federal Reserve Board end FDIC. 11, Appendix A.

See Table

86

There was no marked variation in the average size of loan balances outstanding among the different geographic regions*

Banks in the northern regions held a somewhat

h i ^ e r percentage of small balances ($250 or under) while banks in the southern and western regions held a higher percentage of the larger balances ($1,000 to $1,499)• Down Payment Provisions No information was included in the Federal Reserve survey which would provide any estimate of the minimum down payment required for equipment*

However, based on

the 1948 enumerative survey of farmers, 56 percent of the new equipment and 68 percent of the used equipment loans held by banks had no down payment; the loans were equal to or exceeded the purchase price.

Nearly all these loans

were likely direct loans between the equipment purchaser and the bank*

The ratio of credit used to the original

cost of the equipment for farmers obtaining equipment loans from banks in 1947 was as follows (Table 12, Ap­ pendix A) : Ratio of credit to cost

Percentage of total loans New equipment Used equipment

2 6 -5 0

1 15

2 10

5Ï-75

22

11

\-zS% 7 6 -9 9

100

^6

56

2

68

Some of the loans, where a 100 percent loan was not needed

87 or a down payment was required, were direct loans between the purchaser and the bank, and the remaining loans were indirect loans, t h r o u ^ dealers, between the purchaser and bank in which at least a minimum down payment was re­ quired. Terms More than three-fourths of the equipment loans had terms of 12 months or less; in fact, 48 percent had terms of 6 months or less, while only 18 percent had terms of more than 12 months.

Three percent was payable on demand#

The demand notes were larger than average, as they comprised only three percent of the number of loans but aggregated nine percent of the total amount outstanding (Figure l8). A major portion of the loans payable on demand were in the New England and Middle Atlantic regions.

More than

one-half of the loans in the Middle Atlantic and East South Central regions had terms of six months or less.

On the

other hand, nearly one-half of the loans in the Pacific region had terms of more than 12 months even t h o u ^ the average size of these loans outstanding was about the same as that for the entire country# Repayment Provisions Farm equipment loans held by banks in mid-1947 were predominately single payment loans.

Only 28 percent of

88

T e » of Loan Demand

6 mo. or lass

5 mo.-lyr.

Over 1 yp.

I

I Nimber

Dnelaaslfied

Amount

20 30 Percent Figure 18.

Percentage Distribution of Commercial Bank Equipment Loans by Term of Loan, United States, mid-1947.

Source:

Survey by Federal Reserve Board and FDIC. 13, Appendix A.

See Table

Repayment method One payment

Regular Xnatalment

I n Number Irregular Xnatalment

1^1 Amount

90 30 Percent

40

30

Figure 19.

Percentage Distribution of Commercial Bank Equipment Loans by Method of Repayment, United States, mld-1947.

Source:

Survey by Federal Reserve Board and FDIC. 14, Appendix A.

See Table

89

the loans were repayable in regular instaiments and 10 percent in irregular instalments, while 62 percent of the total were single payment loans (Figure 19) #

No exact

comparison of the average original size of those loans by repayment method can be made from this survey, since only the amount of the balance outstanding on each loan was listed when the survey was made. Regular instalment loans were relatively numerous in the New England, Middle Atlantic and Pacific regions udiich have a high percentage of dairy and other types of farms with a fairly uniform income throughout the year. The East North Central and the East and West South Central regions had a relatively large percentage of single payment loans.

Crop, livestock and cotton farms likewise had a

larger than average percentage of single payment loans. The East South Central states have a relatively large per­ centage of cotton farms and the West South Central states have a relatively large percentage of both cotton and live­ stock farms, accounting for the predominance of single pay­ ment loans in these two regions.

The large proportion of

single payment loans in the East North Central states is not the result of the type of farming in that area because its large percentage of general farms are better suited to irregular instalment loans.

It is more likely the re­

sult of custom in banking practice.

90

Security All the bank loans of the mid-1947 Federal Reserve survey which we analyzed were secured, some by conditional sales contracts and some by chattel mortgages.

Although

it was not possible from the survey data to distinguish the proportion of each kind of security, observation would indicate that the predominate security was the chattel mortgage, particularly for farm equipment.

This was prob­

ably less true for the financing of trucks and automobiles. Some loans made for the purchase of farm equipment were unsecured, a few were endorsed, and still others were secured by something other than equipment.

Nearly 20 per­

cent of the volume of all banks loans outstanding in mid-

1947 for the purpose of financing equipment and livestock was unsecured, 5 percent was endorsed, and 24 percent was secured by something other than machinery or livestock (Table 10, Appendix A).

A portion of these loans was for

financing farm equipment purchases.

Although there was no

way to measure this distribution between livestock and equipment loans, equipment loans probably made up a sub­ stantial amount of these outstanding loans. Interest Charges The average interest rate on all farm production loans outstanding in all insured commercial banks in mid -1947 was

91

6.1 percent per annumêê^

The average rate for all farm

production loans for the purpose of financing machinery or livestock was 6.0 percent per annum and 6.6 percent per annum for all farm production loans secured by machinery# The average interest rate was larger for the smaller loans.

The average rate for all production loans secured

by equipment was as follows for loans of different sizes: Size of Loan

Average Interest Rate

Under $250 #250 - $499 500 - 999 1,000 -2,500 2,500 and over All sizes

7.3 percent 7.2 6.8 6.6 6.0 6.6

Equipment Loans Made by PGA* s The survey of PGA secretary-treasurers in the spring of 1947 included questions relating to certain characteris­ tics of PGA equipment loans made in 1947 * (See Appendix B for an explanation of the survey. )

Data were obtained on

the term of the loans, methods of repayment and types of security.

Additional data pertaining to the face amount

of the loans and down payments required were available from the 1948 enumerative survey.

Thus, it was possible

to obtain a fairly complete description of 1947 PGA farm

26/ See Richard Youngdahl, "The Structure of Interest Rates on Commercial Bank Loans to Farmers," Federal Reserve Bulletin. Dec., 1947> PP* 1491-92•

92 equipment loans. Pace Amount of Loans and Down Payment Required No data are available indicating directly the dis­ tribution of PGA equipment loans by face amount.

However,

estimates from the 1948 enumerative survey indicate that PGA* 8 participated in the financing of about the same per­ centage of small purchases as large purchases of farm equipment (Table 9» Appendix A).

It is estimated that the

face amount of PGA equipment loans were similar to those of commercial banks, with the bulk of the loans for less than $ 1,000. PGA equipment loans are direct loans to the purchaser, since the borrower must own stock in the PGA equivalent to five percent of his outstanding loan.

Also, a high

proportion of PGA equipment loans was part of a larger loan made to cover the farmer*s production needs.

Down

payments, as such, on farm equipment financed were seldom required.

Estimates from the enumerative survey indicate

the following ratio of credit to original cost for the equipment purchased by farmers obtaining PGA equipment loans in 194? (Table 12, Appendix A ) ; Ratio of credit to cost 1 -2 5 ^ 2 6 -5 0

51-75 7 6 -9 9 10 0

Percentage of total loans New equipment Used equipment 0

0

2

0

6 „3

0 8

89

92

93

Terms For the country as a whole, 62 percent of the new equipment loans and 70 percent of the used equipment loans by PGA*s were expected to be repaid within 12 months (Table 7).

Generally, the PGA* s in the eastern regions - Middle

Atlantic, New England, South Atlantic and East South Gentral regions - expected a smaller percentage of equipment loans to be repaid within 12 months than was true in other regions.

With the exception of the East South Gentrai re­

gion, the above relationship is also true for used equip­ ment loans.

The expected repayment of loans in full within

12 months in the Middle Atlantic states was especially low being only l4 percent for new and 29 percent for used equip­ ment loans. The PGA* 8 in the eastern states expected about onehalf of their new and used equipment loans to be repaid within one year, while those in the rest of the country expected closer to three-fourths to be repaid.

The more

stable year to year incomes of farms in the eastern states particularly the Northeastern and the Corn Belt states - and the lower down payments necessary on the equipment to finance it safely may explain this wide variation, at least in part. In 1947» not farm Incomes in the western states were ex­ tremely high.

In such areas which are more subject to both

weather and price risks, the down payment required by the lender is necessarily higher than in areas of more stable

*

production and prices*

When the weather is sufficiently

good for large crop production and prices remain high# farm borrowers are able to repay their loans very rapidly# Repayment Provisions In most instances the credit extended by PCA* s for the purchase of farm machinery is part of a larger loan# granted to cover the farmer* s production needs for a period of time*

The loan is usually arranged on a "budgeted"

basis - i#e*# the loan proceeds are disbursed at intervals (generally in from two to seven instalments) when needed by the farmer and are repaid in instalments (generally from two to eight per loan) as income is received from the sale of crops# livestock and the like# Table ?•

Estimated Percentage of Total PGA Equipment Loans Expected To Be Totally Repaid Within 12 Months# by Geographic Regions# 19475/

Region New England Middle Atlantic East North Central West North Central South Atlantic East South Central West South Central Mountain Pacific United States

New equipment Number (percent)

S9

1/I 6o

Used equipment SIttmber (percent) 52 29 71

83 lj.6 55 88 88 75

dk

%

70

53 69 95 98 77

dix B for coverage of survey and questionnaire used#

95 Although approximately one-third of the total volume of equipment loans called for repayment in single payments# one-fifth in regular instalments and nearly one-half in Irregular instalments, important differences are apparent in these proportions among the geographic regions (Table 8 ). The predominance of dairying in the New England and Middle Atlantic states accounted for the high percentage of regular instalment loans; the importance of general crop and live­ stock farming in the East and West North Central states made irregular instalment loans more common; and crop and livestock specialty farms in the South Atlantic, West South Central# Mountain and Pacific states accounted for the high proportion of single payment loans in those areas# Security Since a PCA equipment loan to an individual borrower is usually part of a larger loan covering the borrower *s production needs, it is customary to take additional secur­ ity besides a lien on the equipment purchased.

In fact#

only i|. percent of the total amount loaned for f a m equip­ ment in 19l|-7 was secured by an equipment lien only (Table 9)*

Of the remainder, 9 percent was either unsecured or

endorsed# 78 percent was secured by the equipment purchased plus other assets# and 9 percent was of other or unknown security#

Where a lien is taken on equipment or other

assets# this is generally in the form of a chattel mortgage.

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98

Except for the New England and Middle Atlantic states, there was little variation in the type of security taken# In these states the percentage of unsecured and endorsed loans and loans secured by a lien on the equipment pur­ chased was much h l ^ e r than for the country as a whole# Interest Charges The interest rate per annum on loans made by PCA* s was

percent until April 1, 19^7 and 5 percent there­

after on the outstanding amount of the loan#

Loan service

and recording fees plus the five percent investment in PCA stock required per dollar borrowed would make the effective interest rate for 194-7 slightly higher* than the above quoted rates#

Loan service fees are usually established on the

basis of the size of the loan#

One-half of one percent of

the face amount of loan up to $2,000 was commonly used by PCA*s.

Also, it has been estimated that the necessity of

owning stock equivalent to five percent of the loan, which is normally borrowed as part of the loan, raises the net cost of the loan to the average borrower approximately 0#4. percent on a i|.#5 percent loan in non-dividend paying associations^Z^

Therefore, loan service fees and the stock

feature combined probably raised the effective interest rate nearly one percent above the quoted rate for PCA farm borrowers# 27/ See E. L# Butz, The Production Credit System for Farmers. The Brookings Institution, 1944* PP* 52-57•

99 Equipment Loans Made by Manufacturers Manufacturers were not an important source of equip­ ment loans in 194-7 or 194-8*

The 194^ enumerative survey

indicated that only one percent of the total new equipment credit and none of the used equipment credit were provided by manufacturers in 194-7 (see page 56)#

Farm equipment

companies Included in the National Bureau survey in the spring of 194-9 reported less than one million dollars of farmers* notes acquired annually in 194-7 and 194-8 * Manufacturers have had an important bearing upon the development of retail equipment financing even though they were not an important source of equipment credit extended in 194-7 and 194-8#

For this reason, an analysis of the

characteristics of manufacturers* equipment loans is post­ poned until the next chapter, "Credit Practices end Credit Standards," where a detailed description of the develop­ ment of manufacturers* equipment credit is presented#

Equipment Loans Made by Retail Dealers Retail dealers were an important source of equipment credit in 1947 » even though a large percentage of equipment sales was on a cash basis#

As stated earlier (see page 56),

l8 percent of all new and 2 percent of all used equipment credit was extended by dealers in 194-7*

A survey of retail

dealers in the spring of 194-8 included questions pertaining

100

to their volume of new and used equipment sales, the dis­ tribution of the credit sales between their own organiza­ tion and outside lending agencies, and the type of fi­ nancial arrangements used for credit provided through their own organization. (See Appendix B for an explanation of the survey. )

These data, along with related data from the

enumerative survey, made possible a fairly complete des­ cription of sales volume of equipment dealers, the amount of retail financing acquired within their own organization, and some of the characteristics of their financing in 194 -7 * The average volume of farm equipment sales made by each of the 333 reporting retail dealers in 194-7 was f 8 1 ,5 0 0 .

This includes $74-» 100 of new equipment sales and

$7*4-00 of used equipment sales (Table 10).

Thus, approxi­

mately 9 1 percent of their total equipment sales was new equipment.

Sales of parts and payments received for ser­

vice labor were not included in this survey#

The annual

"Cost-of-Doing-Business Study” conducted by the National Retail Farm Equipment Association showed average dealer sales of new equipment of $ 1 0 4-,0 00 and used equipment of $9,200 in 194-7^^

This was 38 percent more than sales for

dealers reporting in the National Bureau survey.

The

distribution between new and used equipment was approxi­ mately the same for both surveys, however, having been

28 / See Farm Equipment Retailing. June, 194-8* P* 25

101

e l ^ t percent on one and nine percent on the other#

The

N#R#F#E.A# survey was based on audited accounts mailed to the national offices.

These returns were largely from

better than average dealers as indicated by the fact that they kept complete records#

This explains, in large part,

the higher average sales of the dealers participating in the N.R.F.E.A. survey as compared to the National Bureau survey, which was based on a selected random sample of dealers. Table 10#

Average Volume of New and Used Equipment Sales of Reporting Farm Equîment Dealers by Geo­ graphic Regions, 194.752,

Region

Number reporting

New England 8 Middle Atlantic 23 East North Central 101 West North Central 10i|. South Atlantic 17 East South Central o West South Central 28 Mountain 31 Pacific 13 United States ^

333

Average voiume of equipment sales per dealer Total New ÿsed $ 64,200

$ 5,500

$ 6 9 ,7 0 0

.,3 0 0 ,,5 0 0

3 ,0 0 0 7 .5 0 0

7 7 .3 0 0

8,800

l i 68,700

74,000

52,500

21,800

9 2 ,9 0 0 7 1 ,2 0 0

5 .5 0 0

184,500

1 0 ,7 0 0

7 7 ,5 0 0 6 0 ,7 0 0 7 4 .3 0 0 9 8 .4 0 0 7 6 .4 0 0 1 9 5 ,2 0 0

$ 7 4 ,1 0 0

$ 7 ,4 0 0

$ 8 1 ,5 0 0

57,300

3 ,4 0 0

5,200

Ë'ased on results of questionnaire survey. See Appendix B for coverage of survey and questionnaire used#

With the exception of the Pacific region, there was little variation in the average volume of equipment sales among geographic regions.

Average sales per dealer ranged

from $ 6 6 ,7 0 0 in the South Atlantic region to $98,I|.00 in

102

the West South Central region#

On the other hand, average

equipment sales in the Pacific region amounted to $195*200 per dealer#

Used equipment sales averaged 5 to 10 percent

of total dealer sales in all regions except the East South Central, where used equipment sales comprised nearly 30 per­ cent of total sales# On the basis of 317 replies, it appears that practically all farm equipment sales made in 194-7 were cash sales by the dealer#

Many of the dealers reported that no customer

sales were financed through their own organization In 194-7 * In the country as a whole, reporting dealers financed less than seven percent of their new equipment sales through their own business organizations (Table 11)# Table 11#

Estimated Percentage of Equipment Sales that Dealers Financed T h r o u ^ Their Own .Organiza­ tion, by Geographic Regions, 194-7% Number

Average percentage financed

Region Percent New England Middle Atlantic East North Central West North Central South Atlantic East South Central West South Central Mountain Pacific United States ^

7 21 96

99 16 8

27 31 12

317

Percent

12

8

8 6 4 9 11 5 9 16

1 3 3

6»5

Base dr on results of questionnaire survey#

14

3 2 6 21 4 .4

103

By geographic regions, dealer financed sales ranged from an average of i|. percent of total new equipment sales in the West North Central region to l 6 percent in the Pacific region, and from 1 percent of used equipment sales in the Middle Atlantic region to 21 percent in the Pacific region* Dealers in the Pacific region not only had the highest volume of sales per dealer of any region, but also financed a larger percentage of their sales t h r o u ^ their own organi­ zation* Dealers with a volume of sales exceeding $100,000 reported a larger percentage of their sales financed through their own organization than those with a smaller volume of sales*

Dealers with total farm equipment sales of less than

$ 50,000 each financed an average of approximately five per­ cent of their new equipment sales and two percent of their used equipment sales.

Dealers with total equipment sales

of $ 100,000 and over financed approximately twice as high a percentage of their new equipment and four times as h i ^ a percentage of their used equipment as the dealers with a sales volume of less than $50,000 (Table 12)* Table 12*

Estimated Percentage of Equipment Sales that Dealers Financed Through Their Own Organiza­ tion, by Volume of Sales, 194-754 Number reporting

Sales volume $

0

50,000 100,000

-

#49,999 99,999

-

& over

120 105 91

Average percentage financed New equipment Used ©quipaient Percent Percent 4.8

1*9

5.4 9.5

£*4 0*1

io4

Reporting dealers estimated that approximately 10 percent of their new and 3 percent of their used farm equipment sales were financed in 194-7 by lending agencies to which they had referred their customers or t h r o u ^ which they had arranged the financing for their customers (Table 13)*

These estimates for new equipment sales ranged from

an average of 7 percent in the West North Central region to 20 percent in the Pacific region*

The Middle Atlantic

region, with l6 percent, and the Pacific region, with 20 percent, were the only two geographic regions in which es­ timated new equipment sales financed by lending agencies were significantly h i ^ e r than the average for all report­ ing dealers in the country*

There was little variation

among geographic regions in the estimated percentage of used equipment sales financed by lending agencies* Table 13*

Estimated Percentage of Equipment Sales for Which Reporting Dealers Arranged Financing with Outside L a d i n g Agencies, by Geographic Regions, 194754

Region

Number reporting

New England Middle Atlantic East North Central West North Central South Atlantic East South Central West South Central Mountain Pacific

6 21 83 91 l6 8 24 28 12

United States

289

Average percentage financed New equipment Need equipment Percent Percent 11 2 16 3 2 9 7 4 14 1 2 10 4 i4 13 4 20 5 10.5 3.1

105 Reporting dealers with the largest volume of sales ($100,000 and over) estimated a larger percentage of their new and used equipment sales were financed by lending agen­ cies than did dealers with smaller volumes of sales.

Deal­

ers reporting a sales volume of less than $50,000 estimated that 9 percent of their new and 2 percent of their used equipment sales were financed by lending agencies, compared with average estimates of 13 percent for new and 4 percent for used equipment sales by dealers with a sales volume of $100,000 and over (Table l4)#

It is important to note

that these estimated sales of new and used equipment fi­ nanced by lending agencies are in addition to those financed by the dealers through their own organization. Table l4*

Estimated Percentage of Equipment Sales for Which Reporting Dealers Arranged Financing with Outside Lending Agencies, by Volume of Sales, 1 9 4 7 %

Sales volume $

tfumber reporting

0 - $49*999 50,000 - 99*999 100,000 - & over

110 98 83

Average percentage financed New equipment Used equipment Percent ï^ercent 9*0 11.2 13.4

1*9 3*7 £*3

Based on results of questionnaire survey

No data were available indicating directly the dis­ tribution of dealer financing by face amount.

However,

estimates from the 1948 enumerative survey indicate that retail dealers participated in the financing of a larger

io6

than average percentage of the smaller equipment, priced below $ 7 5 0 .

They provided nearly two-thirds of all the

credit obtained for new equipment selling for less than $50

(Table 9, Appendix A).

The face amount for the bulk

of the equipment loans made by dealers probably was con­ siderably below those made by commercial banks and PCA* 3 in 1 9 4 7 * From the 1948 enumerative survey, it was estimated that dealer equipment loans to farmers in 1947 were dis­ tributed as follows, according to the ratio of credit to original cost of the equipment: Ratio of credit to cost

Percentage of total loans New equipment Used equipment

1 -25 ^ 2 6 -5 0

51-75

1 20 24

0 23 32

K

3I

Down payments were required for more than one-half the credit purchases of both new and used equipment where the credit was extended by the dealer.

The instances

where no down payment was required most frequently involved the smaller dollar purchases*

This was Indicated by the

fact that retail dealers extended nearly two-thirds of the total new equipment credit for purchases of less than $ 5 0 , and nearly Ç0 percent of the loans for equipment of that price involved 100 percent credit.

Equipment credit

107

extended by dealers covered the equipment purchased only and was not part of a larger loan also used for other pur­ poses, as was often true of loans by institutional lenders* Even though a large share of these 100 percent loans was for small purchases and was extended in the form of open accounts, it would appear that a minimum down payment of some sort would have been both desirable and necessary for minimum security of the loan* Dealers replying to the National Bureau survey in­ dicated the type of credit arrangements they used in fi­ nancing sales through their own organization (Table 15)* Approximately one-half of their new and used equipment credit was extended in the form of open accounts, slightly over 30 percent on single maturity notes, and slightly over 20 percent on instalment notes*

This distribution by type

of credit arrangement was true of large and small dealers alike* Table 15*

Methods Used by Reporting Equipment Dealers to Finance Credit Sales Through Their Own Organi­ zation, United States, 194*754

Item Number reporting Method used: Open account Straight note Instalment note ^

New equipment sales

Used equipment saleF

167

71

Percentage

4.8 31 21

ëased on results of questionnaire survey

Percentage 45

32 23

108

CREDIT PRACTICES AND CREDIT STANDARDS

As explained In an earlier chapter, "Development of Farm Equipment Financing," farm equipment manufacturers were the forerunners in the farm equipment financing field.

This was true for both the retail financing of

the equipment purchaser and the wholesale financing of the retail dealer* s equipment inventory.

Since the manufac­

turer was the predominate lender for both purposes until the recent war and post-war years, through and including 194 .8 * the development of equipment credit standards and

credit practices resulted largely from credit policies initiated by the manufacturers. In this analysis of credit practices and credit standards, we shall trace the evolution of the operating methods, terms and charges for both retail and wholesale equipment financing.

From interviews with executives of

some of the larger farm equipment companies and from pub­ lished materials pertaining to this subject, information was assembled pertaining to the credit organization of the manufacturers, the development of manufacturers * credit standards, terms and charges, dealer-lender relations, and the post-war equipment credit organization, operating methods and terms.

109 Credit Organization of the Mannfacturer Manufacturers* business organizations have been arranged, almost from the beginning of the industry, to include a full credit program as a permanent sales policy. Typically, the credit organization of the manufacturer has been a part of the sales department.

A brief description

of organization of the larger farm equipment companies follows in order to clarify the financing arrangements they have provided for handling wholesale and retail sales. Nearly all of the larger manufacturers own and operate their distribution system.

This is commonly known in the

industry as a branch house system.

Farm equipment companies

operating on a national scale have had from 25 to nearly 100 branch houses per company.

Each branch house has a

branch manager in charge, who has been responsible for equipment sales to dealers in his territory. At the general offices of the company, there are usually a number of district managers, each of whom has jurisdiction over a specific group of branch houses and branch memagers.

These district managers, for the most

part, are under the jurisdiction of the vice-president in charge of sales and merchandising. With respect to credit operations, two general types of organization were found among the different companies. Many of the larger companies had a separate credit organi-

110

zat ion within the sales and merchandising department. These companies had a credit manager and several district credit managers at the company level and a credit manager at each branch house to einalyze and pass on both retail and wholesale credit and make the necessary collections. In each branch house, however, the branch manager had the final authority concerning whether a sale was made under the terms offered by the dealer. A few companies had no specialized credit organization; credit and collections were handled entirely by the sales organization.

Each individual in the company, including

the district sales managers, branch managers, and blockmen, were in charge of the farm equipment sales, credit extension, and collections. Purchaser and dealer notes and accounts accepted by the companies were generally held at the individual branch houses and collections were made from that point.

Only a

small portion of the companies handled these notes and accounts through their general offices. The company owned branch house system now widespread in the farm equipment industry developed prior to World War I.

Through this system equipment companies sell

directly to independently owned equipment dealers, who in turn sell directly to the farmer.

Prior to the branch

house system, some companies sold their farm equipment to retail dealers through independently owned distributors

Ill and others sold their equipment through general agents to independent dealers, called local agents, on a commission basis#

By owning their distribution system and granting

dealer franchises, manufacturers have been able to exercise greater control of both their sales and credit transactions* The credit organization has always been a part of the sales department of the larger companies; occasionally a sieparate collections department was maintained by some companies, however.

This was practiced b y at least one

major manufacturer until 1930#

Under this arrangement re­

tail and dealer credit was analyzed and accepted by the sales department.

Also, minimum down payments and maximum

terms were set by the sales department •

After the notes

were accepted, they were sent to the company owned collec­ tion offices, each of which handled collections for several branch houses.

This system was disbanded and was replaced

by a complete organization under the jurisdiction of the sales department in 1 9 3 0 # Wholesale Credit to Dealers Agricultural production is h i ^ l y seasonal.

This is

particularly true of crop production which has been much more highly mechanized on farms than has livestock produc­ tion#

A large share of farm equipment sold to farmers

likewise finds a highly seasonal use.

Corn planters are

used only in the spring, combine-harvesters in the summer

112

and fall, and corn pickers in the fall.

Milking machines

and cream separators are used the entire year; tractors, to a limited extent, are used the entire year#

It is dif­

ficult for manufacturers to anticipate sales for equipment that is sold during a very limited period each year; like­ wise, it is difficult for retail dealers to order the cor­ rect amount of equipment in advance where sales are h i ^ l y seasonal# Besides having h i ^ l y seasonal sales, retail equipment dealers as a group generally operate with a limited amount of capital#

Outside lending agencies have hesitated to

finance farm equipment inventories because the volume of credit needed has been very large and it has often been needed for long periods of time#

For these reasons equip­

ment manufacturers have had to finance a large share of their retail dealers* inventories, in the past.

Generally,

dealers* notes and accounts of manufacturers outstanding at year-end were nearly equal to purchasers* notes out­ standing, from 1 9 3 5 t h r o u ^ 194 -1 * based on reports of manufacturers to the National Bureau survey in 194-9 ♦ Although terms allowed on dealer*s notes and accounts have been liberal, manufacturers have offered and continue to offer substantial discounts for cash payment by the dealer#

A five percent discount for cash payment by a

specified date, which is primarily determined by the season in which the particular equipment is usually sold, has been

113

standard dealer terms for many years*

Over and above this

cash discount, it was very common for manufacturers to allow an additional discount of two-thirds of one percent per month for cash payment prior to the discount date and another two percent discount on all equipment purchased during the year if all dealer obligations, including pur­ chaser notes held by the company, had been paid by year-end. For exan^le, a pickup baler delivered to a dealer on February 1 had an assumed cash discount date of May 1 of the same year.

The dealer decided to remit cash for the

baler which had, say, a retail price of $1250 and a fac­ tory price of approximately $1000.

If he remits cash pay­

ment for the baler on February 1, he obtains a $50 cash discount plus a $19 prepayment discount and pays the manu­ facturer $931 for the baler.

If the dealer had no outstand­

ing obligations to the company at year-end, he received an additional two percent discount, or approximately $ 10.62 on this purchase.

The dealer loses part or all of these

discounts, however, if he submits purchasers* notes for part payment of the baler. The manufacturer retains title to the equipment through a conditional sales contract until the equipment is completely paid for in cash either by the dealer or purchaser.

The dealer generally signs a non-interest

bearing note upon receipt of the equipment ordered and no interest is charged until after the due date of the note.

ii4

whioti Is usually 4 to 12 months after shipment for large equipment.

Also, many manufacturers allow a carryover to

the following season for as much as 50 percent of the larger equipment the dealer has not sold on a new non-interest bearing note secured b y a conditional sales contract. A survey of terms extended by the larger manufacturers to their dealers in 194-8 indicated some variation among companies.

Cash discount dates varied from 10 days after

delivery for one company to the end of the fiscal year for another company. nominal.

Charges on dealer notes and accounts were

Some companies carried dealers* equipment for as

long as two years with no interest or finance charge.

None

of the companies interviewed allowed a cash discount to dealers on transactions involving purchasers* notes taken as part payment for the equipment sold. Retail Credit to Purchasers The majority of large equipment manufacturers has offered and continues to offer credit arrangements to pur­ chasers of farm equipment.

Prior to the depression of the

1 9 3 0 *3 , manufacturers generally required their dealers to

endorse purchaser notes sent to the company as part pay­ ment for the equipment.

In this way the manufacturer had

full recourse against the dealer on defaulted obligations of equipment purchasers.

Since the early 1930*s, however,

equipment companies have commonly accepted purchaser notes

115 without recourse on the dealer provided specific credit information on the purchaser was forwarded to the company and prior approval was received on the credit transaction before delivery of the equipment.

In all cases, the

dealer loses his right to full cash discounts on the equip­ ment purchased from the manufacturer when purchaser notes are sent to the company in lieu of cash payment.

A few

companies have offered somewhat smaller cash discounts on the amount of cash submitted along with the purchaser notes on large equipment such as tractors, provided this cash payment was more than $100.

One company has paid full cash

discounts if the amount the purchaser* s note held by the company is paid in cash by the end of the fiscal year. Certain credit infomation has been required by the manufacturers from purchasers giving a note as part pay­ ment for the equipment purchased.

On the order for farm

equipment provided by the manufacturer for dealer use, the following information was generally required for purchases involving retail credit: (1) a description of the kind, number and price of the equipment purchased; (2) down pay­ ment received in the form of cash and trade-in; (3) amount to be financed and the date and amount of repayments; (4) an operating statement requesting an estimate of the source and amount of income by months during the length of the loan; and (S) a financial statement, description of real property owned end credit references.

ll6

other information required from the dealer before manufacturers accepted or rejected purchaser notes gener­ ally included a description of real property, real estate mortgages and chattel mortgages obtained by the dealer from the public records of the county, credit information obtained from the purchasers* credit references on a form provided by the dealers, and a note and conditional sales contract or chattel mortgage signed by the purchaser. Chattel mortgages or some form of lease were used by manu­ facturers in the six or seven states in which the use of the conditional sales contract was prohibited or limited by certain legal restrictions. The credit information listed above and the note and conditional sales contract were sent to the branch house of the company where the credit arrangement proposed for the purchaser was approved or rejected.

If acceptable to

the branch manager or branch credit manager, the dealer could deliver the equipment to the purchaser.

The notes,

conditional sales contract and credit information were filed and repayments collected at the branch office, or occasionally at the general office of the company. Development of Manufacturers* Credit Standards, Teinns and Charges Complete information indicating the credit standards, terms and charges for purchaser notes accepted by

117

manufacturers in the early I9 OO*s is not available; how­ ever, a brief description of these items is possible from information obtained through interviews with individuals in the equipment manufacturing field and scattered published materials vhich were available# Credit Standards In retail equipment financing by manufacturers, the credit analysis deals with at least three main elements: the equipment being sold, the purchaser of the equipment, and the seller of the equipment#

The manufacturer retains

title to, or a lien on, the equipment sold#

The seller is

responsible for assembling and adjusting the equipment and may accept a contingent liability on the instalment note# The general credit standing of the purchaser is always of prime importance# Until the early 1930*s, manufacturers had placed heavy reliance upon the contingent liability of the dealer in their retail equipment credit.

This proved unsatisfactory

because the credit position of dealers as a group has been limited#

Since the early 1930 *s, manufacturers have gener­

ally accepted purchaser notes without recourse on the dealer, thus placing much greater emphasis on the resale value of the equipment # The ere dit-worthiness and financial responsibility of the buyer of farm equipment has always been a very

118

Important element#

The credit standing of farmers as a

group has been somewhat limited because their business was typically small and organized in the form of individually owned proprietorships, although most lenders consider far­ mers, as a group, good moral risks.

However, standard

credit procedures relating to the farm business have been developed, and the financial standing of the individual farmer can be fairly easily obtained# Terms Terms on purchaser notes accepted by manufacturers have changed as time passed.

Long terms and low down pay­

ments, at times, have been used as competitive devices among firms within the industry to increase sales#

Aside

from their use as a competitive device, however, there have been notable changes in terms typically extended by the industry as a nhole since the early I9 OO *s# From a statement of the McCormick Company pertaining to methods of doing business in 1 9 0 2 , the following ex­ cerpt is made regarding terms on customer sales at that time^2^ The system of giving long credits to the farmer for purchasing reaping machines was established by Gyrus H# McCormick at the beginning of his business early in the fifties, or about 1855• It has been continued

29 / Department of Commerce and Labor, Bureau of Corpora­

tion, op# cit., PP# 34-8-34-1 •

119 up to the present time^ and It is a fact that the harvesting machine business gives longer credit to the farmers than they receive from the manufacturers of any other goods they buy# Plows and spring tools are sold on short time or for cash. Twine is sold principally for cash in the fall of the year it is sold. The usual terms for harvesting machines are one-third (1/3) in the fall of the year the machine is purchased (this is called cash)^ one-third (1/3) the fall of the following season, and one-third (l/3) the fall of the second season, so that a farmer who bought his machine in the spring of 1902 would pay one-third (1/3) of it in the fall of 1 9 0 2 , one-third (1 / 3 ) of it in 19 03 # and one-third (I/3 ) of it in I9 0 I4., or, in other words, he would have used the machine in three harvests before it was finally paid for# Excessive competition has extended this time until it frequently happens that a farmer has three years in which to pay for the machine after the season in which he purchased it# Competition has also brought about the undesirable feature of giving a farmer a year’s time without interest when the crop conditions are unfavorable and he is not able to get full use out of his machine. It is also a custom to sell machines at the close of the harvest on what are called "next year’s time” without interest# That is to say, that if a farmer purchased a harvester or reaper in September of I9 0 2 , he gives his note without interest until the fall of 1 9 0 3 * end at that time he pays one-third (1 /3 ) cash and one-third (l/3 ) each in the fall of 1 9 0 4 * 1 9 0 5 # The policy of extending this long credit has worked to the advantage of the McCormick Company in some ways by increasing sales, but if the collection departments of all the various companies were managed together, many improvements upon this system could be effected by shortening the length of credit and by making the examination of the paper taken in payment more rigid# It is apparent from the above statement, that terms on purchaser notes extended by the McCormick Company were longer than terms commonly used today#

Data from the

International Harvester Company show that notes and accounts accepted from both dealers and purchasers be­ tween 1 9 0 4 and 1 9 1 1 ranged from 25*6 percent to 35*0

120

percent of total sales22^ from one to four years.

These notes ranged in maturity

About one-quarter of the notes

matured the first year and nearly two-thirds the second year.

Approximately 10 percent of the notes matured during

the third and fourth year (Table l6).

During this eight

year period there was a noticeable trend away from three and four year notes toward a h i ^ e r percentage of notes maturing the second year. Table l6 .

Comparison of Percentages of Amounts of Notes Maturing in Specified Periods Taken by the y International Harvester Company, 1 9 0 4 - 1 9 ü % Percent­ age ma­ turing 1st yr.

Year 190 k 1901 1906 1907 1908 19 09 1910 1911

3 4 .7 3 0 .0 3 0 .5 2 9 .6 2 6 .9 2 6 .5

25,9

2 8 ,9

t^ercentage ma­ turing 2nd yr.

Percentage ma­ turing 3rd yr.

58.3

1 0 ,2 7 ,0 6 ,k 6 ,2 6 .0 6 .5

6 3 .0 6 6 .3 6 6 .7

67,7 6 k ,2

Percent­ age ma­ turing 4th yr. x'X .? ,k 4 .6

,k •k

a/ department of Commerce and Labor, op. cit.. p. 2:84#

No down payment until after the first harvest was a common practice prior to World War I, particularly for harvesting equipment.

Attempts were made to collect the

remaining notes on harvesting machines the succeeding two falls.

Occasionally this had to be extended an additional

Ibid..

p.

283.

121

year or two when crop failures or low prices made it im­ possible to make payments.

For the larger equipment sold

at that time, notes with terms extending as long as four years were taken to allow for complete payment for the equipment. Following World War 1 and with the advent of mechanized tractor power, two important developments took place with respect to credit terms allowed the equipment purchaser. First, a new formula replaced the old "two or three falls" for tractors and many larger units of faim equipment.

The

new terms which became well established were 20 percent cash down, 1^0 percent by October 1 of the current year and l\0 percent by October 1 of the succeeding year.

This ar­

rangement ranged from 18 to 2 4 months on the original notes. The second development was the increasing use of monthly Instalments on some equipment, notably cream separators and milking machines.

Where monthly Instalments were made,

the down payment was commonly as low as 10 percent.

As ex­

plained in the preceding section, it was during this period of the 1 9 2 0 ’s that manufacturers began accepting purchaser notes on some equipment from their dealers without recourse, provided the dealer furnished full credit information and agreed to replace any purchaser note which proved unsatis­ factory within 60 days after it was accepted by the company. During the depression of the early 1 9 3 0 ’s, the no down payment principle of equipment finamcing was revived

12 2

again by some of the larger manufacturers in an attempt to stimulate sales.

The program of one company announced in

the spring of 1931, was as follows: (1) For tractors and tractor-drawn or tractor-driven equipment sold and delivered with a tractor, no cash down payment was required.

Settle­

ment was to be made by payment of equal notes maturing October 1, 1931, 1932 and 1933*

(2) The same terms applied

to tractor-drawn or tract or-driven equipment when the sale amounted to $200 or more.

(3) If the farmer paid more than

50 percent cash on either (l) or (2) above, a cash discount

of five percent was allowed.

(ij.) Sales of less than $200

were made on the old terms, except that the company waived the dealer’s guarantee of the notes. Despite the offer of these terms to prospective pur­ chasers of faz*m equipment, sales continued to shrink.

Then

a new plan was devised by some of the companies with the hope of reversing this trend.

Essentially this was the

same plan as the one listed above with the exception that payments the first fall would depend upon the size of the corn, wheat or potato crop.

The farmer estimated the yield

of the one crop of these three that was his major enterprise and agreed to make his first payment that fall based on 10 cents per bushel for all corn or wheat raised or 7 cents a bushel for potatoes, if that was his major crop, up to onethird of the purchase price of the equipment. In the spring of 1932 the industry faced the lowest

123

point of the depression with even less prospect for sales than in 1931.

At this time at least one major company

announced a crop guarantee plan in which the company guar­ anteed the price of No. 2 yellow corn in Chicago at $0 cents per bushel, 70 cents for No. 2 hard wheat at Chicago and 8 l/2 cents per pound for middling spot cotton at New Orleans for an amount sufficient to pay ijD percent of the purchase price of tractors, harvester-threshers and other items of equipment.

This plan also failed to reverse the downward

trend of business. Sales of the farm equipment industry decreased rapidly during 1 9 31 and 1932.

In some instances 1932 sales were

not more than 25 percent of I929 sales.

The amount of past

due purchaser and dealer notes had increased rapidly during this period.

It was not uncommon to find past due notes

in excess of total sales for some companies in 1932.

Total

sales began to increase slightly in 1933 following a slight increase in farm prices and business activity in the country as a whole. The depression of the 1930*s brou#it to l i ^ t several weak spots in the extension of purchaser credit by the manu­ facturers during the 1 9 2 O’s.

Some of these include: not

requiring a sufficient down payment for the customer to establish a real equity in the equipment purchased; not properly spacing the payments on the notes; and, the

12k

weakness of relying upon dealer guarantees of purchaser notes.

Pew dealers had sufficient credit resources to

repay any large number of defaulted obligations of farmers. Since the mid-193P*s and continuing through 1948, manu­ facturers have required a cash down payment and/or trade-in equivalent of 20 to 33 l/3 percent of the selling pri ce for most farm equipment, depending upon the regularity of the repayments.

Where equal monthly repayments were made, a

20 percent down payment was required, compared with 33 1/3 percent down where the balance was repaid in only two pay­ ments.

After the down payment was deducted, approximately

50 percent of the balance of the purchase price was to be

repaid within 12 months after delivery of the equipment and the remainder within 18 months after delivery.

In some In­

stances, a maximum term of 2Ï\. months from delivery date was allowed for complete repayment.

These terms were ex­

tended to all equipment with a selling price in excess of $100 or $200.

Where the selling price was less, the range

of cash down payments was the same, but the maximum term of the loan generally did not exceed 10 to 12 months. The above minimum down payments and maximum terms generally predominated in the farm equipment Industry on purchaser notes accepted by the manufacturers from 19 35 t h r o u ^ 1 9 4^. however.

One or two exceptions were commonly found,

In the areas where the type of agriculture or

weather make farming financially hazardous, down payments

125

required were as high as 4^ or 50 percent.

Examples of

these areas included the large wheat area west of the 100th Meridian, scattered areas in the Northwest and small areas in the Southeast.

Another common exception to the above

terms was the down payment required for milking machines and cream separators.

These items were typically sold with

a 10 percent down payment and repayments were scheduled monthly. The average down payment series on credit sales made by manufacturers reporting on the National Bureau survey ranged from 35 to 5 0 percent for the years 1 9 3 5 to 1 9 4 1 * The average down payment reported by two companies ranged from 35 to 40 percent during each of these years and from 45 to 50 percent for another coiiqpany.

Only three companies

reporting on the survey were able to provide data of suf­ ficient detail to permit calculating the average down pay­ ment series for credit purchases of faim equipment, but the above is believed to have been fairly typical of the in­ dustry. Purchaser notes accepted by reporting manufacturers averaged 39 percent of total equipment sales by reporting companies from 1935 through 194l (Table 5) *

Maximum terms

on purchaser notes accepted by the companies were 2 4 months. For all reporting companies, approximately one-third of their dollar volume of purchaser notes between 1937 and

126

1 941 matured the current fiscal year, one-half the second

year and 10 percent the third year (Table 17)*

There was

little variation from year to year or among companies dur­ ing the same year. Table 17#

Percentage of the Dollar Volume of Purchaser Notes Acquired by Reporting Manufacturers , Maturing at Different Periods, 1937-1941^ Due in current year Percent

Year

37 #5

1937 1938 1939

IZ

il

bue in second year Percent

Due in third year Percent 1 2 .0

m

ût

50.0

ik.i 13.3

5 0 .1

facturers.

It has never been possible to adopt regular weekly or monthly payments on farm equipment or any farm produc­ tion loans similar to that used for urban or industrial loans, except in rare instances, such as dairy farming, where the monthly income is fairly regular.

During the

development of farm equipment production and sales, manu­ facturers extended credit to equipment purchasers, particu­ larly for harvesting equipment, on the basis of repayment in two or three falls - i.e., payments were made after the crops were harvested around October 1 for each of the succeeding two or three years after purchase. This type of repayment was fairly standard throughout

127

the equipment industry until the early 1930* s.

However,

farm income was more regular than once or twice a year, and manufacturers found that the best time to make col­ lections on any loan was a time close to an income date of the borrower.

TAfhether note maturities were set for one

date or another, note collections followed income dates fairly closely# Since the mid-1930*Q, it has been a fairly common practice among manufacturers to list the maximum terms they would accept on purchaser notes, and the financial and operating statements taken from the purchaser have been used by the company to estimate the date and amount of the purchaser’s receipts throughout the year.

Prom this esti­

mate, due dates on the notes were established at irregular intervals to coincide with the approximate income dates. In summary, terms for financing sales of farm equip­ ment by manufacturers have undergone many changes between 1900 and 1 9 4 ^.

Maximum terms were shortened from approxi­

mately three years to two years ; down payments were in­ creased from no down payment to 20 to 4^ percent, depend­ ing upon the frequency of repayments and the nature of the agriculture; and typical repayment schedules were changed from once each fall to irregular intervals falling on in­ come dates of the individual farmer purchaser.

During the

severe depression of the 1 9 3 O' s, manufacturers found that

128

liberal down payments, and even guaranteed prices, did not increase sales materially.

However, these liberal terms

did increase losses Incurred on purchaser notes at a later date because the purchaser had not established a real equity in the equipment.

With no equity in the equipment, the

purchaser had little or nothing to lose by not making pay­ ments on these notes. Charges During the early 1900’s, prices of agricultural equip­ ment commonly were quoted separately for cash and on credit. It was not unconmon to find the retail price approximately 5 percent higher for sales involving two equal fall pay­

ments and 10 percent h i ^ e r for sales involving three equal fall payments^^

In addition to the time price differen­

tial, the interest paid by purchasers on their notes gen­ erally was closely associated with the legal interest rate allowed In each state before and after maturity. Sometime prior to World War I it became a fairly typical practice of manufacturers to quote only time prices to their dealers and allow for cash payment by stipulated discounts.

This has remained the standard practice of

manufacturers.

Until the early 1930' e charges on pur­

chaser notes included a simple interest charge at or near

33/ Ibid.. p. 279.

129

the legal rate prescribed by the individual states plus an additional five percent finance charge on the amount of the note or notes outstanding after 1 2 months. Although some man’ ufacturers made only a simple interest charge on the outstanding amount of the purchaser notes, other companies continued until the mid- 1 9 3 0 ’s to charge a flat five percent finance fee on the outstanding amount of the note after 10 or 12 months.

This added finance charge

was used in an attempt to encourage short maturities on their purchaser notes. Beginning about 193 6 and continuing through 194®, two general types of charges have been used for purchaser notes by the manufacturers.

One type used by a few companies

was merely a simple interest charge on the outstanding amount of the note, which approximated six percent before maturity and somewhat higher after maturity.

The other

type used by many of the larger manufacturers was a six percent simple interest charge on the outstanding amount of the purchaser’s note plus a variable finance charge that increased with the length of teim of the note.

This finance

charge varied from 0 .2 percent for a note maturing in three months to 3*1 percent for a note maturing in 24 months.

A

purchaser’s note that was payable in one lump sum would have a gross charge of 6 .1 percent per annum if repaid in 3 months, 7 # 5 percent if repaid in l5 months, and

percent if repaid

130

in 2 4 months.

Here again, manufacturers placed a premium

on purchaser notes with short maturities. In the spring of 1949, one of the larger equipment manufacturers had shifted to a straight five percent finance charge on all purchasers’ notes accepted by the company’s financing subsidiary.

For notes of all maturities, the

effective interest rate charged was 9*23 percent per annum, whether the note matured in one lump sum, irregular or regular instalments.

Dealer-Lender Relations

Beginning in the late 193 O ’s and continuing through­ out the post-war period of 1 9 4 ® to 19 4 ®,

of the larger

manufacturers made special efforts to encourage their deal­ ers to enter into agreements with local lending institutions for the financing of their customer sales.

Company repre­

sentatives assisted their dealers in making these arrange­ ments wherever possible.

The majority of these agreements

were between commercial banks and dealers.

A few were also

made with local finance companies in some areas of the country.

Agreements between PCA’s and dealers were not

possible because the borrower must purchase stock in the local association equivalent to five percent of his loan. A PCA loan must be made directly to the borrower, whereas most equipment loans made under a dealer-lender agreement

131 were indirect loans closed by the dealer, with prior ap­ proval received from the lender before the dealer delivered the equipment. Some dealer-lender agreements were written prior to and during World War II, but a large share of the existing agreements were made from 194® t h r o u ^ 194®*

During this

three year period, commercial banks were looking for new fields in vhich they could profitably invest their loanable funds, and many of the larger manufacturers were actively promoting lending agreements with local credit institutions through an educational campaign with both the dealers and the lenders. One large manufacturer of farm eqxaipraent stated that approximately 9 0 percent of its dealers had bank agree­ ments in operation in 1 9 4 ® to provide the needed retail equipment credit.

Of the remaining dealers that had no

bank plan, a few dealers had sufficient capital to carry their own customer notes, some used a llne-of-eredit from their local bank and did their own retail financing, and a few dealers had lending agreements with local finance com­ panies.

Another large manufacturer of farm equipment

stated that approximately 70 percent of its dealers had agreements with commercial banks and local finance companies in operation in 1 9 4 ®* The National Bureau survey taken in 194® indicated that 71 percent of the dealers reporting had some type of an

132

agreement with, a hank or finance company to finance customer sales in 194? (Table 18).

Only 29 percent of the dealers

had no financial arrangement with a bank or finance company# Of the 331 reporting dealers, 3® percent had a no recourse agreement with banks or finance companies, 17 percent had a full recourse agreement, 10 percent had a reserve or hold­ back arrangement, and 6 percent had a combination of two or all three of the above mentioned arrangements. Table 18.

Agreement

Types of Financing Agreements Equipment Dealers Had with Banka or Finance Companies, United States, 1 9 4 7 % du m b e r of equipment Percentage of total dealers reporting____ dealers reporting

No recourse Full recourse Reserve or holdback Combination 2/ No agreement Total

38

127 57 34 19 94

17 10 6 29

331

100

^ Based on results of questionnaire survey, b/ Includes retailers with two or more of the above listed agreements.

Only 60 percent of the reporting dealers with a sales volume of leas than #50,000 had financial arrangements with banks or finance companies, whereas close to 80 percent of the dealers with a sales volume of $5 0 ,0 0 0 or more had financial arrangements (Table I9 )#

For dealers with a

sales volume of #100,000 or more, 43 percent had no re­ course agreements, l4 percent had full recourse agreements.

133

and 15 percent had reserve arrangements•

For dealers with

a sales volume of less than $ 5 0 ,0 0 0 , only 33 percent had no recourse agreements, I8 percent had full recourse agree­ ments, and only I4. percent had reserve arrangements with banks or finance companies# Table I9 .

Types of Financing Agreements Equipment Dealers Had with Banks or Finance Companies, by Volume of Sales, 19k7âi Volume of sales

Item Number reporting Type of agreement No recourse Pull recourse Reserve or holdback Combination No agreement ^

$50.000-#99,999

f100,000 and over

12 5

1X1

95

percent 33 18 k .5 ko

percent ko 20 13 6 21

percent w Ik

$0-#49,999

15

6 22

Based on results of questionnaire survey.

As indicated above, a substantial percentage of the dealer-lender agreements in operation in 1947 involved no recourse on the dealer#

It should be pointed out, however,

that in many cases where a no recourse agreement prevailed, the dealer rendered some service to the lender by reposessing, reconditioning and reselling any equipment that had to be repossessed# The three types of agreements commonly found between dealers and lenders in 1 9 4 7 , namely, no recourse, limited recourse and full recourse, are described separately in

134 more detail In the remainder of this section. No Recourse Agreement Where a no recourse agreement is used between the dealer and the lender, each loan must be judged and ac­ cepted for financing by the lender on its own merits. Manufacturers generally provide a warranty and agreement for all new equipment which is printed on the retail pur­ chase order, and the dealer provides for assembling and adjusting the equipment and teaching the purchaser proper operation and care of the equipment*

Where the lender is

also financing used equipment sales under this agreement, he may require a guarantee of performance from the dealer to be specifically written on the order for the equipment. The dealer generally does any repossessing, recondi­ tioning and reselling necess€u?y for the lender, although the lender pays the dealer the cost of these services. This service replaces the one major problem the lender has with farm equipment loans, that of handling and resell­ ing a repossessed implement or machine. As indicated above, equipment loans made by outside lenders without recourse on the dealer was the most common type of credit arrangement between equipment dealers and lending agencies in 1 9 4 7 *

In large part, this was a carry­

over from the way in vehich manufacturers financed purchaser sales without recourse on their dealers, provided certain credit information was presented and prior approval was

135

obtained on the transaction before delivery of the equip­ ment.

Where lending agencies took purchaser notes without

recourse, they also required certain credit information on the purchaser and generally did not allow delivery of the equipment prior to approval of the loan. Limited Recourse Agreement Agreements providing limited recourse against the dealer have been widely recommended by manufacturers as the soundest type of credit arrangement.

With this type

of arrangement, the dealer as well as the lender has some responsibility for initiating sound farm equipment loans. The difficulty with the limited recourse agreement has been the inability of the two parties to agree to the extent of this recourse against the dealer; consequently, it is easily seen why a larger percentage of both no recourse and full recourse agreements existed in 1947 than limited recourse agreements. At least three kinds of limited recourse agreements were commonly used between dealers and lending agencies. These include: (1) A reserve or holdback arrangement, (2) an arrangement whereby the liability of the dealer is limited as to time or amount on the individual or aggregate con­ tracts, and (3) a repurchase plan. One form of the reserve or holdback arrangement in­ volves deducting a certain percentage of the face amount

13 ®

of the notes accepted and placing this in a reserve ac­ count.

Normally three to five percent of the face amount

of the note and five to seven percent of the outstanding balance on all contracts is held in this reserve account. The total amount required in the reserve account at any instant of time is the limit of the dealer’s liability on the contracts.

Where losses are not sufficient to use this

reserve account, the amount accruing over the minimum per­ centage of the reserve account is periodically disbursed to the dealer. Another form of reserve arrangement may be created, either with or without a holdback, by setting aside a cer­ tain percentage of the finance charge of each contract in a reserve account.

For example, if the finance charge is

e i ^ t percent, and two percent is set aside for the reserve account, the bank would have a net yield of six percent on the contracts, barring losses over and above the reserve account.

A holdback on the notes may also be used with this

arrangement until the reserve account reaches five to ten percent of the aggregate balances outstanding from the re­ serve accumulation. Where liability as to time or amount is incurred by the dealer, any number of agreements may be made.

The deal­

er may have full liability for the note until a certain per­ centage of the amount, or number of payments, have been made on the contract, after which the dealer has no

137

liability#

On seasonal contracts, which are common for

farm equipment, the dealer may be relieved of liability after the first payment is made# A plan whereby the dealer guarantees to repurchase re­ possessed farm equipment for the unpaid balance of the con­ tract closely resembles a full recourse agreement#

How­

ever, under this plan the lender generally agrees to assume the responsibility for any legal action necessary# With the exception of the liability incurred by the dealer for these limited recourse arrangements, purchaser notes are handled by the lender in the same manner as they are under the agreements without recourse#

Certain credit

information is required, prior approval of the contract is required, and a conditional sales contract or chattel mort­ gage on the equipment purchased is taken as security# Pull Recourse As the term implies, under this arrangement the dealer is fully liable for all defaulted obligations of the pur­ chaser#

The dealer may endorse each contract with full

recourse, or a master agreement between the lender and dealer may be in effect vhich explicitly sets forth the responsibility of the dealer# There are several limitations to the full recourse agreement#

First, a dealer’s endorsement on purchasers’

notes makes him a borrower in many states, and this limits

138

the power of the lender to loan more than a specified Siam to the dealer--usually an amount not greater than 10 percent of the capital and surplus of the lending institution#

Second, full re course^ makes the dealer the primary

creditor, and dealers as a group have a limited credit standing#

Experience of manufacturers has indicated that

dealers’ endorsements on defaulted purchasers’ notes have been of limited value#

Third, full recourse makes the

dealer both a salesman and a creditor because the lending agency does not take the responsibility for determining and enforcing sound credit policies#

Post-War Credit Organization and Credit Standards In 191*8 all the major manufacturers had a standby credit organization for dealers’ and purchasers’ f aim equip­ ment notes#

Some companies were accepting a small volume

of notes from areas where other credit sources were not available for farm equipment loans#

In the spring of

1 9 4 9 , one of the larger manufacturers organized a fi­

nancing subsidiary in anticipation of a larger volume of dealer and purchaser credit in the near future# There has been a general trend toward more retail financing of farm equipment by institutional lenders, and there was little evidence to indicate that this trend would completely reverse again#

However, there was also evidence

139

which indicated there would be certain areas and times when manufacturers again would have a fairly large volume of purchasers’ notes among their accounts receivable after the return of a "buyers’ market*"

With respect to dealer fi­

nancing, there has been no significant trend on the part of institutional lenders in this type of farm equipment fi­ nancing, and manufacturers undoubtedly will continue to supply the bulk of this type of financing# A survey by the Consumer Credit Department of the American Bankers Association of commercial banks in 194® indicated that 45 percent of the l4» 171 commercial banks in the United States were making direct loans to farmers for the purchase of farm equipment in 1 9 4 ® ^ ^

Also, 25

percent of the commercial banks were making farm equipment dealer loans either for financing dealer inventories or for financing dealer receivables discounted with the bank or both#

Agreements between dealers and lending agencies

for the financing of retail sales of farm equipment were widespread by 1 9 4 ®, azid. many lending institutions had gained considerable experience making retail farm equip­ ment loans, particularly from 1 9 4 ® t h r o u ^ 1 9 4 ®* Characteristics of retail farm equipment loans made in 1 9 4 ® varied, depending upon the lending agency and the

3 2 / American Bankers Association, Consumer Instalment

Lending Directory. 194®, P* 3%#

iko nature of the loan consideration#

It is possible to des­

cribe the general terms for retail equipment loans offered by manufacturers in 1 9 4 ®, however, and these terms were fairly general among lending agencies where the loan con­ sideration involved only the farm equipment being purchased# Minimum down payment requirements ranged from 20 to 40 percent depending upon the repayment schedule#

Maximum

terms ranged from I8 to 2 4 months on larger equipment and closer to 12 months for small equipment#

Repayment pro­

visions usually involved irregular repayments coinciding with income dates for the borrower#

On some equipment,

such as milking machines, repayments were generally monthly# A conditional sales contract or chattel mortgage on the equipment purchased was used as security in most instances# Interest and finance charges ranged from approximately six to slightly over nine percent per annum on the out­ standing amount of the loan#

In general, these were the

retail farm equipment credit terms prevailing from 1 9 4 ® t h r o u ^ 1 9 4 ®, which was marked by a "sellers’ market" in which a high percentage of the total sales was paid for in cash by the purchaser#

i4i CREDIT EXPERIENCE

It was difficult to obtain reliable data pertaining to the loss experience on farm equipment loans for the different financing agencies#

For institutional lenders, such as banks,

PCA’8 and finance companies, it was not possible to separate the experience on equipment loans from that on other agricul­ tural or industrial loans, and annual data were not available for total losses or charge-offs on all loans# However, some manufacturers could furnish data on delinquencies of purchaser notes and losses on dealer and purchaser notes#

These data were obtained as part of the

survey of farm equipment manufacturers conducted by the National Bureau#

Since manufacturers were the major source

of both dealer and purchaser equipment loans prior to World War II, an account of their experience in this financing should reflect the general credit experience in this type of financing# Loan Delinquencies The percentage of past due or delinquent purchasers’ notes held by equipment mantifacturers varied inversely with changes in net farm income from year to year and was closely associated with changes in prices received by farmers from 1 9 35 t h r o u ^ 19 41

(Table 20)#

The amount of past due pur­

chaser notes of all reporting companies averaged 22#5

Ik2 percent of all purchaser notes outstanding at year-end dur­ ing that seven year period, and ranged from a low of 11.1 percent in 1942 to a high of 36.6 percent in 1935*

The

relatively high percentage of past due notes in 1 9 3 5 was due, in part at least, to the carryover of a large number of pur­ chaser notes taken in the worst depression years.

The index

of past due notes varied inversely with the index of net farm income.

In general, this was also true of the relation­

ship between past due notes and prices received by farmers. No data are shown for the war and post-war years of 1942 to 1 9 4 ®, because the volume of notes accepted during those years was extremely small.

Many of the companies acquired no

purchaser notes after 1 9 4 2 and had no purchaser notes on hand after 1 9 4 4 * Table 20#

Year

Percentage Past Due Purchaser Notes Outstanding at Year-end Were of Total Purchaser Notes of Report­ ing Manufacturers, and Index of Past Due Notes, / Farm Prices and Net Farm Income, by Years, 1933-41^

Percentage of past due notes, all Index of past reporting^/ due notes companles-2/ 1 9 3 5 -4 1 = 1 0 0

1935 1936 1937 1938 1939 19 L 0 19 41

Average

3 6 .6

28,2 1 9 .6 2 2 .9

21,6 17.4 11.1 22,5

163 125 87 102 96 73 49 100

Index of prices re­ ceived by farmers 1 9 3 5 -4 1 = 1 0 0 100 105 112 89 87 92 114 100

Index of net farm income / 1935-41=1002/ 90

95

106 89

93 94

132

100

Includes all renewals and extensions, as well as past due notes# 0/ Average annual net farm income, 1935-41 = $6.8 billion.

143 Loss Experience Only one manufacturer could provide specific data for losses incurred on purchaser notes (Company "C", Table 21). Three other companies were able to provide net charge-offs for dealer and purchaser notes combined by years, however# Losses on purchasers’ notes by Company "C" averaged 0#12 percent of total sales of complete machines during this four year period and ranged from 0.01 percent of sales in 1 9 4 2 to 0.35 percent in 1938#

Losses based on net charge-offs for both purchaser and dealer notes and accounts varied widely among the other three companies.

Company "A" had average losses of 0.44- percent

between 193® and 194l, compared with 1.31 percent for Com­ pany "B" and 1.11 percent for Company "D" for the same period Executives of each of these companies stated that dealer losses were much greater than purchaser losses, comprising as much as two-thirds to three-fourths of the total losses. They were not able to calculate the dealer and purchaser losses separately because of the method of accounting and the records kept in those years. Losses of manufacturers on purchaser notes were not listed for the war and post-war period through 194 -® because the volume of purchasers’ notes taken by the companies was very small.

Also, for many companies, recoveries exceeded

charge-offs during most of those years.

One company, for

example^ liad net recoveries during this period amounting to approximately one million dollars, which, was more than 10 percent of its total charge-offs between 1 9 35 and 19 ^1• Table 21.

Losses or Charge-offs on Purchasers * and Dealers' Notes and Accounts as a Percentage of Total Equipment Sales for Four Manufacturers, 1935Company "A”

Year

Company ifBti

Company

Company iipti

5»96

v i/

15..0 L. 3 .1 6 1 .3 3 1 .3 8 1 .3 8 1 .2 6 .6 1

1935 1936 1937 1938 1939 195.0 1951

EX 5/

2 .1 6 1 .8 8

0 .6 3 0 .6 8 0 .3 3 0 .1 9

2.10 .8i|. 1.12

Averages/

0 .5 4

1 .3 1

1 .3 0

•35 •iL ♦06 .0 1

.12^/

1 .1 1

a/ Based on survey of farm equipment manufacturers. ^

Not available.

c/ Average for each company is for the years 1938-Ip. only. ^

Losses on purchaser notes only. For all other companies, losses are for both dealer and purchaser notes.

Data indicating losses by geographic areas were avail­ able from only one company.

Its experience during this pre­

war period with purchaser notes varied considerably among areas.

Lowest losses were in the East— roughly the New

England and Middle Atlantic regions.

Largest losses per

dollar loaned were in the South and Southwest--roughly the South Atlantic, East and West South Central regions.

Losses

per dollar loaned in the South and Southwest were approximately double those in the Northeast.

145 Trends in Loss Experience Only scattered data were available concerning losses by equipment companies in earlier periods*

These, however,

indicate that losses have continued to decline per dollar of sales and per dollar loaned, even though equipment com­ panies probably acquired as much purchaser credit per dollar of sales during the period 1935 to 192^.1 as for any previous period during their existence* Cyrus McCormick wrote concerning the farm equipment credit system of the McCormick Company in the middle and late l800 ' Of course such a credit system entailed some losses* To­ day, farm credit is considered the best in the world* In days when the West was being settled, men were often cruelly tested with their battle with the soil and many failed. Credit losses were therefore higher than now, and varied from three to five percent* The cost of collections is given as seven and one-half percent*..•• Such extended credit demanded a huge provision of capital and could have been justified only by what would now be considered colossal profits* Prom a statement of the McCormick Company in I9 0 2 , the following excerpt was made concerning credit losses^^ The loss on bad paper is four percent (i|. percent) or less, making computation over a t e m of years. It is felt that the interest account accruing on these notes fairly equalizes this loss*

33 / Cyrus McCormick, o£. cit.# p. 5i#

3hy Department of Commerce and Labor, Bureau of Corpora­ tions, op. cit.# p. 3 4 ^"

146 Thus it can be seen that loss experience by equipment companies has improved throughout the development of the farm equipment industry, barring changes in economic activ­ ity similar to the early 1930's*

Credit analysis, lending

techniques and terms on farm equipment loans have evolved and developed from experience with a large volume of credit sales of farm equipment throu^out the history of the in­ dustry*

Terms for farm equipment credit based on sound

credit techniques which are known and have generally been used assure nominal losses*

Credit terms used as a competi­

tive device or strictly as a sales mechanism ultimately re­ sult in excessively high losses*

147

BIBLIOGRAPHY

American Bankers Association, Agricultural Credit and Re­ lated Data# New York, N. Y*, 19i^b. American Bankers Association, Consumer Instalment Lending Directory# 19 i|_8 • American Bankers Association# Farm Equipment Financing by ------ — -------------Banks# 1946. Butz, E* L#, The Production Credit System for Farmers# The Brookings Institution, 1944* Cooper, M# R*, Barton, G-* T., and Brode 11, A. P., Progress of Farm Mechanization# TJ#S#D*A* Mise* Pub# No# 530, October, 19l|.t# International Harvester Company, A Practical Plan for Local Bank Financing of Ins talimentas ale s, CHTcago # 111#, l9l|.6< Johnson, 8. E. and Bachman, K# L#, "How Many Farms.#. ..How Big?" Agricultural Situation, Bureau of Agricultural Economics, December, 192(8 # Lewis, H# B#, "Instalment Selling of Industrial Equipment," American Management Association# Industrial Marketing Series, I#M# 17# McCormick, Cyrus, The Century of the Reaper. Houghton Miff in Co., 193T7 National Retail Farm Equipment Association, "1947 Cost-ofDoing Business Study#" Farm Equipment Retailing# St# Louis, Mo., June, 1948. Saulnier, R. J. and Jacoby, N. H., Financing Equipment for Commercial and Industrial Enterprise# Hational Bureau of Economic Research, 1944* Ü. S. Department of Agriculture, Agricult\xral Statistics# Bureau of Agricultural Economics, Washington, D. C#, 1947. tr# s. Department of Agriculture, "Balance Sheet of Agricul­ ture," Agricultural Situation# Bureau of Agricultural Economics# March, 194-9* U. S. Department of Commerce# Census of Agriculture, Washington, D. C#, 1920, I93O, 1940’, 1 9 4 ^

148

Uo s# Department of Commerce, Sample Census of Agriculture# 1945. TJ* S. Department of Commerce and Labor, Bureau of Corpora­ tions# The International Harvester Company# Washington# D. c#, 1 ^ 3 :--------------------------Youngdahl, Richard, "The Structure of Interest Rates on Commercial Bank Loans to Farmers," Federal Reserve Bulletin, December, 1947•

APPENDIX A TABLES

Table 1.

Percentage that Farm Implements are of Total Farm Value, ty Geographic Regions, on Specified Dates. ^

Geographic region

1910

1920

1930

1940

1945

New England

5.9%

7.9%

3.0%

8.1%

10.1%

Middle Atlantic

5.7

9.1

9.9

11.0

14.5

East North Central

2.7

4.6

5.7

7.9

9.4

West North Central

2.7

4.2

6.0

3.0

9.1

South Atlantic

3.3

4.6

4.6

5.5

6.8

East South Central

3.5

4.0

4.9

5.6

7.2

West South Central

3.1

4.1

4.9

6.5

7.3

Mountain

2.S

4.7

6.5

7.7

8.0

Pacific

2.4

4*4

4.3

6.3

6.1

3.1%

4.6%

5.3%

7.4%

8.6%

United States

V

a/ Total farm value includes land and buildings, implements and machinery, and livestockb/ Excludes automobiles: all other periods include automobiles. If the farm share of automobiles had been included in 1945 > farm implements would have constituted 10.2 percent of total farm value in the United States. Source:

United States Census of Agriculture.

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Table 8.

Percentage of Cost of Farm Equipment Represented by Credit, for All, New and Used Equipment, by Geographic Region, Type of Farm, and Tenure of Purchaser, United States, 1947.

Geographic region

Credit as a percent of cost of All machines New machines Used machines Percent

Percent

Percent

16 24 14 20 19 28 33 23 21

15 23 13 17 18 30 32 22 20

18 28 17 30 22 20 36 27 26

21 18 16 18 37 13 25 20 22

20 17 a/ 16 17 26 10 a/ 21 18 18

26 20 ^ 17 24 36 20 ^ 35 39 30

Full owner Part owner Manager a/ Tenant ^

16 20 6 32

16 18 6 30

18 27 0 35

All purchasers

21

20

26

New England Middle Atlantic East North Central West North Central South Atlantic East South Central West South Central Mountain Pacific lype of farm Dairy Poultry Livestock Fruit and truck Cotton Tobacco Wheat Com Other Tenure of purchaser

^

Based on less than 100 reports.

b/ Excludes croppers since they do not normally purchase farm machinery and equipment. Source:

Bureau of Agricultural Economics, 1948 Enumerative Survey.

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Table 10,

Number and Amount of Farm Production Loans Made for the Purpose of Financing the Purchase of Machinery and Livestock by Type of Security Held ty Commercial Banks, June, 1947. (Estimate) Average size

Security

Number

1. 2. 3, 4* 5. 6. 7. 8. 9* 10.

159,400 71,600 10,500 200,800 1,000 2,500 135,900 122,100 22,100 5,600

$1 4 6 ,3 2 5 ,0 0 0 4 0 ,2 5 7 ,0 0 0 1 4 ,2 5 0 ,0 0 0 2 7 5 ,3 0 3 ,0 0 0 1 ,0 3 5 ,0 0 0 2,076,000 1 0 0 ,4 4 3 ,0 0 0 138,589,000 16,458,000 5 ,3 0 4 ,0 0 0

$

731,500

$7 4 0 ,0 4 5 ,0 0 0

$1,012

Not secured Endorsed G. I. guarantee Livestock Crops in storage Growing crops Machinery Comb, crops, 1st* k., mach. Other security Not listed Total

Amount

918 562 1,357 1,378 1,035 830 739 1 ,1 3 5 745 947

(Percentage) 1. 2. 3. 456. 7. 8. 9. 10.

Not secured Endorsed G. I. guarantee Livestock Crops in storage Growing crops Machinery Comb, crops, 1st’'k., mach. Other security Not listed Total

Source:

21.8% 9.8 1.4 27.5 .1 .3 18.6 16-7 3.0 .8

1 9 .8 % 5 .4 1 .9 37.2 .1 .3 1 3 .6 18.8 2.2 .7

100.0%

100.0%

Survey of farm production loans outstanding in insured commercial banks in mid-1947 made by the Federal Reserve Board and the FDIC*

11

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