Farmer use of merchant credit in the Mid-Yellowstone Valley area of Montana
by Theodore W Witzel
A THESIS Submitted to the Graduate Faculty in partial fulfillment of the requirements for the degree
of Master of Science in Agricultural Economics
Montana State University
© Copyright by Theodore W Witzel (1960)
Abstract:
The objectives of this thesis were (1) to determine the amount of merchant credit being used by farmers
compared to the other types of non-real estate credit being used; (2) to determine the cost and factors
affecting the use of merchant credit, and (3) to determine the importance and degree of farmer
dependence on merchant credit.
The data were collected by personal interview with 144 farmers in Yellowstone, Treasure, and Custer
counties of Montana. Much of the data gathered is presented in descriptive form which summarizes the
use of merchant credit by farmers, the credit policies of the merchants, and some of the aspects of
understanding between the merchants and the farmers.
Five factors which were thought to influence farmer use of merchant credit were analyzed by a multiple
regression technique. These factors were (1) age of the farm operator, (2) years of farming experience
of the farm operator, (3) total revenue of the farm operator, (4) total real estate debt of the farm
operator, and (5) net worth of the farm operator. The first two items were not significant, and items 3
through 5 accounted for 31.1 per cent of the variation in the amount of merchant credit used by
farmers. Two factors which could not be measured numerically, tenure of the farm operator and type of
farming enterprise, were submitted to an analysis of variance. Neither factor was statistically
significant at the .05 confidence level.
Several implications can be drawn from the data regarding merchant credit use by farmers.
Approximately 20.6 per cent of the operating capital used by farmers is obtained through merchant
credit. The cost of this credit is generally higher cost than credit from other sources even though some
credit arrangements through merchants cost the farmer practically nothing. Credit used from a
combination of credit sources may result in lower credit costs to the farmer than is available from any
single credit source. Farmers are more aware of credit costs and policies of commercial lenders than of
merchants. The primary concern of the farmer, however, seems to be to obtain the credit with the cost
of the credit being of secondary concern. FARMER USE OF MERCHANT CREDIT IN THE
MID-YELLOWSTONE VALLEY AREA' OF MONTANA
■ '
■
by.
THEdDORE W. WITZEL
A THESIS'
Submitted-to the Graduate Faculty
in
partial fulfillment"of the requirements
for the degree of
Master of Science in Agricultural Economics
at
Montana State College
APPROVED:
^ /Read, Maj Or-Department
Chaii|i^rrrr^5tamin'3(rjG(/ Committee
Ddcih, Gradu^W. Division
■' Bozeman, Montana
December, I960 •
T A B L E OF CONTENTS
Page
LIST OF ILLUSTRATIONS............................................
LIST OF T A B L E S ...................................................
ACKNOWLEDGMENT
...................................................
ABSTRACT...........................................................
Iii
iv
vi
vii
CHAPTER I. INTRODUCTION ........................................
The Problem Situation
......................................
The Research Problem ........................................
Review of Literature ........................................
Historical Background of Merchant Credit Use ...........
Historical Background of Merchant Credit Cost
........
Trends in Present AgriculturalCredit Needs..................
O b j e c t i v e s ...................................................
P r o c e d u r e s ...................................................
I
I
4
5
5
8
13
15
16
CHAPTER II. CREDIT USE BY F A R M E R S ....................... .... .
Summary of Credit U s e ............
Credit Policy of Merchants ..................................
G a s , Oil, and PetroleumP r o d u c t s ........................
Feed, Seed, Fertilizer and Chemicals ...................
Farm Machinery and E q u i p m e n t ...........................
Veterinarian Sbrvice ....................................
Cars, Trucks and R e p a i r s ................................
Livestock Supplies ................................ . . .
Building Supplies, Lumber and Hardware .................
Blacksmithing, Welding and Repairs .....................
Groceries and General Merchandise
.....................
Drugs and S u n d r i e s ......................................
Furniture and Appliances ................................
Credit Costs to the M e r c h a n t ................................
Loans on C a p i t a l ...................
Floor P l a n n i n g ..........................................
Discounting Commercial Paper ...........................
Comprehension of Merchant Credit Policies by Farmers . . . .
Commercial Credit Costs Versus Merchant Credit Costs . . . .
Farmers' Attitudes Toward Credit Use andCreditSources. .
.
18
18
21
22
24
25
27
27
29
29
30
31
31
31
33
34
34
35
35
39
41
CHAPTER III.
44
FACTORS AFFECTING MERCHANTCREDIT
USE BY
FARMERS.
.
CHAPTER IV.
VARIATION IN CREDIT COSTS FROM ALTERNATIVE CREDIT
SOURCES..............................................
Budgeted Farm Enterprises
..............................
Credit Costs When Using Budgeted Farm L o a n .............
Credit Costs Using Merchant as Source...................
Credit Costs When Using Combination of Commercial and
Merchant Credit..........................................
48
48
50
51
53
i
147EG7
.■7
.
•
TABLE OF CONTENTS
.(continued)
Page
CHAPTER V. SUMMARY AND'CONCLUSIONS . . . . . . . . . . . . . . .
.......................
Summary . . . . . . . . . . . . . . .
Conclusions
.................
Further. Research ........................................
55
55
56
58
APPENDICES
...... .. ...................................
.APPENDIX A
'
■........ .. . .'...........
. •A p p e n d i x b .-. . ........... .. ...'................ • . . . . '
APPENDIX
C ...... ... .......
APPENDIX
D ............................
60
61
63
69
70
BIBLIOGRAPHY
73
.' .
ii
LIST OF ILLUSTR A T I O N S
F i gure
I
Page
The Marginal.Cost and Marginal Revenue of,Credit Available
to a Farm Operator Showing the Limits of Credit lUse in the
Operation . . ...................... .
. . .............. 38
ill
Number
I
II
III
IV
V
VI
VII
VIII
IX
X
LIST O F TABL E S
-
PURPOSE OF SHORT TERM CREDIT OBTAINED BY NORTH CAROLINA
FARMERS IN 1926 BY TENURE OF FARM OPERATOR SHOWING PER­
CENTAGE OF T O T A L .......... .................... ..
5
. RATIO OF FARMER CREDIT ACCOUNTS IN 1924 TO TOTAL SALES IN
1.924 BY KIND OF STORE ....................................
6
THE PURPOSE OF MERCHANT AND CASH CREDIT USED BY ALL FARMERS
IN SAMPLE COUNTIES IN OKLAHOMA ............. ..
7
COST OF ALL SHORT TERM CREDIT BY TENURE OF FARM OPERATOR
AND AMOUNT OF CASH AND MERCHANT CREDIT U S E D .............
'9
NUMBER OF STORES CHARGING HIGHER PRICES FOR GOODS SOLD
ON CREDIT, NUMBER CHARGING INTEREST AND HIGHER PRICES, AND
RATE PER YEAR OF INTEREST AND HIGHER PRICE BY TYPE OF
S T O R E ........ ............................................
IO
FARMERS* NON-REAL ESTATE DEBT AS OF JANUARY I, 1940, AND ■
JANUARY I, 1959, SHOWING THE AMOUNT OF THE DEBT CARRIED
BY PARTICULAR TYPES OF LENDING INSTITUTIONS
. . ........
15
THE PERCENTAGE AND AMOUNT OF CREDIT USED F ROM.COMMERCIAL
AND MERCHANT SOURCES BY FARMERS IN THE MID-YELLOWSTONE
VALLEY AREA OF MONTANA DURING THE YEAR 1959 BY TENURE OF
FARM OPERATOR . . . .'.......... .................... . . .
20
CREDIT USE BY FARMERS IN THE MID-YELLOWSTONE VALLEY AREA
OF MONTANA IN 1959 INDICATING TYPE OF FARM AND TYPE OF
CREDIT USED
............... .. ........... ..
21
CROP ENTERPRISES SHOWING ACRES OF EACH CROP, YIELD, AND
AMOUNT OF DISPOSAL BY SELLING OR F E E D I N G ...............
49
XIII
■■
.v
49
■
EXPENSES AND RECEIPTS FOR THE BUDGETED FARM BY THE MONTH .
..
X1
II
.
LIVESTOCK ENTERPRISES SHOWING NUMBER OF ANIMALS IN EACH
CATEGORY AND THE AMOUNT OF DISPOSAL ................. ..
" /
XI
Page
50
'
.
SCjHEDULE OF EXPENSES AND RECEIPTS SHOWING THE OUTSTANDING
BALANCE AND CREDIT COSTS BY THE MONTH ON A BUDGETED FARM
LOAN FROVl A COMMERCIAL LENDING I NSTITUTION........ ..
51
CUMULATIVE EXPENDITURES CARRIED THROUGH-THE MERCHANT
WHERE THE PURCHASE WAS MADE SHOWING TYPE OF MERCHANDISE ■
PURCHASED, THE COST PER MONTH, AND THE MONTH THE MERCHAN­
DISE WAS PURCHASED . . . . . ........ . . . . . . . . . .
52
I
Iv
- LIST OF TABLES
(continued)
Number
XIV
Paqe
SCHEDULE OF ACCUMULATIVE EXPENDITURES AND MONTHLY COSTS
OF CREDIT BY USING A COMBINATION OF COMMERCIAL AND
MERCHANT CREDIT SOURCES FOR THE BUDGETED FARM ENTERr
PRISES ...................... . . . . . . . . . . . . . . .
,54
ACKNOWLEDGMENTS
The author wishes to express appreciation to the staff of the
Department of Agricultural Economics and Rural Sociology at Montana'
State College for the assistance given in the development of this
study.
Special thanks are extended to Dr. C. W. Jensen5 Dr. J. R. Davidson5
and the other members of the thesis and examining committees for their
guidance, helpful suggestions, and criticism.
Thanks are due also to Dorothy Windecker who did the typing for
this thesis.
Any errors or omissions are the responsibility of the author.
vi
ABSTRACT
. The objectives of this thesis were: (I ) to determine the amo.unt of
merchant credit being used by farmers compared to the other types of nonreal estate credit being used; (2) to determine the cost and factors
affecting the use of merchant credit, and (3) to determine the importance
and degree of farmer dependence on merchant credit.
The data were collected by personal interview with 144 farmers in
Yellowstone,'Treasure, and Custer counties of Montana.. Much of the data
gathered is presented in descriptive form which summarizes the use of
merchant credit by farmers, the credit policies of the merchants, and
some of the aspects of understanding between the merchants and the farmers.
Five factors which were thought to influence farmer use of merchant
credit were analyzed by' a multiple regression technique. These factors
were (I ) age of the farm operator, (2) years of farming experience of the
farm operator^ (3) total revenue of the farm operator, (4) total real
estate debt of the farm operator, and (5) net worth of the farm operator.
The first two items were hot significant, and items 3 through 5 accounted
for 31.1 per cent of the variation in the amount of merchant credit used
by farmers. Two factors which could not be measured numerically, tenure
of the farm operator and type of farming enterprise, were submitted to
an analysis of variance. Neither factor was statistically significant
at the .05 confidence level.
■ Several implications can be drawn from the data regarding merchant
credit use by farmers. Approximately 20.6 per cent of the operating
capital used by farmers is obtained through merchant credit. The cost
of this credit is generally higher cost than credit from,other sources
even though some credit arrangements through merchants cost the farmer
practically nothing. Credit used from a combination of credit sources
may result in lower credit costs to the farmer than is available from
any single credit source. Farmers are m o r e ■aware of credit costs and
policies of commercial lenders than of merchants'. The primary concern
of the farmer, however, seems to be to obtain the credit with the cost
of the credit being of secondary concern.
vii
CHAPTER I
INTRODUCTION
The Problem Situation
The net income realized by farmers as in other production processes
is determined by the combination of their input resources which can be
identified broadly as.land, labor, capital, and management.
In combining
these factors of production, the net income of a farmer.will be limited by
that factor which is depleted first.
The highest level of income can be
achieved when there is optimum resource use— that is,'where all factors of
production are utilized to the point where no net economic gain will
accrue from additional applications of these factors.
The rapid development of technology in agriculture has increased the
need for some factors of production relative to others.
the need for capital in the farm business.
One of these is
Advanced technology has made
it possible for a' farmer to handle more acres of land.
As a result new
capital, both long term and short term, is needed to provide :for obtaining
more acres of land and more machinery and supplies for the new types of
operations being performed.
'
„
The capital outlays for equipment and operating expenses are now
demanding much more attention as the non-real estate assets rise in
proportion to real estate assets.
The non-real estate debt of the United
States farmers was estimated to be equal to the real estate debt as of
— 2 —
January I, I960.—I/
z
This may be the result of both technological change
and changes in lending and borrowing habits.
Of the total non-real estate
debt, approximately 69 per cent was carried by commercial institutions
specializing in short term credit while non-commercial lenders, merchants,
dealers, and others supplied the balance.— /
Historically, the credit supplied by merchants has been high cost
credit.
In a 1926 study in North Carolina it.was found that tenants
paid up to 54.1 per cent interest from merchant credit.
At the same time,
credit could have been obtained from a commercial lending institution at
10.2 per cent interest for the same risk situation.-2/ A Texas study in
1925 indicated that farmers using merchant credit were charged a flat rate
averaging 10.23 per cent.
T his.amounted to an annual charge of 19.37
per c e n t . T h e s e high credit charges were made during a period when a
smaller amount of operating capital was needed to balance out the other
factors of production than is currently necessary.
A 1957 study from Indiana points up the fact that merchant credit is
an important present day source of production credit for Indiana farmers.
J./
United States Department of Agriculture, 1960 Agricultural Finance
Outlook. Washington, D. C., Agricultural Research Service, November,
1957, p._ 5.
2/'
United States Department of Agriculture, The Balance Sheet of Agric­
ulture 1959. Agricultural Research Service, Bulletin No. 214, p. 9.
'3/
D. L. Wickens, and G. W. Forster, Farm Credit in North Carolina, Its
Risks. Cost, and Management. North Carolina Experiment Station, Bulle­
tin No. 270, April, 1930, Figure 12, Greensboro, N.G.,' p"„ 68.
4/
V. P. Lee, Short Term Farm Credit in Texas. Division of Farm and Ranch
Economics, Texas Agricultural Experiment Station, Bulletin No. 351,
March, 1927, pp. 13-21, College Station, Texas, p. 18.
- '3 -
This study indicated that 38 per cent of the production credit used by
farmers was held by the merchant and with 20 per cent being held over 30
days .-i/
Even though merchant credit has been looked upon traditionally as high
cost credit it is still widely used in many instances.
It may seem
strange for a farmer who is trying to do an efficient job of production •
to pay exceedingly high prices for the use of capital resources.
There
are several reasons why farmers use merchants, and dealers as credit
sources.
Some of them are convenience, smaller and more frequently
available increments of credit, less red tape involved in opening a
credit source, more liberal repayment terms, insufficient knowledge
concerning the real annual interest charge being borne, and the inability
to acquire credit elsewhere.2 /
The historically high cost of merchant credit is absorbed by.the
merchant in many cases.
Merchants usually prefer to sell for cash but
give credit to prevent a loss of business to competitors who give credit.— /
Some of the reasons for the high cost of this credit are that merchants do
not receive special rates on borrowed money, they forego the use of their
own capital, there are expenses of administering credit, debt losses are
\f
E. E. Carson, Farmer Use of Merchant Credit in Indiana, Department
of Agricultural Economics, Purdue University, Agricultural Experi­
ment Station, February, 1957, p. 3.
2/
Robert P. Story, Costs of Rural Merchant Credit in Vermont. Vermont
Agricultural Experiment Station, Bulletin No. 555, December, I949»P- 28.
3/
Ibid.
I
•C
_•
h i g h e r than for other lenders,
small volumes
4
-
■
accou n t i n g m e t h o d s are inefficient,
and
of- credit business raise credit costs.— /
The Research Problem
The large strides in technological development have puts short;-term
operating capital in a very vital position.
One question is whether or
not the commercial lenders are keeping apace with the needs' for this type
of credit.
The farmer, in. his quest for increasing operating funds, may
be turning to merchants for credit.
If merchant credit is high cost, as
has been the case historically, the farmer may benefit from a revised credit
program.
This study is concerned with the costs of merchant credit and to
what extent it is being used by farmers as a part of their operating funds.
This study will try to determine the amount of production credit
supplied by these non-commercial sources in the study area and how much
the farmers rely on merchants for production credit.
The factors affecting
the use of merchant credit will also be a part of this study.
These factors
will be concerned with the farmers' background and financial situation;
Other factors include the costs of merchant credit in comparison to
commercial credit costs.
Merchant credit, as it will be used in this study, refers to purchases
which are made from a merchant or dealer where no cash passes from the
purchaser to the merchant at the time of the transaction.
This credit
could be in the form of an open account, an unsecured"note, or a contract
secured.by the purchased goods.
l/
Ibid.
If the note or contract is later sold to
5
a commercial lending institution by the dealer, it is still considered
merchant credit.
This differs from the conventional definition in that it
contains contracts sold to and held by commercial lending institutions.
These are included in the definition used here because of the difference
in cost caused by the merchant handling costs as compared to dealing
directly with a lending institution.
Review of Literature
Historical Background of Merchant Credit Use
It is interesting to look back and find out how many people in rural
areas have used merchant credit and what their particular situation is.
A North Carolina study showed that 80 per cent of the 139 farmers sampled
in 1926 used short term credit either in the form of merchandise, cash, or
bothTable
I below shows the manner in which this short term credit
was used.
TABLE I.
PURPOSE OF SHORT TERM CREDIT OBTAINED BY NCRTH CAROLINA FARMERS
■ IN 1926 BY TENURE OF FARM OPERATOR SHOWING PERCENTAGE OF TOTAL.*
Purpose of Short Term Credit_______
Farming Living
Total
Tenure______ _____Fertilizer Expense Expense Unclassified Percentage
All Farmers
Owners
Tenants
*
J./
Sources
47
50
37
33
34
32
13
7
30
7
9
I
100
100
100
D. L. Wicken, and G . W. Forster, Farm Credit in North Carolina
Its Cost, Risk, and Manaaement. North Carolina Agricultural
Experiment Station, Bulletin No. 270, April, 1930.
W i c k e n and Forster,
op.
c i t . , p. 5.
— 6 “
The amount of credit used by these farmers averaged $416 for tenants
and $770 for-owners
who had bigger operations than tenants, while there
were 74 per cent of the owners and 93 per cent of the tenants using short
term credit.— /
A Texas study which was published in 1927 pointed out that in 1925
there were 52 per cent of the farmers sampled who were using merchant
credit.— /
Table II below shows how extensive credit use was in relation
to retail sales of stores giving credit.
TABLE II.
RATIO OF FARMER CREDIT ACCOUNTS IN 1924 TO TOTAL SALES IN 1924
BY KIND OF STORE.*
Kind of Store
Number of
Stores
General Merchan­
dise
Hardware
Groceries
Dry Goods
Furniture
Hardware and
Furniture
Hardware and
Groceries
'
Unclassified'
*
Source;
Average Sales
Per-Store
Per cent of
1924 Sales
$18,641
16,234
7,238
18.6
- 18.9
9,4
6 ,2 9 4
3,914
6 .9
2 .9
87,966
35,667
40.5 ■
90,641
153,256
37,000
18,921
40.8
12.3
57
49
42
37
19
$100,069
85,687
77,327
91,662
135,632
16
6 .
53.
Total Credit to
Farmers Per Store
'
.
V. P. Lee, Short Term Farm Credit in Texas. Division of Farm
and Ranch Economics, Texas Agricultural Experiment Station,
Agriculture and Mechanical College of Texas, March, 1927, p. 15.
The table above indicates that, with the exception of hardware stores,
the combination stores of general merchandise, hardware and furniture, and
hardware and groceries had the largest percentage of credit sales.
l/
Wicken and Forster, op. cit. , p. 11.
2/
Lee, op. cit.. pp. I K -''T
I
- I -
In an Oklahoma study a sample of 449 farmers exposed the fact that 65
per cent of the farm owners and 85 per cent of the tenants used short term
c r e d i t This study corresponds with all others in showing that tenants
are the most frequent users of. short term credit.
The use of this credit
seems to be directly related to the relative liquidity situation regarding
the assets of the farmer.
Table III will throw a little more light on the
use to which short term credit is put.
Table I can be compared to Table
III to give,a more complete picture of credit use.
All of the merchant
credit was used for living expenses and farm operating expenses.
The major
portion was used ,for family living expenses while the larger portion of the
' , :•/ ■
‘
$
I
cash credit was used for farm operating expenses.
TABLE.III.
THE PURPOSE OF MERCHANT AND CASH CREDIT IJSED BY ALL FARMERS IN
SAMPLE COUNTIES IN OKLAHOMA.*
Kind of
Credit
Living
Exoenses
Merchant
Cash
93
30
* Source's
-Farming
Exoenses
7
38
,■Puroose
Purchase
7-of,- Land
Payment
of Debts
O
14
O
18
Total
Percentaae
100
100
A.t N. Moore, and J. I. Sanders, Credit Problems of Oklahoma
Cotton Farmers. Department of Agricultural Economics, Oklahoma
Agricultural Experiment Station, Oklahoma Agriculture and
Mechanical College, Bulletin No. 198, October, 1930.
- A more recent study, which was done by Purdue University in 1957,
gives a good comparison of users and non-users of merchant credit.
\J
The
A. N. Moore, and J. T 0 Sanders, Credit Problems of Oklahoma Cotton
Farmers. Department of Agricultural Economics, Oklahoma Agricultural
Experiment Station, Oklahoma Agriculture and Mechanical College, Bulletin
No. 198, October, 1930, Stillwater, Oklahoma, p. 3.
8
following are some of the comparisons which were found.— '
Age— users were
younger - 42 vs. 48 years; size— users were larger - 332 vs. 280 produc­
tion man work units; total assets— same for both groups - $42,OOOj net
worth— users had less - $37,000 vs. $39,000» bank. PCA. and other credit—
merchant credit users had more credit from other sources - $515 vs. $334.
This Purdue University study also points out that by tenure categories
owner-operators were on the smallest farms, had the smallest per cent who
were using merchant credit, 44 per cent, and used the least per farm, $258.
Tenants ranked next with middle-sized farms and 57 per cent of them using
credit which averaged $503 per farm.
Part-owners had the largest farms
and there were 61 per cent of them using an average of $783 of merchant
credit per farm.
Historical Background of Merchant Credit Cost
The cost of merchant credit to farmers has historically been high
cost.
The 1926 North Carolina study presented the following table to
indicate differences in credit costs.
Table IV shows that there is
a large difference between the costs of the merchant credit and cash
credit which were' available to the North Carolina farmers in this study.
The merchant credit cost is over three times as high as the cash credit
when both tenure groups.are considered.
Another difference which can be
seen from Table IV is the charges made for credit to the owner and the
tenant.
Jt/
The tenant pays a higher rate of interest for cash credit than
Carson,
op.
c i t . , p. 4.
- 9 -
does the farm.owner.
Table IV also shows that the farm owner pays more
for merchant credit than the tenant but this is due to large credit
fertilizer purchases made by owners which carry a very high interest
rate.
Tenants in the study did not spend a proportionate share of their
merchant credit on fertilizer which resulted in a lower over all interest
charge.
Some areas of North Carolina in the same study reported interest
rates of merchant credit to tenants up to 54 per cent.
TABLE IV.
COST OF ALL SHORT TERM CREDIT BY TENURE OF FARM OPERATOR AND
AMOUNT OF CASH AND MERCHANT CREDIT USED.* .
Merchant Credit____________ ;
____ ________ Cash Credit ■
______ .
_______ _
No. of
Amount of Cost of Cost of No. of
Amount Cost Cost
Borrowers
Credit
Credit Credit' Borrowers
of
. of
of
$
$
%
Credit Credit Credit
Tenure_____________ ;_____ _________________ ______________'
_____ $______ $______ %
All
.farmers
Owners
Tenants
*
Source:
80
51.
29
30,237
19,959
10,278
4 ,9 2 0
25.6
3,621’ 27.7
89
4 1 ,4 5 0
62
2 1 .0
27
35,500
5,950
1,299
7.7
1,911
1,647
7 .6
264
8.1
D. L..Wicken, and G. W. Forster, Farm Credit in North Carolina.
Its Cost. Risk, and Management. North Carolina Agricultural
Experiment Station, Bulletin No. 270, April, 1930.
In the 1927 Texas study there were 62 per cent of a -232-farmer sample
group using merchant credit who paid interest on their accounts.-i/ The
average flat rate was 10.23 per cent which calculated on an average lengthof time outstanding of 6.34 months duration would be 19.57 per cent per
year,
l/
table V shows the rate charged for goods purchased on credit.
Lee,
op.
c i t .. p.
17.
10 Referring back to Table II will give an indication of the amount of credit
extended by these merchants as compared- to the credit charges.
With an average account duration of 6.34 months, a 10 per cent increase
in the price would be nearly the same as a 20 per cent increase on a yearly
basis.
The stores charging an annual interest rate plus a higher price
ranged as high as 32.4 per cent interest per year.
TABLE V.
NUMBER OF STORES CHARGING HIGHER PRICES FOR GOODS SOLD ON CREDIT,
■NUMBER CHARGING INTEREST AND HIGHER PRICES, AND RATE PER YEAR OF
INTEREST AND HIGHER PRICE BY TYPE OF STORE.*
Nb. of
Number
Number
Rate per
Stores
Charging Charging
Annum—
Answering Higher
Higher
Equivalent
Questions
Price
Price
to Higher
and ■
Credit
'Interest
Price
Kind of
Store
General
Merchandise
Hardware
Grocery
Dry Goods
Furniture
Furniture and
Hardware
Hardware and
Groceries
Unclassified
*
Source:
12.8
9 .6
IL .61
0 .0
2 6 .8
20.0
11.5
32.4
9 .5
10.5
2 0 .0
3
13 . 3 ,
1 4 .8
28.1
8
11.5
10.3
21.8
56"
44
41
31
16
20
10
0
13
4
0 .0
2 0 .9
16
6
3
6
52
3
16
16
Annual
Annual
Interest Rate plus
Rate
Higher
Price
9
13
6
0
14.0
10.4
16.1
'
27.7
0.0
V. P. Lee, Short Term Farm.Credit' in Texas,. Division of Farm
and Ranch Economics, Texas Agricultural Experiment Station,
Agriculture and Mechanical College of Texas', March, 1927,
College Station, Texas, p. 17.
There are several reasons for merchant credit being high cost credit.
The following reasons are expanded from a merchant.credit study made in
11
Vermont.I/
money.
(l)
Merchants do not receive special rates when borrowing
The money they lend or credit they give costs them more than a
regular lending agency may give for it.
(2)
on or forego the use of their own capital.
The merchants pay interest
In one case, the merchants
purchased 65 per cent of the goods they sold with their own funds, „25 per
cent on credit from the wholesaler, and 10 per cent with loans from banks
This would necessarily raise the cost of credit to the customer.
;(3)
There
are expenses to administering the credit which consists of the initial
transaction and collection costs.
dollar than larger loans,
other lenders.
(4)
The smaller loans have higher costs per
Merchants' debt losses are higher than for
The liberal repayment terms, the undetermined due date of
the credit, and the probable over-extension of credit are the principle
reasons.
(5)
Merchants have inefficient accounting methods and they
have a smaller volume of credit which causes inefficiencies.
The fact
that credit activity is a supplemental activity means that it usually
rates only secondary attention.
Inefficiencies are sure to come about
when an activity is not given strict attention.
Merchants in the Vermont study were asked why they extended credit.
They stated without exception that competition forced them to do so.
They
preferred to sell for cash but they gave credit to prevent loss of business.
In view of the high costs of merchant credit it may seem strange to
'•
find many farmers using this credit. The Vermont study also lists reasons
l/
Story, op. cit.. , p. 27.
2/
Lee, op. cit., p. 17.
12 -
why farmers are using merchant credit even though it is of higher cost than
other short term credit.— /
of convenience.
(l)
Some farmers use merchant credit because
They purchase items at the place of business and can
easily say "charge it" with a minimum of inconvenience.
The extra trips
to the commercial bank or other lending agency are therefore eliminated,
(2)
Most merchants follow very liberal credit policies.
no terms of repayment or a specific repayment date.
repayment flexibility.
There are usually
This allows for more
This also may set the stage, for over-extension of
credit beyond the repayment ability.
(3)
of credit and at more frequent intervals.
Merchants give smaller amounts
This does not require much
finance planning on the part of the borrower.
When the credit is-needed
it is usually available at the time, and in the amount desired.
(4)
The
lack of understanding of credit costs on both the part of the merchants and
the customers has increased the use of merchant credit.
The reluctance on
the part of the farmer to calculate the true interest rate may lead to a
misconception as to what he is really paying for the credit privilege.
These reasons plus the fact that the farmer may have exploited his
entire borrowing potential for low cost credit and-must turn'to credit
sources of higher costs are some of the factors affecting merchant credit
use.
A summary on merchant credit.in Credit Problems of Oklahoma Cotton
2/
Farmers by A. N. Moore and J. T. Sanders contained the comment,
"Store credit should be abandoned wherever it is possible,
for it is fruitful of poor business both on the farm and in
l/
Story, op. cit.. p. 28.
2/ ■ A. N. Moore and J,. T. Sanders, op. cit. , p. 53.
13 -
town, and is usually not profitable to either the farmer or
the townsman.”
The last two sections have given a historical background of merchant
credit use and cost.
Reasons for the' cost and use were also given which
were evident at the time of the studies.
The proceeding paragraph also
seems to sum up the attitudes toward merchant credit use in some areas.
Trends in Present Agricultural Credit Needs
The situation may have changed regarding merchant credit costs since
the time of the historical data that have been presented.
It is fairly
evident that the attitudes toward the use of credit have changed even
though the costs'of credit may not have changed.
The consumer credit of
today is fairly comparable to'merchant credit and it is a high cost type
of credit.
Since the 1930's the commercial banks have become more competi­
tive in the short term agricultural credit area along1with the Production
Credit Association, Farmers Home Administration, and others.
All of these
credit sources are increasing their lending facilities and their capacity
to lend.
The consumer credit today costs in the neighborhood of 15 to 20
per cent, whereas short term production credit loans to farmers cost
between 6 and 8 per cent interest.
The farmers may borrow from .production
loan sources until this source has been completely exploited.
With the
necessity of larger amounts of production credit to support present day
agricultural technology, the limit of the credit available from the low
cost credit sources may be reached before the required amount of credit
is obtained.
As these low cost credit sources are developing improved
facilities to handle increased credit demands,, farmers may be forced to
14 -
use higher cost credit sources.
These sources may well be the merchants
and dealers with whom they do business,•
The need for increased credit is verified by the increase in the farm
mortgage debt from $5,108,183,0001/ in 1949 to over $12,000,000,000^/
1959 to give an increase of 135 per cent.
At the same time the non-real
estate ,debt of farmers 'rose from $3,200,000,000^/ in 1949 to $9,500,000,000^/
in 1959 to give an increase of 197 per cent,
• The increase in the non-real estate debt of the American farmer over
the real estate debt is due in large part to the rapid technological
changes which are taking place today in agriculture.
In 1940 each American
farmer produced enough food for himself and 11 others while today he
produces enough for himself ,and over 23 other people.
Between 1950 and
1960 the investment per man on farms grew from $12,000 to' $18,000.— /
This shows the growth that the modern farmer has made.
This growth'is not
only in the form of larger farms but also in the use of a higher degree of
mechanization, a greater amount of specialized machinery, more productive
cropping practices, and more efficient livestock' types.
These items plus'
higher family living costs are the cause of higher non-real estate farm
assets and an increased amount of non-real estate farm debt.
\J
United States Department of Agriculture, Agricultural Finance Review.
Volume 12, Supplement, Bureau of Agricultural Economics, May, 1950, p. 11.
2/
The Balance Sheet of Agriculture, 1959. op. cit., p. 8.
3/
Agricultural Finance Review, op, cit., p. 11.
4/
The Balance Sheet of Agriculture, 1959. op. cit.. p. 8.
5/f
'
Clive R. Harston, "Fewer Persons on Farms But Greater Production,"
Great Falls Tribune. February 28, 1960, p. 24J'
15 -
Table VI gives an indication of how the farm non-real estate debt ■
has increased and also how it is being carried by the credit sources.
The
book credits and miscellaneous category, which makes up 37 per cent of the
total non-real estate farm debt, is the area in which the merchant credit
is located.
This is a large amount to be carried, nearly one-third of the
total, by sources whose interest in credit may be. only secondary and whose
ability to perform the lending service functions may also be secondary.
TABLE VI.
FARMERS' NON-REAL ESTATE DEBT AS OF JANUARY'I, 1940, AND JANUARY
I,- 1959, SHOWING THE AMOUNT OF THE DEBT CARRIED BY PARTICULAR
TYPES•OF LENDING INSTITUTIONS.*
Commodity Credit
Corporation
Loans
(billions)
Year
1940
1959
*
$ 0.4
2.5
Source:
Banks a n d .
Federal
Agencies
(billions)
$ 1.5 ■
5.8 -
Book Credits
and
Miscellaneous
(billions)
$ 1.5
3.7
Total
(billions)
$ 3.4
12.0
United States Department of Agriculture, The Balance Sheet of
Agriculture. 1959. Bulletin No. 214.
Objectives
The-objectives of this research study are as followss
(l) to determine
the amount of merchant credit being used by farmers compared to the other
types of non-real estate credit being used, (2) to determine the cost and
factors affecting the use of merchant credit, and (3) to determine the
importance and degree .of farmer dependence on merchant credit with respect
to (a) the major categories of farm purchases, (b) type of. farming areas, and
(c) localities.
16 -
Procedures
The procedure used in this study was determined partly by reviewing
publications on agricultural credit and reading articles on sampling and
schedule taking.
The agricultural economics staff at Montana State College
also gave suggestions which led to a pre-testing of questionnaires and
a revaluation of content and sample' size.
The information for the study was gathered from a 7 per cent sample
of farmers (144) in Yellowstone, Treasure, and Custer counties of Montana.
These counties were chosen because they represent a variety of different
farm types and supply center sizes.
The information gathered from the
farmers was supplemented by contacting 65 farm supply retailers (merchants
and dealers) and nine commercial banks.
The merchant and dealer schedules
represent a cross section of agricultural supply retailers in the three
counties.
Merchants were picked so that each type of major agricultural
supply item was represented.
The commercial lender schedules represent all
the commercial banks in the three-county area.
To determine the number of farm and ranch schedules needed, the total
farm numbers from each county were taken from the 1959 publication of
Montana Agricultural Statistics and multiplied by 7 per cent.
the' total number of farmers to be contacted.
This gave
Area segments comprised of
'SOTfarm''dwellings' .were then .marked" off ©h Montana Qtate Highway iPlarihing .
Survey maps which indicate each farm dwelling.
selected segments was to be contacted.
each area segment.
Every third farmer in the
This would yield I Q
farmers from
The number of segments needed was determined by the
desired 7 per cent farmer sample from each county.
17 -
The area segments were then chosen by numbering each thirty-farm
segment on the county map and drawing duplicate numbers until the desired
number of segments had been chosen.
Alternate segments'.were:-alsb ohdsen :
from which contacts would be made if circumstances warranted it.
This
method was used for all three counties.
Within- a chosen segment every third farmer was contacted.
If the
marked dwelling was unoccupied, the next dwelling was substituted in its
place.
If the occupant of a chosen dwelling refused t o ’
.cooperate, a
substitute was chosen in the prescribed manner from the first alternate
segment.
After failing to make a contact after three visits to a dwelling,
a substitute was also chosen from the alternate segment.
A list of merchants and dealers was made up for the major supply
centers to get a representative cross section of dealers handling specific
types of farm supplies.
In the smaller supply centers all of the farm
supply retailers were interviewed to assure getting information on the
same types of farm supply retailers that were interviewed in the major
supply centers.
The two major supply centers were Miles City and Billings,
while the smaller supply centers were Laurel, Broadview, Worden, andHysham.
These smaller supply centers were in the areas of the counties
where the farm sample segments were located.
CHAPTER II
CREDIT USE BY FARMERS
x'
Summary of. Credit Use
In line with the objectives of this study some of the aspects of
farmer use of merchant credit have been investigated.
This chapter presents
some of the findings regarding merchant Credit use by farmers compared to
credit use from other sources, the comparative costs of the different types .
of credit used by farmers, and.merchant credit policies offered to farmers.
This study indicated that 92.4 per cent of the farmers in the threecounty area used some form of production credit.
This credit may consist
either of short term commercial credit or credit obtained from merchants in
the area.
,In considering just the credit users, there were 96.2 per cent
who used merchant credit and 79 per cent who used .credit from commercial
sources.
The amount of credit used by these farmers ranged from $42 to $160,816
with a mean of $11,087.
The amount of commercial credit used fanged from
$700 to $150,000 with a mean of $11,146.
The ,amount of merchant credit used
ranged from $8 to $16,500 with a mean of $2,366.
The commercial credit in this study refers to the credit from
commercial banks, production, credit associations, credit unions, and
government agencies which is used for production and family living purposes.
The merchant credit referred to here is broken down into three categories
called (l) merchant open account convenience credit, (2) merchant open
account yearly credit, and (3) merchant contract credit.
19 -
The merchant open account convenience credit is that which is used by
a farmer mainly as a convenience in making purchases.
usually 30 days old or less when it is paid.
The credit is
The merchant open account
'
yearly credit, is that which is obtained by the farmer for a period over
30 days in length and carried by the merchant on open account. This type
iof credit account is usually paid up once or twice a year by the farmer
and seldom has a direct interest charge on the balance of the account.
The merchant contract credit refers to' purchases made by the farmer for,
which he signs a note or contract;
This type of credit includes notes or
contracts which are later sold to a bank or other commercial lending
agency.
This type of merchant credit is most often found i n .connection
with larger purchases such as farm machinery, automobiles, etc.
Table VII gives a percentage breakdown of credit use in these
categories both from the total picture and from the tenure status-of the
farm operator.
The part-owner uses the least percentage of commercial
credit of the three categories and consequently the largest percentage
of merchant credit to fulfill his credit needs.
Both the owner and tenant
categories use 82 per cent commercial credit and 18 per cent merchant credit
The merchant credit breakdown indicates that merchant open account
yearly credit is used more than either of the merchant contract or
'
I
merchant open account convenience credit classifications.
The part-owner
category also uses the most of the merchant open account yearly credit
classification.
The Merchant contract credit classification is again
used heaviest by the part-owner while the merchant open account convenience
credit is used more extensively by the owner category.
20 -
TABLE VII.
THE PERCENTAGE AND AMOUNT OF CREDIT USED FRCM COMMERCIAL AND
MERCHANT SOURCES BY FARMERS' IN THE MID-YELLOWSTONE VALLEY AREA
OF MONTANA DURING THE YEAR 1959 BY TENURE OF FARM OPERATOR.■
x
Tvpe of Credit
Commercial
-
Merchant Open'
Account
Convenience
$
Ranae
Owner
$'
Per
Mean Cent
80015,179
150,000
, 8- '
606
9 ,5 6 6
2005,000
1,171
Merchant Contract 5208,250
3,490
Merchant Total
1,901
Yearly
8-
9 ,5 6 6
■- Part-Owner
Tenant
$■ " $
. Per
S- . $
Ranae Mean Cent Ranae Mean
82 700-
10,235
40,000
4 101,343
7 100-
82
I 131,043
287
.1
2,372
12 350-.
5,650
1 ,6 3 3
9
3,751
10 70010,951
3 ,9 6 6
8
2 ,6 9 3
23 13-
. 2,501
18
1 6 ,5 0 0
18 1016.;500
77 4,400- 11,923
100,000
334
.
6 ,5 6 0
7 215-
Per
Cent
.
10,951
Table VIII shows a breakdown of credit use by type of farming carried
on.
Under each -farming type are three columns showing the range in the
amount of credit -used, the mean, and the percentage of the different types
of credit used.
The diversified category uses a higher percentage of
commercial credit than the other two categories.
The dryland grain
;
category' uses the highest percentage of merchant credit to supply its
credit needs.
The livestock category, had the highest mean value for
credit use in both the commercial and merchant credit classifications!
In all three categories more commercial credit was used than merchant
credit.
Within the merchant credit classification the merchant contract
credit was used in greater volume except, in the- diversified farming category
i
Merchant open account yearly credit was used more than the merchant open
- 21
TABLE VIIIo
CREDIT USE BY FARMERS IN THE MID-YELLOWSTONE VALLEY AREA OF
MONTANA IN 1959 INDICATING TYPE OF FARM AND TYPE OF CREDIT
USED.
Diversified
Dryland Grain
•Livestock
Per
Per
$
$ . Per
$
$
$
$
Tvpe of Credit Mean Ranoe Cent •Mean Ranoe Cent Mean Ranoe Cent
180800400Commercial
12,989
81 6,585
78
69 13,475
100,000
150,000
29,876
Merchant Open
50833Account
2
134
2
Convenience •
I
349
589
250
1,213
9,566
•
Yearly
Merchant
Contract
10 1,165
7
5,650
3,330
215-
350-
3,288
3331
8,070
,
12
10,951
5019 2,165
16,500
2,1506,985
8,070
8-
8 •
1,913
5,350
23
7 3,335
16,500
Merchant Total 2,388
500-
200-
100-
1,860
2,634
22
10,951
account convenience credit by all three farm type categories.
The only
category in which the merchant open account convenience credit seems
to be used to any degree is in Table VII under the owner category and
it is still -exceeded by other classifications of merchant credit here.
Credit Policy of Merchants
In trying "to relate the credit policies of merchants to something
more specific than the whole conglomeration of products which are sold to
farmers, the merchandise has been divided into 11 separate' categories.
These categories overlap each other inasmuch as one merchant may distribute
- 22 -
merchandise which may fall into several categories. 'His credit policies
will be shown in the category made up of his major type of merchandise.
The categories into which the merchandise is placed are
(l) gas,
oil, and petroleum products, (2) "feed, seed, fertilizer, and chemicals,
(3) farm machinery and equipment, (4) cars, trucks, and repairs, (5 ) vet­
erinarian services, (6) livestock supplies', (?) building supplies, lumber,
and hardware, (8) blacksmithing, welding, and repairs, (9) groceries and
general merchandise, (10) drugs and sundries, and (ll) furniture and
appliances.
This description of merchant credit will cover the entire three-county
area.
If there are differences in the way the credit is handled between
the counties or between areas within a county they will be pointed out
within each merchandise category.
Gas. Oil, and Petroleum Products
The category ,with the highest percentage of its farm sales on credit,
is gas, oil, and petroleum products with 84 per cent.' The products in
this category not only had the highest percentage of their farm sales
purchased on credit but these also were the credit accounts which were
outstanding the longest with -an average of 185 days.
Most of the credit,
99 per cent, was given on open account while the remaining I per cent
was given on a promissory note carried at 7 per cent interest.
There are usually no interest charges made on operi account credit in
this category because many accounts run until fall and are paid once or
twice a year.
The credit is given to the customer on the basis of the
23
past credit history of the customer and so interest is charged only on
overdue accounts in some cases.
This usually amounts to 6,per cent simple
interest on accounts over six months old where there is a specified' credit
policy set up.
Some merchants in this category would like to maintain a
30-day- credit policy but have not done so.
There were no differences in
the terms offered to customers in this category.
The loss on the open account credit amounted to about Ig-
per cent
of the credit sales and in most areas this loss was borne by the merchant
and his total clientele.
In Treasure County there was a discount of
2 per cent given for cash payment on bulk deliveries to farms and 6 per
cent discount given for sales at the gas pump of the business.
In this
case, only the credit customers' and the merchant bear the cost incurred byextending credit.
All of these merchants would rather have their customers pay cash
than use credit but only the one area seems to have done anything to
entice cash payment.
All of these merchants, however, thought that the
extension of credit increased their volume of business enough to pay for
the costs of extending credit.
There was only one instance in which the.
supplier of.petroleum products carried a portion of the credit for the
distributor.
Upon application for credit by the customer, the supplier
would carry the customer for a 10-month period.
If the account were not
paid within 10 months, the distributor would pay the supplier and collect
the account from the customer himself.
24
The !merchants in this group had the most comparable credit policies
and were the most lenient on their repayment terms.
The per cent loss
from credit sales was no higher than in other merchandise categories,
however.
Feed^ Seed. Fertilizer and Chemicals
This category also has a high percentage, 70 per cent, of farm sales
made on credit.
As much as 91 per cent of the credit sales were made on
open account while 9 per cent were made on a note or other arrangement.
Approximately 45 per cent of the credit paper in the contract sales
were discounted at a bank, 25 per cent were held by the supplier, and
30 per cent were held by the merchant.
The paper discounted at a bank was
usually paid in the fall and was carried at 7 per cent interest.
In one
instance, the merchant would turn the credit accounts over to the company
that purchased the customer's crop.
The company would-charge the merchant
10 per cent of the customer's account for handling.the credit and then hold
the amount that the customer owed out of his crop check.
These accounts
were usually out only about seven or eight months so the actual interest
rate in this case was near 17.per cent.
The portion of these'credit sales
held -by the merchant were usually held less than 30 days so there was no
charge made to the customer by the merchant.
The open account credit usually carried no charge.
The merchants
tried to abide by a 30-day repayment policy, but the accounts averaged
57 days outstanding and no charge was made on these accounts.
The type
of credit arrangement offered a customer was determined by his past credit
25
record and the type of farming he did.
In some cases, the feed dealer would
carry the account of a beef feeding operation longer thani that of a dairyman
because of the difference in their income periods.
The dairyman receives
a portion of his income every week while the beef feeder has to wait several
months for a return from his operation.
The loss from the credit sales amounted to under I per cent with the
merchants using cash discounts from 5 to 10 per cent on some items.
These
items were usually the more competitive articles such as twine, chemicals,
etc.
Although all the merchants preferred to sell for cash instead of
credit, they did not think that the farmer who used credit was a poor
manager.
The majority of the merchants contacted thought that credit
'
extension at least paid its added costs.
Farm Machinery and Equipment
The farm machinery and equipment dealers made 75 per cent of their .
sales on credit.
Most of the credit, up to 56 per cent, was carried on
contracts with the remaining on open account.
Most of the contracts were
sold to a bank with the usual terms being one-third of the purchase price
as a down payment with one, two, or three payments a year at Sg- per cent
interest to pay off the balance.
The 12 per cent of the contract sales'
carried by the supplier were usually under the same terms except the
interest rate was I per cent higher to maintain an insurance policy
which protects the balance of the contract.
The dealers held 8 per cent
of the contracts and the terms of the dealers were the same as those
contracts sold to the banks.
26 -
One farm machinery dealer was given aid by the manufacturer of his
equipment.
The interest charges assigned contracts held by the manufac­
turer were slightly higher than those sold to the bank from the same
dealer.
The manufacturer, however, would carry the contracts longer and
accept more risk than the banks.
-
There was- no interest charged by this
manufacturer on machinery sold on contract during the late fall and winter
months.
This was an incentive used to help move machinery during the
slow business months.
There was usually no charge for open account, credit within the credit
policy of the dealers i/vhich was usually 30 days.. Many dealers gave fall
payment terms to their customers also.
days.
The average account ran for 74
The charge on overdue accounts ran from 7 per cent to 12 per cent
per year.
The charge usually was not added until 60 days had passed.
Customers were given credit arrangements according to their credit rating,
size of the purchase, and net worth.
Large purchases usually were carried
on contract.
Losses on credit sales amounted to between I and 2 per cent of the ■
credit sales.
Cash discounts of 5 per cent on some items were offered to
induce cash purchases.
In some instances the merchants gave "fleet
discounts", which ran from 25 to 50 per cent, to owners of five or more
pieces of a certain brand of farm machinery.
This, howeveir, is a quantity
discount and not a discount for a cash purchase.
Most of the dealers would
rather have a customer pay cash than use credit.
Some dealers indicated
that they would rather have good credit risks on contract purchases,
27 however.
The dealers were of divided opinion when indicating whether
credit extension paid .for its added costs.
Many indicated t;hat it
increased volume, and were afraid to quit the credit extension because
of what it might do to their net income.
Veterinarian Service
Veterinarian service was a category.which was set up to check the
realm of professional services available to farmers and how they are
extended to the farmer.
About 78 per cent of the veterinarians work is
done on a credit basis with all credit being on open account for an
average of 50 days.
As most of the other businessmen, the veterinarian
trys to maintain a 30-day open account credit policy without much success.
In some cases,' the price of professional services is raised to the
credit customer to take care of the I per cent loss-which usually results
from the credit extended.
This is not done on the price of drugs, however
as they are in direct competition with drugs from another veterinarian.
Cash is preferred for work done in this area.
Thp veterinarians thought
the farmer was a good manager if he could use credit and get someone else
to do his bookkeeping for him.
It was thought here that the extension of
credit undoubtedly paid for its added cost in increased business volume.
Cars. Trucks, and Repairs
In the cars, trucks, and repairs category the merchants had 80 per
cent of their credit sales on contracts.
The credit sales amounted to
about 50 per cent of their total farm sales.
The contract sales were
handled by selling 94 per cent of the contracts to banks; the supplier-
28
held 2 per cent and the dealer held 4 per cent.
All three operated nearly
the same on repayment terms and interest charges.
The most popular method
of financing is called the Farm Plan in which the customer pays 40 per
cent of the purchase price as the down payment and the remainder' paid in
one or.two fall payments at Sg
per cent' simple interest.
If monthly t
payments were made instead of the yearly payments the interest charges
would be 6'g- per cent discounted for new units and 8 per cent discounted
for used units.
The merchants' interest rate was a little lower at 8 per
cent simple interest on the contract.
If items were purchased on open account credit there usually was no
charge made and the credit policy was repayment within 30 days, but
accounts averaged between 30 and 45 days in length of time outstanding.
The past credit rating of the customer has a lot to do with the type of
credit arrangement he is offered.
The large purchases go on contract,
however, as security is needed for these large items.
Fleet discounts
are given on parts and supplies if a customer has five vehicles of the
same make.
The discounts amount to at least 25 per cent and are considered
-a quantity discount.
' The loss on credit sales''-was'about 2 per cent for this category.
No
indicated cash discounts were given to induce cash purchases even though
cash was desired rather than credit purchases.
The dealers indicated
that they would welcome good credit risks on contract purchases.
The
majority of the dealers thought that credit extension more than paid for
itself
-
29
-
Livestock.Supplies
Most of the items , 95 per cent, of the livestock supplies category
credit sales, were purchased on open account credit.
The remaining 5 per
cent were purchased on contracts-which.were sold'to banks.
cent of the sales to farmers were made on credit.
About 38 per
These merchants try to
maintain a 30-day open credit policy but accounts average 53 days outstand­
ing.
Interest charges of 8 per cent are sometimes added to accounts which
are out over 120 days.
Items purchased on contract arrangements pay a
6 per cent discounted interest rate and can finance up to two' years.
The
amount of the sale determines what credit arrangements are offered with
the larger items purchased on contract.
A loss on credit sales of §- per
cent is experienced by these merchants but no cash discounts were given to
induce all cash purchases.
Building Supplies. Lumber and Hardware
Merchants in the category, building supplies, lumber, and hardware,
indicated that credit was involved in 41 per cent of the total farm sales.
About 90 per cent of this credit was "obtained on open account while the
remaining 10 per cent was on contract.
The banks purchased 41 per cent
of the contracts from the merchants on which the terms were 40 per cent'
down payment, with two fall payments', at 10 per cent simple interest.
The
supplier held 29 per cent of the paper and the terms for this arrangement
were 10; per cent down with monthly payments carried at 10 per cent interest.
The terms oh the 30 per cent held by the merchants were small monthly
payments with a" large terminal -payment in the fall,-which .was carried
30 -
at 6 per cent interest.
The credit rating of the customer determined
the type of credit arrangement offered to the customer.
There usually was no charge on open account credit and merchants
tried to maintain a 30-day credit policy.
The accounts averaged 79 days
in length and as a result some merchants charged •§■ per cent per month for
accounts running over 60 days.
Merchants in this merchandise category reported a I per cent loss on
credit' sales. •In order to induce people to pay cash most of the businesses'
offered a .10 per cent cash discount.
Quantity purchases, such as. carload
lots of cement or lumber, also received a discount amounting to as much
as 18 per cent in some instances.
Blacksmithina. .Welding, and Repairs
Businessmen in this category reported 45 per cent of their farm sales
as credit, all of which was open account credit.
interest charge on this.credit.
There was no carrying or
A lenient credit-policy with approximately
90 days allowed for repayment resulted in accounts running only 59 days
on the average.
Some old established customers of one business paid only
once a year.
This group of businessmen experienced a 3 per cent loss on credit
business with farmers which was the highest of all the categories.
No
inducement was given to entice customers to pay cash for the most part.
A cash discount of 5 per cent was given on small items which would not
affect the over all picture a great deal.
r
- 31 -
Groceries and General Merchandise
The groceries and general merchandise category of merchants contacted
show that 35 per cent of their farm sales, were made on credit of which ^all
was open account credit.
The credit policy in these businesses is 30
days with the average account outstanding at 30 days also.
Usually no
carrying charge is added to these credit purchases but accounts running
for over a year are charged 6 per cent interest in some cases.
The loss on open account credit was reported at about % per cent of
the credit sales.
Some grocery stores offered a 2 per cent cash discount
or trading stamps, which amount to about 2 per cent, for cash purchases.
Good credit accounts are usually welcomed by these merchants even though
cash is preferred.
Drugs and Sundries
Another category of merchandise which was surveyed in a limited
fashion was drugs and sundries.
Here, only about 11 per cent of the
farm sales were made on credit.
The credit policies were 30 days'on open
account, which was ihe_only type of credit offered, and the accounts
outstanding averaged about 30 days also.
The loss from, credit sales was
negligible.
Furniture and Appliances
The cr'edit sales to farmers by these merchants amounted to 80 per
cent of the farm sales.
About 75 per cent of the sales were made on open
account, while 25 per cent were made on contract.
Of the contract sales 20
per cent were sold to the bank and 80 per cent held by the dealer.
32
Financing purchases by contract cost the customer 18 per cent per
year interest rate both on contracts sold to the bank and held by the
dealer.
The only difference .between the bank and dealer financing was
I
that if the paper were held by the dealer and paid off;in 90 days, no
carrying charges were added to the purchase price of the item.
In determining what credit arrangements were offered the customer,
the credit rating of the customer was checked.
The dealer took the good
credit risks and sent the less favorable risks to the bank.
The person
also had a choice of whether to pay cash or buy on time if his credit
rating was acceptable. ' This is in contrast '-to machinery purchases, where
banks take the good risks and the supplier will often carry the higher
risk paper. .
•
■
In talking about the whole group of merchants contacted in this study
there are some things that they ,all seemed to have in common-. ■ The majority
of the merchants thought that a farm operator's use of credit was no'
indication of his managerial ability.
The group of merchants as a whole
thought that credit extension did pay for the extra costs that it added to
the business expenses.
There was some divided opinion here and many
individuals did not seem to know how they stood as far as returns ,from
credit extension were concerned.
Nearly all the merchants preferred cash
purchases but welcomed a good credit risk into the contract sales especially.
This' seems to be the one area where merchants are sure to make money on
credit extension to good credit risks.
The merchants were not inclined to
talk too openly about the dealer reserve or interest kick-backs on contract
sales.
Also, in this area is the profit on insurance premiums which goes
33 -
along with contract sales and adds to the desirability of this type of
credit extension.
The merchants seem to be trying to curtail open account credit, which
runs over 30 days, as much as possible.
They seem to realize that they
are not equipped, from a capital availability standpoint, or a credit
knowledge standpoint, to handle large amounts of open account credit.
They believe that the farmer should get his funds from a commercial
lending institution and operate his credit on a 30-day basis as other
businessmen try to do.
Many merchants, however, are reluctant to push 1
this.
The credit policies which were discussed in this section were not from
a random sample of business establishments.
The merchants picked for the
study were those who are doing a considerable amount of business with
farmers and who have a policy of extending credit. 'There are many
merchants in this area who operate on a strictly cash basis, especially
in groceries, drugs, and other family living items.
One of the goals
here was to show the credit practices which are being employed by certain
retailers of farm supplies in this area of the state.
The percentage
figures given are related only to those businesses contacted and not to
all the businesses in the area.
Credit Costs to the Merchant
A merchant, when forming his credit policies, must take at least
two factors into consideration.
One factor, of course, is the effect
the policies will have on the clientele, and the other is the cost to
34 -
the merchant of- extending the credit.
The effect that the credit policies
have on the clientele will be reflected in the type of clientele which
frequent the place of business and also the net income realized as a
result of the credit policies.
The cost to the merchant of extending
credit will also affect the credit policies and the net income of the
business.
Loans on Capital
The commercial banks, which determine the costs of credit to the
merchants, have reported various means of extending this credit and
various costs connected to it.
The most usual arrangement is for the
merchant to borrow against his capital for operating funds.
These
merchants must compete in the open market, the same as the farmers, for
their operating funds.
The going rate of interest for this type of
borrowing ranged from 6 to 7 per cent.
The interest rate rises as the
risk increases and as the amount of money borrowed per loan decreases.
Some specific things which affect the interest rate given to a business
are the net worth of the business, the past record of the business in
repaying debts, and the compensating balance of the business.
The
compensating balance is the amount of money that the business has on
deposit in the commercial bank.
Floor Planning
Another popular way of extending credit to a merchant is called "floor
planning."
This type of lending practice is related nearly entirely to new
35
durable goods being sold by the merchant such as automobiles, trucks, farm
machinery, furniture, and appliances„
A commercial bank will loan a
merchant money on a particular piece of merchandise which is for sale in
the merchant’s place of business»
pays back the bank,
Upon sale of the merchandise the merchant
The rate is usually 6 per cent simple interest and the
"floor plan" agreement is usually renewable after 90 days for 30-day periods
not to exceed one year.
In some cases, the interest rate drops after the
first renewal by one-half of I per cent.
In some instances, a merchant will
get a prime rate of interest to induce him to sell his conditional sales
contracts to the bank.
Some Tenders require a 10 per cent curtailment
on the merchandise each month following the initial renewable period of
90 days,;
Discounting Commercial Paper
Merchants with customers who desire to buy merchandise on a conditional
sales contract may also use a commercial lender to supply the credit.
Although the purchase is made through the dealer, the conditional sales
contract is sold to the commercial lender.
The interest rate ranges from
7 per cent to 9 per cent on new merchandise and up to 12. per cent on the
unpaid balance on used merchandise.
The lender usually has full recourse
with the merchant in the event that the purchaser defaults in his obligation
to pay off the contract.
Comprehension of Merchant Credit Policies by Farmers
The credit policies of the merchants are not too well understood by
their farm clientele in general.
There were 73 per cent.of the farmers
36 -
contacted who were aware of relative differences in credit costs.
The
remaining farmers indicated that there was doubt as to whether or not they
realized relative costs of credit from different sources.
The cost of
credit to the farmer is the most likely part of the merchants' credit
policy to be understood by the farmer.
Details of a merchant's credit
policy sdch as interest charged on ^overdue accounts, cash discounts fqr
payments made within. 30 days of purchase,, and differences in contract
arrangements between dealers and banks were not understood by all those
who were aware of relative differences in credit costs.
Only about one-half
of the 73 per cent who were aware of these relative costs gave an indication
of being aware of specific credit costs and how they were incurred.
The specific credit costs-which were reported on purchases of farm
supplies and machinery varied slightly among the sources reporting the .
credit costs.
The farmers' reported interest charges on commercial credit
ranging from 5 per cent to 8 per cent with a mean value of 6.72 per cent.
This includes production credit from the Production Credit Association and
the Farmers Home Administration as well as from commercial banks.
The
commercial banks reported that production credit costs ranged from 6 per
cent to 8 "per cent with a mean value of 7 per cent.
This indicates that
the farmers in general are fairly well aware of the costs of commercial
credit.
The area of merchant credit .is not quite as well understood as
far as costs are concerned.
This may be due to the wide variability
in merchant credit policies as compared to the nearly identical policies
of .commercial lenders.
37 The only charge on open account credit which was reported by farmers
was a possible increase in the price of goods if a merchant gave credit.
There was no
interest reported by the farmers for overdue accounts.
Some
merchants reported charges running from 6 per cent to 12 per cent per year
on some accounts running over 60 days, and oh others running over "six
months.
There were 80 per cent of the merchants contacted who reported
no charges on open account credit-.
Merchants,-on the other hand, reported
no increase in prices due to credit extension.
Farmers reported that purchasing" supplies and equipment on contracts
was the most expensive as far as credit costs were concerned.
Farmers
reported these costs as ranging from 5 per cent to 18 per cent with the
mean being 8.3 per cent.
The commercial banks, for the same period, reported
that contract purchases, through merchants and dealers showed finance charges
ranging from 8 per cent to 13 per cent with a mean value of 9.7 per cent.
Merchants also reported a higher cost on contract arrangements than did
the farmers.
These costs ranged from Sg-■ per cent simple interest to 8
per cent discounted interest on monthly payments which is equivalent to
16 per cent simple interest.
Some household items purchased on credit
terms carried a charge equivalent to 18 per cent per year.
Most farmers
either reported these charges lower-than they actually were or else didn't
have any idea what the charges were.
It becomes increasingly evident that
the farmers' primary concern is obtaining the credit while the cost of
credit is of secondary concern.
Farmers in this area do not seem to shop for lower credit costs, as
a general rule, within the area of-merchant credit.
Cash discounts and lower-
38 -
finance charges are taken by the farmers in many cases only because the
purchase arrangements required by the merchant are the same as those the
farmer had in mind before making the purchase.
There are many other factors
affecting the farmers' choice of purchasing arrangements which decrease the
importance of the credit cost.
Some of these may be convenience, loyalty
to a business or community, inability to get credit elsewhere, length of
term for which the credit is desired, and others.
l/
Another explanation for farmers using higher cost merchant credit may
be that the amount of low cost credit which is available has been used
and they must resort to higher cost credit to fulfill their needs. The
marginal cost of this credit still may be less than the marginal revenue,
as shown in Figure I, which would allow the farmer to increase his net
returns. The situation in Figure I shows that $11,000 is available to
the operator at 6 per cent interest.
If more money is needed the
marginal cost jumps to 18 per cent. The marginal revenue is equal to
the marginal cost at $14,000. This indicates that the operator in
question could increase his net income by using $3,000 of the higher
cost credit.
Per Cent
Interest
$5,000
Figure I.
$ 10,000
$15,000
$ 20,000
The Marginal Cost and Marginal Revenue of Credit Available to
a Farm Operator Showing the Limits of Credit Use in the Operation.
39 -
There was no indication that farmers use credit from a combination of-'
sources in an effort to minimize their credit costs.
In many instances,
the reduction in credit cost may seem too insignificant to cause concern.
The repayment periods in merchant contract arrangements seemed to
be very well understood by the farmers.
There was some difference in the
reporting on open account merchant credit, however.
There were 74 per cent
of the merchants contacted who reported having a 30-day credit policy.
There were very few farmers, however, who reported that there was any
pressure to pay up their accounts'before harvest time or whenever there
was income expected.
This may be due to a more lenient policy on the part
of the merchants,or the farmers may actually pay up the accounts before
there is any pressure needed.
There were a few farmers who reported that
the merchants did exert some pressure for payment,of accounts.
These
accounts were usually paid up with funds borrowed from a commercial lender.
Commercial Credit Costs Versus Merchant Credit Costs
The only area in which these two types of credit, commercial and
merchant, can be compared as far as costs are concerned is the area of
secured notes and contracts.
The open account merchant credit does not
directly cost the customer who uses it.
Some costs may be incurred by
credit extension and covered by an increase in the retail prices of the
articles sold. 1These costs are difficult to determine and also vary to a
large degree depending on the merchant and the commodity being considered.
It is nearly always possible, however, to buy articles on 30-day credit
and still receive the allowable discounts for cash.
Open account credit
40 -
extended with no cash discounts can run up to one year with no direct
carrying charges or interest.
On those accounts where interest is charged
after a certain period of time the charges run from 6 per cent to a high
of 12 per cent per year on the unpaid balance.
These charges for overdue
open accounts do not vary drastically from the regular charges on contract
'arrangements.
Farmers, when dealing .with commercial lending sources, can borrow
for nearly any type of production, machinery, or family living purpose
at the going interest rate.
The rate quoted by the commercial banks
contacted ranged from 6 per cent to 8 per cent with a mean of 7 per cent
interest per year. ' Merchant credit must be broken down into categories
of particular purchases as interest rates vary from one type of purchase
to another, while interest rates do not vary with the commercial lender.
Feed, seed, and fertilizer, which was purchased on contract, was charged
7 per cent interest on the unpaid balance.
Farm machinery and equipment
uses the same repayment terms as the commercial lenders but the interest
rate is a little higher at 8 &
note at. a bank.
per cent when the dealer discounts the
When the farm machinery supplier carries the contract,
the rate is usually near 10 per cent interest on the unpaid balance,'
which includes an extra charge for insurance.
Cars and trucks usually :
have a higher credit cost of Sg- per cent through the dealer when
purchased with a 40 per cent down payment and one payment.aayear.
If
the unit is purchased on a contract with monthly payments the finance
charges are 6's
pet cent discounted on new vehicles and 8 per cent
discounted on the unpaid balance on used vehicles.
This amounts to
■
41 -
12.8 per cent and 16 per cent interest per year, respectively.
Building
supplies, lumber, and hardware, when bought on contract, were charged 10
per cent simple interest per year.
The rates of interest just quoted give an indication that merchant
credit on contract arrangements is more expensive than credit from
commercial sources.
The length of the contract and the risk taken has not
•
been given consideration.
■
Merchants are usually willing to carry contracts
over a longer period and accept.greater credit risks in order to sell their
goods.
This may contribute somewhat to the higher rates of merchant contract
credit arrangements.
The commercial banks contacted have reported that farmers who deal
directly with the bank for their credit can save from I per cent to 5 per
cent interest on their borrowed funds.
The ability to talk to the farm
supplies merchant in cash terms may also increase the bargaining power of
the purchaser to
the point where he will realize increased savings
purchase also in
theform of a cash discount.
on the
Farmers'Attitudes Toward Credit Use and Credit Sources
In the area surveyed, 92.4 per cent of the farmers used credit and.
7.6 per cent did not.
The owner category made up 64 per cent of those
farmers not using credit.
The remaining farmers not using credit were
divided equally between the part-owner and tenant categories.
Approxi­
mately 12 per cent of the total number of farmers used no merchant credit
and 31 per cent used no production credit from commercial sources.
Sixty-
nine per cent of
19 per
the'farmers using no merchant credit were owners,
cent were part-owners and 12 per cent were tenants.
Those using no
42 -
commercial credit were 68 per cent owners, 25 per cent part-owners, and 7
per cent tenants.
These figures give an indication of Credit use according
to the tenure status.
Although 88 per cent of the total farmers interviewed used merchant
credit, only 68 per cent thought that merchant credit should be used as
part of the operating funds in a farm business.
Many farmers were using
30-day merchant credit merely as a convenience and not as general production
credit and this is referred to as convenience credit.
The volume of conven­
ience credit amounted to 9.5 per cent of total merchant credit extended.
Open account yearly credit made up another 46.4 per cent of the total
merchant credit used with contract arrangements through the merchant
accounting for the remainder.
The open account merchant credit seems to
be the most popular type of merchant credit.
Merchant credit made up only
20.6 per cent of the total volume of production credit, used with the
remainder classified as commercial credit.
Comparing this with the 88
per cent of the farmers who use merchant credit indicates that only:a
small volume was used per farmer compared to commercial credit use.
The
amount of merchant credit used per farmer was $2,366 compared to $11,146
of commercial credit per farmer.
Credit use by farmers is increasing and farmers are becoming more
accustomed to using credit in their farming operations.
The age-old idea
that borrowed money is "tainted*' seems to be becoming obscure,• The atti­
tudes of farmers toward credit use is very favorable especially for
commercial credit.
About one-third of the farmers, as well as most of
the merchants, think that merchant credit should not be used as a part
■
43 -
of the farm production funds. ' The 30-day credit use by farmers appears to
be highly acceptable on the part of both farmers and merchants.
The idea of being -in debt is not quite so unpopular as it was at one
time.
The farmers more readily accept the fact that the capital resource,
if not already available, must be borrowed to achieve a better balance of
resource inputs for the farming enterprise.
The source of the credit is-
partially dependent upon the individual farmer's experience with various
credit sources, the farmer's ability to determine credit costs, and the
ability of.the credit source to fit the individual farmer's needs.
v
'1
'; ;
..
C H A P T E R III
FACTORS AFFECTING- MERCHANT CREDIT USE BY FARMERS
Previous studies, preliminary investigations, and other considerations
suggested that the following items were factors which influence farmer use
of merchant credit:
(l) age of the farm operator, (2 ) years of farming
experience of the farm operator, (3) total revenue of the farm operator,
(4) total real estate debt of the farm operator, (5) net worth of the farm
operator, (6 ) tenure of the farm operator, and (?) type of farming enter­
prise.
There were 144 farmers interviewed to secure the necessary infor­
mation for the analysis of these factors.
To make the analysis, multiple
regression techniques were utilized with reference to those factors (items
I through 5.) readily measurable in numerical terms.
The last two items,
tenure of the farm operator and type of farming enterprise, were analyzed
by the use of an analysis of variance.
. Equation (l.) represents the least squares estimates where items I
through 5 are considered.
The coefficient of multiple correlation appears
to the right of the equation and the standard error of the regression
coefficients appears below the coefficients in parentheses.
(l) Y 1 = 1433.65 + 2.RSOSX 1 - 17.7393X2 + .0775X3 + .0172X4 - ,OlllX5
R = .5613
(63.30)
(58.29)
'
(.Oil)
(.013)
(.004)
Variables in the above equation are defined as follows:
z\
Y 1 = Estimated amount of merchant credit, in dollars, used by farmers.
X 1 = Age of the farm operator in years.
Xg = Years of farming experience of the farm operator.
X 3 = Total revenue of the farm operator in dollars.
45
^4 = Total real estate debt of the farm operator in dollars.
X 5 = Net worth of the farm operator in dollars.
. The above analysis (see equation (l)) indicates that the age of the
farm operator and the number of years of farming experience of the farm
operator were insignificant.in affecting the use of merchant credit by
farmers.
The total revenue of the farm operator and the net worth of
the farm operator were both significant factors affecting use of merchant
credit by farmers at the .05 confidence level.
The real estate debt load
had some affect on merchant credit use by farmers .but it was not statistically
significant.
When using all five independent variables in.the multiple regression
analysis, it was found that these variables accounted for 31.5 per cent of
the variation in the dependent variable., A test of significance of the
regression coefficients of equation (l) indicated that the coefficients of
%1 and X 2 were not significantly different from zero.
In an attempt to
/
increase the explanatory value of the analysis a second equation (equation
(2) below) was computed in which these variables were deleted.
The
coefficient of multiple correlation is to the right of the equation and the
standard error of the regression coefficients appeals i n •parentheses‘bdlow
the coefficients.
(2)
Y 1 = 1 0 5 4 . 7 8 + .0787X3 + .0203X4 - .0120X^
(.011)
(.012)
R = .5578
(.003)
When the two factors, age of the farm operator and years of farming
experience of the farm operator, were deleted from the multiple regression
analysis, (see equation (2)), 31.1 per cent of the. variation in the dependent
— 46 -
variable was explained by the remaining three independent variables.
The
computed t values for each of the independent variables in the final equation
were 7.3721 for X 3 , 1.6706 for X 4 , and 3.6313 for X 5 .
The variables Xg and
X 5 are significant at the .05 confidence level while the variable X 4 is not
statistically significant at this pre-determined level.
The variable X4 , .
real estate debt load of the farm operator, does however, explain about 2
per cent of the variation in the dependent variable while holding the other
variables constant.
The variable Xg
accounts for 28 per cent of the ■
variation in the dependent variable, Y, which is unexplained by the other
two independent' variables.
The remaining independent variable, X 5 , explains
8.6 per cent of the variation in Y as the other two variables are held
constant.
The net worth of the farm operator, X 5 , is related inversely to
the amount of merchant credit used by farmers.
As the net worth of the
farm operator increases, the amount of merchant credit he uses decreases.
The decrease in merchant credit use by a farmer, as his net wotth
increases, may be due to the fact that less credit is needed to finance
the operation of the farming enterprise.
This may mean that the optimum
point of capital input is reached with less credit or borrowed money.
This
inverse relationship may also be due to the farm operator using more
commercial credit as a result of his .increase in net worth and probable
ability to secure better credit arrangements thus decreasing his use of
merchant credit.
The effect of total revenue on the amount of merchant credit used
by farmers was indicated as significant.
cited for this relationship.
Three possible reasons can'be
One reason may be that the total revenue of
Al
-
the farm operator is an indicator to ,.the businessman of the farmer's ability
to repay and thus permits him to buy more on credit.
Another reason may be
that the farmer's operation uses up all of his available commercial credit
and he may resort to merchant credit to balance out the input resources of
his farming enterprise.
A third reason may be that the use of a greater
volume of credit by the farm operator has enabled him to increase his totalrevenue.
.
Two factors which were thought to influence merchant credit use by
'
farmers, type of farm enterprise and tenure of farm operator, were subjected
to the analysis of variance.— /
Neither of these factors were significant
at the .05 confidence level; however, the tenure qf farm operator classifi­
cation was significant at the .28 confidence level.
The part-owner
classification had a mean value of $2,567 merchant credit use.
The tenant
classification had a mean of $2,466 and the owner classification had a mean
value of $1,487 of merchant credit used by farmers.
l/
The analysis of variance compares two independent estimates of variance
by means of an F test.
If the same forces are at play on these two
variances they will be equal. Due to some sampling error that could
have occurred by chance, the variances usually are not equal. Confi­
dence limits are set up within which to test the variance. A .05
confidence level means that a particular phenomenon will occur 95 per
cent of the time -for reasons other than chance.
If the difference
between the two variances is greater than may have occurred by chance
within the confidence limits, then it is assumed that other forces ^
namely the classification of,the data, have affected the variances.
The analysis of variance procedure is shown in Appendix A, Table I.
C H A P T E R IV
VARIATION IN CREDIT COSTS FRGM ALTERNATIVE CREDIT SOURCES
It was stated In Chapter II that it did not seem that the cost of
credit had much influence on the farmer's use of merchant credit.
This was
because the farmer's first interest seemed to be to get the credit at anycost within reason.
As the ability of the farmer to bargain for credit '
needs becomes more apparent, then the cost of the credit to the farmer may
become more important.
Nevertheless, credit costs are important to any
farmer who is interested in increasing his net income.
Budgeted Farm Enterprises
A farmer may obtain the necessary production credit for his farming
enterprises from various credit sources.
individual sources may vary.
The cost of credit from these
The total credit cost to the farmer for the
total production expenditures during the year may vary considerably depending
upon the source or combination of sources of credit that the farmer uses.•
Budgeting out the enterprises on a farm unit can give a fairly realistic
picture of the farm expenditures and .receipts.
The expenditures and
receipts listed in chronological sequence will then permit the determination
of credit needs at a particular point in time.
The credit costs can be
calculated by handling the credit needs through commercial credit sources,
merchants, or a combination of these two sources.
The farm unit which is budgeted to show the production expenditures
and receipts is an irrigated 200-acre unit.
in Tables IX
and X.
The farm enterprises are listed
- 49 .TABLE IX.
CROP ENTERPRISES SHOWING ACRES OF EACH CROP, YIEDD, AND AMOUNT
OF DISPOSAL BY SELLING OR FEEDING. '
Enterprise
Acres
Alfalfa Hay
Barley
Beans
Pasture
Sugar Beets
Wheat
Total
30
TABLE X.
3
70
20
2
18
50
20
30
'40
50
30
Disposal,
Sell ■
Feed
Yield Per Acre
Ton
Eu.
Bags
Au/A
Ton,
Eu.
.1,000 Eu.
600 Bags
90 Ton
400 Eu.
900 Ton
1,500 Eu.
'
200
LIVESTOCK ENTERPRISES SHOWING NUMBER OF ANIMALS IN EACH CATEGORY
AND THE AMOUNT OF DISPOSAL.
Enterprise
Beef Cows
Two-year-did Heifers
Yearling Heifers
Calves
Bulls
’ "
Number
50
,
Disposal
Sell
Home Use
8
8
8
45
' —
■
37
2
The activities for each enterprise along with the date of the activity
and the necessary expenditure is listed in the Appendix B, Tables I through
VII.
A schedule of the expenses and receipts which will be encountered
during the production period are listed in Table XI.
Tb show the variation in credit costs between credit sources, the
expenditures for this budgeted farm unit will be handled by three different
methods.
The Expenditures, in the first method, will be handled through a ■
budgeted loan from a commercial lending institution.
estimated total cost ,for credit by using this method.
This will result in an
The next method of
handling the expenditures is by carrying ^hem through the merchant where
- 50 -
TABLE XI.
EXPENSES AND RECEIPTS FOR THE BUDGETED FARM BY THE MONTH.
Month
Exoenses
January
February
March
April
May
June
July
August
September
•October
November
December
TOTAL
$
they were purchased.
140
145
3,663
2,082
1,395
674
484
’1,193
310
1,050
300
145
11,581
Receiots
2,250
'
690
7,716
5,480
9,000
25,136
The third method used is a combination of the first
two methods to take advantage of the lower costs offered by the two sources
...
for various types of purchases.
Credit Costs When Using Budgeted Farm Loan
Table XII shows the expenses and receipts of the farming enterprises
along with the outstanding balance of the budgeted farm loani
The farmer makes arrangements with a commercial lending institution at
the beginning of the year for the amount of production credit that will be
needed.
He has agreed that he will borrow only when necessary expenditures
occur and mak|e payments against the amount borrowed whenever there are
'
receipts.
The assumption is made that all expenditures are made with
borrowed funds.
In Table XII the outstanding balance builds up until
$2,250 in receipts in March reduces the amount that would normally accumulate
without applying the receipts to the outstanding balance.
In August and
51
TABLE XII. . SCHEDULE OF EXPENSES .AND RECEIPTS SHOWING THE OUTSTANDING
BALANCE AND CREDIT COSTS BY THE MONTH ON A BUDGETED FARM LOAN
FRCM A COMMERCIAL LENDING INSTITUTION.
Interest
Rate
MonthJanuary
February
March
April
May
June
July
August
September
October
November
December
7%
7%
7%
7%
7%
'7*
7%
7%
7*
7%
7%
7%
Expenses
Receipts
$
$
140
145
2,381
3,362
1,395
674
484
1,193
310
1,050
300
145
Outstanding
Balance
$
2,250
690
7,716
5,480
140
285
416
3,778
5,173
5,847
6,331
6,832
3,686.
Cost of
Credit
$
.82
1.66 ■
•
2.43
22.04
30.18
34.11
36.93
39.85
22.15
0
0
9,000
o$ 190.17 1
September the receipts lower and finally eliminate the outstanding balance.
Here, the credit costs are ended and the remainder of the year's ;
purchases
are made by paying cash .
borrowing is only $190.17.
The total cost of credit by this method of
If the money had been borrowed; from January
through September on a straight-end loan at the same interest rate, the
credit costs would have been $529.41.
Credit Costs’Using Merchant.as Source
The second situation analyzed was to pay for the same expenditures
through the merchant where the purchase was made.
A schedule of expenses
was prepared by type of purchases for this situation.
The credit policies
of the merchants in the area where this study was conducted were taken
into consideration when determining the costs which were incurred by
using the merchant credit.
When receipts became available they were used to
pay for the purchases previously made.
52 -
Purchases, such as petroleum products and groceries, were carried by
the merchant for the complete production period on an open account with no
carrying charges.
Carrying the groceries on account over 30 days results in
a loss of trading stamps regarded as worth at least 2 per cent of the’ total
purchases.
Feed, seed, fertilizer and chemicals were carried a maximum of
six months for which there is usually no charge.
This fit in with the
receipts schedule so that the purchases were paid for within the six-month
period.
The new tractor, which was purchased in.March, was completely paid
for by. the receipts which were also received the same month.
Ordinarily,
this purchase would have been carried through the dealer at a rate of
possibly Sg- ■ per cent interest.
The farm machinery repair parts which run
on open account for over 60 days are charged I per cent per month until the
\
bill is paid.
TABLE XIII.
This amounts to $3.31 for the production period.
CUMULATIVE EXPENDITURES CARRIED THROUGH THE MERCHANT WHERE THE
PURCHASE WAS MADE SHOWING TYPE OF MERCHANDISE PURCHASED, THE ■
CCST PER MONTH, AND THE MONTH THE MERCHANDISE•WAS PURCHASED.
_______ -i__
Month
Petroleum Feed, Seed, Farm ■Auto-Truck
Groceries Products
Fert.
MachV . Reoairs
Live- BuildStock
Black
ing
S u d d Iv S u d d Iv smith
$100
January
$ 25
$
15
$
$
$
■
$ ■
$
200
30
55
February
75
300
March
116
45
25 1,280 - 12
2,049
■i
paid
paid paid paid
paid
400
1,894
April
216
18
15
1,280
500
2,404
May
327
30
28 1,280
26
2,404
June
620
425
45
12
37
28 1,280
740
2,404
July
■ 466
45
. 60
28 1,280
840
530
2,404
August
1,075
28 1,280
59
940
September
634
2,404
82
1,095
28 1,280
paid
October
paid
paid
paid
paid
paid paid paid
paid
November
paid
paid
■paid
paid
paid paid paid
oaid
paid •
oaid
Daid
oaid
December
Daid oaid oaid
$18.80
0
0
0 $128.00 0
charges
$3.31
$14.16
TOTAL. $164 . 27'olus labor carrvina charaes .of $38.99 at bank .'=' $203.26
- 53
The repair's in the Auto and Truck category are on open account while
the balance of the used truck purchase in August is carried on contract at'
8 •§• per cent interest for two months and then paid off as receipts become
available.
The purchase of building supplies in March, costing .$1,280,‘ is
carried on open account.
There is no interest charge on the open account
but the 10 per cent cash discount amounting to $128 is not realized.
This
cost of credit amounts to considerably more than a 10 per cent per year,
rate because the purchase is paid off within seven months.
The money 'paid out for labor under this method must be borrowed from
a commercial credit source the same as under the first credit method’.
This
amounts to $38.99 in credit costs which brings the total to $203.26 or
$13.09 more than using the budgeted loan at the commercial credit instit­
ution.
Credit Costs When Using Combination of Commercial arid Merchant Credit
The third method, a combination of commercial credit and merchant
credit, is illustrated in Table XIV.
The purchases which can be carried
on open account or by any other means through the merchant at' a lower
cost than available commercial credit are so carried.
All other purchases
are paid for with cash borrowed from a commercial credit source so that
all cash discounts are received and high merchant credit costs are
avoided.
Under the Combination method the credit costs on those purchases
carried by the merchants amount to $1,6.80. , The credit costs for the
purchases paid for with funds borrowed from the commercial credit source
54
TABLE XIVw
Month
SCHEDULE GF ACCUMULATIVE EXPENDITURES AND MONTHLY COSTS OF
CREDIT BY USING A COMBINATION OF COMMERCIAL AND MERCHANT
CREDIT SOURCES FOR THE BUDGETED FARM ENTERPRISES.
Expenses- Receipts
January
February
March
April
May
June
July
August
September
October
November
December
$
140
310
3,971
$
$
,
2 ,2 5 0
3 ,8 0 4
5,200 •
5,876
6,480
Amount Carried
bv Merchants.
'
6 ,9 8 3
690
7,290
1,050
300
145
13,186
140
310
1 ,7 2 1
2 ,5 2 4
3 ,2 9 6
3 ,5 5 2
3,738
.3,931
4,178
Cost
$ 2.00
Amount Carried
bv Commercial
$
2.00
2 .0 0
2.00
2.00
$
1,280
7.47
1 ,9 0 4
11.11
2.40
2.40
2,324
2 .0 0
3,052
3,112
13.56
, 16.00
’ 17.80
18.15
2 ,7 4 2
,
$ 84.09
9,000
$ 16.80
,
TOTAL COST
amount
to $84.09.
Cost
- .
$
1 0 0 .8 9
The credit costs from the two sources total $100.89.
This is $102.37 less than the credit costs incurred by using merchant
credit only and $89.28 less than credit costs incurred by'using a budgeted
farm loan from a commercial lending source..
■The implication here is that credit costs vary from source to source.
Credit costs also vary from one type of purchase to another depending upon
where the purchase is made and how the credit is handled.
A combination of
credit sources which will take advantage of the lower credit costs for
particular types of purchases will ultimately result in lower over-all
credit costs to the individual farmer.
CHAPTER V
SUMMARY AND CONCLUSIONS
Summary
Merchant credit use by farmers, as a part of the necessary production
credit needed to carry on the farming operations, has been important in the
past.
This credit has been a high-cost source of credit to the farmer and
used by him for various reasons even though lower-cost credit may have been
available to him from other sources.
The costs of merchant credit in the
past, varied with the tenure of the farm operator with the tenant paying the
highest"rate, because of his comparatively insecure position.
't
There was a general consensus in past years that the farmer who used
credit was not in an enviable position from either a managerial or a social
point of view.
The use of credit was to be avoided "if possible.
This
opinion, to the. benefit of many people, has been changed in recent years
due mostly to the increased need for capital resources in farming.
The
use of merchant credit has continued with emphasis on special types of
credit arrangements to meet different income situations and schedules.
Farmers, in general, are becoming more aware of credit policies
extended by merchants, the terms of repayment, and the costs connected
with merchant credit.
There is., however, much more understanding needed,
both on the part of the farmer and the businessman, before an optimum
credit situation is realized.
Several of the factors which influenced the credit policies of merchants
in the past are no longer prevalent today.
The increased availability of
commercial credit for farmers' operating capital has eliminated a large
- 56 -
amount of the harvest terms and changed to 30 days credit terms.
Harvest
terms are still available where necessary and convenient to both the farmer
and the merchant..
The tenure status of the farm operator does not affect-,
to any significant degree, the cost of merchant credit.
The amount of
merchant credit used, however, does seem to vary with the tenure of the
farm operator.
The average amount used by the part-owners i,s the highest,
with tenants using about twice as much as full owners.
This is somewhat-
reversed from the situation of some '30'.years a g o .
The cost
of merchant credit to the farmer varies a great deal
depending upon the type of purchase, the length of time the credit is
outstanding, and the security offered by the purchases.
.Open account
credit for short periods of time may cost the farmer virtually nothing,
while some long term contract arrangements may run as high as 18 per cent
per year on some items.
..As a rule, the cost of merchant credit to the
■farmer is not as high as has been reported in earlier years.
Commercial
credit costs have decreased also over the same period of time., The costs
of merchant credit for short periods*oh many items, is much cheaper than
commercial credit.
Over longer time periods., .however, merchant credit
becomes more costly than commercial credit.
A combination of merchant
and commercial credit to fill the specific credit needs of the farming
enterprises provides the lowest-cost credit to the farm operator.
Conclusions
• Analysis revealed that only two of the seven factors considered as
possibly having an effect on merchant credit use by farmers really had a
- 57 -
significant effect.
Two other factors seemed to have a slight effect on
the use of merchant credit by farmers.
The total revenue of the farm operator and the net worth of the farm
operator were significant factors affecting the use of merchant credit by
farmers at the .05 confidence level.
These two factors along with the real
estate debt load of the farm operator accounted 31.1 per cent of the unexplai­
ned variation in the amount of merchant credit used by farmers.
Merchants do seem to be an important source of production credit for
farmers.
They have provided 20.6 per cent of the production credit used by
the farmers in this area.
The cost of merchant credit as compared to other
types of production credit is somewhat higher.
This must be qualified,
however, by stating that the credit from other sources must be obtained
under the most efficient arrangements available or this is not true.
Credit
obtained from the commercial banks, production credit associations, and
other sources must be on a budgeted loan basis.
This may not be done by
some farmers, which may raise -credit costs from these sources, but the
opportunity to keep the costs down are available to all farmers.
The term
production loan would be more costly to the farm operator than merchant
credit, providing the farm operator took advantage of the most beneficial
merchant credit policies being offered.
.The optimum arrangements for credit:'turn out to be a combination of
merchant and commercial credit.
Under the credit policies extended by
many merchants it is possible to make credit purchases up to 30 days,
and in most cases, 60 days, before any charge for credit is made.
The
- 58 charge for commercial credit must be compared to the charge for merchant
credit on the same purchase.
If the merchant credit is cheaper, the article
shotild' be carried with the merchant.
If the merchant credit is more expensive
than the commercial credit, the merchant should be paid off with credit
received from the commercial source.
If.cash discounts given by the merchant
for cash purchases amounted to more than the interest rate at the commercial '
lending source, credit should be obtained from the commercial lending source
to take advantage of that cash discount.
This leads to lower credit costs
by taking advantage of the best credit terms being offered for particular
types of merchandise.
Further RmsAATcb
The amount of research previously done in the area of merchant credit
use in Montana has been fairly insignificant.
The research in this study
gives rather general treatment to merchant credit use as it is related
to farmers and their farming operation.
Some more specific areas of
merchant credit use should be investigated.
Different types of merchandise purchased on credit are carried at
different-rates of interest.
Research into the subject of variation in
credit charges for different types of credit purchases should be conducted•
to determine which purchases carry the highest credit charges and whether
there is any economic justification connected with the different charges.
The factors affecting the use of merchant credit by farmers could
also use further investigation.
The five factors in the Multiple regression
analysis used in this study accounted for only 31.5 per cent of the variation
in the amount of merchant credit used by farmers.
The two variables tested
- 59 with the analysis of variance also showed very little significance in
affecting merchant credit use.
There are obviously other factors of
significance which could be identified and their effect on merchant credit
use by farmers quantified.
This study showed that as the net wotth of a farm operator increased
the amount of merchant credit being used decreased.'
be given for this relationship.
Various reasons could
One might be that the optimum level of
capital use had been reached when the net worth increased and less merchant
credit was needed.
Another reason might be that the farmer decides that
the risk incurred to increase the level of capital use after a certain level
of net worth was attained was too great in view of the possible returns.
■
Inquiry into this subject might prove very interesting.
The area of merchant credit costs is one that could use more research
also.
Direct cash discounts and direct interest charges for credit are
easy to apply to a cost of merchant credit.
Hidden costs, such as price
increases due to credit extension, are difficult to determine and identify.
Research might prove beneficial in comparing, prices of comparable articles
from merchants who extend credit with those ,from merchants who do not
extend credit.
APPENDICES
- 61 -
-APPENDIX A
TABLE I.
ANALYSIS QF VARIANCE PROCEDURE SHOWING THE CLASSIFICATION OF
DATA ARRANGEMENT THROUGH THE F TEST..
Classification of data into columns;
2
3
-i
9 ..
X2
4
9
16
29
ZX
=
^ -2
ZX
=
2 ■
2
4
4
^
ja
' 17
7
cnIXI
Xl
IXI
Xl
3
I
2
6
9
I
4
14
22
N = number Df observations
60
C = number Df columns = 3
Procedure for analysis;
o
2
Z X 2MC = Z x 2
a/
—
%
W
M
S
CO
^ % be
(I
2
X c)
Ne
—
2
2
C
2
kc
2
I
•kc
SI
c _
2
( Z X c)
'
(Z X)
b/
I ' 1-
Ne
2
S
2
F test ; .S2 bC'
be=
C - I
a/
we stands for "within columns",
b/
be stands for "between columns".
S2 VifC'
- 62 -
TABLE II. ANALYSIS OF VARIANCE FOR THE FACTOR TENURE CF THE FARM OPERATOR
. SHOWING THE COMPUTATIONS AND F TEST.
_2
S X = 305,356
SX
= 2,053,354,792
2
2
S x wc = 2,053,354,792 -
(84,748)
2
2
'
+ (154,039)
+ (66,569)
27
2
S x WG = 2,053,354,792 - 685,597,915 = 1,367,756,877
S2WC = S.x_2wc
N - C
2
=
- 9 , 7 0 0 ,4 0 3
1,367,756,877
141
'
S x be = 685,597,915 - 647,515,880 = 38,082,035
S 2bc = % xfbc
C-I
= 38,082,035
F Test:
=
=
^ i.6?_4,_0_12 -
i 309
9,700,403
TABLE ITI.
SX
= 12,694,012
ANALYSIS OF VARIANCE FOR THE FACTCE-TYPE OF FARMING ENTERPRISE
SHOWING THE COMPUTATIONS AND THE F 'TEST.
SX
305,356
2,053,354,792
2
S X we = 2,053,354,792 -
(210.098)
2
+
(45,206)
30
90
S x we = 2,053,354,792 - 662,960,301 = 1 , 3 9 0 , 394,491
S2wc = .l.!.-3.90.^3.9.4.,4J9A
b
144-3
= 9,860,954
S.x^bc = 662,960,301 - 93,242,286,736 =
144
S2bc = .15,444,.4.21
2
=
15,444,421
7,722,211
2
2
F test None needed: ( S wC; is larger than S bb).
2
+
(50.052)
24
- 63 -
,APPENDIX B
I/
TABLE I,- SUGAR BEETS ENTERPRISE BUDGET OF ACTIVITIES SHOWING THE
ACTIVITIES, DATES OCCURRING, AND CASH EXPENSES OF EACH
ACTIVITY.
-Sugar Beets - 50 acres
Time Exoended
Activity
Preoare Seed Bed
.Plow
Disc
Harrow
Level
'32
11
8
10
hours
hours
hours
hours
Planting
Seeding
29 hours
Fertilizer
Seed
Cultivating •
Before Thinning 50 hours
After Thinning/ 50 hours
Thinning
Machine
Labor
Irrigating
First Appli.
Second "
Third.
"
Fourth "
Fifth
”
Sixth
"
Harvesting
Tractor and
Harvester
Two trucks
JL/
50 hours
20
20
20
20
20
20
hours
hours
hours
hours
hours
hours
Date Occurring
Expense.: Incurred
March
March
March
March
$
10-14
15
16
17
April 1-3
33.94
10.25
7.50
9.00
20.00
1,200.00
120.00'
May 5-10
May 25-30
25.00
25.00
.May 10-15
25.00
600.00
June 1-5
June 17-22
July 4-9
July 21-26
Aug. 7-12
Sept. 1-5
Oct. 8 through
Nov. 3
300.00
• 210.00
All budgets in Appendix B are synthesized using the following publi­
cations for guidance and background:
Roy E. Huffman and D. C. Myrick, Farm Organization and Production
Requirements in Selected Irrigated Areas. Montana State College,
Agricultural Experiment Station, Bulletin No. 453; and LeRoy C. Rude,
Land Use Alternatives for Dryland Cash-Grain■Operators South Central
Montana. Agricultural Economics Research Report No. 8, Department of
Agricultural Economics and Rural Sociology, Montana Agricultural
Experiment Station.
-
TABLE II.
64
BEAN ENTERP R I S E BUDGET OF A C T I V I T I E S SHOWING T H E D A T E EACH
M A J O R A C T I V I T Y OCCURS A N D T H E C A S H EXPENSES INCURRED.
Beans - 30 acres
Activity
Prepare Seed Bed
Plcw
Disc
Harrow
.Level
Plantina
Seeding
Seed Cost
Fertilizer
Time Expended
19
7
5
6
hours
hours
hours
hours
Date Occurrinq
Expense Incurred
May
May
May
May
$•
1-2
3
4
4
16 hours
May 29-30
Cultivation
First Time
Second Time
30 hours
30 hours
June 15-18
July 5-8
Irriaatinq
First Appli.
Second
11
Third
"
12 hours
12 hours'
12 hours
June 19-22
July 10-13
A u g . -6-9
Harvestinq
Cutting
Raking
Combining
30 hours
10 hours
30 hours •
Sept. 2-6
Sept. 2-6
Sept. 7-11
20.36
6.15
.4.50
5.40
12.00
30.00
480.00 -
15.00
15.. 00
15.00
8.10
42.00
65 -
T A B L E III.
WHEAT E N T E R P R I S E BUDGET OF A C T I V I T I E S S H O W I N G T H E DA T E EACH
M A J O R A C T I V I T Y OCCURS A ND T HE C A S H EXPENSES INCURRED.
Wheat - 30 acres
Activity
Time Expended
Prepare Seed Bed
Plowing
Discing
Harrowing
Leveling
Planting
Seeding
Fertiliz .er
Seed Cash
19
7
5
6
hours
hours
hours
hours
8 hours
Irrigating
First. Appli.
Second
"
,Spraying
Application
Harvesting
Date. Occurring
Expense Incurred
March
March
March
March
$
21
22
23
24
April 5
1
20.36
6.15
4.50
5.40
15.90
240.00
108.00
June 13-15
July 15-17
' 7 hours
June 20
30.00
20 hours
Sept. 12-13
42.00
- 66 -
T A B L E IV. , B A R L E Y ENTERP R I S E BUDGET. OF A C T I V I T I E S S H O W I N G T H E DA T E EACH
M A J O R A C T I V I T Y OCCURS A N D T H E C A S H EXPENSES INCURRED.
Barley - 20 acres
Activity
Prepare Seed Bed
Plow
Disc
Harrow
Level
Planting
Seeding
Seed Cost
Fertilizer
Time Expended
13
4
3
4
hours
hours
hours
hours
5 hours
Irrigating
First Appli.
Second "
Spraying
Application
Harvesting
Combining
Date Occurring
Expense Incurred
Maroft- 18
March" 19
March '20
March.20
$
■April 5
13.58 "
4.10
3.00
3.60
10.60
36.00
160.00
June 11-12
July 11-12
5 hours
13 hours
June 20
20.00
Aug. 15-16
29.00
■
- 67 -
T A B L E V.
Hay
H A Y ENTERP R I S E . B U D G E T GF .ACTIVITIES SHO W I N G T H E D A T E EACH
. M A J O R A C T I V I T Y OCCURS A N D T HE C A S H EXPENSES INCURRED.
30 ,acres
Activity
Time Expended
Date- Occurrinq
Irriaatinq
First Appli.
Second
"
Third
"
12 hours
12 hours;
12 hours
June 10-12
July 15-17
Aug. 20-22
Harvestinq
Mowing
29 hours
Raking
25 hours
Stacking
30 hours
June 17,
& Aug.
June 18,
& Aug.
June 19j
& Aug.
TABLE VI'.
Expense Incurred
'
July 22
27
July 23
28
July 24,=
29'
.$
27.21
'24.30
18.00
PASTURE ENTERPRISE BUDGET OF ACTIVITIES SHOWING THE DATE. EACH
MAJOR ACTIVITY OCCURS AND THE CASH EXPENSES INCURRED.
Pasture - 40 acres
Activity
Irriqatinq
First Appli.
Second "
Third
"
Fourth "
Time Expended
16
16
16
16
hours
hour's
hours
hours
Date Occurrina
June 15-19
July 20-24
Aug. 15-19
Sept. 15-19
Expense Incurred
- 68 -
T A B L E VII.
BEEF C O W ENTERP R I S E BUDGET OF ACTIVITIES S H O W I N G T HE DATE
EACH' M A J O R A C T I V I T Y O C C U R S 'A N D T H E CASH EXP E N S E S INCURRED.
Beef cows - 50 head
2-year-old heifers - 8
1-year-old heifers - 8
Activity
Vaccinating and
Branding
Weaning
Shipping
Feeding
Time Expended
4 hours
8 hours
300 hours
45 calves
2 bulls
Date Occurring
' Expense Incurred
May 15
Sept. I
Oct. I
Dec. I - Apr. 30
$
22.50
- 69 -
APPENDIX C
TABLE I.
RECEIPTS SCHEDULE F CR, BUDGETED FARM ENTERPRISES.
Date
March I
August 20
September 15
September- 15
September 20
October I
December I
TABLE II.
Month
January
February
March
April
May
June
July
August
September
October
November
December
Tvoe of Receipt
Payment on last year sugar beets
Sell 1,000 bushels of barley
Sell 600 bags of beans
Sell l,5O0 bushels of wheat
Last sugar' beet payment for last year
Sell 45 calves and 8 cows
Sugar beet payment
Amount
$2,250
690
3,-456
2,460
1,800
5,480
9,000
RECEIPTS AND EXPENSES BY THE MONTH FOR THE BUDGETED FARM
ENTERPRISES.
,
Receipts
$
2,250
690
7,716
5,480
9,000
-
Expenses
$:"■ 140.00
145.00
3,663.00
2,082.'00
1,395.00
674.00
484.00
1,193.00
:,310.00
1,050.00
300.00
145.00
1
- 70 -
APPENDIX D
TABLE I.
CREDIT USE BY TENURE OF .OPERATOR SHOWING AMOUNTS AND PERCENTAGES
OF MERCHANT AND COMMERCIAL CREDIT USED.
Type of
Credit
Commercial
Credit
Merchant
Credit
Open Acct.
Convenience
Yearly
Contract
TOTAL
Grand TOTAL
TABLE II.
Tenant
Amount
Percent
$274,239
82
2,873
I
9
8
18
100
2 9 ,3 8 8
27,765
6 0 ,0 2 6
$334,265
Part-Owner
Amount
Percent
Owner
Amount
Percent
$501,526
77
$394,651
82
7 ,6 8 6
I
12
10
23
100
18,168
32,793
38,387
3
7
8
'18
100
78,279
67,523
1 5 3 ,4 8 8
$ 6 5 5 ,0 1 4
8 9 ,3 4 8
$483,999
TOTAL AMOUNT OF MERCHANT AND COMMERCIAL CREDIT USED BY 144
FARMERS SURVEYED SHOWING PER CENT OF TOTAL.
Type of Credit
Commercial Credit
Merchant Credit
Open Account
Convenience
Yearly
Contract
Total' Merchant Credit
Grand TOTAL
Amount Used
IPercent of Total
1,170,366
79.4
28,727
140,460
133,675
302,862
1,473,228
2.0
9 .5
9 .1
20.6
1 0 0 .0
'
71
TABLE III.
CREDIT USE BY TYPE OF FARM SHOWING-AMOUNT AND PERCENTAGE OF
COMMERCIAL AND MERCHANT CREDIT USED.
Type of
Credit______
Diversified
Dry Land Grain
Amount Percent_______Amount Percent
Commercial
Credit
$883,239
Merchant
Open
Convenience.
2 2 ,3 6 6
111,594
Yearly
69,045
Contract
$203,005
TOTAL ■
Grand TOTAL $1,086,244
TABLE IV.
Livestock
Amount -Percent
81
$111,946-
69
$175,181
78
2
7
10
19
100
1,470
11,646
36,690
$ 49,806
$161,752
-I
-7
23
•31
100
4,891
17,220
27,940
$ 50,051
$225,232
2
8
12
22
100
NUMBER OF FARMERS USING COMMERCIAL, MERCHANT, AND NO CREDIT BY
TENURE AND TYPE. OF FARMING.
Type of-Farming-._________Owner
Part-Owner
Tenant
Total
Uses
no
Credit
Diversified
Dry Grain
Livestock
2
4
I
I
I
0
2
0
0
5
5
I
Uses Mer­
chant Credit
Only
Diversified
Dry Grain
Livestock
10
5
8
4
3
2
2
0
0
1-6
8
10
Uses
Commercial
Credit Only
Diversified
Dry Grain
Livestock
0
'4
0
■0
0
I
0
0
I
0
4
2
Uses Both
Sources of
Credit
Diversified
Dry Grain
Livestock
12
.6
5
40
5
3
17
2
3
69
57
60
-27
144
TOTAL
13
11
72
TABLE V.
SUMMARY OF CHARACTERISTICS COMPARING USERS AND NON-USERS OF
MERCHANT CREDIT.
Users of
Merchant Credit
Item
Age of operator (years)
Size of farm (acres)
Net ’worth of operator
Gross Revenue of operator
Net income of operator
Real estate debt load
Total debt load
Other ©redit Used -■ Bank, PCA, etc.
TABLE VI.
46
53
1,717
2 ,3 8 6
$73,007
23,611
8 ,3 2 9
9 ,6 3 6
19,608
8,873
$
6 2 ,6 6 2
11,529
4 ,8 6 2
2,897
5,384
I ,«864
PRICES USED 'IN THE STUDY.
Wheat
Barley
Oats
All Hay (baled)
Alfalfa Seed
Red Clover Seed
Potatoes
Dry Beans
Sugar Beets
Flaxseed
Sweet Corn Silage
Corn
Beef Cattle
Beef Calves
Sheep
Lambs
Hogs
Butterfat
Chickens
Eggs
Wool* ■
Loose Hay .
Stock Gow .Value
Grade A Whole Milk
*
Non-Users of
-Merchant Credit
Bu.
Bu.
-Bu.
ton
cwt.
cwt.
cwt.
•cwt.
ton
ibu.
ton.
ton
Bu-.
cwt.
cwt.
cwt.
cwt.
cwt.
lb.
lb;
do,z.
lb.
ton
hd.
lb. bf.
Includes G o v e r n m e n t incentive payment
$ 1.6< ■ ,
.6 9
.57
22.85
25.90
20.13
2.55
5.76
14.50
2.83
14.25
6.50
1.72
21.50
29.00
5.80
' 17.00
12.73
.61
. .13
.3 9
. .62
20.00
250.00
1.09
73
BIBLIOGRAPHY
Carson, E. E., Farmer Use of Merchant Credit In Indiana. Department of
Agricultural Economics, Agricultural Experiment Station, Purdue
University;( Lafayette, Indiana, February, 1957.
Harston, Clive R., "Fewer Persons on Farms But Greater Production", Great
Falls Tribune. February 28,M 960.
Lee, V. P.., Short Term Farm Credit in Texas. Division of Farm and Ranch
Economics, Texas Agricultural Experiment Station, Bulletin No. 351,
College Station, Texas, March, 1927.
,Moore, A. N., and J. T. Sanders, Credit Problems of Oklahoma Cotton Farmers.
Department of Agricultural Economics, Oklahoma Agricultural Experi­
ment Station, Oklahoma Agriculture and Mechanical College, Bulletin
No. 198, Stillwater, Oklahoma, October, 1930.
Story, Robert P., Costs of Rural Merchant Credit in Vermont. Vermont
Agricultural Experiment Station,. Bulletin No. 555, Burlington,
Vermont, December, 1949.
United States Department of Agriculture, Agricultural Finance Review.
Volume 12, Bureau of Agricultural Economics, Supplement, Washing­
ton, D. C., May, 1950.
United States Department of Agriculture, 1960 Agricultural Finance Outlook.
Agricultural Research Service, Washington, D. C., November, 1957.
United States Department of Agriculture, The Balance Sheet of Agriculture.
1959. Agricultural Research Service, Bulletin No. 214, U. S.
Government Printing Office, Washington, D. C., October, 1959.
Wickens, D. L., and G. W. Forster, Farm Credit in North Carolina.-Its
Risk. Cost, and Management. North Carolina Experiment Station,
Bulletin No. 270, Greensboro, North Carolina, April, 1930.
libraries
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