Crop Diversification and Banking Resilience: An Entropy-Based Evaluation of Agricultural Lending Performance
Presented by:
Jim Teal
Practice Job Talk
Department of Agricultural and Applied Economics
University of Wisconsin-Madison
Friday, September 26, 2025
12:00 pm-1:30 pm
Taylor-Hibbard Seminar Room (Rm103)
Agricultural producers have greatly benefited from the economies of scale in agriculture. By taking advantage of these economies of scale, producers choose to specialize in only a small number of crops. Although specialization has the benefits of higher expected returns, there is a trade-off with increased risk exposure. Consequently, increases in large scale specialization have increased risk for agricultural lenders. This is especially true for regional banks which may only lend to producers in a small number of neighboring counties. I evaluate whether declines in crop diversification have negatively impacted agricultural loan performance and if certain types of diversification have less of an impact than other types. I show that diversification does have an impact on delinquency rates of agricultural loans. Contrary to conventional wisdom, diversification increases delinquency rates for agricultural production loans and real estate loans secured by farmland. A one standard deviation increase in a lender’s diversification exposure raises production loan delinquencies by over 13% and real estate loan delinquencies by 11%. The negative impact of diversification on real estate loans is primarily driven by diversification “within similar” crop groups. My results suggest that not all diversification is created equally, and some forms of diversification are actually risk increasing instead of risk mitigating.