Crop Rotations, Transition Costs, and the Path Dependence of Farm Delinquency

Abstract

Operating credit in row-crop agriculture is path-dependent: unpaid loan balances roll forward and compound, so a single bad year can initiate a multi-year delinquency spiral. Yet credit underwriting and crop insurance pricing treat farm revenue as an aggregate stream, ignoring how crop rotation history shapes both yield distributions and the cash-flow process that determines whether harvest revenue retires the operating loan. This paper develops a simulation framework that couples field-level, rotation-conditioned yield distributions, estimated from a fifteen-year Illinois corn panel, with an explicit operating-credit model that tracks origination, accrual, repayment, and balance rollover. Delinquency risk follows a sawtooth pattern: soybean-harvest years periodically retire accumulated rollover debt, reducing the six-year cumulative delinquency probability by up to 25 percentage points relative to continuous corn. A Shapley decomposition assigns 92-100 percent of delinquency risk to price uncertainty, with the natural price-yield hedge contributing only one to two percentage points (largely redundant where rotation has already reset the debt balance); rotation reduces this price-driven risk not by lowering price uncertainty but by restructuring the cost-and-debt path the price shocks propagate through. A comparison between independent and correlated price–yield draws shows the natural hedge contributes little; the debt-reset dynamics and yields confirms that the rotation channel operates via the timing of debt retirement, rather than an aggregate price effects. Rotation history is an observable risk factor that current credit and insurance instruments systematically ignore.