The FASB’s Accounting Standards Update 2016-13 (CECL) requires lenders to estimate lifetime expected credit losses using the EAD x PD x LGD framework. For agricultural lending, CECL has created a structural distortion: the Loss Given Default (LGD) component is uniquely unstable for livestock collateral due to information asymmetry around biological asset valuation. Because cattle cannot be continuously audited like real estate, lenders apply a 35% collateral haircut that caps loan-to-value ratios at approximately 65% for operating lines backed by live inventory. We estimate that this information-risk premium locks between 11. 5 billion and 18. 4 billion of productive credit capacity out of the U. S. cattle industry; capital that cannot flow to ranchers even when cattle prices are at record highs and the Farm Credit System maintains a 0. 42% allowance ratio. Using portfolio-level data from 55 Farm Credit associations, USDA NASS inventory reports, and FCA call report filings, we walk the CECL formula for livestock-specific parameters and demonstrate why the LGD compression problem is intractable under current collateral verification technology. Our analysis shows the U. S. cattle industry – now at 86. 2 million head, the smallest inventory since 1951 – is credit-constrained not by borrower risk, but by the inability of accounting standards to price biological collateral accurately.
Labs et al. (Tue,) studied this question.