How Traditional Ag Lending is Difficult for Farmers

Agricultural lending plays a vital role in sustaining the farming industry worldwide. Farmers rely on loans to purchase land, livestock, machinery, seeds, fertilizers, and other inputs crucial to their farming operations. Despite the importance to the wider industry, farmers still struggle to obtain adequate financing for their operations. The current agricultural lending system is failing many farmers. Access to agricultural credit remains a top concern for farmers in the US and worldwide. 

Strict Farm Lending Guidelines 

Due to the perceived risk in the agricultural industry – market volatility and unpredictable weather patterns—traditional ag lenders take a conservative approach when they review farms’ financials. Yet, data shows that farmers are not inherently riskier than other businesses, at least in their likelihood of meeting the terms of their loan agreement. A financial report on the state of the agricultural industry in 2022 found that agricultural loan delinquency rates in commercial banks were less than 1%. The 10-year US Ag Loan default rate hovers around 2% - similar to the default in the general commercial lending sector. 

And yet, among commercial and Farm Credit ag lenders, only 25% of US farmers are considered “prime” – meaning the borrowers with the least likelihood of default. The capital requirements, debt repayment capacity, debt to assets, and other financial ratios required for ag loans should be reassessed to ensure they are sufficient for the needs of the modern farmer. 

Limited Access to the Best Credit 

If 25% of farmers are considered “prime,” are the very best farmers with access to the best financial services, and 2% of farmers default, that leaves 73% of farmers either underbanked or unbanked. Essentially these farmers go without sufficient capital, efficient capital, or the best rates, terms, and services needed to grow their business.

Traditional ag credit models analyze and determine creditworthiness based on narrow financial metrics. If you fall outside of that skinny corridor due to your age, experience, lack of credit history, or business model, you either don’t get a loan or you’re offered one which takes longer to underwrite, has stricter terms, or higher rates.  Or you get a loan from the “lender of last resort,” the Farm Service Agency (FSA), which has a tedious 29-page application. This group of borrowers tends to be younger, newer, or smaller farmers.

In the US, for example, over 27% of all farmers (900,000+) are young or beginning farmers and produce about one-fifth or $88B of the overall national agricultural output. Over 80% of US farmers are small to medium-sized businesses (under $5M revenue/year). And it’s precisely these borrowers who need to be supported with the best rates, terms, and service to grow our future food, not constrained to fail.

Inadequate Loan Products and Collateral Options 

Even if a farmer’s financial history is up to par with the farm lending guidelines, the loan product or terms the lender sets may not work with the farmer’s business plan. For example, a loan requiring monthly payments does not match a farmer’s yearly production schedule. Lending terms must be tailored to the agricultural operator and their unique business, whether a row crop farmer, cattle rancher, dairyman, or orchardist. While it seems like a safer bet for the lender, they are setting the farmer up to fail because those terms are unaffordable and inappropriate. 

Additionally, many farmers, especially beginning farmers lack the collateral lenders are demanding to secure a loan. Securing an operating loan with a land title may be a good idea for one farmer, and yet, for a farmer who leases their ground or for a farmer whose land is already collateral for a real estate loan, it doesn’t work. Farmers require loans with flexible terms and conditions that align with their production schedule, cash flow, and business structure. While they aren’t necessarily more risky than other businesses, they are more specialized.

Technology and Digitalization: 

Most farms in the United States are in rural areas, away from major city centers. The isolation of farms can create geographic barriers that make it harder for a farmer to do business. If applying for a loan and working with a lender means traveling to the city, many farmers will go underbanked. It’s not just the geographic barrier that is a problem either. A new generation of farmers is looking for digital tools to do business and prefer the efficiency of online application. By failing to adopt new technology, traditional ag lenders are failing to meet that generation. Due to security concerns and lacking technical expertise, many lenders are slow to adopt new digital tools, such as mobile banking and digital applications. Ag lenders, innovative agribusinesses, policymakers, and farmers must work together to identify solutions to overcome these challenges.