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October 25, 2023

Why Farm Lending Needs to Change 

Farmers have been navigating the same farm lending company practices for more than a century. 

When the Federal Farm Loan Act was passed in 1916, it gave farmers access to desperately needed capital. But since then, farm lending companies have remained stuck in the past and seen little change. Meanwhile, farming has changed drastically, with the advent of smart technology and the aftershock of the 1980s Farm Crisis. But, because financing hasn’t evolved with them, it’s challenging for farmers to secure the capital they require to purchase land and invest in their operations. 

The Farm Crisis of the 1980s and Farm Consolidation 

In the 1970s, concern about feeding the growing population led to Earl Butz, the Secretary of Agriculture, calling for farmers to “get big or get out.” This led to industry-wide expansion, inflated land prices, and high rates of borrowing. Combined with a poor grain season overseas, farmers achieved an economic high they expected to last for years to come.  

In 1980, the bubble burst—the large amount of debt accumulated in the 1970s, combined with land and commodity prices falling, failed government policies, and two droughts, created a ten-year-long farm crisis.  

This crisis forced many family operations to sell their land, accelerating the trend toward farm consolidation. In 1935, the number of farms in the U.S. had reached an all-time high of 6.8 million. But today, that number has fallen to just above two million farms.  

Farm Lending Company Market Share 

Farming is a volatile industry, with multiple factors influencing the farmer’s bottom line that are beyond their control. In fact, 44 percent of the time, farmers make less than they did the year before. Loans offer a safety net of capital to offset hard years. That is one reason farm debt has risen 30 percent since 2013, to levels seen during the 1980s farm crisis. Historically, that debt has only come from a few lenders. Half the farm lending market is served by lending co-ops. Another 35 percent is served by local banks. 

The implication for farmers is that a large portion of their borrowing needs are dependent on just a few organizations. This could potentially limit farmers’ access to diverse farm lending options and competition for better interest rates and terms. It also makes it challenging to find a farm lender that can comprehend their operation. In fact, 90 percent of the agricultural debt market isn’t diversified across commodities, regions, or experience. 

Additionally, only four organizations are capable of lending to farms across the entire U.S., the largest of which comprises just over two percent of total farm debt. For many farmers living in rural areas, this could mean being relegated to just a few options.  

Technology Is Changing Farming While Farm Lending Lags Behind 

New farm technology like AI has already irreversibly changed agriculture. Farmers are using GPS-guided tractors to plow fields and drones to precisely apply pesticides. But farm lending companies are still participating in the same habits that began more than a century ago after the Federal Farm Loan Act was passed.  

While some technology is allowing farmers to cut costs, farm lenders can do more. Digital platforms and online loan applications are a start, but financing built for investing in technology and a deeper understanding of the value of those assets can elevate farm lending.  

The Next Generation of Farm Lending 

Seeing a need for more flexible farm lending options, AgAmerica provides adaptable custom loans to farmers and rural landowners that meet the needs of their operations.  We pride ourselves on being perpetual learners, keeping innovation at the top of our minds.  

As a nationwide farm lender with genuine experience in agriculture, our wide range of custom loans is made to benefit the farmer—connecting them with the capital they need without overbearing requirements.  

Learn how AgAmerica can help you with innovative farm lending options. Contact us today to learn more.

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