Agricultural Lending

Background

Bank credit has played an important role in farm activities throughout U.S. history. The financing supplied by banks over the years has been essential to many individual farm operators and to the development of new agricultural technologies and techniques. As with all forms of lending, however, agricultural credit presents the banker with a unique set of risks.

Each region of the country has unique conditions that are reflected in the variety of commodities produced and marketed. Typically, there is at least some product diversification within a region; however, because of the interrelationships between many farm products and activities, and their influence on surrounding communities, agricultural concentrations are an everyday risk for many community banks. Moreover, each agricultural enterprise has its own technology, restrictions, and challenges for both the borrower and the bank lender.

The traditional role of bank credit in agriculture has been to fund seasonal production and longer term investments in land, buildings, equipment, and breeding stock. As with most business loans, the repayment of agricultural loans depends primarily on the successful production and marketing of a product, and only secondarily on the collateral taken for the loan. In some cases, non-farm, salary income may also be available, but it is often devoted to family living expenses and usually plays only a supporting role in the loan decision.

Consolidation has had a dramatic effect in recent years, both on the number of farms and the number of banks in predominantly agrarian geographies. The challenges facing farmers and farm lenders, however, have not subsided. Increased market risk from the elimination of government price supports is requiring farmers to take additional steps to continue as successful operators. They must become more familiar with global markets and the influences underlying demand for their products, and this, in some cases, is requiring more diversification. Environmental considerations and urban sprawl are also becoming increasingly important factors in agricultural decision making. These structural changes and increased risks reinforce the need for close cooperation between farmers and their lenders.

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