Change is brewing in the agricultural lending system. Bank consolidation, a dramatic shift in farmer profitability, technological advances and more are driving how you will finance your operation in the future. Some changes will happen rapidly while others could take years — but you should prepare now for these issues.
FINANCIAL METRICS
The past few years of low commodity prices and financial stress make some lenders adjust the structures and requirements for their farm loans, says Ashley Arrington, Ag Resource Management real estate director.
“We saw financial ratios, such as debt to asset or the current ratio become lax, because no one could get approved,” she says. “With higher prices, bankers want to see improvement in the balance sheet. Bankers feel entitled to know how you will spend profits because they helped you through the bad times.”
“Without a question, cloud-based scorecards and desktop appraisals will be the way of the future for ag credit,” he says. “The average farmer who qualifies for financing may not sit down with a lender. They will have access to capital on platforms where they put their loans out to bid and look for the best structure options.”
COLLATERAL OPTIONS
Expect alternative lenders to play a bigger role in financing, Covington says. These types of institutions provide fi-nancing options without the policies that often constrict the typical loan process. They don’t have the regulatory pressures of traditional banks.
With the cost to own land dramatically increasing, alternative lenders can offer farmers who rent most of their land another option, Arrington says. For instance, some use crop insurance or other risk management strategies as loan collateral.
RELATIONSHIPS
The changes above all point to a major shift where you might not have the same kind of close relationship with your banker in the future.
“This shift will be over time, and it will be a difficult process for farmers and bankers,” Covington says. “I’m not say-ing relationships will go away, but there will be situations where the relationship won’t be as tight. Having spent 40 years in this business, I’m not happy about that. But ultimately you have to accept reality.”
Many farmers use their bankers as a trusted financial adviser, he adds. These changes mean farmers will need to fill that role with a different person or service.
How do Covington and Arrington advise farmers to accept and gain from these changes? Keep an open mind and talk to financial consultants who can give you guidance.
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