How to Meet Your Ag Customers’ Evolving Lending Needs 

As the global population continues to grow — with the United Nations estimating an increase of nearly two billion people in the next 30 years — the call for a more resilient agriculture industry is loud, ushering in a new era of agricultural practices, technologies and lending.

The World Bank estimates that at least $80 billion in annual investments will be required to meet the global food demand, which is estimated to increase by 70% by 2050. In turn, farmers and other agribusinesses are starting to evolve their operations, and ag-tech companies are continuing to advance innovative solutions to help drive higher quality and production levels.

Shifts across the agricultural landscape include: 

• Rising Costs: Most farmers and other agribusinesses are battling rising production costs, such as labor, fertilizer and land. Last year, total fees paid by U.S. farmers to raise crops and care for livestock reached an all-time high of $460 billion. Machinery and equipment costs are also at record highs. The average price of a new tractor increased by 50%, or $163,200, over six years.
• Rapid Consolidation: Census of Agriculture data shows that the number of farmers is shrinking, influenced by policies and financial pressures that have farmers doubling down or dipping out. As a result, the size of the remaining farms is growing. For instance, in Minnesota, the number of farms decreased by 3,300 over five years, while the average farm size increased by 17 acres. Like other industries, this trend allows agriculture stakeholders to scale operations, spread out fixed costs and generate higher profit margins.
• Technology-Driven Growth: Vertical and indoor farming, precision crop farming, alternative feed supplies and other sub-industries are emerging as software, robotics, artificial intelligence and the Internet of Things push ag practices forward. Technology-driven growth across the market shows no signs of slowing down: agricultural-technology has an $18 billion revenue opportunity in the U.S. alone, according to Deloitte.

As the agriculture market continues to grow larger and more complex, and as ag entities continue to evolve, their banking and lending partners need to grow and evolve with them.

How Ag Lenders Can Keep Up
These industry-specific changes, paired with rising interest rates, a more competitive marketplace and post-pandemic portfolio tension are shifting how banks can and should service their ag clients. Many banks are taking note of the evolving agriculture landscape and turning to partners within the secondary market to stay ahead of their clients’ needs and meet their lending and banking expectations, all while growing their own operations.

The secondary market provides leeway to banks. For instance, farm sector debt is expected to increase 5.2%, or $27 billion, to $547.6 billion in 2024. When banks require solutions outside of their institution’s capacity to accommodate loans, such as extending lending limits or providing terms and rate flexibility, they can offload the loan to their secondary market partner but continue servicing the client. The secondary market allows bankers to maintain their customer relationships, offer their clients a variety of innovative lending products and feel better equipped to accommodate the demands of the new agriculture market. The process itself is quite simple:

• The lender originates a loan to a customer.
• The secondary market partner assumes the credit and liquidity risk for the loan, often serving as a behind-the-scenes partner.
• The lender earns the loan servicing income to grow their business.

While some move faster than others, all industries are evolving, and lenders need to find new ways to keep pace. The best path forward is to lean on the right partners to provide market expertise, access to liquidity and help manage risk and capital.