Competition for Ag Lending Could Heat Up

Agricultural bankers received a boon from the One Big Beautiful Bill Act.

Within that massive piece of legislation, there is a provision that allows banks to exclude from their gross income 25% of the interest earned from qualified real estate loans. The loans must be secured by property that is primarily used in agriculture, such as ranches and farms, or used in the fishing, seafood processing or aquaculture industries.

The tax break also applies to the Federal Agricultural Mortgage Corp., more commonly referred to as Farmer Mac. That means banks will be able to sell these loans to this government-sponsored enterprise and the tax break will still apply. These changes take effect for loans originated in the tax years after the legislation was signed into law.

Banking industry advocates are hopeful that this will lower interest rates for agricultural loans and drive additional competition in this space. Bank directors need to start preparing for this change to stay competitive.

“If banks are in this industry and in that market, they have to ask, ‘What do we need to do in terms of competing more effectively on the interest rate side?’ There will be competitive pressure,” says John Benesh, head of agriculture lending at Moody’s Analytics. “If a bank isn’t in that market, they need to ask themselves, ‘Do we want to get into this?’”

The banking industry had been pushing for this type of tax exemption through a standalone bipartisan piece of legislation called Access to Credit for our Rural Economy Act, or ACRE Act. However, the original bill called for a 100% tax exemption on interest earned from agriculture-related loans.

Still, the banking industry believes that even with just a 25% tax exemption there should be a decrease in pricing for agriculture loans and an increase in competition. “Banks’ bread and butter is lending,” says Rose Oswald Poels, CEO of the Wisconsin Bankers Association. “The industry intends to use this to help lower borrowing costs for farmers and ranchers and make more loans with the tax savings as well. It’s a huge benefit with interest rates remaining high.”

Oswald Poels believes there is evidence to support that the benefit of this tax break will be passed onto borrowers. In 2023, Wisconsin passed legislation that provided a 100% state tax exemption on income earned from commercial and agriculture-related loans of $5 million or less. Anecdotally, Oswald Poels has heard of Wisconsin bankers lowering the interest rates they offer on agriculture loans based on underwriting criteria. A few have shared a decrease ranging between 25 basis points to 33 basis points. She also estimates that ag loan portfolios have grown by 3% to 5% more than they would have without the tax break at the state level.

The banking industry also argued that the tax change in the One Big Beautiful Bill will allow banks to better compete with Farm Credit institutions. The Farm Credit System is made up of cooperative institutions that originate real estate and other loans related to the agricultural sector in addition to making rural mortgages. However, those institutions don’t pay any income taxes, which has long been a point of contention with banks.

Farm Credit institutions hold more farm-related real estate loans than banks, according to a January 2024 newsletter from the Rural and Farm Finance Policy Analysis Center at the University of Missouri. These cooperatives held 49% market share in 2022, compared with 32% for commercial banks, though these figures don’t account for loans banks may have originated and sold to the secondary market. But the newsletter also noted that commercial banks led Farm Credit institutions in terms of non-real estate lending, with a 42% to 39% market share.

The Farm Credit Council, the trade association for Farm Credit institutions, declined to comment for this story. However, when the ACRE Act was being considered, some Farm Credit institutions questioned whether banks would pass along any tax savings to borrowers. “The bill would simply make banks more profitable,” wrote one in a blog post.

How much interest rates are lowered for borrowers will largely depend on the level of competition in a community, says Jennifer Ifft, a professor of agricultural policy at Kansas State University. If there are enough potential lenders in a market, then agricultural producers could see other types of lenders — and not just banks — lower their rates to stay competitive.

Ifft is studying the effects of the state-level tax changes in Wisconsin and also in Kansas, where lawmakers passed a law in 2021 making the interest earned from agriculture-related real estate loans tax exempt. So far, it’s hard to draw any significant conclusions, in part, because there isn’t enough data yet and the difference might be too small to detect at just the state level, she says. But any changes might be more magnified on a national scale.

“A lot of bankers say they want to help their clients but both banks and farmers have to run a profitable business at the end of the day,” Ifft adds. “Is farm lending competitive and to what degree is the local market competitive?”

For banks looking to take advantage of this new tax exemption, Ed Elfmann, senior vice president of agricultural and rural banking policy at the American Bankers Association, recommends that directors ask management about how the benefit can be priced into the agricultural loans they are offering. But he also notes that banks should keep an eye out for guidance from the Treasury Department and others with more specifics on the One Big Beautiful Bill. “You can start internally working on how this changes your pricing,” he adds. “This will give more options to borrowers and let lenders compete on a more level playing field.”