Overview
Welcome to the world of Ag Lending! Ag Lending is the practice of providing financial services such as loans, lines of credit and other financial services tailored to the needs of farmers and ranchers. Farmers and agribusiness require capital in order to generate the products which ultimately go to market.
Please note that the term ag lending may also be referred to agribusiness lending, agri-lending, ag production lending or rural lending. For the purposes of this guide, we will use the very generic Ag Lending term throughout this overview.
Responsibilities of the Ag Lender
As an ag lender, it your responsibility to:
- Foster Relationships with Farmers and Ag Businesses to Understand their Needs
- Understand which Types of Loans are Best Suited to Meet Borrower Needs
- Take Responsibility for Working with Borrowers and your Organization
- Structure Loans in a Way that Maximizes Opportunity for Your Organization and Borrowers You Serve
- Identify and Mitigate Key Risks Associated with Your Borrower
In short, every interaction with borrowers is crucial to your success and the well-being of your company. Your actions, engagement and collaboration with farmers and organization can have a direct impact on the community you serve and the profitability of your company.
Financial Institutions and Clients
Most banks act as financial intermediaries between savers, depositors and investors and farms, ranches and agribusiness operations.
Depositors contribute funds in the form of savings accounts and checking accounts with the bank. In return, depositors expect a safe place to keep their money. In exchange, depositors expect some amount of interest on the funds contributed. There tend to be hundreds, thousands or potentially millions of depositors who hold money in banks at any given time.
Borrowers, such as farm and ranch businesses, require capital to start, operate and grow their business. Banks take the money deposited by savers and provide money to farms and ranches in the form of loans. These loans can be short term, such as lines of credit for one year, or long term, such as 30 years mortgages on agricultural real estate. Loans are then repaid with interest which in turn is paid back to the bank and savers for profit.
Ultimately, it is the function of the bank or lending institution to facilitate the transaction of cash held for deposit, originate and service loans and provide interest payments to the borrower in exchange for the privilege of holding their deposits.
Overview of Agriculture for Lenders
Agriculture meets the fundamental human need for energy and sustenance. Agriculture is arguably the oldest profession in existence and is the one indispensable industry to society.
Because the ag sector is so fundamental to each society, it is important for the lender or financier of agriculture to think broadly and holistically about the topic.
Types of Agriculture
Agriculture is generally broken down into three main categories:
- Crops including row crops, fruit, tree products, nuts, timber, and vineyards. Crops are used primarily as a food source but are also integral for textiles, medicine, and more. Crop production accounts for roughly 6% of all habitable land on the planet and accounts for nearly 85% of all calories consumed.
- Livestock including poultry, beef, hogs and aquaculture. Roughly one third of all habitable land on Earth is used in the production of livestock. Each year, the demand for animal products and protein has continued to grow. The impact on the economy and ecology of the planet cannot be understated.
- Livestock Products are any consumable which are derived from livestock. This includes dairy, leather, wool and a multitude of other products associated with livestock production.
The process to take raw inputs for each of these industries and transform them into end products for consumption requires the contribution of not only lenders, but farmers, equipment dealers and manufacturers, mills, processing facilities, distribution channels, retailers and more. This process is known as the food value chain and employs over one billion people across the planet.
To facilitate and support these industries requires a sizeable capital contribution, most of which is financed through lenders.
Gaining a comprehensive understanding of the agricultural industry allows lenders to effectively assess risks, tailor financial solutions, comply with regulations, anticipate industry trends, and build strong relationships with agricultural customers, ultimately contributing to the success of their agricultural lending operations.
Types of Loans
There are several different types of loans that lenders may extend to agricultural borrowers.
- Operating Lines of Credit
- Term Loans
- Real Estate Term Loans
- Equipment Loans
- Livestock Loans
- FSA Loans
- Specialty Loans
Each of these loans have unique characteristics and individual lending institutions will tailor loan products to the market. Ag lenders should understand the
One or more loans may also be held within a credit facility, which is a broader financial arrangement with a borrower. These are usually pre-approved credit arrangements between a lender and a borrower which establish the terms and conditions under which the borrower can access funds.
Often times, lenders will extend several loans within a single agreement. A facility may encompass various types of credit instruments, including loans, lines of credit, overdrafts, or other forms of financing.
Most facilities provide ongoing access to credit, giving borrowers greater flexibility to manage their financing needs over time.
Types of Ag Lenders
Various types of lenders exist to support the needs of farmers, ranchers and rural communities.
- Commercial Banks. Commercial banks offer a wide range of financial products and services to farmers and agribusinesses, including loans, lines of credit, and agricultural mortgages. They may have specialized agricultural lending departments or programs to cater to the unique needs of agricultural borrowers.
- Credit Unions. Credit unions are member-owned financial cooperatives that provide banking services to their members, including farmers and rural communities. They often offer competitive interest rates on loans and may have a more personalized approach to lending.
- Agricultural Cooperatives. Agricultural cooperatives are farmer-owned organizations that provide various services to their members, including access to credit and financial services. These cooperatives may offer loans for purchasing inputs, marketing crops, or investing in cooperative-owned facilities and equipment.
- Farm Credit System. The Farm Credit System is a nationwide network of borrower-owned lending institutions that provides credit and financial services to farmers, ranchers, and rural communities in the United States.
- Government Agencies. Government agencies, such as the Farm Service Agency (FSA) in the United States, provide loans and financial assistance programs to farmers and ranchers. These programs may include direct loans, loan guarantees, and disaster assistance to support agricultural operations.
- Specialized Agricultural Lenders. Some financial institutions specialize exclusively in agricultural lending and may offer customized financial products and services tailored to the needs of farmers and agribusinesses. These lenders may have expertise in agricultural risk management, commodity markets, and rural development.
- Non-Bank Financial Institutions. Non-bank financial institutions, such as agricultural finance companies and rural investment funds, also provide financing to farmers and rural businesses. These institutions may offer alternative financing options or specialize in niche markets within the agricultural sector.
Phases of Loan Origination
Loan origination is the term used to characterize the process of taking a loan all the way from start to finish. The loan origination process typically involves several phases, each with its own set of activities and considerations.
While each financial institution may have some unique aspects and terminology in their loan origination process, there are generally eight (8) distinct phases that almost every loan goes through:
Pre-qualification Phase
During this phase the borrower provides basic information such as income, assets, employment history, and credit history to determine their eligibility for a loan. This step helps both the borrower and the lender understand the potential loan amount and terms that may be suitable.
Application Phase
During this step, the borrower submits a formal loan application. This involves providing detailed financial information and documentation, such as pay stubs, tax returns, bank statements, and information about the property or purpose of the loan.
Deal Structuring Phase
Process is when a lender verifies and evaluates the information provided by the borrower. This includes ordering a credit report, verifying employment and income, assessing the property (if applicable), and gathering any additional documentation necessary to make a lending decision.
Underwriting Phase
During underwriting, lender’s underwriting team reviews the borrower’s financial information, creditworthiness, and the property (if applicable) to assess the risk associated with extending the loan. The underwriter determines whether the borrower meets the lender’s lending criteria and decides whether to approve, deny, or conditionally approve the loan.
Approval Phase
If the loan application is approved, the lender issues a formal approval letter or commitment letter outlining the terms and conditions of the loan, including the loan amount, interest rate, repayment terms, and any other requirements or conditions that must be met before closing.
Closing Phase
Once the borrower accepts the loan terms, the loan moves to the closing phase. During closing, the borrower signs the loan documents, pays any closing costs or fees, and the lender disburses the funds. For mortgage loans, this often involves working with a title company or attorney to transfer ownership of the property and record the mortgage lien.
Funding and Disbursement Phase
After closing, the lender funds the loan, meaning that the borrower receives the loan proceeds. In some cases, the funds may be disbursed directly to the borrower or to third parties, such as sellers or contractors, depending on the purpose of the loan.
Servicing Phase
Once the loan is originated, the lender may service the loan themselves or transfer servicing to another entity. Loan servicing involves collecting payments from the borrower, managing escrow accounts (if applicable), and handling other administrative tasks related to the loan throughout its term.
Further Reading
Global Land Use for Food Production. Our World in Data. https://ourworldindata.org/global-land-for-agriculture