Between 2008 and 2015, JP Morgan grew its agriculture loan portfolio by 76% to $1.1 billion. Although still a small percentage of its overall loans, the fact that large, money center banks were aggressively seeking agricultural loans was an injection of good news for the farming community. But since 2015, large banks have shed nearly $4 billion in loans from their portfolios.
Throughout the up and down cycles of farming, we see one consistent pattern: banks and credit unions that have local ties consistently support farmers through lending despite cyclical peaks and troughs. Larger banks are far more return-driven, and when the credit profile of farm loans changes for the worse, the banks are keen to shift into other sectors like real estate.
Local lending institutions to the rescue
Total farm debt continues to rise, and is at its historically highest level. But since farm values have also risen significantly, the debt-to-equity ratio is relatively healthy at about 16%. Agricultural lending is still active due to robust values and relatively low interest rates.
The largest player for farm-focused lending is Farm Credit Services, whose portfolio is approximately 90% in agricultural loans, with the balance being residential. FCS also has the lending capacity to provide large loans that the money center banks won't provide.
Our view is that in Indiana and other Midwestern locations, an owner or farmer can source a very competitive loan by soliciting bids from FCS and two local banks or credit unions. Farmers who may have borrowed from an equipment manufacturer or fertilizer company and are paying high interest loans can potentially benefit from getting a new loan secured by land that carries a much lower rate.
Local banks also can provide a deeper level of service
One reason that local banks consistently provide liquidity for farmers is that the farmers provide support for the entire region through job creation and demand for other goods and services. We see that this idea plays out in other ways, with local banks acting in a financial consulting capacity to smaller farmers and landowners who lack the sophistication and resources to hire outside advisors.
A bank may not only provide a loan, but can help with budgeting and assessing the overall financial fitness of a farm. In view of retaliatory trade policies from tariffs, reduced crop prices, and difficulties brought on by unpredictable weather, this level of service is more important than ever.
Other lenders have also emerged to fund the gap
One lender that has stepped in to fill the gap left by the large banks is Rabo AgriFinance, a division of the Dutch financial giant Rabobank. Outside of the Netherlands, Rabo AgriFinance is solely focused on food and agriculture, so it lies somewhere between the large banks and local lenders.
At Halderman Real Estate and Farm Management, our focus is on helping farm owners and farmers identify the optimal solutions for their unique requirements. We have served the community for several generations, and look forward to speaking with you about agricultural lending or any other farm-related questions.