This document discusses agricultural credit markets in the United States. It begins by noting that after falling from historically high levels, US net farm income is expected to rise in 2020. It then provides data showing that for many Kansas farmers, recent government payments have helped boost net farm income. The document also states that farm loan repayment has weakened slightly and farm loan demand remains strong. It discusses the structure of agricultural lending in the US, including the primary lenders and key points about banking institutions and the Farm Credit System. The document concludes by noting that agricultural extension services provide advice and tools related to financial decision making, tax preparation, and other areas relevant to agricultural credit markets.

1. Agricultural Economics
Agricultural Credit Markets
in the United States
DR. BRIAN C. BRIGGEMAN, PROFESSOR
AND DIRECTOR OF THE ARTHUR CAPPER COOPERATIVE CENTER
BRIDGES BUSINESS FORUM 2020
WWW.BRIDGES.COM.UA

2. Agricultural Economics
After falling from historically high levels, U.S. net farm
income is expected to rise in 2020.

3. Agricultural Economics
For many farmers in Kansas, recent ad hoc government
payments have helped boost net farm income.
Data source: Kansas Farm Management Association Panel Data of Kansas Farmers
2014 2015 2016 2017 2018 2019
Net Farm Income (NFI) $137,508 $13,788 $58,412 $74,040 $109,443 $120,479
Government Payments (GP) $28,373 $20,615 $26,047 $27,541 $41,384 $90,543
GP as a Percent of NFI 20.6% 149.5% 44.6% 37.2% 37.8% 75.2%

4. Agricultural Economics
Farm loan repayment has weakened slightly and farm loan
demand remains strong.
Graphs Source: Federal Reserve Bank of Kansas City’s Agricultural Credit Survey
https://www.kansascityfed.org/research/indicatorsdata/agcreditsurvey/articles/2020/8-13-2020/pandemic-adds-pressure-to-farm-finances
Degree of Repayment Problems Farm Loan Demand; Renewals and Extensions

5. Agricultural Economics
The Federal Reserve lowering interest rates has also
contributed to the decline in farm loan interest rates.
Farm Loan Interest Rates in Federal Reserve Bank of Kansas City’s District
Graph Source: Federal Reserve Bank of Kansas City’s Agricultural Credit Survey
https://www.kansascityfed.org/research/indicatorsdata/agcreditsurvey/articles/2020/8-13-2020/pandemic-adds-pressure-to-farm-finances

6. Agricultural Economics
Takeaways about U.S. agricultural credit situation
• High uncertainty
• Build liquidity
• Reasonably manage costs
• Carefully evaluate each growth opportunity
• Do not build a business plan assuming continued government subsidies
• How will producers use government payments?
• Low interest rates continue to put pressure on lending margins
• Interest rates are exceptionally low…refinance/restructure debt?
• Have a plan!

7. Agricultural Economics
Structure of Agricultural Lending in the
United States of America

8. Agricultural Economics
Primary lenders to U.S. agriculture
• Banking institutions
• Farm Credit System
• Credit Unions
• Vendor Financing (e.g. John Deere Financial)
• Others (life insurance companies, Farm Service Agency, etc.)
• Banks and the Farm Credit System are the biggest debt capital
providers to U.S. agriculture
• Over 80% of farm debt (real estate and non-real estate) is connected to
banks and the Farm Credit System

9. Agricultural Economics
Key points about U.S. banking institutions serving U.S.
agriculture
• Vary in size from big banks like Wells Fargo to small, locally owned
banks like Peoples Bank and Trust in Pratt, Kansas
• Governed differently
• Banks primarily use deposits to make loan
• Funding source is driven by macroeconomic forces
• Regulated by either the federal government or the state government
to ensure safety and soundness
• Federal Deposit Insurance Corporation (FDIC)
• Federal Reserve Banks (U.S. central bank)
• Provide access to short-term, intermediate-term, and long-term debt
to U.S. farmers, ranchers, cooperatives, and agribusinesses

10. Agricultural Economics
Key points about the Farm Credit System serving U.S.
agriculture
• Government sponsored enterprise (GSE)
• Farm Credit Act of 1933
• While the U.S. government is the institution, the Farm Credit System is a
financial cooperative…it is this business structure that makes it successful
as a GSE
• Funding source from loans comes from issuing Farm Credit Bonds on
Wall Street…abundant and affordable source of funds
• Regulated by the Farm Credit Administration
• Provide access to short-term, intermediate-term, and long-term debt
to U.S. farmers, ranchers, cooperatives, and agribusinesses

11. Agricultural Economics
Application process for agricultural credit in U.S.
• Standard approach, best practices, taken by all agricultural lenders
• Scorecard loans
• Smaller loans and/or less complex loans
• Credit score of borrower, from credit bureaus, primary data for determining
whether or not the borrower receives the loan
• Few financial statement items entered – may or may not be verified
• Full credit review
• Larger loans and/or more complex loans and/or higher risk loans
• Loan officer and analyst will complete a loan narrative on the borrower
• 5 C’s of Credit – character, capacity, capital, collateral, and conditions

12. Agricultural Economics
Character
• Who is the borrower? What is their reputation?
• Have they or a family member borrowed from the lender? Do they
reliably pay back debt? Delinquent? Ever filed for bankruptcy?
• Credit score from the credit bureau
• Very important ‘C’ of credit…the most important
5 C’s of Credit

13. Agricultural Economics
Capacity
• What is the ability of the borrower to repay the loan?
• Assessment done by using borrower’s financial statements (income
statement and cash flow statement)
• Financial statements are often verified by lender
• Projected or pro-forma financial statements and debt repayment
ratios are often calculated
• Will the borrower be able to pay back loan in the future?
• Second most important ‘C’
5 C’s of Credit

14. Agricultural Economics
Capital
• What is the equity position of the borrower? What is the ability of the
borrower to service debt from ‘non-cash’ sources?
• Assessment done by using borrower’s financial statement balance
sheet
• Financial statements are often verified by lender
• Considers the leverage position of the borrower…can be an indication
of potential future bankruptcy issues
• Third most important ‘C’
5 C’s of Credit

15. Agricultural Economics
Collateral
• If the borrower defaults on the loan, what can the lender collect to pay
off the loan? How secure is the lender by issuing this loan?
• Loan-to-Secured Asset Value Ratio
• Often, a ratio less than 65% indicates the lender is well secured
• Dangers of being a ‘collateral based’ lender…farmland values will always go
up and will hold their value…1980s Farm Debt Crisis
• Today, some lenders focus on total loan amount instead of ratio
• Secured asset can be farmland, equipment, infrastructure, chattels
(crops, livestock, etc.)
• UCC filing is legal notice the lender files against secured asset
5 C’s of Credit

16. Agricultural Economics
Collateral (cont.)
• Nearly all lending institutions have their own collections department
• Lending institutions use their own or independent appraisal firms
• Appraisers ensure secured assets exist and are valued appropriately
• Typically collateral is “matched” with type of loan
• Land loan secured by land; operating loan secured by crops (chattels);
machinery loan secured by machinery
• In special cases, land can be used to secure other types of loans…typically
done to reduce the lender’s risk of loss
• Fourth most important ‘C’
5 C’s of Credit

17. Agricultural Economics
Conditions
• After assessing the previous 4 C’s, what conditions are necessary to
make the loan to the borrower?
• Make the loan as presented
• Require the borrower to have a co-signer (common in young/beginning)
• Proof of insurance (crop insurance, property insurance, etc.)
• Crop insurance is provided via independent firms and adjusters verify losses
• Larger down payment on the loan
• “Hint” at potential issues in the future
• Off-farm income is a significant factor in the repayment of this loan. Should this off-farm
income go away, the loan may not be approved in the future.
• Many other conditions can be imposed or suggested
5 C’s of Credit

18. Agricultural Economics
Agricultural Extension Services in the U.S.
• Provide advice and tools in the following areas that are related to
agricultural credit markets:
• Financial and management decision making
• Tax preparation
• Agricultural mediation services
• Succession planning
• Provide outlooks and knowledge of impact of local, regional, and global
trends on agriculture and rural industries

19. Agricultural Economics
Thank you! Questions?
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