Credit Unions Should Strongly Consider Ag Lending

Over the last year, the cost of fertilizer, seeds, fuel and farming equipment have all risen sharply, creating major challenges for U.S. farmers and impacting net farm income. Meanwhile, supply chain issues, long-term drought and ongoing labor shortages have compounded issues.

Unfortunately, these challenges may worsen. Three-quarters of farmers polled for the Ag Economy Barometer expect farm input costs to increase by another 20% this year. Consequently, net farm income is expected to take a $9.7 billion hit, according to the USDA.

To cover rising costs, farmers will need to borrow. However, many are reporting challenges with finding banks that will lend them money, especially for smaller operations.

During the “Farm Crisis” in the 1980s, Congress mandated that banks participate in ag lending to solve similar issues. Today, we’re seeing comparable initiatives. To encourage more lending activity, the Biden Administration is currently proposing a scoring of banks on how well they lend to farmers.

Currently, over half of the ag operating loans are generated by the Farm Credit System, a network of only 67 lenders. Meanwhile, there are over 5,200 credit unions nationwide but only a handful that generate ag loans.

This may be a missed opportunity, especially as lending across nearly every other sector declines. Mortgage demand fell to the lowest level in 22 years, according to the Mortgage Bankers Association. For credit unions specifically, the share of auto loans sits at just over 22%, compared to nearly 31% at banks.

However, credit unions have experienced strong gains in membership, adding 4.7 million new members in 2021 – an increase of nearly 24%. This would make sense. Credit unions are known for delivering exceptional service to members, as well as their strong focus for supporting their local communities.

So why are more credit unions not tapping into ag lending? They are in a key position to not only help local farmers but also move into a new lending space that is currently underserved.

Simplifying Ag Lending Risk

For most other loans, assessing risk is relatively simple, requiring FICO and other standardized scores, verification of employment and income, reviewing financial statements and evaluating debt-to-income ratios. Ag lending isn’t so simple.

Assessing risk in ag lending is complex, requiring access to both farm financials and farm production information. Unfortunately, neither of these are standardized nor structured for ease of use. As a result, collecting this information becomes a manual process, which not only requires an extensive amount of time, but is also prone to human error.

Ultimately, credit unions have been dissuaded from entering this space for these reasons. Additionally, variables like weather patterns, historical yield production and management practices impact risk and create unique challenges for calculating the lost cost or interest rate for an operation.

To overcome this challenge, credit unions must have access to scientifically validated data like historical weather, crop production and land classification information, combined with scalable and accurate machine learning and artificial intelligence solutions to help identify and replicate field-level patterns and generate a risk score that is unique and specific to an agriculture investment. Without this, they are essentially flying blind and unable to appropriately assess risk at the field or portfolio level.

Accelerating Loan Decisioning

Another factor credit unions must consider is automation. Assessing risk in ag lending is already complicated and time-consuming, but determining the value of farmland continues to be a moving target.

To properly manage risk, credit unions must focus on accurate loan-to-value (LTV) ratios that compare the cost of a loan to a fair market value of a property. The challenge is that farmland is becoming scarcer, and land values are rising sharply.

Since 2006, farm real estate values have increased by more than 70%, according to the U.S. Department of Agriculture, but valuations have skyrocketed in recent months. According to Jackson Takach, chief economist for Farmer Mac, the current environment of rising interest rates could further impact farmland investments, and in turn, farmland values.

Credit unions must therefore have access to reliable and updated data for land appraisals, and then automate processes to speed loan approvals. For instance, credit unions can leverage an automated land classification tool, where data is inputted into an internal risk model to allow for more reliable land classification information and expedited LTV ratios.

As a result, manual processes are removed, and important information is automatically verified through the USDA and other sources. What usually takes weeks to generate is shortened to just minutes, allowing credit unions to move quicker.

Digitizing the Borrower Experience

Farmers are becoming more tech-savvy and – just like everyone else – apply for and manage loans online. According to a 2022 study from PYMNTS, 72% of borrowers manage their loans digitally. This will only continue to increase. This digital lending market is expected to eclipse $20.5 billion by 2026, a 2022 report from MarketsandMarkets stated.

To remain competitive among farmers, credit unions must embrace digital banking practices by improving the digital prequalification and preapproval process. By offering an easier and more convenient way to apply for ag loans, credit unions can attract more business and deliver a better experience. Otherwise, they risk losing out to competitors and nontraditional lenders.

Historically reluctant to tap into ag lending, credit unions can do so by simplifying and automating risk assessments while also leveraging the latest in machine learning and AI. Additionally, credit unions must extend digital banking features to farmers and ag loan borrowers to not only improve the experience, but also speed processes. As farmers look for additional capital in the wake of rising costs, credit unions have an opportunity to meet these needs – but they must act now.

Jim O’Brien is the CEO of Agrograph, a global agrifinance company based in Madison, Wis.