Growing Complexity of Agricultural Lending Decisions

The face of agricultural lending has changed dramatically over the last several decades from both a demand and supply perspective. Farm numbers are down, but size is up. The distribution of farms is increasingly bimodal; 2% of farms today produce over one half of total sales. Largesized operations are capital intensive, utilizing the latest technologies embodied in variable and fixed inputs to expand productivity and lower costs. The use of debt capital in agriculture has reached an all-time high. Total farm debt outstanding today is up almost 50% from 1990 and now exceeds the peak debt outstanding before the farm financial crisis in the mid-1980s. These borrowers are increasingly sophisticated in their marketing strategies, alliances, and use of available information technology. There has also been considerable change in the lenders providing loans to farmers. The Farm Credit System (FCS), which accounts for 38% of real estate farm debt and 22% of non-real estate farm debt, has transformed itself from 12 farm credit districts down to just four Farm Credit Banks (FCBs) and CoBank, which serves cooperatives nationwide in addition to its affiliation with major agricultural credit associations (ACAs) on both coasts. The recent failed attempt by the Dutch banking conglomerate Rabobank International to purchase one of the larger ACAs in the FCS raised a number of policy issues addressed by other papers in this theme. Commercial banks, the largest commercial lender to farmers, account for 33% of real estate farm debt and 49% of non-real estate farm debt outstanding. The credit delivery system at both lenders has changed considerably in recent years, with credit scoring and information technology playing a major role in credit decisions and resulting in efficiency gains in terms of decision turnaround and cost of operations. Other lenders to farmers and ranchers are undergoing change as well. This paper focuses on the drivers of change at the farm level and emerging credit analysis issues. The remaining papers in this theme provide background on and discuss the implications of the attempted Rabobank purchase of an ACA, the implications that the Basel II Accords have for lending and portfolio decisions by agricultural lenders, and a look at where agricultural lending may be headed over the next several decades.