In banking, agriculture clients often stand out as some of the most highly sought-after business borrowers. They’re deeply invested in their ventures and contribute significantly to the prosperity of their communities.
Building trust with ag clients can result in long-term, fruitful partnerships where the bank becomes a vital partner in the growth and success of an essential industry.
Agriculture also presents unique financial complexities and risks. Understanding these challenges before adding ag borrowers to your portfolio is crucial. By using the right approach, ag clients can become a scalable and rewarding strategy.
What makes agriculture risky? Here are some key challenges that farmers face:
1. Weather patterns. Weather is unpredictable, and its impact on agriculture cannot be overstated. Extreme heat, intense storms or flooding can devastate crops and disrupt livestock forage. These conditions significantly increase risks for farmers, affecting yields and overall operations.
2. Fluctuating commodity prices. Commodity prices directly influence a farmer’s income. In recent years, prices for corn, wheat and soybeans have been increasingly volatile. These fluctuations create financial uncertainty and highlight the need for risk management strategies.
3. Disease outbreaks. Disease outbreaks threaten both crops and livestock. For producers, maintaining herd and crop health is critical. Outbreaks can disrupt current production and have lasting impacts on profitability.
4. Governance and public policy. Farming is heavily influenced by government policies. Compliance is a constant challenge for farmers and can include local taxes on farmland, state environmental regulations on ag chemicals and federal programs like the Farm Bill. Staying informed about these regulations is essential.
5. Succession planning. Farming is often a family business. A single personal event such as divorce, illness or death can disrupt operations. Asking about succession plans and revisiting them regularly helps safeguard the future of these businesses.
6. Inflation and interest rates. Rising interest rates increase borrowing costs, while inflation increases the price of inputs, adding pressure to already thin profit margins. These financial challenges make it more difficult for farmers to sustain a stable income.
The key to supporting ag borrowers is to find solutions that protect cash flow and set them up for long-term growth. Lenders can achieve this by:
1. Focusing on relationship building. In agriculture, relationships are everything. Taking the time to understand a borrower’s operations and goals builds trust and loyalty. On-site visits and regular check-ins provide valuable insight into their financial conditions and long-term goals, enabling banks to adapt strategies to meet their evolving needs.
2. Providing flexible lending solutions. Flexible loan options — like extended terms with competitive interest rates — can provide immediate benefits. Lower payments free up cash flow, enabling farmers to cover costs and reinvest in their businesses.
3. Participating in agriculture loans. When bank liquidity is a challenge, loan participation can provide a win-win solution. Partnering with a trusted secondary lending partner allows banks to offer extended terms while managing liquidity risks. This approach strengthens the bank’s relationship with ag clients while ensuring long term financial stability.
Lending for long-term success
Agriculture is a cornerstone of many communities, and farmers rely on trusted financial partners to navigate the unique challenges of their industry. By building relationships, offering flexible solutions and participating in loans, banks can create meaningful partnerships that benefit both parties.
With a deeper understanding of the complexities of agriculture, lending institutions can play a pivotal role in supporting the financial success of farmers — ensuring a prosperous future for all involved.
