Agricultural financing helps maximize operations
There is no “one size fits all” effort in understanding agricultural finance or the importance of it within the industry.
Agricultural finance is lending for farm operations including the production of crops and livestock, said Sam Miller, Managing Director of Agriculture Banking at BMO Harris Bank.
“Agricultural financing can be more widely defined as providing credit for agribusinesses selling to or buying from farmers,” Miller said.
Lending for row crop operations is heavily dependent upon the commodities produced and their markets. Agricultural lending can be a risky business as repaying loans depends on a farm’s profitability. Factors affecting this include weather, market prices, demand, pests, diseases and irrigation requirements.
Financial strength is essential to the agriculture industry. Without adequate cash flow, growers and processors would not be able to feed the nearly 8 billion people. Agribusiness contributed more than $1.1 trillion to the US gross domestic product in 2019, according to the United States Department of Agriculture.
Financial needs vary throughout the production cycle. Planting season often requires maximum credit utilization. Harvest season brings its own needs as it relies heavily on expensive equipment that can break down. When equipment fails, repair costs can be hefty.
Growers also have day-to-day operational costs: labor, fuel, land rent or mortgages, crop protection methods and more.
Advancements in technology have played a role in lending, causing both growers and lenders to pay special attention to developing technologies, Miller said.
Most agricultural businesses “require significant amounts of capital for operations, equipment and real estate,” Miller said.
Ag lending is a critical business line for many banks, especially those in rural areas, according to a report from the Office of Comptroller of the Currency.
“Bank loans are a way to finance a large portion of these investments beyond the equity capital provided by the owner,” Miller said.
Miller said it is important to have banks that understand industry operations involved in the lending process.
“Due to the specialized nature of farming or other agricultural enterprises, having a bank who understands the business cycles and risks and challenges of the sector is crucial to the success of the operation of the business.”
This is the third article in the National Learning & Development Month series. Throughout October, we will be posting articles to help you gain a better understanding of the topics above in relation to your food. Be sure to follow us on social media channels to stay up to date with all published content.
