Agriculture provides livelihoods to many people in developing and emerging economies—especially those living in rural areas. Yet access to agriculture finance is often a hurdle. Lack of access to finance stops many farmers from adopting new technology and improving their efficiency.
With demand for food expected to increase by 70 percent by 2050, and the agricultural system already under pressure to satisfy current demand, the only way to increase food production is to invest in sustainable technologies and climate-smart agriculture. These kinds of investments would enable farmers to produce more food with less of an environmental impact. Wise investments could also help keep food prices lower and promote economic health in rural areas.
Agricultural Finance: “Financing of agriculture-related activities, from production to market. Not all agricultural finance is rural, and not all rural finance is agricultural. Yet financial service providers offering rural, micro-, or agricultural finance often have overlapping objectives and opportunities.”
Agriculture finance empowers poor farmers to increase their wealth and food production to be able to feed 9 billion people by 2050.
Yet financing the agricultural sector presents many challenges for financial institutions. Reaching remote rural areas can be expensive. Weather risks, crop concentration, and price volatility increase the credit risk for lenders, reducing their appetite to finance the sector. Risk-assessment technologies often lack precision for evaluating investment opportunities in rural areas. Financing the agricultural sector requires integral risk-management strategies and close collaboration with tech providers and agribusinesses.
What Can Agricultural Loans Be Used For?
Farmers can use agricultural loans to:
Purchase farmland. Whether you are just starting out as a farmer or wish to expand your current farm business, agricultural land loans help you purchase the land you need to build a great farm.
Cover operating expenses. Besides needing farmland financing, many farmers also need help covering some of the operating costs. Farm equipment is expensive, but it’s necessary to run the farm. With better equipment, you can cover more land quickly.
Help with the marketing of their product. If they want to make a profit, then farmers need to sell the product they create. This means that they need an effective marketing plan and money to pay for marketing costs in addition to farmland loans.
How Agricultural Loan/Credit Works
When someone needs credit, they often turn to banks for loans or other credit vehicles. Some industries have special facilities set aside through certain financial institutions as is the case with agribusiness—the business sector encompassing farming and farming-related commercial activities which involve all the steps required to send an agricultural good to market—production, processing, and distribution. This is called agricultural credit, which is available in many different countries.
The Federal Farm Credit System (FFCS) plays a key role in agricultural credit in the United States. The FFCS, which has been around since 1916, is made up of a series of institutions that have more than $180 billion in assets. These institutions range from wholesale banks and retail lenders that provide an estimated 35% of the real-estate and non-real estate borrowing needs of U.S. farmers.1 Short-term credit finances operating expenses, intermediate-term credit is used for farm machinery, and long-term credit is used for real estate financing.
Agricultural credit, which is also commonly referred to as agricultural finance, is an important component of the economy, especially in countries with arable land since agricultural products can be exported. Credit is vital to agricultural businesses because it gives farmers access to capital that might not otherwise be available to them. It helps them secure the seeds, equipment, and land they need to operate a successful farm. Agricultural credit programs not only help farmers and other agricultural producers but also supports ranchers and rural homeowners with their finances.
Credit needs to be made available on competitive terms to allow American farmers who operate in a free market economy to be able to compete with farms that receive state financial subsidies, such as in the European Union (EU) or Russia. If this credit wasn’t available, the U.S. agribusiness sector would face unfair competition when it comes to securing the equipment and arable land needed to produce agricultural products for the global marketplace.
Countries with farming industries face consistent pressures from global competition. Products such as wheat, corn, and soybeans tend to be similar in different locations, making them commodities. Remaining competitive requires agribusinesses to operate more efficiently, which can require investments in new technologies, new ways of fertilizing and watering crops, and new ways of connecting to the global market.
Global prices of agricultural products may change rapidly, making production planning a complicated activity. Farmers may also face a reduction in usable land as suburban and urban areas move into their areas.
Just like any other industry, many entrepreneurs in the agricultural industry also find the need to diversify in order to maximize their profits. So farmers may not just grow single commodities or one type of livestock. Instead, they may need to think beyond existing operations. Doing so requires capital. The availability of agricultural credit helps these borrowers realize their dreams of expanding into more complex businesses.
9 Major Types of Agriculture Finance
Agriculture loans are specifically tailored to meet the needs and often unpredictable nature of running a farming operation. There are 9 major types of agriculture finance including some variable finances which are described below:
A governmental subsidy is paid to farmers and agribusinesses to stabilize food prices, ensure plentiful food production, guarantee farmers’ basic incomes, and strengthen the overall agricultural sector of the national economy. Proponents of agriculture subsidies claim the country’s food supply is too critical to the nation’s well-being to be governed by uncontrolled market forces.
They also contend that to keep a steady food supply, farmers’ incomes must be somewhat stable or many farms would go out of business during difficult economic times. Critics argue that subsidies are exceedingly expensive and do not achieve the desired market stability.
Farm Storage Facilities Loans
Farm Storage Facility Loans (FSFL) can help you afford the cost to build an on-farm storage facility for your crop and products. To qualify, the commodities you are storing must fall into the categories of corn, oats, wheat, barley, rice, soybeans, peanuts, oilseeds, lentils, peas, hay, biomass, fruits, vegetables, or grain. If you qualify, you can obtain up to $500,000 in direct financing from the federal government.
Farm Operating Loans
Operating Loans can be used to purchase livestock, seed, and equipment. It can also cover farm operating costs and family living expenses while a farm gets up and running. Operating loans assist farmers in day-to-day needs or expansion requirements. They come in both direct and indirect options.
An indirect loan is provided by a private lender but may be guaranteed by the FSA. This makes the loan more affordable. A guaranteed, indirect loan may be issued in an amount as large as $1,112,000, with a guarantee of up to 95 percent. Direct loans may also be issued to credit-worthy individuals who do not qualify for private loans due to other circumstances. These loans may be as large as $300,000.
Farm Ownership Loans
Farm Ownership Loans can be used to purchase or expand a farm or ranch. This loan can help with paying closing costs, constructing or improving buildings on the farm, or helping conserve and protect soil and water resources. In addition to credit requirements, the farm owner must have experience in the farming industry to promise the successful operation of the new business.
Like operating loans, ownership loans provided by the FSA come in both guaranteed and direct loan forms. The limits are the same as those limits provided by the operating loan program. This money must go directly toward the purchase of land, livestock, crops, or machinery needed to assist in acquiring ownership of a farm meant for commercial production.
Farm Labor Housing
This program provides loans and grants through the US Department of Housing and Rural Development’s Rural Housing initiative. The program provides capital to build or replace housing structures for rural farmworkers. The program is meant to make the housing facilities more livable, and it may include the replacement or repair of furnishings inside the housing structure. Further, this loan or grant can extend to a wide range of farming projects including rare projects like oyster farming or fisheries.
Emerging Farmer Finance
This type of finance is aimed specifically at SMEs and start-up farms. Emerging farmers often battle to gain access to the financial aid that they need, due to the fact they are considered to be higher-risk clients than their more established counterparts.
Emerging farmer finance is usually provided by financial institutions and by commercial banks, as private lenders may view it as a risky investment. If an SME or emerging farmer can be assisted to receiving a contract from a large-scale retailer, this contract can be ceded to a financial institution as security for their loan. You may find that finance for a start-up loan requires some form of collateral.
An agreement between farmers and processing and/or marketing firms for the production and supply of agricultural products at a specified time in the future, frequently at predetermined prices. Repayment of the input credit is deducted when the farmer sells the produce.
Special Mortgage Loan
The special mortgage loan is aimed at farmers who have the potential to become successful but who have experienced setbacks such as being denied the right to purchase land. It offers a special interest rate for those who may not be able to pay the higher rates that some banks offer.
Pledging of an asset as collateral by a borrower to a lender until a loan is paid back. If the borrower defaults, then the lender has the right to seize the collateral and sell it to pay off the loan.
The rate is fixed over 24 months and the maximum amount is R500 000. You can pay this loan back over 25 years, making it highly affordable for those who are previously disadvantaged. You will qualify for this loan if you have been denied the right to buy land, are the son or daughter of someone who owns farmland (as a first-time buyer), or if you own land in a town or a city.
Value Chain Finance
Series of transactions necessary to bring a product from inputs to the final market, involving a process of adding value at every stage. Credit or other financial services flowing through actors along value chains. Value chain finance can improve the overall effectiveness and efficiency of the value chain by identifying relationships among players along the value chain, mitigating constraints, and exploring how formal financial institutions can participate to provide services. If designed well, value chain finance interventions can increase the competitiveness of a range of agricultural and agribusiness enterprises, including small producers.
Fisheries Finance Program
This program is designed for specific projects in fisheries and aquaponics that qualify under the direction of Congress. A qualified program is eligible for up to 80 percent financing through a direct loan program. This loan program is designed to refinance a private debt on a fishing vessel or to provide for maintenance and repairs on an existing vessel.
Qualified projects do not include the complete construction of a new fishing vessel or fishery, however. In order to qualify, the fishery must meet environmental and government regulations. The business owner must also be free of delinquent federal debt and be in good financial standing. This program is not designed to refinance a loan in delinquency or default.
Other Variable Agricultural Loans
Covariant risk arises when many farms/households in one area are adversely affected by a single phenomenon such as a natural disaster, epidemic, unexpected change in world prices, macroeconomic crisis, or civil conflict. This is distinct from individual risks, which randomly affect individual households.
A special form of insurance that can be used to compensate for losses related to extremes in weather that often plague agricultural enterprises and increase the level of risk involved in agricultural endeavors. Unlike traditional insurance, which is most useful in compensating for losses from idiosyncratic events, such as house fires or car wrecks, index-based insurance works best where there is correlated risk, i.e., risk of an event that causes consistent damage or losses across a geographical area or sector, such as drought, flooding or price volatility. More recently, some insurers are also piloting innovative index-based livestock insurance products.
Contract for use of an asset for a set term in exchange for fixed regular payments between two parties. Leasing is a method of financing the acquisition or use of a fixed asset, predicated on the concept that the value of the asset is in its business use rather than through ownership.
Provision of financial services to a heterogeneous rural farm and the non-farm population at all income levels. It includes a variety of formal, informal, and semiformal institutional arrangements and diverse types of products and services including loans, deposits, insurance, and remittances. Rural finance includes both agricultural finance and rural microfinance and is a sub-sector of the larger financial sector.
Short-term or seasonal loans between buyers and sellers of inputs or products. It is typically provided in commodity value chains. Relationships between buyers and sellers are often more temporary and more price-driven than outgrower schemes.
Warehouse Receipt Financing (inventory credit)
The use of securely stored goods as loan collateral. A document is issued by a warehouse listing the goods or commodities deposited in the warehouse. The depositor can then use that receipt as a pledge to secure a loan from a bank or other lender. The lender places a lien on the commodity so that it cannot be sold without the proceeds first being used to repay the outstanding loan.
Microloans are a type of Operating or Farm Ownership Loan. They’re designed to meet the needs of small and beginning farmers, or for non-traditional and specialty operations by easing some of the requirements and offering less paperwork.
Youth Loans are a type of Operating Loan for young people between 10-20 years old who need assistance with an educational agricultural project. Typically, these youth are participating in 4-H clubs, FFA, or a similar organization.
Native American Tribal Loans
Native American Tribal Loans help Tribes acquire land interests within a tribal reservation or Alaskan native community; advance current farming operations; provide financial prospects for Native American communities; increase agricultural productivity, and save cultural farmland for future generations.
Emergency Loans help farmers and ranchers recover from production and physical losses due to drought, flooding, other natural disasters or losses.
Targeted Loan Funding
A portion of FSA loan funds is set aside for Minority and Women Farmers and Ranchers to buy and operate a farm or ranch.
Direct Loans vs. Guaranteed Loans
Many FSA loans are available as either Guaranteed Loans or Direct Loans. Direct Loans are made directly from FSA to the farmer. Guaranteed Loans are made by a USDA-approved traditional lender with the backing of FSA.
Agriculture Finance Providers
There is an ever-increasing need to invest in agriculture due to a drastic rise in global population and changing dietary preferences of the growing middle class in emerging markets towards higher-value agricultural products. In addition, climate risks increase the need for investments to make agriculture more resilient to such risks.
Estimates suggest that demand for food will increase by 70% by 2050 and at least $80 billion annual investments will be needed to meet this demand, most of which needs to come from the private sector. Financial sector institutions in developing countries lend a disproportionately lower share of their loan portfolios to agriculture compared to the agriculture sector’s share of GDP.
On the other side, the growth and deepening of agriculture finance markets are constrained by a variety of factors which include:
- inadequate or ineffective policies
- high transaction costs to reach remote rural populations
- covariance of production, market, and price risks
- absence of adequate instruments to manage risks
- low levels of demand due to fragmentation and incipient development of value chains
- lack of expertise of financial institutions in managing agricultural loan portfolios
The development and commercialization of agriculture require financial services that can support: larger agriculture investments and agriculture-related infrastructure that require long-term funding (given that currently, transportation and logistics costs are too high, especially for landlocked countries), greater inclusion of youth and women in the sector, and advancements in technology (both in terms of mechanizing the agricultural processes and leveraging mobile phones and electronic payment platforms to enhance access and reduce transaction costs).
An important challenge is to address systemic risks through insurance and other risk management mechanisms and lower operating costs in dealing with smallholder farmers.
Agriculture finance and agricultural insurance are strategically important for eradicating extreme poverty and boosting shared prosperity. Globally, there are an estimated 500 million smallholder farming households – representing 2.5 billion people – relying, to varying degrees, on agricultural production for their livelihoods.
The benefits of The World Bank work include the following:
- growing income of farmers and agricultural SMEs through commercialization and access to better technologies
- increasing resilience through climate-smart production
- risk diversification and access to financial tools
- smoothing the transition of non-commercial farmers out of agriculture
- facilitating the consolidation of farms, assets, and production (financing structural change)
What They Do:
They focus on developing and implementing agriculture finance strategies and instruments to the crowd-in private sector, enhancing access to suitable financial services to farmers – particularly smallholders – and agricultural Small and Medium Enterprises (SMEs) as a way to increase agricultural productivity and income, and facilitating the consolidation/ integration of production and marketing entities in agriculture to achieve economies of scale and stronger presence in markets.
They primarily work on agriculture finance, agriculture insurance, and its linkages with agriculture finance. Our key areas of work are described below:
Policy and Regulatory Interventions – Agriculture Finance: We conduct diagnostic studies on the state of agricultural finance within client countries and produce concrete action plans to reform public policies and regulations in order to create an enabling environment to mobilize agricultural finance. Some examples of policy and legal/regulatory intervention areas include lending quotas, interest rate caps, bank branch expansion regulations, prudential regulations impacting agricultural lending, warehouse receipt financing frameworks, and alternative dispute mechanisms for contract farming.
Policy (and Insurance Product Development) Advisory – Agriculture Insurance: We advise governments on policies for agriculture insurance (e.g. financial incentives, premium subsidies, and the overall role of government to promote agriculture insurance) and on the development of effective insurance products. On issues related to insurance, we collaborate and coordinate with the Global Index Insurance Facility (GIIF) and the Disaster Risk Finance and Insurance Program (DRFIP) on certain projects and activities.
Strengthening of Relevant Institutions: We provide technical assistance to reform and build the capacity of public financial institutions, establish commodity exchanges, and build the capacity of MFIs and other institutions. We operate a special program focused on financial cooperatives, given the importance of these entities as providers of financial services to smallholder farmers, rural MSMEs, and households.
This program aims to strengthen their performance as well as to enhance applicable regulations and oversight arrangements to better integrate them into their country’s financial system. Furthermore, we design and implement risk-sharing mechanisms through various instruments, such as partial risk guarantees.
Developing Innovative Products: We assist in the design and develop a wide range of instruments, either as technical assistance or part of lending projects: value chain finance, inventory finance (examples include warehouse receipts, CMA, and SMA), partial credit guarantee schemes for agriculture-sector loans, matching grants, crop insurance, price hedging instruments, and gender finance. We also work on developing mobile banking & payment platforms to enhance access to finance and reduce transaction costs within the eco-system.
An important focus of our work in this area has been to develop solutions to reduce the riskiness of agriculture by addressing systemic risks (e.g. production and weather risks through insurance, and price hedging instruments) and also focus on ways to reduce operating costs in reaching to smallholder farmers and SME agribusinesses (for instance, the role of digital finance technologies).
Focus on specific new topics: We are exploring work in new areas such as access to finance for women in agriculture, the use of digital financial instruments in agriculture, and financial solutions for “green” agricultural investments promoting resilience of agriculture to climate change and reduction of agriculture’s footprint on the environment.
Knowledge Management and Community of Practice: Informed by our in-house research and knowledge production, we carry out activities both at the internal level (including the community of practices and training programs) and at the external level (global and regional dissemination events, South-South exchange, and capacity building for policy reforms, among others). We lead two Communities of Practice: one on agriculture finance (co-led with Agriculture GP) and another one specific to financial cooperatives.
Global Engagements: Since 2011, we have served as a technical advisor to the G20 Global Partnership for Financial Inclusion (GPFI) SME Finance Sub-Group on issues related to agricultural finance and insurance. Also, we have formed a partnership with Rabobank on financial cooperatives that aims to contribute to the global knowledge on these institutions and their promotion building on concrete experiences.
Collaboration: We work closely with the Risk Management team in FCI when it comes to agricultural insurance solutions, and also collaborate with CGAP and the Agriculture Global Practice.
IFC’s Global Agri-Finance Advisory Program aims to help increase the availability of agricultural finance in emerging and developing markets by promoting appropriate risk-mitigation products and skills development in financial institutions. Their program supports different types of institutions—banks, microfinance institutions, and fintech—as follows:
They help microfinance institutions with developing digital scoring models, E-wallet, and mobile payments; building the skills of credit agents in rural areas, and building strategic alliances with agribusinesses. They assist fintech with developing digital scoring models, implementing risk-management frameworks, improving portfolio management in rural areas, and building strategic alliances in agricultural supply chains.
They work with banks to help strengthen agricultural supply chain finance, climate finance for agribusinesses, risk-assessment models, and digital scoring for agriculture. Through partnering financial institutions, IFC helps to provide customized short- and medium-term working capital and long-term agricultural financing. Their investments include credit lines and risk participation. They often complement these investments with advisory services.
Some of our recently established agricultural finance programs include the Global Trade Liquidity Program (GTLP), the Food and Agri and Global Warehouse Finance Program (GWFP), and the Critical Commodities Finance Program.
IFC has an extensive network in the agriculture sector and a history of helping clients address risks and identify opportunities. Their financing and advisory services support private sector investment that applies creative solutions to complex problems.
America’s next generation of farmers and ranchers are supported through FSA’s “Beginning Farmer” direct and guaranteed loan programs. Farm Ownership loans can provide access to land and capital. Operating loans can assist beginning farmers in becoming prosperous and competitive by helping to pay normal operating or family living expenses; open doors to new markets and marketing opportunities; assist with diversifying operations; and so much more. Through the Microloan programs, beginning farmers and ranchers have an important source of financial assistance during the start-up years.
While FSA is fully committed to all farmers and ranchers, there is a special focus on the particular credit needs of farmers and ranchers who are in their first 10 years of operation. Each year, FSA targets a portion of its lending by setting aside a portion of all loan funds for financing beginning farmer and rancher operations. With the single exception of the Direct Farm Ownership Down Payment Loan, the Beginning Farmer classification is not related to a type of loan program; it references a specific, targeted funding source.
Other Major Agriculture Finance Players
- Farm Credit Services of America (ACA)
- Farm Credit Mid America (ACA)
- MetLife Insurance
- Rabo Agrifinance / Rabo Bank NA
- Compeer Financial (ACA)
- Texas Farm Credit
How To Apply For Agricultural Loans?
Farmers have several different places to turn to when in need of an agricultural loan.
1. Apply for an agricultural land loan from a major bank.
When farmers need financing, most turn to their local banks first. It’s often easier to get a loan from the bank that you typically do business with. If your credit is good, you should be able to get an affordable interest rate on your loan.
2. Apply for direct and guaranteed loans for farmland from the government.
If you do not qualify for a traditional loan, you don’t have to sell the family farm. There are government agencies that aim to help farmers get the cash they need to be a profitable business.
3. Look for agricultural home loans to purchase a home and farmland.
If you want to purchase land in order to run a farm, then there are a number of loans that apply directly to you. Housing and Community Facility Programs, operated by the government, offer loans to families that wish to live in rural areas. Farm Credit Services also provides loans for homes in rural and agricultural areas.
How Do You Qualify For Agricultural Loans?
To qualify for an agricultural loan, you’ll need to take the following steps:
1. Contact a lender (and have a good credit score).
Each lending institution will have its distinct requirements to qualify for any of their loan programs. One of the first things a lender looks at is your current credit score. For instance, Farm Plus Financial asks for a minimum score of 660 from at least one of the three major credit reporting bureaus. The lender may also ask for a business plan before considering you for an agricultural loan.
2. Know which type of agricultural loan you want.
FSA has dedicated officers to review applications for agricultural loans. The officer reviews the applicant’s eligibility based on what type of loan they want. For instance, those who wish to apply for a farm ownership loan must have a minimum of three years of business operations experience on a farm or ranch.
Similarly, those seeking a farm operating loan must meet the FSA’s education, on-the-job training or farming experience requirements. Beginner farmer loans ask that the farmer or ranch have less than 10 years of farm operation experience.
3. Familiarize yourself with all types of agricultural loans.
Agricultural loans aren’t a monolith, and the above loan types are only a small piece of the pie. FSA loans are also available for those who require assistance with only a down payment for a new farm. In this case, the applicant must be able to produce a cash payment of at least 5% of the purchase price.
Agricultural loans are also available for those who currently own a farm and need emergency funding. For instance, if the farm is located in a designated disaster county and the farmer has suffered a production loss of at least 30%, an emergency loan may be granted.
Tips On How To Get Agricultural Loans With Bad Credit
Bad credit is notoriously a huge hurdle to getting a business loan, but you can still obtain financing with a low credit score. Here’s how:
1. Find low-credit agricultural lenders.
Prospective farm owners can search for companies that lend to those with poor credit. Although good credit earns you better interest rates, lenders still approve those with bad credit albeit with higher APRs. Once your credit score improves, you could refinance the loan at a lower rate.
2. Gather proof of your farming experience (and be prepared to present it).
Government programs like the FSA are less restrictive about what credit scores they permit from applicants. They will look at your credit score but also consider your background in the farming industry. If you have significant farming experience, then you’re more likely to be approved even with a less than desirable score.
3. Have someone co-sign your loan.
Another tip for getting approved for a farm loan with bad credit is to enlist the help of a cosigner. If the co-signer has better credit than you, your loan is more likely to get accepted by the lending agency.
4. Pursue income-based loans.
Some lenders will approve you based on your farm’s income, rather than your credit score. These lenders will let any farm with income above a certain minimum, which varies by loan provider, borrow money. These loans are often quickly approved, though they may be on the smaller side.
5. Show that your bad credit doesn’t define you.
Farming experience can prove more important than your credit score to some lenders. So too can other factors such as your debt ratio, business plan, and possession of high-value assets – especially those of greater value than your loan. Include these items along with your loan application, and you just might get the funding you need.
There are several different options for those who are in need of agricultural finance. You will be able to find one to best suit your needs, and your budget. Be sure to research every aspect of whichever one you choose and read the fine print before signing anything. It may seem a daunting prospect but you will be able to find finance to help your farm grow.
- Farm Service Agency, U.S. Department of Agriculture.
- Agriculture Finance & Agriculture Insurance, The World Bank
- Agriculture Finance, International Finance Corporation
- Rural and Agricultural Finance, Find Gateway.
- Max Freedman “Business” Contributing Writer
- Agricultural Credit, Investopedia