What are the current dynamics in farming? Farms are getting larger and operators are managing more acreage. To manage more acreage, farm operations require more and larger equipment. And with many pieces of equipment having electronic sensors and connections, costs have increased substantially. With per-acre revenue margins being small, more acreage has to be acquired, either through purchase of expensive farmland or through high cash rents. This assessment process of today’s farming dynamics is pointed in one direction that is a significant dynamic in its own right.
Larger farms and larger operating budgets lead one to larger demands for capital to finance today’s farming operations and not every community bank can afford to extend lines of credit with six and seven zeros to dozens of local farmers. Subsequently, they have to access credit from larger banks, say economists Nathan Kauffman and Maria Akers at the Federal Reserve Bank of Kansas City. Small community banks used to take care of nearly every farmer in the community, but when their credit needs expanded tenfold, the small banks could not keep pace. The economists say a recent survey indicates, “The share of non-real estate loans originated by large banks relative to their smaller counterparts jumped to the highest level in nearly 20 years.” But they also suggest that the shift to larger banks could result from better loan terms such as floating interest rates at lower rate levels.
The survey was taken in the second quarter of the year and reflected the demand for operating loans, compared to land purchase loans. They said the survey indicated increased loan demand for purchase of crop inputs, and less loan demand for machinery and equipment purchases. And the economists said there would be another shift in demand at the end of the crop year, due to expected low commodity prices and a strain on farm profits. That would “potentially boost the need for short-term loans and curtail farm capital spending at year-end.”
The dynamics in agriculture, focused on the need for increased credit and higher loan demand, is reshaping the lending industry itself. The Fed economists say the larger banks are getting the business from the larger farmers because of more attractive loan terms, “Almost 90 percent of non-real estate loans at large lenders were made with floating interest rates, double the percentage at small and midsized banks. Moreover, the average effective interest rate offered by large banks on non-real estate loans was 3.6 percent, much lower than the average 5.4 percent effective interest rate at small and midsized banks.”