Real Risk: Could Rising Rates Be The End Of The Road For The Country Banker?

What a difference a year makes. On Nov. 2, the Federal Reserve Board voted unanimously to raise the interest rate paid on reserve balances to 3.9%. Contrast that to one year ago when the Fed rate was 0.15%. 

This rate hike was the sixth increase this year, and based on Fed chairman Jerome Powell’s comments following the November meeting, this interest rate rocket ship will continue to gain altitude. Bottom line—interest rates are not coming back down to earth anytime soon. 

It’s not good news for anyone 

For farmers preparing for the 2023 crop year, such a rapid rise in rates is just another punch in the nose that goes along with parallel increases in inputs such as fertilizer and diesel fuel. Ready for your flashback? Anhydrous ammonia in late summer 2021 was $749 a ton. Today, it's more than $1,300 a ton. Diesel fuel a year ago was $3.72 a gallon. The price per gallon averages $5.31 today.  

In simple terms, farmers will likely see their dollars only go half as far as they did last year. Plus, for those relying on crop input loans, those loans will now be way more expensive. For example, on a $1 million line of operating credit, farmers can expect to shell out at least another $40,000 this year in interest on an annualized basis compared with last year. And according to rates published by the lender AgDirect—a division of Farm Credit—most fixed-interest machinery loans are more than 7% following the latest hike, and some nearly touch 8%. 

Welcome to the new world of agricultural lending 

The new reality is that interest costs are a real factor impacting a farm’s P&L. This is going to lead to some potentially uncomfortable sit-downs with local bankers. Tough questions will be asked from both sides of the desk. Will a traditional crop input loan be enough to cover today’s inflated input costs? How much more guaranteed collateral will be required to secure a crop input loan? How many more details about a farm business will be needed even to apply for a loan? 
The good news is most analysts say we are nowhere near a 1980s agricultural meltdown. However, this will be one of the traditional agricultural lending system's toughest tests since at least the 2008 timeframe, and God forbid if inflationary trends continue like we saw during the tumultuous ‘80s. Because of this rising inflationary storm and possible extended period of restricted capital, this may be the moment to accelerate massive changes in capitalizing and financing production agriculture. 

Different way to do business

Innovations in consumer financing have transformed the sector into something that most of us could not have imagined 10 years ago. Personal and small business loans are now rendered completely online via fintech startups such as OnDeck, Kabbage, LendingTree and Bluevine. These companies provide services with no bricks-and-mortar overhead, and they don’t have to pay for the banker or the desk that he or she sits behind. Lending approval is delivered via an algorithm instead of a handshake. 

The COVID-19 pandemic only accelerated such trends as the traditional institutional banks such as Bank of America and Wells Fargo shut down hundreds of branch locations. In 2021 alone, nearly 4,000 physical banking locations closed nationally. Today, checks are deposited not by going through the drive-thru but by simply taking pictures with your phone. Bills are paid online with a click—no stamp or trip to the post office required. And loans are considered based on all the ones and zeros of your digital financial profile, not some printed spreadsheet.  

Up until now, the ag sector’s use of such innovative fintech tools has been limited. One could argue that several reasons have caused the lag in adoption. The most common argument is farming is local, and only my local rural banker or Farm Credit loan officer truly knows my farm. I totally get it. How is a cold-hearted algorithm going to work if Mother Nature throws a big-time curveball? Farm Bureau recently did a great TV and online ad campaign playing off such sentiments. It showed a robot sitting at a desk with a farmer. Without listening or caring about the farmer’s needs, the robot tells the farmer the one-size-fits-all insurance plan chosen for him. 

Capital is tighter, risk is higher

Given the current financial situation facing production agriculture, personal ties may not get as far as they once did. At the end of the day, at the end of the season, farming is a numbers game, and those numbers have rapidly gotten bigger. Knowing production cost details—from the seed in the planter to the oil in your tractor—matters big time. Being able to provide visibility into such detailed agronomic and financial datasets will likely determine a farmer's access and options to available capital resources. 

Access to working capital is the lifeblood of production agriculture. Changes are on the horizon. Nontraditional fintech players are just now starting to put money into agriculture. For example, Crowde is a firm that provides a peer-to-peer lending platform for Indonesian farmers. Then, consider ProducePay, a fintech startup that is speeding up cash flow to fresh produce suppliers across Mexico and Latin America. Finally, don’t overlook the Ant Group, which is part of the online retail behemoth Alibaba. Using AI technology and satellite imagery data, the group provides farmers with corresponding production loans. 

Back here stateside, look for new ag fintech names such as FarmOp Capital and Growers Edge. These are just two examples of how fintech services are set to expand in U.S. agriculture. FarmOp Capital caters to agricultural operations by filling operational loan lending gaps based on future crop production. Meanwhile, Growers Edge seeks to streamline input financing between ag retailers and farmers through its financial software and services platform.  

Financial transformation has taken root 

Although they may not put the traditional country banker out to pasture tomorrow,  changes in ag lending have begun, and more are coming. The local banker and an online algorithm will both require data and due diligence at a level of insight and granularity that most farms today are not ready to experience. That’s your warning shot because tomorrow is coming faster than we thought.