Jim is the Co-Founder and CEO of Agrograph, Inc. He’s led in multinational corporations in finance, insurance, ag and corporate wellness.
As the number of delinquencies on loan payments has reached its highest point since 2010, mortgage demand has dropped to a 28-year low, and consumer deposits continue to decline. Banks are facing more obstacles to profitability than ever before.
Warren Buffett once said that it is wise for investors to be “fearful when others are greedy, and greedy when others are fearful.”
This is exactly what is playing out in the agricultural asset class as investment bankers and foreign wealth funds are seeking stable returns in an unstable market through this advantageous “non-correlated asset class.” The obvious answer is agricultural assets such as farmland and operating loan portfolios.
The value of farmland continues to soar, making it a compelling investment. In 2022 alone, the average value of farmland across the United States rose by an astonishing 14%. In states like Iowa and Kansas, the value of an average farm acre increased by 22.4% and 25.2%, respectively.
Despite the uncertainty faced by production agriculture, such as weather, crop disease, global commodity prices and input costs, farmland has consistently outpaced inflationary headwinds for stable returns. This resilience, coupled with the increasing conversion of farmland to urban and residential development, makes it an attractive proposition for investors.
According to the U.S. Department of Agriculture, one-third of the 3.4 million farmers in America are over 65 years old. This deluge of impending retirement creates a significant opportunity for banks to capture this generational wealth transfer and support the next generation of farmers who will require loans and capital to establish their own operations or continue those they inherit.
However, despite the attractiveness of farmland as an investment, assessing its fair market value poses a challenge for most lenders. Unlike traditional risk assessment processes for commercial loans, agriculture lending requires additional farm-specific information such as yield, crop diversity, grain market insights and ratio of owned vs. leased farmland, to name a few. These unique data points are not reported by analytics companies, publicly available to investors, or standardized by any measure—only adding to the complexity of the time-consuming process of assessing risk for agricultural lending.
For example, banks can access land classification information to evaluate a farm’s vulnerability to, say, flooding and infer probable impact on production performance should forecasted weather patterns increase the risk of damage during the planting season. This is part of the farm’s hazard risk, which can impact the overall loan given.
In addition to accessing the land classification and determining the category, they can also perform back testing on historical yields and volatility to determine if a farm under financing consideration is a stable, high-yielding, profitable operation.
Banks must also evaluate the farm’s hazard risk—or its potential for being impacted by natural occurrences such as weather events. This requires going beyond looking at the land’s proximity to floodplains and must include risks related to droughts or hail, for instance.
Additionally, a farm’s soil health and chemical makeup are critical as it has a direct impact on production and profitability. Banks must therefore consider these metrics in their assessments, including the soil carbon accrual. This is based on the relationship between inputs (from vegetation) and outputs (from decomposition or disturbance). As ESG lending increases, soil carbon emissions are also important.
Looking ahead, agriculture lending presents a promising future for banks. Farmland’s increasing value, coupled with the upcoming generational shift in farming, presents a stable investment opportunity for financiers and ag lenders. By embracing the potential of farmland, banks can navigate the current economic climate and position themselves for long-term success.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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