Crucial Ways Agricultural Bank Services Can Contribute to A Sustainable Ag Economy
Ag banks and Farm Credits, enable agribusinesses to attain the financing they need in order to execute functions like harvesting and planting, as well as buying new equipment and combat overhead costs. They allow farmers to operate by engaging in a relationship with them.
Both banks and Farm Credits are crucial to the agricultural system because they are the financial engine that can get capital to where it needs to go.
The FCA, for example, was “created by Congress in 1916 to provide American agriculture with a dependable source of credit, the System is the nation’s oldest government-sponsored enterprise.” Of the 4 banks and 67 associations that make up the Farm Credit System, together they actively manage over $180 billion in assets.
For farmers, credit is a necessary part of operations because it gives them the capital they need which might not be readily available to them. Financial institutions like agricultural banks that work with farmers to offer flexibility and resilience may offer long-term credits for land or machinery, while short-term financing options help with operating expenses.
Agricultural banks assist farmers in maintaining a successful farm by supporting them with their finances.
Creating a Mutually Beneficial Situation for an Agricultural Bank and its Borrowers
The agriculture business is unique in its own right. It’s an industry that continues to face growing regulatory quotas, climate change impacts, and other unpredictable measures. With agricultural banks, farmers can focus on growing their crops and running their businesses.
Agricultural banks can have over 100 years of direct experience working with ag entrepreneurs and are directly tailored to the ag industry and the local communities they serve. Offering customized solutions to support goals that are often tied to complex costs, lenders work with farmers against the uncertainties that affect their bottom lines.
As primary builders of communities they serve, the aid provided by agricultural banks propels farms to be resilient against the onslaught of threats. The financial benefits accumulated by these businesses can then trickle down as benefits to the lender in the form of lowered probability of default. This means less risk to the financial institution.
Fostering Agricultural Bank and Farmer Relationships to Maximize Mutual Longevity
This past September, the Environmental Defense Fund released a report in conjunction with the Nature Conservancy. The report revolved around uncovering the sentiments of 100 farmers from Iowa in regards to “soil health practices like cover crops, conservation tillage, and nutrient efficiency, and tests multiple ways lenders could support the transition.”
Agriculture is key for the state of Iowa, with 86% of its land being used for farming. It’s no surprise that in 2019 the industry reached up to 10% of the state’s total GDP, along with amassing upwards of $27.5 billion. Meanwhile, the USDA reported the estimated “value of production” from corn alone to be $9.87 billion.
Still, out of the 100 farmers interviewed, “only 35% of farmers discuss soil health practices with their lenders”
This discovery is even more puzzling when 50 of the farmers showed interest in a product that would either provide a $10 per-acre incentive or reduce interest rates by 1%, with the condition of establishing a transition to better soil health practices.
Agricultural banks can help provide the needed capital for farmers to begin practicing sustainable farming that would otherwise be unattainable for them. When financial institutions and farmers engage with one another using the right data management and measurement tools they can discover new possibilities that lead to a better understanding of what can be done to increase long-term viability and profitability.
What it boils down to is collaboratively reducing risk.
Building Resilience Together
Financial professionals are skilled individuals who frequently deal with risk, earning them a well-rounded understanding of how to manage and mitigate relevant threats that affect their businesses.
Resilience is taking form in agriculture in a number of different ways. Given the industry’s relationship with weather events and other climate-related threats, ag entrepreneurs have been exploring new ways to preserve their viability and strengthen themselves against the risks that they continue to face.
One major example of this is the adoption of no-till and conservation tillage farming. Tilling is a soil preparation method that uses aeration to increase water and nutrient absorption into the ground. No-till and conservation tillage farming are contrary to the norm because they do not disturb the soil as tilling does. However, no-till and conservation tillage enriches the soil through improved biodiversity and fights back against soil erosion.
By limiting tilling farmers can save on fuel and equipment that would be used across their farmland and agricultural banks can see higher ROIs as a result of higher crop yields due to richer soil producing better crops.
Regenerative agriculture is another sustainable practice that can be beneficial to ag lenders and their borrowers, given its focus on rehabilitating the land. It is a holistic approach that uses a multitude of techniques like cover crops that are meant to maintain healthy soil during cash-crop off-seasons.
Carbon credits are a new way of aiding ag entrepreneurs on the quest of becoming more sustainable. A carbon credit can be a form of incentivization for farmers who sequester carbon through their agriculture practices, document it. Growers can be financially rewarded for their environmentally sustainable practices.
The benefits of financing sustainable agriculture are proven in on-farm success, which can translate to decreased risk of loan default.
Creating a Win-Win Scenario for an Agricultural Bank and Its Borrowers Using Fintech Technologies
Financial institutions like agricultural banks have the potential to unlock knowledge by using fintech solutions that enable discoveries that were previously hidden behind opaque datasets.
The digitization of risk data is streamlining the process of identifying, monitoring, and mitigating risk across the banking industry. With this valuable information, software solutions can harness the power of data visualization to deliver contextualized information in a way that is easily digestible.
For agriculture, this presents a new level of consciousness that can offer the industry an elevated level of climate resiliency.
Extreme weather events can change the trajectory of making decisions, this alone can make accurate and up-to-minute information not a priceless necessity.
Whether it’s loan decisioning or working with farmers to ensure they have what they need to grow resilience for both parties, agricultural banks that use fintech can reap the benefits from utilizing 21st-Century solutions.
The Bottom Line
Agricultural banks can use fintech to figure out how impact investing can be financially feasible while still making sure to manage risk. Having the metrics to support farmers in adopting more sustainable methods creates a win-win scenario for both the financial institution and the farmer.
Regenerative agriculture is one of the pillars of sustainable farming. It focuses on carbon back into the soil in a way that does not disrupt its existing structure or nutrients. The USDA credits no-till farming methods of improvements like better soil moisture and more efficient usage of fuel. No-till farming focuses on building a more nutrient-based soil that is healthy and resilient against environmental threats.
Agricultural banks and other financial institutions can use fintech in conjunction with sustainability initiatives to support their lenders to incorporate holistic farming practices that revitalize the soil and contribute to a more resilient operation.
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