"Financial stress is mounting in the Farm Belt, pushing more growers to take on high-interest loans outside traditional banks to stay in business," report Jacob Bunge and Kirk Maltais of The Wall Street Journal. "With crop prices stuck at low levels, traditional farm banks are placing stricter terms on farm loans and doling out less money, leaving cash-strapped farmers . . . to seek capital from more lightly regulated entities."
Farmers have been struggling in the past few years. Five years of good harvests that lowered crop prices and farm profits, and the trade war with China, have left many with no customers. On top of that, record wet weather this year kept millions of acres unplanted, and now standing water in the fields is preventing harvest, Bunge and Maltais note.
"Farm debt is projected to hit a record $416 billion this year, according to the U.S. Department of Agriculture, up nearly 40 percent since 2012. Defaults and bankruptcies are rising as well, crimping the ability of cash-strapped farmers to secure funding for seed, fertilizer and fuel," Bunge and Maltais report. But some big banks are cutting back on farm loans, seeing them as too big of a risk. That has led many farmers to seek nontraditional, high-interest loans.
While such high-interest loan providers can be a lifesaver for farmers in the short term, their interest rates are double those of traditional farm lenders. "The funding can require closer monitoring of how farmers spend, as well as liens on each bushel of grain they produce," Bunge and Maltais report.
"For collateral, alternative farm lenders rely on crop-insurance policies, government payments and crop-sale proceeds rather than real estate, equipment and other assets. Lenders said that allows them to lend to farmers who don’t own much land or are working their way out of bankruptcy," Bunge and Maltais report. "David Kohl, professor emeritus of agricultural economics at Virginia Tech, estimated such firms supply about 2% of financing to U.S. farms. They can provide a financial bridge to struggling farmers, but their looser regulation allows the firms more control over rates and terms."
Farmers have been struggling in the past few years. Five years of good harvests that lowered crop prices and farm profits, and the trade war with China, have left many with no customers. On top of that, record wet weather this year kept millions of acres unplanted, and now standing water in the fields is preventing harvest, Bunge and Maltais note.
"Farm debt is projected to hit a record $416 billion this year, according to the U.S. Department of Agriculture, up nearly 40 percent since 2012. Defaults and bankruptcies are rising as well, crimping the ability of cash-strapped farmers to secure funding for seed, fertilizer and fuel," Bunge and Maltais report. But some big banks are cutting back on farm loans, seeing them as too big of a risk. That has led many farmers to seek nontraditional, high-interest loans.
While such high-interest loan providers can be a lifesaver for farmers in the short term, their interest rates are double those of traditional farm lenders. "The funding can require closer monitoring of how farmers spend, as well as liens on each bushel of grain they produce," Bunge and Maltais report.
"For collateral, alternative farm lenders rely on crop-insurance policies, government payments and crop-sale proceeds rather than real estate, equipment and other assets. Lenders said that allows them to lend to farmers who don’t own much land or are working their way out of bankruptcy," Bunge and Maltais report. "David Kohl, professor emeritus of agricultural economics at Virginia Tech, estimated such firms supply about 2% of financing to U.S. farms. They can provide a financial bridge to struggling farmers, but their looser regulation allows the firms more control over rates and terms."
Kohl called the proliferation of nontraditional loans "shadow financing for ag," and told Bunge and Maltais that "It’s hot money trying to find a place to get a good return without a lot of oversight."
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