As the world’s food needs continue to evolve,the process of planting, growing, harvesting, and distributing crops across theglobe is in a constant state of flux. With the planet’s ever-increasingpopulation and steadily decreasing arable acreage, the needfor maximum efficiency from existing farming operations is essential tolong-term sustainability. This means implementation of new processes and cutting-edgetechnology.
The cost of maintaining a successful andprofitable farm business is higher than most uninitiated consumers wouldestimate, and that’s without factoring in additional costs to replace orupgrade equipment and machinery. Further, with commodity prices remaininggenerally low over the past 7+ years, record numbers of crop farmers wereforced to lower prices, ultimately generating only a fraction of the revenuenecessary to maintain unencumbered operations. Farmers experienced financialdifficulties that threatened both their families and their businesses.
Land Ownership Is Important
According to the Department of Agriculture,only about 60% of farmland in the U.S. is owner-operated.The other 40% is rented to tenant farmers at steadily increasing rates. The division ofowner-operated versus rented farmland has remained stable for the pasthalf-century, and is unlikely to change.
More than 54% of cropland in the U.S. isrented, and “Farm businesses specializing in crops tend to have higher sharesof very highly leveraged operations than farm businesses specializing inlivestock and animal products.”
The number of farms categorized as “very highly leveraged” by the USDA – thosewith debt-to-asset ratios greater than 0.7 – has reached the highest levelssince 2002. Since traditional lenders consider debt-to-asset ratios during theloan underwriting process, tenant farmers with highly leveraged operations faceeven greater scrutiny and risk than farmers who own their land.
Additionally, the ever-changing distributionand manufacturing aspects of the agriculture business force farmers, bothowners and renters alike, to constantly evolve their operations to account fornew processes and logistics. This can be detrimental to continued successfulfarming operations, as procedural and logistical changes often mean increasedcosts and reduced profits.
Traditional Lending Options
“As the United States becomes increasingly urban, the new demographics include a generation of bankers who do not understand farming and the economic mechanics of a farming operation.”
Alternative Lending Options
As the state of financial affairs in theagriculture arena becomes increasingly detrimental, specifically with regard tothe challenges faced by farmers desperate for financing, the need foralternative lending options has never been more pressing. Presently, there isnot an overwhelming number of solutions, but choices indeed exist beyondtraditional banks and outside the customary Ag lending channels.
Unlike traditional lenders that use landownership and equity as the primary collateral for loans, there arealternatives that focus, for example, on cash flow and future crop valuesinstead. Loans from these types of alternative lenders are not backed by hardassets, making them more feasible for tenant farmers with no equity. Alongsidea properly structured crop insurance policy, alternative lending products oftenconsist of capital restructuring of both debt and equity.
What This Means for Ag Investors
With significantly fewer alternative fundingoptions available to the agriculture industry, those that do exist are in aposition to capitalize on the overwhelming need for financing. As an investor,you have an opportunity to help facilitate the continued operations of a realfarm run by real people (and generate a profit at the same time).
The biggest challenge for Ag investors,however, is knowing when, where, and how to invest to have the biggest positiveimpact and the best potential for positive returns. This is why enlisting theassistance of an experienced company makes the most sense for investors andfarmers as well.
FarmFundr is one such company, offering“fractional farmland ownership opportunities to our members who can access andinvest in highprofit potential projects.” Founded by a fourth-generation farmerwith more than 21 years experience, FarmFundr truly understands the industrylike no other. To learn more, start by signing up for a freeaccount and reading the Ultimate Guide to Investing in Farmland.