Who’s Lending? A Look at Farm Sector Debt
Last week we considered how much farm debt was utilized. As a follow-up, this week’s post considers who is lending to farmers.
Figure 1 shows the sources of farm real estate debt in 2021. Remember that real estate debt accounts for nearly 70% of total farm debt. The Farm Credit system – a government-sponsored enterprise (GSE) established in 1916 that is focused on long-term farmland loans – accounts for nearly half of all real estate debt. The second-largest source is commercial banks, which accounted for 31% of liabilities at the end of 2021.
Other sources of real estate debt are the Farm Service Agency (3%), Farmer Mac (3%), life insurance companies (7%), and the category “individuals & others” (7%).
Those following the AEI.ag Presents podcast – including ‘Escaping 1980’ and ‘Nothing Borrowed; Nothing Gained’- are familiar with the shift in farm debt during and after the 1980s. For instance, Congress established Farmer Mac in 1988 as part of the response to the decade’s farm financial crisis.
Going back in time, Figure 2 shows farm real estate debt sources in 1980. While farm credit was the largest source of real estate debt four decades ago, it only held 37% of the total. The rest of the pie chart is quite different. Commercial banks held just 9% of real estate debt, while life insurance companies (13%) and “individuals and others” (33%) provided a much larger share.
Non-Real Estate Debt
Finally, Figure 3 shows the sources of non-real estate debt in 2021. At 43%, commercial banks are the largest source, followed by the farm credit system (38%). Two other categories – FSA (2%) and individuals & others (17%) – provide the remaining credit.
Wrapping It Up
Season 3 of our podcast seeks to unpack the question: “Where does the money a farmer borrows come from?” While the loan products may be very similar, each source will have a slightly different business model for accessing funds. One of the biggest differences occurs between commercial banks – which rely on deposits – and the farm credit system or Farmer Mac – which utilizes the bond markets.
These three charts help underscore two important concepts about farm debt. First, the sources of loans differ between real estate and non-real estate loans. A primary reason for this is that farm loans typically have long repayment periods. Second, the market has shifted significantly over the last four decades.