Keeping farms (and bank accounts) green

As tech-savvy farmers who are ready for change prepare to reshape the ag industry, financial solutions need to keep pace.

Farmers have traditionally been wary of grandiose sales pitches (sometimes for good reason!) and cautious when it comes to adopting new technologies. Even the mighty tractor took decades to roll out into fields.

However, the continued deterioration in farm profitability has made farmers more risk averse than ever – especially when it comes to adopting new on-farm technologies. As today’s farmers face mounting financial pressures – from international trade uncertainty and the limited availability of working capital to years of declining debt-to-asset ratios – improving cash flow and creating acccess to technology advances that could increase their long-term farm profitability is absolutely critical.

Understanding cash flow concerns

Let’s step back and start with the primary concern: cash. While employing advanced data and analytics for getting auto loans, home loans, student loans, and credit cards now seems like a given, ag lending still seems dependent on outdated practices. Ag lenders and regulators continue to rely on ultra-conservative approaches that have served them well in the past. And due to the current farm economy, most lenders are increasing their pressure on farmers to trim costs in an effort to improve cash flow.

Negative impacts on yield

However, while cutting costs may temporarily boost cash flow, it is generally short-lived and can actually have negative impacts on yield ultimately reducing cash flow. Worse yet, those yield dips create a negative impact on a farmer’s production history as the current industry rating algorithm uses a 10-year average. One subpar year stays on the farmer’s production record for an entire decade.

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A farmer is installing a GPS receiver on his tractor. Farmers have traditionally been wary of grandiose sales pitches and cautious when it comes to adopting new technologies. - Photo: Peter Roek
A farmer is installing a GPS receiver on his tractor. Farmers have traditionally been wary of grandiose sales pitches and cautious when it comes to adopting new technologies. - Photo: Peter Roek

Although community bankers have played a critical role in the lives of America’s farmers, community banks and smaller institutions are being pressured to pull back financing despite their personal connections. Meanwhile, large financial institutions are demanding more from the farmer and being much more selective about providing capital.

Dramatic imbalance in the farm ecosystem

However, as lenders tighten underwriting rules and focus on asset-based loans to ensure profits for their organisation, it creates a dramatic imbalance in the farm ecosystem as almost 40 percent of the land being farmed is now on land rented to the farmer.

This asset-based lending approach does not account for the time and upfront costs needed to integrate new technologies or transitioning sustainable growing practices into farming operations, and it simply does not work in today’s ag arena.

When cash flow is strained, it becomes much harder to rationalise spending money to buy and deploy new technology

This not only makes it more difficult for farmers to qualify for attractive rates or, in some cases, get any financing at all, but also makes it more difficult for farmers to readily embrace technology. When cash flow is strained, it becomes much harder to rationalise spending money to buy and deploy new technology, even when that change could improve the farm’s profitability.

While that might seem logical, the farmers who invest in technologies that can increase ROI on the farm will be the only ones who can overcome both current financial challenges and create long-term financial security for their farm. Ultimately, embracing and deploying technology will help improve cash flow and could help keep the family farm IN the family.

Tackling the technology gap

While many areas of agribusiness can be improved through technology, there is a tremendous gap between the availability of those technologies and the ability for farmers to feasibly be able to deploy them on their farms. When new technologies that could benefit the ag industry are introduced, the wait-and-see approach is still much too common. Some of the most important technological advances for farmers are pushed to the wayside for years out of the fears tied to financial risk.

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Farmers who invest in technologies that can increase ROI on the farm will be the only ones who can overcome both current financial challenges and create long-term financial security for their farm. - Photo: Peter Roek
Farmers who invest in technologies that can increase ROI on the farm will be the only ones who can overcome both current financial challenges and create long-term financial security for their farm. - Photo: Peter Roek

We are getting closer to the inflection point, however. The next generation of farmers has grown up surrounded by technology and more readily understands both its value and its disruptive power. As the farmers taking control of their family farms become more comfortable with technology, a more tech-first approach to farming (yes, even in the throes of financial pressures and market volatility) will take root.

Data, data, and more data

Farm technology today is no longer relegated to the tractor, although “smart” tractors abound. Technology for ag means seed treatments, biological crop protection, satellite and drone imagery, artificial intelligence, moisture sensors, nutrient management, machine learning and data – data, data, and more data.

Some agtech innovations not only provide an opportunity to make data-driven decisions to improve efficiencies and yields while increasing profitability, but also deliver a proven way to conserve valuable resources and create the sustainable ag ecosystem that will be needed to meet the demand of feeding almost 10 billion people in the decades ahead.

Artificial intelligence

Other financial sectors like personal lending have eagerly embraced new tools and techniques, such as innovative credit scoring tactics and the application of artificial intelligence. Fintech in the ag arena has lagged behind. To date, most of the fintech solutions entering the ag market have focused on streamlining the processing of the loan.

Ag lending needs to move to a more data-driven approach to ensure capital is available for farmers who readily embrace the next era of sustainable ag

While that certainly benefits the lender and gives the farmer more visibility into the loan process, it does not help farmers create a path toward long-term financial freedom. However, tapping advances in fintech can help solve the problems of access to capital and risk mitigation in ag lending as well.

The next phase of fintech in the ag arena needs to focus on solving the fundamental financial pain point for the farmer – providing solutions that increase farm resiliency to improve long-term cash flow. Leveraging advances in data science, financial products for ag need to become both more attractive for farmers and less risky for lenders.

Preparing for the next fintech era in Ag

As tech-savvy farmers who are ready for change prepare to reshape the ag industry, financial solutions need to keep pace. Ag lending needs to move to a more data-driven approach to ensure capital is available for farmers who readily embrace the next era of sustainable ag – the farmers who use the best seed, follow the best growing practices, and manage their farm operations most efficiently.

Leveraging fintech machine learning models and artificial intelligence platforms in ag can remove financial barriers and create lending options for farmers based on grower practices, farm profitability, credit score, etc.

If the next crop of data-driven financial solutions can be specifically tailored to meet the requirements of the ag community, they can make new technologies more accessible by removing the financial risk, guaranteeing performance and improving cash flow on the farm.

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Farmers need access to data-driven financial solutions to effectively navigate emerging environmental risks, intensifying regulations, and changing consumer demands. - Photo: Peter Roek
Farmers need access to data-driven financial solutions to effectively navigate emerging environmental risks, intensifying regulations, and changing consumer demands. - Photo: Peter Roek

Accelerate adoption of new technologies

This will accelerate the adoption of new technologies and get better technology past the farm gate and into the fields. Being able to guarantee crop performance for farmers who follow a prescribed set of ag practices tied to a specific technology will remove a substantial amount of risk for all parties involved.

The ag lending ecosystem is also in dire need of scalable programs that can help finance the transition from conventional farming practices to more regenerative practices that decrease environmental impact and support the move to sustainable farming.

Farmers need access to data-driven financial solutions to effectively navigate emerging environmental risks, intensifying regulations, and changing consumer demands. Third-party benchmarking, verification and improvement plans will also be essential to prove sustainability and track environmental impact.

Agriculture needs more fintech innovation

Put simply: Agriculture needs more fintech innovation. Many sustainable and regenerative practices – be it tied to soil health, water management, nitrate mitigation, or chemical reduction – require a complete overhaul of unprofitable management processes and take years to drive ROI.

Sound financial solutions can help farmers mitigate the risk of adopting new technologies so they can drive long-term sustainability and increase their profitability despite increasingly complicated market dynamics.

Also read: Why is adoption of precision ag so slow?

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