Is The Next Disruptor in Ag Finance?
The next disruptor in agriculture might surprise you. Many have entered the agriculture industry lately, and a few are focusing on the ag finance segment. Legacy businesses can progress into better business models or shift strategy and deliver solutions that benefits both them and their customers. That is also disruption. So, I’ll postulate on why modernized lending is coming, is needed, and how the major players (hint…they’re everywhere) are already in place to disrupt the way farmers borrow money.
Let’s begin at the farm. Agronomic farm data utilization is fairly mature. Cloud applications, IoT, drone tech, and other advanced tools are readily available and have been adopted with vigor. Farmers have become proficient at leveraging these tools and the resulting agronomic and operational data to increase yields or capture efficiencies. There are also many tools that will connect all this data and turn it into a financial metric for analysis and decision making. But there is still a significant gap between the utilization of that farm financial data and it manifesting to profitability or direct ROI on the farm. The gap filler might be a dark horse…
In its current state, farm financial data utilization is viewed very differently by farmers and community banks. The farmer often sees it as a chore that is secondary to the actual work of producing a crop, or maybe worse, something that only needs attention post-harvest, just to get financed. The banker often sees it as the primary information source during the loan underwriting process to determine repayment, to get the loan done. Both should be working together regularly, using the data to drive profitability on the farm! Some banks are implementing this strategy, and they are learning more about their borrowers and pioneering more effective capital deployment.
A recent survey from Farm Journal/Trust in Food and The Sustainability Consortium™ asked farmers “How likely would you be to both collect and share more data about your operation if you received one of the following?” Out of 8 possible choices, the answer that showed the most positive response was, “Tools to make your operation more profitable using data”¹. The same survey also found that farmers trust bankers with the security and use of their farm’s data, more than government or private companies². So, perhaps community banks need to rethink how they are serving and engaging with their farm borrowers. There is opportunity to go deeper with farmers and their data; whether the bank is providing a tool or just doing a great job being engaged around the farmer’s data, farm success and bank success are inextricably bound. This is community banking.
Leveraging farm financial data will enable community banks to increase loan volume and interest income that will also benefit the farmer’s bottom line. New types of loan structures, custom tenor or loan maturities, participations and opportunities that mitigate risk or deploy capital, will be a few of the tools that make that possible. Community banks should be more intentional regarding their borrower’s bottom line. After all, an ag portfolio is only as good as its client’s profitability. But the bank will have to drive the engagement. This strategy puts the bank in the driver seat to facilitate business with farmers and be the disruptor, rather than being displaced by disruptors because “we’ve always done it that way”.
References:1) “Farmer Perspectives on Data” - Slide 392) “Farmer Perspectives on Data” - Slide 44