Agricultural Credit: Definition and Types of Credit Vehicles

What Is Agricultural Credit?

The term agricultural credit refers to one of several credit vehicles used to finance agricultural transactions. These vehicles include loans, notes, bills of exchange, and banker's acceptances. This type of financing is specially adapted to the specific financial needs of farmers and allows them to secure equipment, plant, harvest, marketing, and do other things that are necessary to keep their farms running.

How Agricultural Credit Works

When someone needs credit, they often turn to banks for loans or other credit vehicles. Some industries have special facilities set aside through certain financial institutions as is the case with agribusiness—the business sector encompassing farming and farming-related commercial activities which involve all the steps required to send an agricultural good to market—production, processing, and distribution. This is called agricultural credit, which is available in many different countries.

The Federal Farm Credit System (FFCS) plays a key role in agricultural credit in the United States. The FFCS, which has been around since 1916, is made up of a series of institutions that have more than $180 billion in assets. These institutions range from wholesale banks and retail lenders that provide an estimated 35% of the real-estate and non-real estate borrowing needs of U.S. farmers. Short-term credit finances operating expenses, intermediate-term credit is used for farm machinery, and long-term credit is used for real estate financing.

Agricultural credit, which is also commonly referred to as agricultural finance, is an important component of the economy, especially in countries with arable land since agricultural products can be exported. Credit is vital to agricultural businesses because it gives farmers access to capital that might not otherwise be available to them. It helps them secure the seeds, equipment, and land they need to operate a successful farm. Agricultural credit programs not only help farmers and other agricultural producers, but also supports ranchers and rural homeowners with their finances.

Credit needs to be made available on competitive terms to allow American farmers who operate in a free market economy to be able to compete with farms that receive state financial subsidies, such as in the European Union (EU) or Russia. If this credit wasn't available, the U.S. agribusiness sector would face unfair competition when it comes to securing the equipment and arable land needed to produce agricultural products for the global marketplace.

Special Considerations

Countries with farming industries face consistent pressures from global competition. Products such as wheat, corn, and soybeans tend to be similar in different locations, making them commodities. Remaining competitive requires agribusinesses to operate more efficiently, which can require investments in new technologies, new ways of fertilizing and watering crops, and new ways of connecting to the global market.

Global prices of agricultural products may change rapidly, making production planning a complicated activity. Farmers may also face a reduction in usable land as suburban and urban areas move into their areas.

Just like any other industry, many entrepreneurs in the agricultural industry also find the need to diversify in order to maximize their profits. So farmers may not just grow single commodities or one type of livestock. Instead, they may need to think beyond existing operations. Doing so requires capital. The availability of agricultural credit helps these borrowers realize their dreams of expanding into more complex businesses.