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Financing Agricultural Conservation Practices: An Ag Lender’s View

Paul Dietmann
Educational Opportunities: 
Home > Education & Events > November 2020 > Financing Agricultural Conservation Practices: An Ag Lender’s View

Agricultural lenders tend to be a pretty cautious bunch. They want to make adequately secured loans to farmers who have both the cash flow and the propensity to make payments on their loans as agreed.

Ag lenders think a lot about financial risk. More and more, financial risks are emanating from the effects of climate change. Hundred-year rainfall events are now happening several times per decade, mixed in with extended periods of drought – then throw in a derecho just in case we were getting complacent. These events are changing the perception of financial risk.

A common way Ag lenders deal with production and market risks is by requiring borrowers to carry federally subsidized crop insurance. However, insurance isn’t available to every type of crop or livestock enterprise. Also, every time a farmer collects an indemnity payment, it has the potential to reduce the farm’s documented crop yield history and thus its potential coverage in subsequent years. This means it will be increasingly important over time for farmers to implement conservation practices to mitigate production risks.

In many respects, financing an agricultural conservation practice isn’t much different from financing crop or livestock production, the purchase of a piece of machinery, or a real estate transaction. The lender will gather a balance sheet, tax returns, a cash flow projection, and a credit bureau report.

Ag lenders will likely approve a loan if the farm’s balance sheet shows adequate equity and working capital; the tax returns and projections show enough positive cash flow to comfortably handle the added debt; the farmer’s credit score is good (above 670 or so); and the credit report doesn’t contain any major derogatory indicators, such as unpaid bills sent to a collection agency.

However, there are unique factors that can make conservation practices more challenging to finance. Challenges are not necessarily barriers, though. They just require more creative ways of accomplishing the goal.

First, some practices, such as cover cropping or pasture establishment, might add extra costs without generating additional income, at least in the short run. For a farm with historically strong financial performance, this probably wouldn’t be an issue. For those with marginal cash flows, it could be a big hurdle.
Second, some practices, like building fences for managed grazing or installing drainage control structures, might require significant capital investments but not add anything to the land’s fair market value. A farmer would have to already have enough equity in the land to borrow against it to free up capital and make the investment. The improvements wouldn’t have collateral value that could be used to secure the loan.

Third, non-farming landowners hold an increasing percentage of farmable acres in the upper Midwest. According to a 2019 report by The Nature Conservancy, non-operating landowners control 62% of Midwest farmland. For a lender to finance conservation practices on land owned by a non-farmer, either the landowner has to apply for the loan or the farmer renting the land has to be able to carry the debt load without using the land as collateral to secure the loan.

The best way to overcome the challenges outlined above is to use cost-sharing and other assistance available from the USDA Natural Resources Conservation Service (NRCS), county land conservation departments, or other entities. Cost-sharing for practices like cover cropping helps with annual cash flow. Public sector funding for capital projects, like fencing, alleviates the collateral issue that might prevent a lender from being able to finance a conservation project on a farmer’s own land. A long-term lease agreement, along with cost-sharing, could address the challenges inherent with rented land.

What can—or can’t—a lender do to influence farmer adoption of conservation practices? The first step lenders can take is to become aware of the practices used in their area and learn about what cost-sharing options are available. Well-informed lenders can help their borrowers get connected with reliable resources and can help them understand the short- and long-term financial implications of conservation adoption.

What a lender can’t do is force a borrower to adopt conservation practices as a condition of loan approval. While a lender can encourage a farmer to take steps that are in his or her best financial interests, most lenders are also very careful to avoid the perception of unduly influencing the management of a borrower’s farm.
How can watershed leaders work with Ag lenders to improve soil health and water quality? First, be sure to invite lenders to field days and workshops. Second, keep them updated on cost-sharing and technical assistance available in their area, and ask them to share information with their borrowers. Third, ask lenders to help run financial projections for various conservation practices or even to help train conservation staff on basic farm financial management.

Ag lenders and conservation professionals have mutual goals. All want to see farms become more resilient and less vulnerable to weather extremes. All want farms to be economically and environmentally sustainable. By working together in partnership with farmers and landowners, and with crucial public sector support, we can promote much greater adoption of conservation practices in the Midwest.
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