What Is Agricultural Credit?

Agricultural credit is any of several credit vehicles used to finance agricultural transactions, including loans, notes, bills of exchange, and banker's acceptances. This type of financing is adapted to the specific financial needs of farmers, which are determined by planting, harvesting, and marketing cycles. 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 Explained

Agricultural credit is an important part of the broader Agribusiness, which is the business sector encompassing farming and farming-related commercial activities. The business involves all the steps required to send an agricultural good to market: production, processing, and distribution. It is an important component of the economy in countries with arable land, since agricultural products can be exported. Agricultural credit allows this business to take place by supplying farmers with the financial credit that might not otherwise be available to them. This financing is vital to be able to secure the seeds, equipment, and land needed to operate a successful farm.

In the U.S., the Federal Farm Credit System (FFCS) plays a key role in agricultural credit. Originated in 1916, the FFCS comprises approximately 100 institutions with over $180 billion in assets and provides an estimated 35% of the real-estate and non-real-estate borrowing needs of U.S. farmers.

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.

Agricultural credit needs to be made available on competitive terms to allow U.S. farmers operating 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 were not 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 market place.