Minding Ag's Business

Implement Dealer Financing Rises

Implement dealers' share of long-term non-real estate debt grew from 11% in 2003 to 31% in 2013 and 2014. It was 27% in 2016. (Chart courtesy of FarmDoc Daily)

Implement dealers and input suppliers are taking on an increased role in funding farm operations, and a new study published on the FarmDoc Daily blog finds that in 2016, implement dealers issued $11.2 billion dollars of debt to farmers with the vast majority of it -- $10.72 billion -- going to fund equipment purchases.

"What we've seen is a growth in implement dealer financing for non-real estate long-term debt," Todd Kuethe, one of the blog's authors and University of Illinois ag economics professor, told DTN. "These are things you're financing for multiple years, so it's not your one-year operating loans. We saw a real growth during the farm expansion and commodity price boom. It's come down a little bit, but it's still stayed pretty high."

Kuethe's research, done in conjunction with Jennifer Ifft at Cornell University and Kevin Patrick with the National Ag Statistics Service, shows implement dealers' share of long-term non-real estate debt grew from 11% in 2003 to 31% in 2013 and 2014. It was 27% in 2016.

"Part of it is, I think, sort of the ease of financing. If you go to buy a car, for example, it's much easier to negotiate all the terms of the sale when you're at the car dealership and working with the car dealership's financing than it is if you go to the bank, do it on your own," he said. Sometimes, implement dealers or input supplies will include perks if you go with their financing, like priorities for repairs during busy times of year.

Tracking this kind of debt is difficult since these types of lenders aren't subject to the same aggregate reporting requirements as commercial and farm credit lenders. Kuethe said they used USDA survey data where farmers reported where they received their financing.

"Unfortunately we don't know if that's being financed directly by the equipment manufacturers or if they are doing point-of-sale financing through another institution. It's maybe not the best measure of who's providing the debt, but at least who the farmers are writing the checks to," he said. For example, a Farm Credit bank, commercial lender or credit union could work with a local supplier to provide financing. It could also be through a lending arm of the company providing the equipment, like John Deere's financial arm, which according to a Wall Street Journal article from last summer, is the fifth largest agricultural lender.

The rising popularity of this type of financing raises two primary concerns: tracking and regulating it. If a lender is running a credit history on a potential borrower, will it show up in that buyer's history? The concern isn't the John Deeres and the like, it's the potential "that some people, if they have enough individual wealth that they're loaning out through other means, those potentially aren't regulated. So how much of it is risky?"

Kuethe says that's a concern, but the data shows there's no significant difference between people who borrow from implement dealers and from traditional lenders. "So it doesn't appear that its riskier, and it appears that the interest rates are pretty comparable, so it doesn't look likely they're (conventional lenders) at a pricing disadvantage."

The bottom line: Farmers like the convenience of one-stop shopping. Kuethe said there's more on implement dealer financing coming from the FarmDoc team, and he's hoping to do more research into how some of these agricultural credit trends compare to the overall consumer economy.

For a breakdown of farm operator debt by lender type, you can find Kuethe's blog post here: http://farmdocdaily.illinois.edu/…

You can find the Wall Street Journal article on John Deere and its role in agricultural financing here: https://www.wsj.com/…

Katie Dehlinger can be reached at Katie.dehlinger@dtn.com

Follow her on Twitter @KatieD_DTN



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