Agricultural product financiers are turning to leasing as higher interest rates affect equipment financing across the agriculture industry.
“With the high interest rate environment that we’re in, tax leasing becomes something that is favorable because the bank can take the depreciation and pass on a lower rate to the consumer as a result of taking their depreciation,” Justin Woodward, vice president at Key Equipment Finance, told Equipment Finance News. “This year probably more than ever … we are doing more tax leasing, just because there can be a lower interest rate, which therefore equates to a lower monthly debt service.”
Leasing also presents an opportunity to solve some of the back-end problems that farmers face after a traditional purchase, Dan English, general manager of FBN Finance at Farmer’s Business Network, told EFN.
“We’ve seen a lot more AgTech purchases, for a variety of reasons, but I would expect, from some of the partnerships that we’ve looked at, that the lease is a good way to solve some of those issues on the back end for the farmer,” he said. “If they don’t have to worry as much about resale value, they’re not committed quite as long, and so we think there’s a lot of value there in [the leasing] market to evolve.”
External capital investment in the upstream side of the agriculture food technology industry totaled $18.2 billion across 1,846 transactions in 2021, according to food technology and AgTech venture capital firm AgFunder’s AgriFoodTech Investment Report. Total industry investment totaled $51.7 billion across 3,155 transactions in 2021.
Navigating food markets
As the AgTech industry continues to grow, agriculture lenders are seeing new opportunities for financing and leasing new technology. With so much money in the AgTech and food technology markets, identifying the right investment opportunities is key, Justin Woodward, vice president at Key Equipment Finance told EFN.
“We’re handling that with the customer as they bring these opportunities to us through analysis,” Woodward said. “Sitting down and determining what might this do in terms of efficiency, and it doesn’t take long putting pencil to paper to see that there are some incredible efficiencies that are to be had in terms of not only quality but quantity as some of the automation is put into play now.”
Higher rates and lower commodity prices are hampering the equipment financing market to some degree, FBN Finance’s English said.
“Prices have come [down] and rates have gone up,” he said. “It’s putting a little bit of a damper on the equipment financing market, but it still continues to strike for us.”
Higher costs are likely to affect consumer spending on agricultural products for the rest of the year, Key’s Woodward said.
“The second half of the year, you’re going to see the consumer be in the grocery store a lot more than the restaurant, just given the price of things, and kind of pushing the family back to the dinner table,” he said.
“As technology has hit the ag space, these machines have become much more sophisticated, and the support and the engineers that are behind them have identified that they need to be able to pivot,” he said. “This equipment can be modified to be able to accommodate those types of changes, and that happens depending on who you’re selling your commodity to.”
AgTech and the overall strength of the agricultural industry provides lenders with increased opportunities to negotiate financing in the current macroeconomic environment, FBN Finance’s English said.
“From a lender’s perspective, it continues to be a great market to do loans in,” he said. “Farmers have very good quality credit [and] they manage their operations like a business. With commodity prices where they’ve been the past couple of years, and good turnarounds from some of the levels of profit we saw a few years ago, we’re always looking for new ways to help finance equipment that’s going to make farmers more profitable.”