While many institutional investors are familiar with the investment opportunities associated with financing private real estate, most tend to focus on commercial real estate assets, such as office buildings, apartments, retail spaces, industrial properties and hotels. However, they may be overlooking another compelling segment of the market: agricultural finance. In this paper, we will examine the attractive investment characteristics of agricultural finance, current market dynamics and key considerations for investing in the asset class.

WHAT is agricultural finance?

Many U.S. farmers access credit as a normal course of business at various points throughout their production cycles. This can include short-term loans to help finance the planting and harvesting of crops, medium-term loans or leases to finance farm machinery and mortgages to finance land purchases and capital improvements. Investing in this debt offers an effective way to tap into a major sector of the U.S. economy that is experiencing secular growth.

HOW do agriculture loans become investable assets?

Farmers can access loan financing through several sources. Many of these lenders offer these
specialized credits as investment opportunities to institutional investors:

• Government-sponsored entities (GSEs), such as the Farm Service Agency, the Farm Credit System and the Federal Agricultural Mortgage Corporation ("Farmer Mac"), historically have been the largest sources of agriculture loans and offer investment access through securitization. These are typically issued as bonds through broker deals and can be sold directly or offered as part of a bond fund. They tend to have a relatively low yield advantage to Treasuries and may be callable.
• Commercial banks also have been a large source of financing but do not generally provide direct investment access to these types of loans. National banks and community banks provide capital to the agriculture sector primarily through operating revolving lines of credit and short-term business loans. Rural community banks may source and service loans for secondary buyers, such as Farmer Mac.
• Some life insurance companies have direct agriculture finance origination platforms and may include these loans as sleeves within broader commercial real estate funds available for investment as well as through customizable loan portfolios.
• Private lending institutions are a relatively newer lending source for the industry that provides farmers with alternative access to capital, often focusing on non-investment-grade credits, that also typically offer investment opportunities through funds and customizable loan portfolios. A long-standing but shrinking segment of term financing comes from individual landowners that carry a note back on a property sale.

Within the spectrum of agriculture loan types, investors tend to focus on real estate mortgages in the segment, on both a whole loan and securitized basis, with most operating and machinery debt traditionally financed by banking institutions.