Long-awaited ACRE Act boosts banks’ ag lending competitiveness

By John Hintze

Decades in the making, the Access to Credit for our Rural Economy Act, tucked into the recently enacted One Big Beautiful Bill Act, provides agricultural producers and their lenders with less than hoped for but nevertheless represents a major step forward, especially for farmers and ranchers seeking to acquire property.

That’s a big plus for farmers and other ag producers who want to purchase the property they currently tend on a tenant basis, and for those who want to expand their holdings. The law should enable their banks to offer lower rates on those new property loans, helping them stay in the black in today’s challenging times.

“The ACRE Act is something we’ve been working on for 30-plus years, and it will lower the cost of capital for ag producers who are struggling across the country,” says Caleb Hopkins, chairman of the American Bankers Association’s Agricultural and Rural Bankers Committee.

New laws typically become effective several months or even years later, enabling regulators to develop guidance to clarify the law’s implementation and reach. In an unusual scenario, the ACRE Act went into effect the day the legislation was signed into law, on July 4, arriving at a particularly helpful time.

“The biggest challenge today for ag producers is margin compression,” says David White, senior commercial relationship manager at Wichita, Kansas-based Intrust Bank, adding that inflated wages as well as costs for chemical fertilizers and other inputs have combined with depressed grain prices to squeeze farmers’ income.

“Unless farmers can produce historically high yields to make up for that lower price, there’s going to be a lot of red ink,” he said.

Regulatory guidance coming soon

The ACRE Act will provide some relief, but the lack of regulatory guidance so far has delayed its application. Noting banks’ aversion to risk, White says he has discussed the law’s benefits with customers at a very high level and its longterm effects.

“Maybe we can work some rates down a bit on the margins, but until there’s meaningful guidance, it’s hard to lean into 100%,” he says.

Hopkins says ABA is currently working with members of Congress to better understand their intent with the law. The association is also talking to certified public accountants and tax attorneys to ensure a smooth and consistent implementation of the law’s requirements and to better understand the Internal Revenue Service’s approach to auditing them.

“We’ve been telling banks to take it slow, for now,” he says. “Our advice is for them to start having conversations about the law with the appropriate executives internally and with the bank’s accountants.”

At least some guidance could arrive by November, at the start of a season when land is barren and farmland acquisitions tend to occur. Such guidance, from the Treasury Department and likely also the IRS, should clarify some technical issues, such as how banks account for the partial tax exemption the law gives them on the interest-come they make on the loans. It may also clarify whether the law’s benefits impact a broader swathe of loans, including chattel and other nonproperty loans, than the statutory language currently suggests.

Commercial banks have long competed in the ag real estate arena against the Farm Credit System, a nationwide network of federal chartered cooperative lending institutions that receive a 100% interest-rate exemption on their loans. The ACRE Act’s 25% exemption will result in some savings for potential borrowers, bumping up private banks’ competitiveness.

ACRE savings

ACRE Act proponents originally sought a 100% exemption on banks’ interest income and for the types of loans impacted to include refinancings and those for rural housing. In budget negotiations, the House of Representatives scaled the exemption back to 25%, and only for newly originated loans to acquire property.

ABA estimates that the broader bill would cost approximately $2 billion over 10 years and provide a significant bang for the buck, including an estimated savings for farmers of $100 per acre annually over the next 30 years. That compares to one-time economic relief of $43 per acre for corn and $29 per acre for beans paid out to farmers in February under the Emergency Commodity Assistance Program, which cost taxpayers $10 billion in a first tranche and $30 billion overall.

“The economic impact per producer is much greater under ACRE, and it’s much less expensive for the government,” Hopkins said.

The original bill with the 100% exemption would have cut loan interest rates between 1% and 1.5%, says Ed Elfmann, SVP who leads ABA’s agricultural and rural banking policy. Under the scaled back law, savings have been estimated, based on anecdotal evidence, at between 0.25% and 0.40%.

“If you’re a beginning farmer, a 0.25% interestrate deduction may be enough to get cash flowing properly,” says Elfmann, whose family has long been in the farming business.

Although scaled back, the law is still a major win for bankers, Hopkins says, in part because it has served to educate members of Congress about current agricultural issues and potential solutions.

“We opened the eyes of a lot of people on Capitol Hill as far as how the agricultural industry works and what can be done to help producers,” he says.

Refinancings and chattel

A top priority for bankers will be increasing the tax exemption from the current 25%, White says, although that may have to wait until Congress takes up another major tax bill, since the tax-based legislation wouldn’t fit into the farm bill or other non-tax legislation. Also important, and something that anticipated guidance may clarify, is whether loans whose status as refinancings is currently unclear may be eligible for the exemption.

For example, White says, a farmer facing tightening or negative production margins whose farmland provides strong balance-sheet equity may use that land as collateral to extend an existing short-term operating loan that has become insufficient to support working capital.

Jennifer Ifft, a professor in the Department of Agricultural Economics at Kansas State University, says that extending short-term loans is a tactic long taken by crop farmers.

“Farm income is cyclical and can present surprises … the weather, pests, all kinds of surprises,” she says.

However, whether that loan is a refinancing and therefore excluded from the ACRE Act or could be viewed as a new property loan is unclear.

“It’s ambiguous in the law’s current language if that type of restructuring would qualify or not,” White says.

Similarly, shorter-term loans to buy cattle, crops, farm machinery and other necessities — so-called chattel loans — may be added to an ag producer’s existing real estate loan. Todd Welch, vice president specializing in agricultural loans at Enid, Oklahoma-headquartered Gateway First Bank, says agricultural producers typically do that to streamline their finances at often better terms, essentially creating a new loan that the ACRE Act guidelines could potentially include.

While chattel loans on their own do not appear to meet the ACRE Act requirements currently, that could change in the anticipated guidance. Elfmann says ABA wants ACRE to reflect modern agricultural lending, including chattel loans and other types of financing common today.

“We are hopeful the guidance from the federal government will provide more clarity on what can and can’t be included in an ACRE-qualified loan,” he says, adding that chattel loans could be “interpreted as part of the loan ‘package,’ reflecting how [agricultural financing] is usually structured.”

In fact, reducing the interest on chattel-type loans could be an even bigger benefit to new farmers than loans to purchase property.

“Beginning farmers are usually tenant farmers first, and they need to buy that tractor or combine — those more intermediate-term assets,” Welch says. “Then when they get the business up and running, they can look at investing in real estate.”

Remembering ‘aggie bonds’

Welch notes that Oklahoma was one of 16 states to eventually offer “Aggie bond” programs starting in the 1980s. The federal/state partnership enabled private lenders to receive federal and/or tax-exempt interest on loans to beginning farmers and pass on the savings. When interest rates hovered upward of 10%, borrowers accrued savings of around 3%, but interest in the program faded when rates fell significantly in the early 2000s.

More recently, Kansas and Wisconsin have both instituted a 100% state tax exemption on loans that are secured by farm real estate or for agricultural purposes. Given that federal taxes make up a bigger portion of banks’ tax burden, ACRE’s much smaller exemption may still provide similar, if not greater, interest-rate savings, says Ifft, and they could increase commercial banks’ competitiveness with the Farm Credit System.

She adds that the extent to which the tax exemption is passed through to qualifying borrowers may depend in part on the competition a bank faces in its specific locality. Overall, the overall impact on rates may be difficult to measure, she says, “But from a political-economy standpoint, these types of benefits often don’t get taken away.”

Commercial banks have long competed in the ag real estate arena against the Farm Credit System, a nationwide network of federal chartered cooperative lending institutions that receive a 100% interest-rate exemption on their loans. The ACRE Act’s 25% exemption will result in some savings for potential borrowers, bumping up private banks’ competitiveness.

“I would have really liked a higher break, but some of that savings will get passed down for sure,” Welch says. “It’s going to be a bit of a challenge to rebuild that market, to get commercial banks back into ag real estate lending, but it’s not impossible. It’ll take time.”

Contributing editor John Hintze is a financial journalist who writes frequently for the ABA Banking Journal.