Study: Black farmers face bank bias regarding loans; impacts are generational, far reaching

Black farmers have historically and systemically been at a disadvantage when competing with their counterparts.

They have had less land, inferior crops, have been shorted on generational wealth and have a harder time accessing business loans than white farmers, according to an Arizona State University professor’s new study on the subject.

Ashok Mishra, the Kemper and Ethel Marley Foundation Chair in Food Management in the Morrison School of Agribusiness, part of the W. P. Carey School of Business, along with two other principal investigatorsGianna Short and Charles B. Dodson, took a deep dive into this issue through a new study titled “Racial disparities in farm loan application processing: Are Black farmers disadvantaged?” which was recently published in Applied Economic Perspectives and Policy.

ASU News spoke to Mishra about how Black farmers have historically been discriminated against in services from the federal government, including access to credit.

Note: Answers have been edited lightly for length and clarity.

Ashok Mishra

Question: What made you undertake this particular study or why did you see a need to conduct this study?

Answer: The genesis of this study is rooted in my employment history. After getting my PhD in 1996, I worked for the United States Department of Agriculture from 1997–2007. During that time, the USDA was grappling with Pigford vs. Glickman ... (a) class-action lawsuit alleging racial discrimination against African American farmers in the allocation of farm loans. Credit access can affect farm productivity, profitability and the income of farming households through liquidity constraints, requiring farmers to use lower levels and lower-quality inputs. As a student of labor economics, I was taught that discrimination is very hard to assess because of all the intricacies involved in economic modeling. The lawsuit intrigued my curiosity and economic thinking.

Even though I left (the) USDA in 2007 to take a professorship at Louisiana State University, I have been contemplating the issue of discrimination and how to test discrimination empirically. Fast forward, I joined ASU in 2015. The current focus (here) on diversity, equity and inclusion provided the impetus for the study. Diversity in farm businesses remains scant and elusive. I found that researchers at the USDA agency were also interested in this issue and had the data to test the discrimination hypothesis.

Q: What are the forms of discrimination that you found in this study?

A: Access to credit allows farmers to satisfy cash needs induced by the agricultural production cycle, purchase farmland and other real estate, and invest in fixed improvements. In loan programs, discrimination can take several forms — for example, reduced loan amounts, higher interest rates or increased loan processing time. In this study, we investigated delays in loan application completion and processing time (in days) as forms of discrimination. Minority farmers usually lack the documents — income statement, assets, balance sheet — to submit loan applications. The Farm Service Agency (FSA) of (the) USDA is a lender of last resort and makes direct farm ownership and operating loans to family-sized farms that cannot obtain loans from elsewhere. Many farmers get loans from the FSA program.

Delays in access to credit, such as increased loan processing time, can affect the timely planting and harvesting of crops and feed for livestock. In this study, we considered loan processing time for two types of loans — farm ownership loans and operating loans — by Black farmers compared to white farmers.

We find significant differences in loan application completion and processing times for operating loans. The most striking finding from this study is that it takes significantly longer for loan application completion and loan processing time for Black borrowers compared to all other farmers.

Longer loan application completion for Black borrowers could be due to a lack of communication between the loan officer and applicant, failure to provide a clear and accurate description of the information and documents required, and attempts to discourage applicants.

Q: What are the long-term negative impacts of this type of discrimination towards Black farmers?

A: Historically, Black farmers faced adversities in agricultural business mainly due to access to land and participation in government farm program payment — primarily geared for grain producers and base acreage. Consequently, Black farmers faced barriers to their ability to engage in production agriculture and the affordability of land rental rates. They missed the opportunity to take advantage of farm program payments and lost capitalizing government payments on farmland markets, resulting in a lost opportunity to build generational wealth.

In the long term, discrimination could result in slower growth in generational wealth accumulation, fewer farms owned by Black farmers, decreased supply of food and fiber, loss of livelihood, increased poverty and food insecurity.

Q: Does your study include recommendations to improve Black farmers' situation? 

A: After reading this research publication, readers can easily glean several recommendations. First, investment in education is paramount. Education plays a significant role in producers' ability to process information and seek a solution that maximizes their welfare, particularly for Black farmers. Additionally, they are more likely to participate in business recordkeeping and financial management. 

Secondly, increasing financial literacy in rural communities, especially among Black farmers, can reduce distrust among farmers, decision-makers, loan officers and program officers.

Thirdly, investment in public infrastructure like information technology can bring transparency in rules, document requirements, market information, government programs and timely information for borrowers, lenders and decision-makers.

Q: Your next study is actually an expansion on this one. Tell us what you'll be doing.

A: The current study paved the way for the next study. ... The study proposes to investigate the impact of soil quality and climate change on the debt repayment capacity and access to farm loans by minority farmers in the U.S.  

Farm performance and revenues are inherently linked with production, affected by — among other things — soil quality, irrigation, climatic conditions and income capacity of loans. Minority or socially disadvantaged farmers and ranchers generate less revenue on average, have greater difficulty qualifying for agricultural loans or may be dissuaded from applying for credit. The above situation is exacerbated by low soil quality and increased climatic risks. In the next three years, we will be exploring the above issues using firm and state-level data.

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