INTRODUCTION

One of the major contraints small-scale farmers face in their agricultural operations is limited access to the formal financial sector, which includes banks, credit unions, and the various services theses institutions provide. Because agricultrual operations are seasonal, there is often a time gap between planting and harvesting. Perennial plants such as fruite trees and blueberries may take years to produce income, creating a need for additional funds to maintain operations and meet household expenses.

Access to financial institutions is therefore crucial. Without it, farmers encouter serious difficulties obtaining credit, purchasing agricultural inputs, transferring funds, or acquiring personal and business credit cards-services essential for managing both farm and household finances.

The results presented in this report are based on surveys conducted in Michigan and Tennessee under the LAFAT project, funded by the USDA-NIFA program. In Michigan, data were collected throug in-person interviews with 50 Latino farmers. In Tennessee, data were gathered online from 180 farmers representing multiple ethnic groups, including whites, Hispanics, African Americans, and Asians. Participants in Tennessee were  predominantly white.

NATIONAL CONTEXT

To provide context, this section introduces recent national data from the Federal Deposit Insurance Corporation (FDIC) on unbanked, underbanked, and banked households in the United States for 2021 and 2023.

• Unbanked households have no relationship with formal financial institutions.
• Underbanked households maintain a checking and/or savings account but use financial services infrequently.
• Banked households maintain active relationships with financial institutions, utilizing services such as checking and savings accounts, mortgages, money transfers, and credit cards.

White and Asian households consistently show the highest banking rates. Between 2021 and 2023, underbanked rates increased slightly for whites (0.8%) and Asians (0.3%) but declined for Hispanics (2.4%) and Blacks (0.9%). Hispanic and Black households also saw modest improvements in banked status.

SURVEY FINDINGS

BANKING STATUS OF SMALL FARMERS

Analysis of the LAFAT survey data revealed substantial differences between small farmers in Michigan and Tennessee. As shown in Table 2, 58% of Latino farmers in Michigan were unbanked, compared

with only 8.4% of predominantly white farmers in Tennessee. Factors contributing to this gap include lower educational attainment among Michigan farmers (nearly 60% had not completed high school) and fewer years of farming experience (average of 23 years), while Tennessee farmers have farmed for multiple generations.

Combining the data from both surveys, 19.2% of all farm households were unbanked—more than double the national average for Hispanic households and 10 times higher than that for white households—

highlighting the need to promote financial inclusion among small farmers.

TYPES OF FINANCIAL ACCOUNTS

Table 3 presents the types of financial accounts held by participating farmers. Checking and savings accounts were the most common, making these farmers predominantly underbanked, which aligns with national data on minority households.

Other financial products such as credit cards, mortgages, and direct deposits were less common. On average, only one in ten farmers reported having a mortgage.

USE OF FINANCIAL SERVICES

Results in Table 4 show that small farmers make limited use of financial services, consistent with their underbanked status. However, a relatively moderate percentage reported using online (30.4%) and mobile (14.8%) banking.

REASONS FOR NOT HAVING A BANK ACCOUNT

Table 5 identifies five social-capital-related motives explaining why some small farmers do not hold bank accounts. The most important reason  across both states was that farmers perceived no significant benefits in working with banks, reflecting self-interest and preference motives.

Other key reasons included opposition to high interest rates and fees (community support/altruism) and lack of perceived social validation for maintaining a bank account.

ACCESS TO CREDIT

Access to formal credit differed sharply between states (Table 6). Only 44% of Michigan farmers had access to credit compared to 82.1% in Tennessee. This disparity may be explained by differences in farming experience, ethnicity, education, and social capital.

MOTIVES FOR LACK OF CREDIT ACCESS

The primary reason for not seeking or obtaining credit was the perception of high interest rates and fees. The second most common reason was farmers’ reluctance to incur debt, reflecting an internal validation motive.

Other reasons included lack of connection with bank officials and limited participation in bank-sponsored community events. The least important reason cited was poor business reputation.

FINANCING TECHNOLOGY ADOPTION

Table 8 shows that both Michigan (32.0%) and Tennessee (35.8%) farmers plan to fund new technology primarily from farm- generated income, followed by personal and family savings. Loans from banks and credit unions ranked third, suggesting potential opportunities for financial institutions to expand rural lending.

 

PREVIOUS SOURCES OF CREDIT

Table 9 presents previous credit sources for small farmers. In Michigan, the top sources were the Farm Service Agency (19.2%), close and extended family (15.1%), and local banks (12.3%). This reliance on personal networks highlights the importance of bonding social capital.

In Tennessee, the leading sources were equipment and machinery suppliers (23.7%), local banks (23.2%), and the Farm Service Agency (13.5%), reflecting stronger integration with formal and commercial financial networks.

CONCLUSION

Small farmers—particularly ethnic minority farmers—face multiple challenges in sustaining their agricultural operations. These include inadequate access to modern technology, limited market reach, dependence on outdated crop varieties, climate variability, labor shortages, and, most critically, poor access to the formal financial sector.

Being unbanked or underbanked constrains their ability to invest, purchase necessary inputs, and manage seasonal cash flow. Building stronger relationships between small farmers and local financial institutions is therefore essential.

Beyond maintaining checking and savings accounts, farmers must be encouraged to utilize a full range of financial services such as fund transfers, mortgages, bill payments, and digital banking tools—services often available at competitive costs.

Financial institutions can also benefit from understanding the motives that deter small farmers from engaging with banks or seeking credit. By addressing these barriers and exploring alternative lending mechanisms, banks can foster mutually beneficial, long- term partnerships that promote rural economic growth. 

 

 

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