Category: White Paper

In the competitive world of agricultural finance, there are alternatives to a traditional bank loan for farmers to consider. But why? What are the differences between a traditional bank loan and getting a loan through Ag Resource Management? Let’s dive into the details.

Comparing Loan Processing and Approval

Most banks are insured by the Federal Deposit Insurance Corporation (FDIC), which means their loans (including agricultural loans) are insured through this independent federal agency. However, being insured by the FDIC also means these banks have more complex processes for making loans and more restrictions on the various types of loans they can make.

For example, an FDIC Financial Institution Letter issued to FDIC-regulated banks in January of 2020 reads (in part), “As headwinds facing the agricultural economy persist, insured institutions must be prepared for agricultural borrowers to face financial challenges by employing appropriate governance, risk management, underwriting and credit administration practices.” You can read the entire letter here: https://www.fdic.gov/news/financial-institution-letters/2020/fil20005a.pdf.

The letter goes on to outline additional recommendations for increased oversight and regulation of agricultural loans.

In other words, the tighter the ag economy becomes, the more FDIC-insured institutions are pressured to increase scrutiny of ag loan applications, ask for more documentation and overall, tighten the criteria for approving agricultural loans.

In addition, most agricultural loans approved by banks are based on the farmer’s real estate and equipment equity. Younger farmers, or farmers who rent versus own most of their acres, and thus have lower equity, might find it challenging to get approval for a bank loan.

Traditional bank loans also rely heavily on the historical income of the farming operation. This presents another challenge for a new farmer, who doesn’t have a proven history of producing profitable crops and successful farm management.

“They don’t have equity in real estate, which most young farmers don’t because they don’t own the land they are farming,” explains Don Hastings, an area manager with Ag Resource Management based in Dexter, Missouri. “They’re going to be very limited in their equipment because they’re just starting and making payments on that, so again, low equity. To get a bank loan, many of them would have to go back to their parents or relatives to secure the note that they are a co-signer and co-guarantor of the loan.”

This is where the Ag Resource Management (ARM) loan process differs significantly from those used by traditional lenders. Area Manager Jason Brown, who is based in Waunakee, Wisconsin, explains.

“Our product is tailored to those who don’t have real estate equity, and that lack of real estate equity could be for a variety of reasons,” says Brown. “The business model of farming has changed over the years; and in today’s crop production world, farmers are renting or leasing the majority of their land. That may be because they’re just starting out, or they are expanding their operations and they’re leasing land to grow, and the equity that they do have just isn’t enough for the size of the farm that they need.”

The ARM loan process looks at the value of the crop that’s going into the ground this planting season and government payments crop insurance and then provides loans based upon that future crop value, not on equity.

“We’re more interested in determining the future value of that crop and lending against that whereas the bank is more interested in looking at hard assets,” explains Brown. This means there are significant benefits for farmers who get loans through ARM.

The Benefits of Working with ARM

Two of the key benefits of getting a loan through ARM are freedom and flexibility.

“We turn the farmer back into a cash buyer,” says Brown. “If you don’t get a bank loan, you can consider a loan from a co-op, who’s going to sell you inputs like seed, fertilizer or chemicals. But financing through them means you’re committed into buying inputs from whichever institution will give you credit, and that limits your choices. Your ability to compare prices or purchase the right inputs for what your acres need is reduced. And you’re tied to paying whatever price they are going to sell it to you at. If you have a loan through ARM, you have the freedom to make the right choices for your farming operation and the ability to shop around for the best prices.”

The freedom of an ARM loan also means farmers can pay for things that a co-op isn’t interested in financing.

“We give farmers options,” says Brown. “The co-op isn’t going to finance rents, for example. It may not finance labor and repairs. That leaves the farmers with the additional job of figuring out how to finance those things on their own. We give them a way to finance all of those things.”

Another advantage of working with ARM is that it gives the farmer a knowledgeable financial partner to help them evaluate different financing offers, to construct a financing package that will be most beneficial for their operations. ARM financial experts can help farmers evaluate offers on seed or equipment financing, for example, and make those part of the farmers’ overall financial management plan.

“There are times when working through a supplier, such as your seed company, makes sense,” says Brown. “We’re here to help the farmer determine when that makes sense and when it doesn’t. For example, if the seed company is willing to finance your seed on an unsecured basis at a reasonable rate, let’s use that. That way it frees up some dollars for me to help you in another way. We help farmers create these custom financing packages, and we help them manage that process.”

“That’s a key difference between the way we work at ARM and the way a traditional lender works,” says Hastings. “We’re able to connect with the input suppliers and perhaps get the farmer some additional credit there and work out a partnership deal. We can work with a banking partner and help them get their equipment payments built into our budget. There are so many different ways that we can package deals and offer them solutions. It’s a very well-rounded approach. We look at everything.”

That kind of hands-on partnership with farmers is another key advantage of working with ARM. ARM financial experts monitor the details. And that can save their customers from financial disaster.
“For example, if I have a customer who normally plants 2,500 acres, initially his loan was based on planting that many acres,” says Brown. “But in 2019, for example, it was a horrible, wet spring. Lots of prevent plant acres, and he only ended up getting 1,600 acres planted, which was the case for many farmers. In late summer, we went over those numbers, and I told him we needed to reduce the loan, so it was based on this lower acreage. He may not have been happy about that at the time. But fast forward to December when we are recapping the year, and he had just enough crop expenses to get his loan paid back. We did the right thing, even though it wasn’t an easy thing to do, and it saved them from being short on their loan.”

Lastly, and this is a big one, there’s the advantage of speed.

It can take weeks or even months to get the final word on a loan from a traditional lender. But because ARM doesn’t need to wait on a real estate or equipment appraisals or other procedures that draw out the loan process, they get farmers the loan money they need much more quickly. In most cases, ARM loans are processed and in the farmer’s bank account in less than a week. And in the dynamic world of crop production, having the money when you need it is crucial.

“Other lenders make decisions by looking at tax returns based on the previous calendar year, among other things,” explains Brown. “The tax year ends December 31, so they might get those tax returns in mid-February or even early March. They need time to digest those financials, so the physical calendar keeps inching closer and closer to planting season, and the farmer doesn’t have the capital to make buying decisions until April or May if they’re working with a traditional lender. On the flip side, I can help them in December and January and get them their money quickly. We give them the capital they need in a timely fashion, so they can be more successful.”

To learn more about the advantages of working with ARM, visit www.armlend.com.

The year of 2020 was certainly been one for the record books – and we’re not just talking about the COVID-19 pandemic. It has brought us some of the wildest, most unpredictable weather events in recent history. One event in particular, a derecho storm that smashed through the Midwest on August 10, 2020, caused damage in Illinois, Ohio, Minnesota, Iowa and Indiana.

According to the National Oceanographic and Atmospheric Administration (NOAA), the derecho was the second-costliest U.S. disaster in 2020, impacting 37.7 million acres of farmland across the Midwest – 14 million of those in Iowa alone, according to the Iowa Soybean Association.

The costliest U.S. disaster of 2020? Well, that was Hurricane Laura, which caused $14 billion in damage when it ravaged the Gulf Coast in August, according to NOAA. In fact, Laura was one of twelve named storms (yes, that’s a record) and six record-tying hurricanes to hit the United States in 2020.

These devastating weather events caused headaches for farmers in many ways, including loss of crops and lower yields due to crop quality issues, extended harvest time, potentially the need for specialized equipment to pick up downed corn and other crops, increased fuel and labor costs and other unanticipated expenditures that could turn a banner year into a financial disaster in the course of a few weeks.

According to risk management experts with Ag Resource Management, these events bring up an important reminder:  It’s time to start moving forward from 2020.

“It’s absolutely critical for growers to re-evaluate their risk management plan every single year,” says Matt St. Ledger, an Area Manager with Ag Resource Management based in Haubstadt, IN.  “Every year, new insurance products become available, and those need to be evaluated. Some years, new or different adjustments are allowed on your Actual Production History (APH) calculation. A farmer’s crop mix can change year over year. There’s a lot to be evaluated each year to make sure the risk management plan is going to cover the farming operation adequately.”

Before beginning the process of calculating risk management, it’s important to select the right experts to partner with, according to Billy Moore, President of Insurance at Ag Resource Management.

“In terms of risk management, the grower wants to avoid having multiple agents covering different areas of the operation,” he says. “It’s critical that their risk management plan evaluates and manages the risk in every part of their farming operation. That’s the way we approach our clients. Everything we do is aligned toward achieving those overarching goals.”

In addition to this alignment, farmers need to work with a risk management partner who will customize a risk management plan specifically to their farming operation’s needs. Ag Resource Management takes a unique, proactive approach to lending and risk management.

“A balance sheet is what has been,” says Moore. “Looking at your APH, your crop insurance policy, your planting intentions and any contracts you may have, that’s looking at what can be – it’s looking at the potential of a specific farmer’s operation. We lend money based upon that potential.”

Another thing that makes Ag Resource Management unique is the ag lending technology that it uses to evaluate a farm operation’s potential.

“We have the ability to see farm by farm, acre by acre, what the best potential for that farming operation is,” says St. Ledger. “The technology allows us to dive into deep detail on any specific farm, looking at the best potential crop mixes and risk management plan to produce the best potential profit for that operation. We know every farm has its own unique potential, and that’s what we gear our lending and risk management planning toward.”

Moore and St. Ledger laid out a step-by-step plan they follow with clients when planning for the upcoming crop year:

 

Step One: Get Your APH Adjustment Correct Now

“A lot of things have been added this year to the APH calculation, such as the quality loss option that will address some of those quality issues,” says Moore. “It allows the growers to be able to use their pre-adjusted yield calculation into their APH, and that’s going to be a big feature that’s going to benefit those who had quality issues.”

For example, new for the 2021 crop year, the Quality Loss Option (QL) allows exclusion in quality loss from an APH database in circumstances where a quality loss occurs. Get a fact sheet on the Quality Loss option at https://www.rma.usda.gov/en/Fact-Sheets/National-Fact-Sheets/Quality-Loss-Option.

For those whose losses came through production versus grain quality, there are other adjustments in the APH calculation that can be made.

In addition to adjusting the farm’s APH, Ag Resource Management will review other critical information such as the farm’s FSA-578 annual acreage report form, the operation’s budgets, projected input costs and other key factors.

Step Two: Analyze the Good and Bad of 2020

It’s always uplifting to recount the successes of each crop year. However, it’s even more critical to evaluate what didn’t go so well.

“You have to be willing to look at what went wrong as well as what went right,” says St. Ledger. “New revenue products will start coming out in December. That’s why it’s important to work with your risk management partner to have an analysis done of your farm operation, so you’ll be in the best position to evaluate these new products when they start rolling out.”

Step Three: Evaluate New Offerings

Step three, says Moore, is evaluating these new products. Are they necessary to cover any “risk gaps” in the operation and reduce exposure? This is another area where having a forward-looking, experienced risk management partner, like Ag Resource Management, is crucial.

“I tell every grower I sit down with that it’s my job to find where those exposures or risk gaps are,” says Moore. “We want to take out the minimum amount of insurance needed to put them into a position where they can pay their bills and go farm for another year. That’s our business – to help you keep that farming operation going year after year.”

For more information, contact your nearest Ag Resource Management area manager or visit armlend.com.

The rogue derecho storm that raged across the Midwest on August 10, 2020, caused more than $7.5 billion in damage – more than most hurricanes. The storm was the second-costliest U.S. disaster in 2020, impacting 37.7 million acres of farmland.

Where did your farm’s equity go? Over the last four to five years, the agriculture economy has stagnated, and commodity prices have dropped. We’ll explain why this has caused many farmers to lose equity and left them struggling to secure capital needed to keep farming.

Liquidity is working capital. Liquid funds include savings and other assets you can turn into cash quickly to help cover costs when an expense arises — either planned or unplanned. Your balance sheet also lists intermediate-term assets, such as equity built up in equipment, and longer-term assets represented by land or real estate equity.

Strong commodity prices allow farmers to buy or trade equipment on a regular basis to collect the tax deduction created by accelerated depreciation. As the ag economy slows, some farmers have to slow or stop that purchasing cycle, leaving them to manage high equipment payments without the benefit of the accelerated tax deduction. Furthermore, low commodity prices reduce the cash flow they count on to keep up with payments.

A weak economy also slows equipment sales, creating a drag on equipment value. This catches famers in a double-jeopardy situation as depreciation piles up. Thus, the equity in farm equipment begins to shrink — even while farmer stays current on the payments. This grim combination of circumstances makes it difficult for equipment to hold its value and negatively affects the farmer’s position in securing future deals.

From the standpoint of land, equity erosion can even affect farmers who built equity through many years of consistent payments or through inheritance. Losses in recent years have depleted many farmers’ short-term liquid assets. Banks watching those losses pile up may ask producers to rebalance their assets. Farmers can inject cash (liquidity) back into the operation by selling some land (which either reduces potential harvest volume or increases overhead through rental fees) or by refinancing their land to convert some equity into cash, which stretches their payments farther into the future.

Low commodity prices can even limit the ability of farmers possessing plenty of land equity to benefit from a refinance deal. When sitting down with a banker to work out cash flow, what remains to produce the coming year’s crop after overhead, land and equipment payments may not add up. There simply may not be room to increase land payments by $10,000 or $20,000 in a weak ag market.

 

ARM’s Equity Solution

Ag Resource Management (ARM) offers a solution to farmers with limited equity. ARM doesn’t look at equity like a traditional bank does, because ARM uses this season’s growing crop, crop insurance and government payments as collateral.

If a bank determines they can’t renew a farmer’s loan, the farmer can work with ARM to finance the entire loan or just a portion. Usually the bank will handle traditional term lending, and ARM will create a plan for the farm’s operating loan. ARM can step in when there isn’t enough equity for a traditional banker to approve a loan and provide the needed liquidity for a farmer, based on the projected crop. This patnership allows the farmer to continue farming.

ARM also consults with the farmer to help identify where issues may exist on the farm. The process of sitting down together and outlining a budget helps determine exactly where the money is going and where the farm can tighten its budget to get the most ROI out of the loan. For example, family living expenses may still be on the high end compared to where commodity prices currently sit. When expenses are detailed, it’s often easy to find areas to trim back.

Rent is another example of a line item that can often be reduced. It’s not an easy discussion, but once an analysis is complete on a field-by-field basis and the expenses are broken down, it’s fairly easy to see where rent is too high to create a profitable scenario. A farm’s highest producing fields aren’t necessarily the most profitable. Often, the highest producing fields are also the ones with the highest rent. When farming a particular field is not profitable, a farmer must decide to either renegotiate the rent or give up the land. Giving up hard-won land contracts can be very difficult for a farmer, but sometimes it’s the best choice for the long term.

ARM also creates a cashflow analysis, which includes the crop budget. Looking at input costs and actual production history (APH), ARM works with the farmer to determine where to spend the loan dollars for the best possible return — sometimes optimizing profit means accepting a smaller yield and benefitting from reduced seed and input costs.

Lastly, ARM takes a holistic approach, looking beyond just that season’s crop to help address issues that affect the entire operation. This perspective helps farmers focus their resources throughout the year, allowing them to operate much more efficiently and reach their long-term goals.

Partnering with Farmers

ARM wants to partner with the farmer, the bank, distributors and other input suppliers because the best approach gets everyone working together in the best interest of the farmer. Along with the loan, ARM offers farmers budget and risk-management advice. Having a deep understanding of crop insurance, they can guide a farmer through those discussions and decisions, as well.

The farmer receives a monthly loan statement, and at the end of the loan, ARM collects harvest information and conducts a reconciliation, showing the end results of the season. This can sometimes lead to finding a revenue insurance claim because of a shortfall. Or it might result in finding another area of budget leakage that can be corrected for the next year. Reconciliation helps the farmer develop a strong understanding of and confidence about where the dollars were spent and how that affected total production and return on investment.

ARM provides the support you need to get the most out of your farm. Struggling operations as well as those simply looking to tighten up their business practices can benefit from the ARM crop-as-collateral lending model and the guidance its experienced staff can provide. ARM does ag finance differently. Is it time your farm did, too?

Contact Ag Resource Management to learn more about finance options for your farm.

AG RETAILERS CAN NOW OFFER ALTERNATIVE FINANCE SOLUTIONS

A persistent credit crunch has entangled the American agricultural community, despite the opening of more markets than ever before. That probably isn’t front-page news. For participants in agriculture, the real news lies in practical paths for navigating the economic challenges faced by growers and the businesses that supply them.

HOW WE GOT HERE

A little more than 15 years ago, news of world population growth and a rapidly growing Chinese middle class wanting to increase the quality of their diet put a focus on U.S. agriculture’s responsibility and opportunity to help feed the world. An invigorated industry push began to improve genetics to increase yields. Additionally, the Renewable Fuels Act started consuming corn which increased demand, and commodity prices and margins soared.

But the upturn didn’t last long. Commodity prices and margins began to tighten. Then, consolidation of farms, manufacturers and suppliers began to shrink the number of players in the agriculture industry. This sequence of industry events caused available credit to drain out of the market.

HAS EQUITY LEFT THE ROOM?

As the ag retail industry began to consolidate, larger companies purchased many of the smaller family-owned businesses. Many of these smaller retailers had established stable customer bases in their communities where they felt comfortable extending credit. Once those businesses became extensions of major national distributors, that capital began disappearing. They had to follow new policies that determined credit limits, and credit was pulled away from the market.

Over the past five to seven years, there’s been no improvement in commodity prices. Some financial institutions still extend credit to farmers and rely on equipment and land equity as collateral. However, much of that equity has been used up. Thus, a real credit crunch exists in the marketplace for farmers who must make arrangements for seasonal capital to cover their annual crop production costs. It’s given rise to alternative financing and paved a new way to bring capital to production agriculture. 

ALTERNATIVE FINANCE OFFERS SOLUTIONS

Seeing these events roll out, Ag Resource Management (ARM) developed the Ag Input Loan to help bring equity back to farmers who need it through a partnership with ag retailers and ag input distributors. Retailers have long-standing relationships with their customers, but they may be concerned about the credit quality or their cashflow and aren’t able to carry the farmer’s unsecured trade credit for the season. ARM can partner with the distributor, then take the distributor’s input sales and convert that to a secured loan transaction. This makes it part of an overall budget that ARM manages and monitors throughout the growing season.

The retailer can then secure the sale of inputs to the long-term farmer-client and wait until the crop is sold for payment. They benefit from not having to carry accounts receivable on an unsecured trade credit status. They’ve now become part of a secured loan transaction because of their partnership with ARM.

As a forward-looking capital provider, ARM does not rely on land or equipment equity to make a loan decision. Rather, the loan decision is based on the farm’s capacity to generate an income stream from a growing crop. To do that, ARM uses a proprietary financial model to apply appropriate discounts, which generates a risk-adjusted crop loan that syncs with the farm’s budget. In the event of a crop failure, the revenue stream is protected with a well-structured crop insurance policy that maximizes farm revenue.

Once established, ARM sets up a systematic process to help manage risk on the loan by maintaining a close working relationship with the farmer. For example, ARM helps the farmer acquire the proper amount of insurance, spend capital on the inputs required to realize the highest potential yield and pay the loan when the crop is harvested. This in-depth involvement in the operation increases the chance of success.

Offering the Ag Input Loan benefits the retailer in two ways: He maintains his long-term relationship with that farmer, and he can offer a credit product that allows him to compete with other ag retailers who are trying to sell to the same farmer. However, the retailer has the advantage of shared risk with ARM, working under a well-documented credit structure.

ARM may also be able to help farmers who have filed bankruptcy.  ARM does this under special provisions and protection provided by the bankruptcy court.

 “Ag Resource Management pioneered the concept of monetizing crop revenue streams. By combining the math and science of determining both yield and price market values and their relative insurance values, ARM can reliably predict a farm’s potential revenue stream.” -Leroy Startz, Director of Market Channel Development at Ag Resource Management

 

INTEGRATING NEW SUPPORT TOOLS

ARM is developing a Partner Portal that will allow retailers and distributors to monitor ARM accounts in real-time through an online dashboard. Retailers will be able to view every farmer loan they participate in and create monthly loan reports. ARM also offers a Master Program Agreement to its retail and distributor partners. The agreement serves as a roadmap on how ARM and its partners do business together throughout the season, detailing the responsibilities and obligations of both parties. If the season requires additional sales and seasonal credit to the producer, it provides a process to communicate with one another about those needs.  This communication ensures that changes sync up with a revised and jointly approved crop budget.

ALL-IN LOAN OPTION

Another loan tool available from ARM is the All-In loan, which it sells directly to the producer. ARM can provide the working capital a producer needs to produce a crop, make land and equipment payments and cover day-to-day operation and living expenses. ARM provides an option so distributors and retailers can take care of their customers, whether they purchase their inputs from them that year or not.

To learn more, contact your nearest Area Manager or visit us at ARMLEND.COM

PARTNERING WITH COMMUNITY BANKS

Community bankers know the challenges presented by struggling farming operations. Look to Ag Resource Management (ARM) as a partner for creating strategies that manage risk for you and your farmer customers.

A troubled loan puts a bank in a precarious position: It must either refuse a request for additional funding or extend more capital into a loan that’s already troubled. Neither scenario holds much appeal.

ARM can help banks address efficiency and performance by managing some of the risk in their ag-loan portfolio. ARM can offer alternative financing that allows farmers to plant their crops, move forward with the season and continue generating income — and the bank won’t have to advance further capital.

Banks have historically made operating loans based on real estate assets, but many farmers now own only a small piece of land and lease most of their acres. Because ARM relies on this season’s crop for collateral, ARM can take on the operating loan while banks continue to manage equipment and real estate term debt.

“Sometimes bankers need somebody to stand with them in order to provide the farmer an operating loan to farm that year — that’s where ARM comes in.” -Gerald Kruger, ARM market leader

BENEFITS FOR COMMUNITY BANKS

Partnering with ARM offers community banks many benefits:

    • Improve the balance sheet and financial performance.
    • Maintain relationships using a sustainable plan and without increasing commitment in a regulatory environment that may advise exiting the relationship.
    • Continue existing relationships in a tough landscape for finding new customers.
    • Reduce reputational risk. Offering a path forward shows that a bank wants to offer value to and help its farmers, thereby avoiding the appearance of marginalizing its farming client base.

ARM assistance creates a path forward for a troubled farming operation. Often, these clients just need to get through a rough spot. ARM can bridge the gap and give the farmer time, while helping the bank preserve the long-term relationship with that customer.

If the path forward for a farming operation is bleak, then ARM’s involvement for a year can offer everyone time to plan an orderly liquidation. The farmer and the bank usually come out better given the extra time. 

HOW ARM WORKS WITH FARMERS

Every farm situation is different, and many financial challenges arise through no fault of the farmer. Listening to a farmer’s pressure points allows ARM to adapt and fit that farmer’s situation. Next, attention shifts to the farm’s balance sheet and cashflow. ARM needs to understand the leverage position on the balance sheet to attract alternative financing solutions. Then it becomes possible to secure a line of credit for the season.

After identifying a financing solution, ARM sets up a systematic process to help manage risk. For example, ARM helps the farmer acquire the proper amount of crop insurance, spend capital on the inputs required to realize the highest potential yield and pay the loan when the crop is harvested. This in-depth involvement in the operation increases the chance of success.

ARM also serves as an advisor to help farmers right-size their balance sheets. This might include recommending the sale of a parcel of land or a piece of equipment. These changes can put the farmer in a better position to secure financing through the bank in the following year.

“We’re not trying to compete with community banks. We can partner with the bank to help them continue working with a farm client when the financial situation or regulatory pressures might make that difficult.” -Jason Brown, ARM market leader

To learn more, contact your nearest Area Manager o visit us at ARMLEND.COM