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Rabobank’s ways to reduce risk

DANIEL LOOKER 03/04/2011 @ 3:06pm Business Editor

Farm debt is rising along with land values and a volatile commodities market, but Rabo Agrifinance has several tools to help its farm borrowers withstand any downturns.

That’s the view from the Commodity Classic  in Tampa, Florida, where the lender’s regional vice president from Marshall, Minnesota, Jeff Bly, described ways to batten the hatches for future financial storms.

The bank, part of the Dutch cooperative that’s a triple-A rated global lender in agriculture, is in its second year of offering farmers over-the-counter derivatives to hedge more than one year in advance.

Called a commodity swap program, it’s an easier way to hedge than using futures.  Bly said the lender offers a forward price with a transparent cost.  

For example, if a producer wants to lock in December 2012 corn when futures are $5 a bushel,  Rabobank’s swap might offer $4.95, he said.

“They don’t have to worry about margin calls. We do it for them,” he told Agriculture.com Friday. Rabobank acquires the futures contracts to back up the swap.

Of course, it’s best to make those sales part of a margin.

“If you’re going to price corn two years out, you’d better have locked in fertilizer and know what your rent’s going to be,” Bly said.

The lender is also working with borrowers to do stress tests, analyzing loan repayment capacity if corn prices fall to $3.50 a bushel, for example.

Not all of Rabobank’s borrowers that Bly works with in Minnesota,  North Dakota and South Dakota are expanding, he said.

“Some guys are just paying down debt,” he said, especially if they’re older farmers nearing retirement.

Those who are expanding with land are increasing debt but there is a difference from the debt expansion during the 1970s.

“Working capital levels are a lot higher,” Bly said. “They have a lot more of what I call short-term dry powder to withstand some shocks.”

It ranges from 20% to 40% of anticipated expenses, he said. That’s up a lot from just five years ago, when the minimum standard was 10% to 20%.

In spite of all the uncertainty, the mood of his borrowers remains cautiously optimistic, he said.

“They see a lot of potential out there but they’re very aware of the volatility and the risk,” he said.

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