Modern farmers need modern finance

Nontraditional ag lenders offer alternatives.

With 4,256 career hits, Pete Rose is one of the greatest baseball players of all time. Yet, his success in the batter’s box wasn’t achieved by amassing towering hits deep into the upper deck but rather through singles – and a lot of them. Hitting a single – or even a double – is an important part of the overall game. The same is true in agriculture.

Throughout his 20-year farming career, Jonathan Auten has proven he can produce a crop. Yet, separating himself when profit margins are tight means he needs to not only fill a bin but also take advantage of opportunities in the market while managing his risk.

When commodity and cattle prices were high, the Ayr, Nebraska, farmer was knocking it out of the park.

“I was doing well, and I was able to pay my debt back,” says Auten, who grows corn and soybeans and raises livestock.

Then the farm economy turned.

“It’s no secret agriculture has been in a trough for about six years now, and a farmer’s balance sheet is reflecting that,” says Billy Moore, president of insurance and field operations at Ag Resource Management.

The growers driving in the runs to stay profitable were the ones hitting singles and doubles vs. hitting home runs. Yet, even getting on base became difficult for Auten.

Shopping for funding options

Although his loan officer at the time – who had financed Auten’s operating loan for 10 years – didn’t say he wouldn’t renew it, the traditional lender did suggest Auten look at other funding options.

“I went from thinking everything was good to all of a sudden feeling lost,” Auten says. “I wasn’t sure they would be there in another tough year.”

As he explored new ways to finance his operation, Auten discovered Ag Resource Management (ARM). Founded in 2009, the nontraditional lender provides operating capital tied to a specific crop budget. Since it lends against future crop value, financing doesn’t rely on land or equipment liens. Rather, it uses crop insurance to protect the investment.

“A bank underwrites on a balance sheet and looks at what has been,” Moore says. “We look at what can be and offer two types of loans.”

One product offers an all-in approach where the entire loan is funded in-house by ARM. The second is an ag input loan in which ARM partners with ag input providers to bring third-party credit to the financial package it offers a farmer.

Both loans are managed by ARM’s proprietary underwriting platform, which generates documents to help evaluate the true cost of growing a crop. While the information gives farmers greater insight on perfor- mance, it can also lead to some hard conversations.

“They may have to let go of a piece of leased ground that isn’t profitable or consider planting a different crop,” Moore says.

Auten admits he is more vigilant than he ever has been before on how the budget works.

“As long as I pay close attention to my expenses and stick to the budget my re- gional manager, Jay Landell, and I create, it’s a pretty fool- proof system,” says Auten, who has been with ARM for three years. “The fact that Jay and I look at the budget together has helped me more than anything.”

Many of these collat- eral-based lenders, says Cornell University assistant professor Jennifer Ifft, report that they are making a significant investment in getting to know their bor- rowers and monitoring farm operations and collateral.

“From the very beginning, I’ve felt like Jay is in this with me no matter how many acres I have,” Auten says.

Not lenders of last resort

While there is a perception that companies like ARM are lenders of last resort, Ifft says it may be more accurate to define them as specialized ag lenders who are filling a gap between traditional farm and nonfarm lenders, and who happen to charge a higher interest rate.

“However, paying a higher rate is not sustainable over the long term, so there should be a plan to graduate back to standard lending products within a few years,” Ifft says.

Auten says even though ARM does charge him more in interest, the lender has also helped him take advantage of third-party financing. “My blended interest rate is actually less than what I’ve paid in the past with a traditional lender,” he says.

It’s also important for a borrower to understand that these types of loans may come with other fees. Ifft says, “You’ll want to look closely at the terms. What is at risk if you can’t repay? What is the penalty if a payment is late?”

As an increasingly diverse number of lenders look to serve ag’s financial needs, you need to remember that what it all comes back to is having a clear understanding of your overall financial picture. After all, if you don’t know your cost of production, how do you market a crop with confidence?

Now that Auten knows exactly where he’s at financially and is better managing his risk, he’s hitting singles – and even a few doubles.

“ARM has truly helped me understand the value of every penny,” he says. “It’s getting me through these hard times.”

Higher level of buying power

Even though financial stress may be the reason for some farmers to turn to a nontraditional lender, conventional lending products at competitive rates convinced Jason Lattus to switch. Working with FarmOp Capital, the western Kentucky farmer is able to take advantage of a higher level of buying power.

“I can borrow 100% of my operating needs,” says Lattus, who grows corn, soybeans, and wheat. “Having the ability to use that extra capital has really benefited my operation.”

Not only does this give him more flexibility when negotiating and prepaying his inputs, but it also allows Lattus to work within his marketing plan to sell a crop when he needs to and store it when he doesn’t.

“I have been able to strategically lock in great price levels, and I can sleep at night knowing I have those hedges in place,” Lattus says. “If you’re looking to hit a home run rather than a base hit in today’s volatile market, you’re a lot more likely to sit on the bench. By trying my best to get on base, I can at least keep playing.”

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