Put cash advance to work in your marketing plan
In the business world, different strategies often create synergies where one plus one can equal three.
Of course, the same goes for agriculture. There are many agronomic strategies that are used together, from advanced seed genetics to crop rotation and variable rate fertilizer applications, to subsurface drainage or irrigation pivots and the list goes on. again and again.
And because we also have many tools at our disposal in the financial markets, there are many strategies that can be used together to help create a more diverse and robust farm operation.
For example, base contracts, deferred delivery contracts, and options and futures strategies all work with your storage capacity. Together, they can help you manage both your price and production risk while fine-tuning your marketing plan throughout the year.
Likewise, when it comes to financing, you have plenty of alternatives ranging from short term borrowing to long term borrowing, variable rates or fixed mortgages, and equipment rentals, all from a variety of different lenders as well as creative crop sharing agreements and unique land lease agreements. All of these together – and possibly more – help shape your farm’s overall financial strategy. But you can always look for more synergies so that one plus one can equal three.
Two specific areas that more and more farmers are adopting are hedging strategies with options and futures as well as available cash advance programs. However, I am often surprised at how many farmers do not use options to maximize their marketing efforts or take advantage of some of the incredibly low rates and flexibility offered by cash advance programs.
Over the years Dave Gallant, Director of Finance and Operations at the Canadian Canola Growers Association (CCGA) and I have discussed at length how our two financial tools can work together; how one plus one can equal three and how producers can benefit from all the financial tools at their disposal.
The CCGA has been helping western Canadian farmers manage their seasonal cash flow needs for 35 years by providing them with access to cash advances for more than 50 products, including crops, livestock and even honey. Gallant says farmers can use an Advance Payments Program (APP) cash advance to access cash flow on their inventory, while still giving them the time they need to find the right place in the market to maximize returns. price.
He says the key is that there are no limits to how you can put a lead to work on your farm. It can be used to cover seasonal operating expenses, pre-purchase next year’s inputs, upgrade or maintain farm equipment or structures, or expand your business by investing in purchases. fixed assets. The APP gives you the flexibility to plan commodity sales and optimize the prices you receive, while reducing borrowing costs with interest-free, interest-bearing advances below prime.
Basically, farmers can apply in the fall or at any time of the year, and eligible applicants can receive up to $ 1 million, of which $ 100,000 is interest free.
The CCGA rate on the interest bearing portion of the 2021 PPA is the prime rate minus 0.75%. This means that the low weighted interest rate on a million dollar advance can save your business $ 10,000 to $ 20,000 per year compared to the same loan value taken at commercial lender rates. Farmers have access to cash advances for up to 18 months for crops, small livestock and honey, and up to 24 months for cattle and bison.
Advances are repaid as the merchandise on which the advance is issued is sold, so the repayment schedule depends on when you sell your merchandise. These low interest rates lower your production costs, allowing you to stretch your own money further. The additional farm cash flow also gives you more time to execute your grain marketing plan. You can sell when the time and price is most convenient for you. Ultimately, it’s this match between loan repayments and commodity sales that works well with options and term hedges. Essentially, you can sync your covers to coincide with when you want to make physical sales and also pay off the advance.
Ultimately, the cash advance program and hedging strategies are useful financial tools in and of themselves to improve your marketing decisions. Together, these financial tools provide greater flexibility and adaptability to your marketing plan, especially if we have drought conditions again next year.