It’s often said that farmers are land rich and cash poor. For earlier generations, this was especially true, with most farmers buying land and other assets to scale their operations and then acquiring operating loans or other assets based on the equity they’ve accumulated or the amount of owned land.
Today that isn’t always the case. With landowners often deciding to keep owned land and renting it out as an income source, many younger farmers and large farming operations are forced to rent farm ground to grow their businesses.
Seventy-five percent of very large farms—farms with more than 2,000 acres—rent land, and that rented land accounts for 66% of the land they farm. Similarly, 87% of large farms—farms with between 1,000 and 1,999 acres—rent land, and that rented land accounts for 50% of the land they operate.
The Better Way to Borrow Farm Operating Capital isn’t Based on the Balance Sheet Alone
This gradual move from owned ground to rented ground has led to an expanding lending gap for some of the country’s largest, most productive farms and young farmers. The existing lender-borrow model relies primarily on the amount of land or hard assets owned to extend credit.
But what if there was a better way to borrow the cash—a way that didn’t focus primarily on the balance sheet? That’s where crop production-based loans—like those offered by FarmOp Capital—come in. For farmers who mainly rent farm ground, production-based loans allow additional flexibility and help close the lending gap. Crop production-based loans also place more value on farmers’ cropping plans, grain marketing plans and crop insurance— on the crop to be grown and sold than hard assets alone.
Two Important Risk Management Strategies When Borrowing Farm Operating Capital: Grain Marketing and Crop Insurance
Farmers who work with FarmOp Capital continue to sit in the driver’s seat, choosing their level of crop insurance as well as a commodity marketing plan. Farmers continue to work with the crop insurance agent of their choice and may create a marketing plan with a FarmOp Capital-approved trading advisor. Better yet, some costs associated with crop insurance and marketing strategies may even be included in farmers’ loans. With these risk management strategies in place, they serve as a major portion of the collateral for operating loans.
With these risk management strategies in place, FarmOp Capital looks for a track record of efficient and profitable crop production when making farm operating loan decisions. This includes lending up to 100% of requested loan amounts and renewing loans early in the fall so that farmers can take advantage of early discounts offered by input suppliers and seed dealers.
For everything that has stayed the same in farming, much has changed—especially when it comes to lending. For expansion-minded farmers or operations ready to transition to the next generation, crop production-based loans from FarmOp Capital could offer the flexibility and cash flow needed to scale the farm business operation next year.
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