Episode 65: Three Types of Loans for Your Grain Operation with Josh McBride
As a grain farmer, you need financing options for your operation’s expenses, like the upfront costs of seed and fertilizer. In this episode of AgCredit Said It, host Phil Young talks with AgCredit’s Chief Credit Officer, Josh McBride, about the types of loan programs available for grain producers and the benefits of each.
Here’s a glimpse at the three lending solutions they discuss:
Grain Inventory Loan
What it is - A grain inventory loan is designed to assist farmers with their cash flow needs by allowing them to borrow money against their existing grain inventory. For example, you might opt for a grain inventory loan to maintain cash flow while waiting for a better market price for your grain. You could then use this loan to cover costs of inputs for the next planting season while holding onto your current grain.
Advantages - Grain inventory loans enable you to purchase inputs for the next planting season while still holding onto grain from the previous year. This gives you the flexibility to wait for a more favorable market price. By deferring grain sales, grain inventory loans can provide tax benefits, reducing your taxable income in a given year. These loans could also help you take advantage of supplier discounts for early purchases of inputs for the next season.
Revolving Line of Credit
What it is - A revolving line of credit is typically used for managing the operational expenses of a farm. It operates on a one to three-year term, allowing you to borrow money as needed for purchasing inputs or covering other expenses. For instance, as you sell grain, generating income, the borrowed amount is repaid, making those funds available again for future use.
Advantages - A revolving line of credit allows you to access funds as needed and manage cash flow fluctuations throughout the year. Additionally, it can be integrated into a grain inventory loan when the credit line is maxed out (usually at year-end if you haven’t sold any grain yet) using unsold grain as collateral.
Ohio Ag-LINK Loan
What it is - Offered by the state of Ohio’s Treasurer’s Office, the Ohio Ag-LINK loan assists agricultural producers, agricultural businesses, and cooperatives with financing their operations. Though the program has been in existence for over 30 years, it has become increasingly popular in recent years due to rising rates. The Ohio Ag-LINK loan program allows borrowers to receive up to a 3% rate reduction on their operating loan rates.
Advantages - The Ohio Ag-LINK loan program allows you to borrow up to $500,000 at a fixed interest rate for a full year, helping to protect you from fluctuations in the interest rate market. In 2023, AgCredit secured more than 1,500 Ag-LINK loans, amounting to approximately $275 million in total funding.
Tune in to the full episode for a more in-depth discussion on each of these loans. If you’re looking to finance your inputs for next year’s crop expenses, consider discussing your options with one of AgCredit’s knowledgeable account officers here. We’re here to support your farm’s success!
Here’s a glance at this episode:
- [01:37] Josh explains what a grain inventory loan is.
- [03:27] Josh outlines the three main benefits of grain inventory loans.
- [04:47] Josh describes what a revolving line of credit is and how a grain inventory loan can supplement this line of credit type.
- [06:16] Josh explains the amount a borrower can receive from a grain inventory loan.
- [07:49] Josh explains what Ohio Ag-LINK loans offer ag producers and ag-related businesses.
- [09:49] Josh explains how Ag-LINK loans allow lenders like AgCredit to support borrowers by offering interest savings without fees.
- [12:26] For input financing, Josh explains how it’s beneficial for borrowers to finance through AgCredit.
- [14:13] Josh leaves by emphasizing that AgCredit’s lending model is dedicated to supporting farmers and their success.
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- Transcription
Voiceover (00:08):
Welcome to AgCredit Said It. In each episode, our hosts sit down with experts from all parts of the agriculture industry to bring you insights and must-have information on all things from farming to finances and everything in between.
Phil Young (00:28):
Welcome back to another episode of AgCredit Said It. I'm Phil Young, I'll be your host today. Today, we're talking with Josh McBride. He's our Chief Credit Officer here at AgCredit, and we're talking about grain inventory loans, Ohio Ag-LINK loans, and the advantages of borrowing with AgCredit. So welcome, Josh.
Josh McBride (00:45):
Thanks, Phil. Glad to be back. I think it's been a couple of years since my first appearance on the podcast, so excited to be here again.
Phil Young (00:52):
Yeah, welcome back. You're a returner, so yeah, I'll stamp your punch card like I do with Brian and others that have come back, so.
Josh McBride (01:00):
All right, that's good. Is it like, three appearances, you get something free, or something like that?
Phil Young (01:04):
Yeah, it's a big secret, though, so you don't know what you get.
Josh McBride (01:06):
Yeah, all right.
Phil Young (01:07):
But it keeps people coming back, so.
Josh McBride (01:09):
Yeah, that works.
Phil Young (01:10):
Yeah, AgCredit obviously specializes in loans for those in agriculture. Because of that, we have a variety of loan types that we can help with farming operations – to help your farming operations succeed. One of those types is called a grain inventory loan, and Josh, we had you on to share what that is. It has kind of an unusual name, so some guys maybe don't know what that is. So can you walk us through what a grain inventory loan is and maybe why someone would take it out?
Josh McBride (01:37):
Yes, sure, Phil. So a grain inventory loan is a loan program to help with the borrowers' cash flow needs. Now, years ago, guys would harvest their corn and beans in the fall, take them right to the elevator, get all that income, and then have money in their accounts to pay for inputs for the next year. As time went by, people improved their marketing plans, which is a good thing. But in doing so, a lot of times guys are now holding grain all the way to the following summer, sometimes longer.
(02:09):
So when you do that, that creates a cash flow crunch because you're financing all the previous year's crop while not selling the grain, and then you're trying to buy inputs for the following year. So that would be great if most guys had enough working capital that they could cover it themselves, but that's not the case. So what grain inventory loans do is allow them to borrow against existing inventory that's in the bins or sitting with the elevator. It can be either marketed or non-marketed. And we have different rates for each of those, but it allows borrowers to basically get enough cash flow to buy their inputs for the following year while still holding grain from the previous year.
Phil Young (02:53):
Yeah. And I think a big reason, maybe this came about too. You mentioned marketing plans, people just developing a marketing plan and kind of holding grain, but just I think over the decades we've just seen, obviously, a lot more people being able to store their own crop so they can actually take advantage and have grain facilities that they could store their crop and take advantage of holding it and to be able to market it at a later time. And I think a lot of guys want to take advantage of maybe the tax benefits too. Maybe they don't want to take that income that year, right? They want to hold it for tax reasons.
Josh McBride (03:27):
Yeah. So that's another good reason. The first point, like I mentioned, is that they hold grain longer to try to carry the market and the grain markets, which makes sense. We're going to pick up an extra 30, 40 cents by holding it for three, four, five, even six months. Makes sense. And then, to your point, a lot of guys, it's the typical farmer. They want to limit their income to as little as possible in the current year, so they want to defer grain to the following year. And the third point, another thing we want to mention, is pre-paying expenses. It seems like more and more input suppliers are offering larger discounts before year-end now. So if guys buy their inputs for the following year earlier and earlier, they get a bigger discount, which helps them in the long run. So it's kind of the three main benefits of inventory loans.
Phil Young (04:16):
Yeah. You're trying to shove two crop years into a short amount of time, is what it feels like. Yeah.
Josh McBride (04:21):
Yes. You're trying to finance two crop years at once, basically.
Phil Young (04:23):
Exactly. Yeah. So kind of walk through... And I've had a lot of conversations with people that maybe don't have a revolving line of credit, and so this kind of marries well with a revolving line of credit; that's the whole point of doing a grain inventory loan. What is a revolving line of credit, and how is that different from a grain inventory loan?
Josh McBride (04:47):
Yeah, so a revolving line of credit is, it's a line of credit. It's usually outstanding for a year, one to three-year terms, and that's the main operating line, so they borrow out as they need to pay for inputs or expenses on the farm, and then as they sell grain or get income, they'll pay it down and then pull it back out for future stuff. So that's kind of our standard, go-to line of credit for guys to finance their crop operations. Now, grain inventory loans fit into that, usually at year-end if they haven't sold their grain yet. A lot of times, their operating lines are maxed out, so they're out. But come to us and say, "Hey, this is maxed out, but we have all these bushels on hand and we want to start pre-paying expenses for the following year. What can we do?" Well, in that situation, we'll say, "We can finance those bushels in the bin while still being secured on the operating line and help you with that cash flow crunch there."
Phil Young (05:49):
Yeah, so you've got your operating line of credit, then you have a grain inventory loan if you get in a pinch and want to hold grain. And then we, AgCredit, partner with the state of Ohio on something called the Ohio Ag-LINK Loan Program. And so we are actually the number one user in the state of Ohio for the Ag-LINK Loan Program. And Josh, one more question I had was on grain inventory loans is, how much do you get? How much of a dollar amount can a borrower ask for when they are seeking a grain inventory loan?
Josh McBride (06:16):
Yes, good question, Phil. So typically, every fall, about September, we'll set our advance rates on inventory loans. Last year, we lent up to $3.25 on corn and $9.25 on beans. This year, unfortunately, crop prices are down from last year, so probably a little bit less than that, but basically, we'll then lend that amount per bushel. So if you have a hundred thousand bushels of corn in the bins and you want to max it out, we can lend you $325,000 as an example from last year. And the same thing goes with beans. The same rates apply there, so the same calculations.
Phil Young (06:53):
Gotcha. And it doesn't matter if you store the crop on your farm or at the elevator, right? It doesn't matter, right?
Josh McBride (07:00):
That's correct. As long as you can vouch that you have the crop somewhere stored, we lend either on the contracted price if you have some contracted or just on an uncontracted price, which is obviously a little bit lower, usually than your contracted bushels.
Phil Young (07:17):
Nice. Okay, good. Any other thoughts on grain inventory loans or anything that maybe we didn't share?
Josh McBride (07:24):
No, I think that sums it up.
Phil Young (07:25):
Okay, good. And the other thing we wanted to chat about was Ag-LINK loans, and so we actually, AgCredit, partner with the state of Ohio on something called the Ohio Ag-LINK Loan. We've been doing this for a few years now. The program's been out there for a while, but we were the, I think, the number one user, but can you talk about what that is and how that maybe trickles down to borrowers' lines of credit here at AgCredit?
Josh McBride (07:49):
Yeah, so Ag-LINK loans, like you mentioned, it's a program offered by the state of Ohio's Treasurer's Office, and they've had this program for over 30 years now. It seems to have become a lot more popular here in the last few years as rates have risen. But the basics of it is they're trying to help ag producers finance their operations, and they understand as rates go higher, that it's more and more difficult for producers to be able to afford that financing of their operation. So this is one way that they can show their constituents in Ohio that they're trying to help the farmers. So what it is: it's available for all farm operators, ag businesses, and co-ops, and right from their website, it says up to a 3% rate reduction on your operating loan rate. So to be eligible for the Ag-LINK loans, the state requires the business to be either a for-profit, ag-related business or a cooperative.
(08:48):
You also must have headquarters in Ohio and have 51% of your operations in Ohio, and the loan must obviously be used exclusively for ag purposes. So once you're through the eligibility part, the terms of the loan are… what they'll offer is up to a $500,000 loan, and it's for a year term. So what we're able to do through that program is say you have a line of credit for $500,000, and all lines of credit typically are set up on prime rates, so variable. So you're subject to the fluctuations in the interest rate market. What this program will allow us to do is fix your operating loan rate for the full 12 months, typically at a pretty good discount as a state set up to 3% here in the last year, year and a half. It's been close to 3% for most of our borrowers. So that's a pretty good savings when you figure that out over a $500,000 loan.
Phil Young (09:42):
Yeah, big time. And I guess, are all lenders doing this, Josh, or who does this?
Josh McBride (09:49):
So all lenders in the state of Ohio are eligible to utilize the program. Not all lenders are doing it. Like you said, we have been the largest user in the state in the last couple of years. Last year, for example, we did over 1,500 Ag-LINK loans for approximately $275 million. So we're really trying to help our borrowers as much as we can, save as much on their interest costs as possible. We're in the ag business; we're a cooperative. So we always say that we're successful when our members are successful. If we can utilize these types of programs whenever we can to help our borrowers save money, we're going to do it.
Phil Young (10:29):
Yeah. When I talk to people about this, I guess, you kind of develop a pro-con list with somebody sometimes when you talk about programs and different things they can do. There's really no con or negative side to doing this, right? There's no fees, there's nothing, right?
Josh McBride (10:47):
Yeah. I mean, the old saying is, "There's no such thing as a free lunch," but in this case, that's true. They have to sign one piece of paper; they can even do DocuSign to make it really easy. But yeah, other than that, there is nothing else they have to do. There are no fees. Basically, they sign a piece of paper, and it lowers their rate for a year, and it fixes the rate. So if rates go up 2% in the next year, they're locked in at the low rate. So yeah, it's one of the very few things in life that there is really no con.
Phil Young (11:15):
AgCredit takes care of the application, so there's no upfront paperwork for the borrower, there are no fees. And to be honest with you, AgCredit, I'm always upfront when I talk to people; AgCredit doesn't really make money on this. This is not something that AgCredit makes money on to do this program. We don't get anything from it to my knowledge. And so, yeah, go ahead, Josh.
Josh McBride (11:38):
Yeah, that's a good point. That's part of the actual program; the state will say that the lender is not to make a profit off this program. So yeah, we make nothing. It is a lot of work on our end, but like I said, we're in it for our members, so we're willing to do whatever it takes to help them as much as we can.
Phil Young (11:54):
Yeah, inflation's a big deal. And so yeah, prices are up on everything, and so just any way we're able to kind of help, like Josh said, make farm operations more successful and cut those costs. So yeah, just a great program all around. Along the lines of Ag-LINK loans, and operating loans, something that guys often do is input financing. So they'll maybe go with a dealer where they get their chemicals, fertilizer, and seed; they'll do input financing there. Can you talk a little bit about why maybe it's beneficial to do that with AgCredit versus maybe doing it with the dealer?
Josh McBride (12:26):
Yeah, you're right. And you'll see a lot of dealers offer low interest rates. Typically, the more you purchase with them, the lower rate you can get as far as your input suppliers. So we see a lot of that. But one of the things maybe to think about as you're trying to finance your operation is if you have to buy it all from one place, typically you may not be getting the best deal upfront on the inputs. You may get a little cut on the rate on the backend, but if you could spread your purchases around and maybe try to work with a few different suppliers, you could possibly get better upfront pricing and then finance with AgCredit, and we allow that flexibility obviously. If you have an operating loan with us, we don't dictate who you have to buy your supplies from. So if you combine that with our cooperative model, our patronage refund history, and just the overall value we provide, we think we offer a lot of great benefits for producers.
Phil Young (13:25):
Yeah, big time. And one thing we didn't touch on with this is you still get patronage back on that loan, right? So you get a lower rate and patronage back. Correct?
Josh McBride (13:35):
Yeah, that's a good point. I can't believe I forgot that, Phil.
Phil Young (13:37):
Yeah.
Josh McBride (13:38):
That's the basis of our model there.
Phil Young (13:40):
Yeah, right. Yeah.
Josh McBride (13:42):
You're right. So you get a lower rate upfront, and you still get patronage back. So it's a win-win.
Phil Young (13:46):
So yeah, if you're interested in doing any type of, if you don't have an operating loan and you're looking to help finance those inputs and help the next crop year, definitely talk to an account officer. If you're with another lender and want to find out more about how AgCredit can help you with your financing or how the LINK loan can help save you money, just give us a call. We'd love to help you out. But any other thoughts, Josh, as we end the episode here?
Josh McBride (14:13):
One last thought is if you're looking to who to work with as far as your input supply, one thing to keep in mind, is our business model is we can only lend to farmers. So we're in it with the producers, good and bad, ups and downs. We're not going to say ag is on the downturn and just pull out and go to finance someone else. We're in it with you guys for the long run. We'll work with you as much as possible, even through the tough times. We're going to do everything we can to help you be successful. Because, as I said earlier, when our members are successful, we're successful.
Phil Young (14:45):
Exactly. Josh, thank you so much for joining us today, and thanks again to our listeners for tuning in to another great episode of AgCredit Said It. Be sure to subscribe to the show on your favorite podcast app so you never miss an episode. If there's a topic you'd like us to cover, email us at podcast@agcredit.net and let us know. We'll talk to you next time. Thanks guys.
Voiceover (15:07):
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