Agrifinance

Farming is a highly seasonal and cyclical business and farms are especially vulnerable to unexpected and disruptive events including droughts and floods. Prices of inputs such as seeds and fertilizer fluctuate as do the prices of the commodities sold. Maintaining an agriculture line of credit or overdraft facility can be extremely helpful to ensure that you are able to preserve adequate working capital through any unexpected downturns or through periods of reduced cash flows. After all, inadequate working capital and/or cash flows is the primary reason for default and bankruptcy for farmers.

One of the many advantages of a lines of credit is its flexibility in that you can draw down on money immediately without even speaking to a banker. Many lenders also offer lines of credit specifically tailored to farms and agricultural businesses and provide flexible payment schedules that you can align with your business’s income schedule.

Lenders will accept collateral in the form of residential property or farm land and many banks will also allow you to use a term deposit as collateral. Other possible forms of collateral for an agriculture line of credit include livestock, farm equipment and machinery or other farm assets.

An overdraft facility is simply a line of credit directly linked to an existing business bank account. The credit becomes available once all the funds in the account have been used. It is important to understand what fees and interest costs are associated with using an overdraft facility.

Learn more about business line of credit.

If you are looking for long term capital to invest in growing or improving your farm through land purchases or major improvement works, building production facilities etc., a term loan may be an excellent option.

Agriculture term loans are available with terms from 5 to 20 years and allow you to borrow anything from $15k to $2 million or more. Most lenders will allow you to structure repayments in a way that is most suitable for your farm’s cash flow.

Common types of collateral accepted for agriculture term loans include residential property or land. Some lenders will also accept water, livestock or crops as collateral for agricultural loans.

Read more about secured business loans.

Livestock finance provides funding to purchase livestock, re-establish stock numbers, invest in breeding or cover veterinary expenses. Livestock loans start at around $30,000 and have a term of 1 to 3 years. Interest rates can often be capitalized allowing you to repay the loan and interest when you sell or refinance the livestock. Collateral for livestock loans is equity in the

Speak to one of our brokers to learn more about livestock finance.

Low Doc loans are available primarily to hobby farms but some lenders will also extend this type of loan to commercial farms. Low doc loans involve much lower requirements in terms of proof of income and assets compared to regular loans. However due to the inherently higher risk that low doc loans pose to lenders, collateral is typically required in the form of a 1st mortgage and interest rates are high.

One of the most common need for agricultural businesses is equipment finance. See an in-depth discussion on the different forms of farm equipment finance below.

If the upfront cost of buying equipment feels insurmountable, one option is buying used equipment. Advantages of second hand equipment will be the lower upfront cost and faster depreciation of the asset. On the other hand, there is always a risk of higher maintenance expenses. The large agricultural equipment companies such as John Deere or Caterpillar have used equipment resale divisions. There are also a multitude of agriculture equipment brokers and specialised equipment resale pages. Second hand farm machinery and machinery parts can even be found on Gumtree.

If your farm is small and the particular task you need assistance with occurs infrequently, it may make more financial sense to hire a contractor to come in and do the work. The costs of buying and maintaining the equipment rests on the contractor who will usually run large and highly efficient machinery. The cost of contracting is also deductible for tax purposes.

If you have the skills to run the machinery needed and want to avoid paying the wages and overhead involved in contracting, most rural towns will have machinery rental companies such as Kennards Hire. Hiring agricultural machinery allows you to complete the tasks needed without the longer-term concerns of maintenance and storage.

If you want to fully avoid the risks and headache of managing a farm and its machinery, livestock and labour, share farming is an option. In share farming, also known as farm profit sharing, another farmer to will farm your land in return for a percentage of profits.

If you are surrounded by other similar small farms, one possibility is to set up a syndicate and to purchase the necessary equipment through the syndicate. This structure necessitates an ability to agree on fair scheduling and maintenance responsibilities etc. Similar to syndicating, farmers can also set up a reciprocal borrowing schedule where machines are shared across multiple farms.

Australian agriculture exported two thirds of its estimated $66bn worth of agriculture, fishery and forestry production in 2017-18 according to ABARES. As an export industry, farmers are exposed to the risks inherent in international trade in terms of counter-party risks as well as commodity and currency price fluctuations that can have a dramatic impact on earnings. Financial products such as export letters of credit or non-recourse export finance bills can be used to reduce counter-party risks. Furthermore, currency and commodity derivatives can shelter your business from price fluctuations and reduce the risks inherent in the capital markets.

Read more about trade finance.

Named risk insurance protects farmers against business and production disruptions due to specific and named risks. This can include fire, flood, hail, frost, disease or specific pests. For instance, stud stock insurance protects against the loss of a stud bull through accident, illness or death.

Other traditional agriculture insurance products include worker's compensation, home insurance and farm property insurance.

Index-based insurance products protect against yield risk by tracking the performance of a specific modelled index. Indexes can be based on weather patterns (e.g. rainfall, temperature, etc.) or a combination of climate factors and specific crop-related factors. Index-based insurance products’ payout depending on how actual outcomes perform relative to what the index forecasts.