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Episode 7: Understanding Lines of Credit

 

Whether you’re a beginning farmer or an experienced operator, you’re probably no stranger to the unsteady cash flow that’s typical to the annual production cycle of agriculture. 

Grain farmers need significant amounts of money for seed and inputs at the beginning of the year, only to reap the rewards come harvest time. Cattle finishing operations need to purchase calves, pay to feed them out, and then experience an influx of income when they are sold.

So, how do producers keep their purchasing power strong throughout the entire year? With an effective agriculture financing tool called a line of credit.

“I always describe a line of credit as like a credit card,” says Phil Young, AgCredit Said It host and account officer.

By having a line of credit, you can take advantage of opportunities when you see fit, like purchasing inputs for the next crop season when prices are lower, or having the flexibility to purchase feed when you need it.

Unlike a loan payment that’s paid back over time, lines of credit allow you to pull money out, and once it’s paid back on, can be pulled back out. Otherwise referred to as a revolving line of credit.

Lines of credit are a great cash flow tool for both starting farmers and well-established producers. For a first time borrower, a line of credit will typically be structured as a 12-month, variable rate, revolving line.

“That gets you acclimated to what an operating line is and helps us get to know your operation and how it functions,” says Phil.

However, there are non-revolving lines of credit that are appropriate for certain producers.

“When we look at revolving versus non-revolving, revolving fits well for a grain operation,” says Matt Adams, AgCredit Said It host and account officer. “When we look at non-revolving, I look at that more on our livestock feedlot producers.”

Lines of credit also need a renewal process. Meeting with your loan officer to determine cost and income projections helps you secure what is needed.

“We want to make sure [the line of credit] fits within your repayment capacity for the crop or the animal that’s going to be produced to repay the loan,” explains Matt.

Here’s a glance at this episode:

  • [3:56] A line of credit can be best described as a cash flow tool to help you get through cyclical seasons in your operation, like the next planting season or finishing a set of cattle for market.
  • [4:41] A line of credit works much like a credit card. Unlike a loan payment, money can be pulled out.
  • [5:31] Grain operations will primarily take advantage of lines of credit to purchase inputs for next year’s crop season at a lower cost.
  • [6:26] Flexibility is key. Lines of credit allow you to purchase things you need, when you need them.
  • [7:18] Lines of credit are ideal for both beginning farmers and well-established operations.
  • [12:29] For first-time borrowers, lines of credit are typically structured on a 12-month basis, allowing you to pay it down over the next year, establish a relationship with your borrower, and help them understand your operation needs.
  • [13:36] Most lines of credit have a variable rate and are revolving, meaning once a certain amount of money is pulled out and paid back, that particular amount is available again.
  • [14:49] When looking at revolving versus non-revolving lines of credit, revolving lines of credit fit well for grain operations. Whereas non-revolving lines may be better suited to feedlot producers.
  • [16:53] Lines of credit have a renewal season. Meeting with your loan officer to determine a renewal amount is based on your projected income and repayment capacity.
  • [17:40-22:27] Our hosts give examples and scenarios of how they would determine a line of credit for various types of producers and situations.
  • [24:12] A secondary product to a line of credit is a grain inventory loan. This allows grain operations the flexibility to hold crop back to wait for better prices or contract months out.

Resources mentioned in this episode:
Ep. 4: Balance Sheets https://www.agcredit.net/news/episode-4-what-are-year-end-balance-sheets-and-how-build-them-credit-analyst-joel-althauser

Connect with AgCredit:
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Share questions and topic ideas with us:
Email podcast@agcredit.net

Bios

Host Matt Adams

Matt serves Paulding County as an account officer at AgCredit. He has worked in ag lending for over three years and previously worked in farm equipment sales for 11 years. He and his wife farm in northwest Ohio with their two daughters and son. His favorite part about AgCredit is the people. From the member-borrowers to the internal team at AgCredit, every day keeps getting better. Matt hopes to bring insights to ag lending and some laughs to the AgCredit Said It podcast.

Host Brenna Finnegan

Brenna has been an account officer serving Lorain County for three years. She’s worked in the agricultural industry for over 16 years with experience in livestock production, specialty crop production, seed production and processing/distribution. She grew up on a small family farm raising row crops and cattle. She currently has her own herd of beef cattle that she breeds and sells as show stock calves for 4-H and FFA members. At AgCredit, Brenna enjoys being able to work directly with the local farmers and especially helping young farmers achieve something that they didn’t think they could.

Host Phil Young

Phil is an account officer for AgCredit serving Van Wert County. He’s been in ag lending for over three years but his agricultural background goes back much farther. He grew up on his family’s farm where his father raised a large herd of sheep. Currently, he helps with the family farm raising corn, soybeans and wheat. Phil likes working at AgCredit because he can help people achieve their dreams. Whether that is purchasing a new piece of farm ground, updating a piece of equipment, or helping a borrower understand their financials, helping his clients succeed is always his goal.

Host Libby Wixtead

Libby has been an account officer for seven years serving AgCredit members in Marion County. She grew up on a 200-acre grain farm and was very active in 4-H and FFA. Today, Libby and her husband operate a 2,400-head swine finishing barn. Her favorite thing about working at AgCredit is working with local farmers from the same area where she grew up and seeing their operations thrive. She loves working in agriculture and helping her customers be successful year after year.

Transcription

Speaker 1 (00:02):Welcome to AgCredit Said It! The podcast for farm newbies and seasoned professionals alike. In each episode, our hosts sit down with experts from across the agriculture industry to bring you insights, advice, and must have information on all things rural living, from farming to finance and everything in between. So let's get to it.

Libby Wixtead (00:27):Welcome back podcast listeners and happy new year. This is Libby and I'm here with Matt, Phil, and Brenna. How is everyone's holiday? Matt, we'll start with you.

Matt Adams (00:36):The holiday has been great. Wrapped up with harvest, yields were surprisingly better in our area than years past. We did have our son, so he is doing great. He originally came about five and a half weeks early for us, but he is growing, doing great and looking forward to back at it with our podcast here and keep things rolling.

Libby Wixtead (01:10):Phil, how about you?

Phil Young (01:10):Ah, fantastic. The holiday season for me is obviously I love spending time with my family but also, I love food. So I was fat and happy by the end of it and that's the holiday season for me is spending time with the family, getting my belly full and just enjoying time with them. So it was good.

Libby Wixtead (01:28):There's always those certain dishes that you only get at holiday season that you look forward to, and then you fill up on like crazy. At least I do.

Phil Young (01:36):Little green bean casserole, sweet potato crunch, sweet potato casseroles, are my big ones.

Matt Adams (01:42):That's your go to?

Phil Young (01:42):It's awesome. It's sweet, but it's like mashed up sweet potatoes and then they put... Is it some kind of nut? I can't remember if it's pecans or almonds on it and you basically mix brown sugar and a bunch of more butter and more sugar and...

Brenna Finnegan (01:56):That's like the recipe for a pecan pie.

Phil Young (01:57):

Yeah, it's kind of. Yeah, it is. I mean, it's kind of like a heart attack.

Matt Adams (02:00):We call it a casserole, so it makes it more healthy.

Phil Young (02:03):Right. It tastes like a dessert, but it's really your main entree and so, but it's good. It's really good. So we try to put that in the mix and have it. So, yep.

Libby Wixtead (02:13):Awesome. Okay, Brenna, your turn.

Brenna Finnegan (02:16):It was busy as usual. So I've got a niece and quite a few nephews. So I get to spoil them and the youngest, his name's Kyle, and he just loves the tractors and the farm. So I actually spend most of my day outside in the barn with him because he just has to feed the cows, and “That's my cow”, “That's the mean cow”, you know how that goes. So, spent a lot of time with them and really just enjoyed time with family. So what about you Libby? I know you got little ones too.

Libby Wixtead (02:51):Yes. No, it was great. My favorite is we always do cookie making with some of my family members and we get all the grandkids to join in on that, so that's always fun. And then just seeing the kids on Christmas morning get so excited that Santa came is just, I love it. I'm a Santa lover and Christmas lover, so it was awesome. And of course, just being with some family that's out of town is always great.

Matt Adams (03:14):And you know, anytime you have any excess Christmas cookies, you're more than welcome to bring them in here when we're recording.

Libby Wixtead (03:20):Oh, absolutely. My mother-in-law was a home ed teacher, so she makes the best cookies.

Phil Young (03:27):Going to hold you to that.

Brenna Finnegan (03:30):You're going to have to bring her recipes in. I'm going to have to steal the recipes now.

Libby Wixtead (03:32):Oh yes. Trust me, I have. All right, enough with a holiday chat. We are going to talk about lines of credit today and describing everything about them from the way they are structured, to collateral, to how they fit your operation. So I think what we'll start with, what is a line of credit?

Brenna Finnegan (03:56):Well, when I talk with people, I describe it more as a tool for them to use. You go out to the barn and you use your wrenches and your hammers and all that kind of stuff. And in the office, this is your tool, I guess, is how I would describe it in a way.

Phil Young (04:10):Yeah, exactly right. So it is another tool in your toolbox. It's a way for you to operate your farm when maybe cash flow isn't quite there yet. So all of us have a time where, as a farmer, you get cash at certain times of the year and sometimes you use that cash on things and that's just not quite there. So the line of credit is kind of this intermediary tool that you can kind of use to kind of help you get through the entire year. So paying for anything from chemicals, fertilizers, seed, to hay, to anything at all.

Brenna Finnegan (04:40):Cash rents.

Phil Young (04:41):Cash rents.

Brenna Finnegan (04:41):All sorts of stuff like that.

Phil Young (04:42):Whatever that looks like. So I always kind of describe a line of credit as kind of like a credit card. You can kind of think of it like that in the simplest terms if you're using this kind of, “credit card” to kind of get you through the next cycle, the next harvest, the next planting season. And then obviously the goal of it, by the end of it, when you do have cash in hand, is to pay it off. And so when you do get income, you do get revenue from whatever it is, livestock to your grain farm, to pay that line down. The great thing about a credit card, most of the time you could pull that money right back out. So in a lot of our instances, this we call a revolving line of credit, so once you pay the money back on, you can pull it right back out. So it's not a loan payment where you pay it and it's done, you can pull it back out and use it for the next year..

Matt Adams (05:31):And I think when we look at lines of credit, especially on the grain side, when we look at generally people look at a grain farm, we think, okay, well, we plant in the spring, harvest in the fall, we have crops to sell. In today's agriculture, we're buying our inputs for the next crop season before we've harvested this crop season, so that's where the line of credits really come into play on the grain farm side. Really, it's a cash flow tool that we look at to keep it rolling, to take advantage and buy the inputs lower cost for the next year's planting season and also to help with the grain marketing size. So a lot of times our prices may be better after the first year for our crops, versus if we sell right through harvest. By having those lines of credit, we're able to pay for inputs and then carry that grain over and take advantage of the marketing opportunities.

Phil Young (06:26):I think flexibility is kind of the great word to use when it comes to a line of credit. You're not locked into the cash you have at the time. It gives you that flexibility to purchase things you need when you need it.

Libby Wixtead (06:37):Yeah, absolutely. And I also think too, it's a good tool to use for tax planning purposes as well. I know we have many customers, that is the only reason they have their line of credit is to use it for tax purpose planning from year to year and towards the end of the year. I think we can all agree, most lines of credit, our balances look awesome towards the end of the year because everybody has their line of credits pulled out to the max or if not quite a bit of it out. Okay, let's shift gears a little bit here. At what point do you guys think a farmer should look at seeing when they actually need a line of credit if they haven't had a line of credit before?

Matt Adams (07:18):I think we kind of looked at that. There's so many different scenarios where lines of credit fit into place. First one that comes to mind is a beginning farmer. We don't have the cash flow to buy the inputs to put in that crop. It helps too if we have to pay up some cash rent. It really just keeps... One thing I always tell our young producers too is, lines of credit are great because we don't want to cash strap a young operation. Take all the cash we have to pay for the inputs. Let's keep the cash in the operation, use the line of credit, because that's truly what it's there for, to help us produce that crop and then harvest it.

Matt Adams (07:55):We also look at, lines of credit fit very well mature operations. The size of some of our operations nowadays, the inputs that we have to carry forward, it's just another tool that we have and it's really a cash flow tool just to keep everything rolling and take advantage of the opportunities when they see fit. We even look at this on the livestock side too. Our livestock producers, there's lines of credit available for them. Not necessarily - we don't have crop inputs, but we have feed inputs, veterinary services...

Brenna Finnegan (08:31):The initial purchase even of the livestock in the first place. So it kind of puts you into a cycle or mode with the operation. So it might be one way of looking at it like, “Hey, what do I need to get through this set of cattle to get them to harvest?”

Matt Adams (08:49):And Brenna, with your operation at home, how does the line of credit fit on a cow-calf operation?

Brenna Finnegan (08:57):Well, for me, I mean I sell calves in the fall for show stocks, so that's when my income is coming in just like grain farmers. It's almost the same type of process. But I've got inputs I got to buy when the harvest of those inputs is happening, like hay or straw or any of that type of stuff. But I mean, it gets me through until I sell those calves, then I pay that off and any excess money, I guess, is mine to, in my case, buy more cows.

Matt Adams (09:30):It's a vicious cycle. The more money you make, the more you want to expand.

Brenna Finnegan (09:34):It really is. But I mean, there are certain times of the year where that cash is not there. Well, that's when we need to use it and that's when it becomes...

Matt Adams (09:41):All your money's tied up on hoof basically until it gets to the market.

Brenna Finnegan (09:46):Yep, pretty much. But there's also other supplies and things that you need and I mean, I don't necessarily go buy feed or anything like that with it. I mean, hay, yes, is feed, but that's a whole nother beast when you're buying it in that type of quantity. Other supplies that you just need. I mean, I have show cattle, so you guys can imagine these supplies that go into that and how expensive they are. So it's like, well, I'll buy this right now and then pay that off when I sell this calf or whatever. So that's how I use mine and I don't necessarily have a large one. I mean, a smaller amount just to get me through. I mean, I was afraid to take out a big one because I would just go buy more cows. So it's a way of keeping it small, but yet still relatively in check with my operation itself. But then we have these large grain operations in the area and it's not a weird thing for somebody to come and be like, Hey, I need $100,000 operating line or a $250,000 operating line.

Matt Adams (10:53):And it's funny when we talk about those grain operations, we as account officers, just for retrospect, we're like, oh, a 12-month line of credit. In all honesty and especially in grain operation, it's more of an 18-month. I mean, because our growing season's overlap so much.

Brenna Finnegan (11:11):It's getting worse and worse as the years go on.

Matt Adams (11:14):And it is. And we look at “right now in the industry” trends and our inputs really, we look at generally fall is when most of us buy our inputs for next spring. Looking at current prices, we probably should have bought a lot of our inputs in the mid-summer. We look at prices. So, I mean, there's again where we have those lines of credit just to really carry that. And we have a crop out with inputs we've purchased and now we're buying the next round of inputs on a crop that, if you bought in July, you're three months from harvesting the crop to pay for the last input. So it's a cycle that really takes a lot of note keeping and management skills to do right. And I think that's where we, as account officers, are always willing to help our members and sit down and really tailor that line to what fits the operation the best. And that's where you look, I feel that every line may be tailored a little different just to fit that operation.

Libby Wixtead (12:19):So speaking of that, what type of structure do we typically do for operating lines? Can you guys describe that?

Phil Young (12:29):Normally if you're a first time borrower with AgCredit, you're going to come to us and we'll probably structure it on a 12 month line of credit. And that does two things. Number one, that gets you used to and acclimated to what an operating line is, and that also just helps us get to know your operation and how it functions and watch you kind of revolve, what we call revolve, that line of credit, pay it down over the next year. And so it is typical. There's obviously fixed rate loans and there's variable rate loans. Most things on the market are a variable rate. So it is keyed off of a little bit different interest rate than fixed rates are. So it can change. The market we're in now, they've been really, really low.

Brenna Finnegan (13:10):And really, really steady too. We get the little slips in the mail, “Hey, your rate changed and it went up 25 basis points” or whatever, but lately we have not gotten those out. I mean, because they've stayed relatively steady.

Phil Young (13:26):Last year and a half they've kind of shot down. And variable rates can be keyed off different indexes, is kind of what they're called, and not to get too nerdy and technical with it…

Matt Adams (13:35):Never you Phil.

Phil Young (13:36):No, never me. So ours right now is keyed off, it's called the prime index. And so that's something you can pick up and look at in the Wall Street Journal and kind of know where the prime index is. And different banks use different indexes, but that's as far as the nerdiness I'll get on that one. So we are a variable rate and like I said, most operating lines are. But like I said, we structured on 12 months, it's variable, and I would say a high percentage, probably 95% of them are structured on what we call revolving line of credit. Meaning once you pull $10,000 out and you pay $10,000 back on it, that $10,000 is available for you to again pull back out. There is something called a non revolving line of credit, which once you pull that money out and pay it back, that 10,000 is not available anymore. And so until you do a renewal process and redo it. So those are a few kinds of highlights, I guess, on revolving lines of credit. I don't know if I missed anything on lines of credit or how to describe them.

Libby Wixtead (14:33):I guess what would be appropriate for a line of credit to be revolving and non revolving? As a loan officer, how would you determine that an operation would fit to have a revolving line of credit or a non revolving line of credit?

Matt Adams (14:49):So I think when we look at revolving versus non revolving, revolving fits very well for a grain operation, like we talked about, with the way inputs are structured. When I look at a non revolving, I look at that more on our livestock feedlot producers. We base them more off of the turns that they're going to make. When I say turns, how many turns of animals they're going to be sending out to market? We have that initial amount that we know working with the producer, how much the animals are going to cost, what our feed inputs, all of our inputs are going to be, and we set that line up for according to when they go to market, that's the time that we will then pay that line back. And then at the time of that, when that line is closed and those animals are out, we're ready to buy the next batch, we do another term line. And I think that's how we look at it because it's different, because we're on a feedlot where we're not producing an animal, we're raising an animal. And take into Brenna's account on a cow-calf operation, where you have breeding livestock, that's more, I look on the revolving side for a livestock producer because it is that long term investment.

Brenna Finnegan (16:04):On the flip side of that though, it can always change.

Phil Young (16:09):Right.

Brenna Finnegan (16:10):So if you're on a non revolving line of credit, you've done well, you've paid it down, maybe when we go, “renew the line”, then maybe it shifts over to a revolving line of credit to where you have that access when you need it. And it's there for you every time you pay it back.

Phil Young (16:29):And I would say, I don't know if you guys can disagree with me, I'd say a large majority of our lines of credit are revolving. I'd say, super high percent.

Libby Wixtead (16:37):I would agree with that.

Brenna Finnegan (16:38):For sure.

Phil Young (16:40):But there are situations where it does call for a non revolving.

Brenna Finnegan (16:43):Now we talked about renewal. We are now into our prime renewal season.

Libby Wixtead (16:49):Can you describe what renewal means, Brenna?

Brenna Finnegan (16:53):Well, when the term comes up on the lines of credit, when we renew it, it's kind of re-upping it. So it's meeting with us, it's giving your information to us regarding your production. And this is where the history of everything comes into play really good for us because if you know how many head of cattle you're going to have, or how many acres you're going to plant, but we want to know your production history, that's going to help us project out how much you are going to need and how much you are potentially going to make. So we don't want to overextend somebody and do $100,000 line when they're only going to have an income worth of $75,000. It kind of really puts you in a pickle in that scenario.

Libby Wixtead (17:40):Okay. So going off of that, what would you guys say if somebody is new to an operating line, when they're thinking about, okay, what amount do I need, what would we think would be an appropriate amount for a size of operation?

Brenna Finnegan (17:56):Like a dollar amount per acre or per head or anything like that?

Libby Wixtead (17:59):Yes. Or just the total dollar amount. Like you brought up $100,000 line, when would that be appropriate?

Matt Adams (18:06):When we look at what amount we might need for a livestock operation, we look at... And there's where I think it's, we do a lot of projections and our grain producers have ideas down for how much they think it's going to cost for their inputs. Our cattle, our livestock producers will do the same thing. What's that animal going to cost? What's it going to cost to feed it? What's going to be the total cost per head on that till we get to market? And that's how we'll base a lot off and we will use market projections and everything to really kind of help the member find out what's best for them. And like Brenna said, we never want to over extend anybody. We want to make sure it fits within the repayment capacity for the crop or the animal that's going to be produced to repay that loan.

Libby Wixtead (18:58):And I would say too, I mean, the projections that you guys give us are very key in looking at what you need for an operating line. I know we've already had our podcast about year-end financials, but we're right here at the new year, so if you haven't got your balance sheet yet, make sure you guys get that done.

Matt Adams (19:16):Good drop in Libby.

Libby Wixtead (19:18):As of 12/31. But that is so key to us if you are doing a line of credit, so we can look at where your operation is at and what your future needs are. And especially if you're growing, this is a time that we look at those things and get you the line that's appropriate for you. So I want to shift gears here a little bit. We have been talking about structure here and what's appropriate size. Now we have the size, now where do we land on collateral position? What do we typically look at for collateral and how is that collateral used to repay the line?

Brenna Finnegan (19:54):In most scenarios an account officer is probably going to say all equipment, probably for the general use or the ability for you to buy and sell things when you need to, rather than tying things to one particular piece of equipment or a list of equipment or anything like that.

Matt Adams (20:15):So let me ask you guys this scenario right here, we're talking about collateral. I'm a brand new farmer. I'm farming a hundred acres. I have one tractor that's worth $10,000. I want a $25,000 line of credit, how do you guys set something up for me?

Phil Young (20:32):The best tool for that, and in this scenario, I assume that you're cash running the ground, right?

Matt Adams (20:36):Correct.

Phil Young (20:37):You don't own any real estate?

Matt Adams (20:38):Yep. So the scenario where I'm cash running ground.

Phil Young (20:40):This is kind of a perfect scenario to use crops, and typically we use crops as collateral for everything, for all lines of credit. But in this situation that's what you have, that's the asset you have to offer for collateral. We will use that.

Brenna Finnegan (20:58):Now here, toss another little wrench into this scenario. What if the growing season is terrible and everything gets flooded out, or I didn't get into the field or anything like that, what do you do?

Matt Adams (21:13):I think, especially when we look at our young producers, our mature operations, is crop insurance comes into play at that point. One thing I do, especially with our young producers, because your mature operations usually have the crop insurance, is make sure that if they are securing with grain, that we have crop insurance for that scenario right there. Where we had two years back in my area, we didn't get any corn out.

Brenna Finnegan (21:46):But that input was still there.

Matt Adams (21:48):But the input was still there and we still had an operating line to pay back. And that's where our crop insurance comes in to work with that. And we will work with that producer and the crop insurance company at that point to make sure that they know we as a lender have a lean on that crop. So if there is crop insurance proceeds, just to make sure that we get that applied to that loan for a repayment capacity.

Libby Wixtead (22:13):Yes, absolutely. To finish up here. What if a producer gets a line of credit and then they decide that they don't necessarily need it, what happens then?

Phil Young (22:27):So similar to a credit card, we had that discussion earlier, it is an available balance. So let's say you have a $100,000 line of credit, we close the loan and at that time, let's say for six months leading up to when you need to buy inputs, you just don't have a need to pull any of that money off. You only get charged interest on what money you have pulled out on that line of credit. So it could sit there, that $100,000 could sit there at AgCredit, you do not pull it out. Your interest charge is $0 at that point because you haven't used it yet. As soon as you draw money out, let's say you pull $10,000 out to buy seed, as soon as you pull that $10,000 out, that's when interest starts to accumulate. And it's only accumulating on that 10,000, not the $100,000 potential. And as soon as you throw that $10,000 back on and pay it down to zero, then that interest kind of slows down and it really just doesn't accrue at all. So it just kind of sits there.

Brenna Finnegan (23:24):I just had that question come up. I just did a renewal and they asked, haven't needed it so didn't use it, how much interest do I owe. And I said, 44 cents.

Phil Young (23:38):Get your checkbook out of it.

Matt Adams (23:39):Phil, the interest that we have out on our lines of credit, do we pay patronage on those?

Phil Young (23:43):We do, yes. In the last episode with Brennan and I, we kind of talked a little bit with patronage with Dusty and Brian, but we do. So we 100% do pay patronage on lines of credit. So you get the benefit of having a patronage payment to spring on this.

Brenna Finnegan (23:57):And once again, it's on that interest that you've paid, not the full amount. So if you don't draw it all out and your interest is only accruing on a small portion of it.

Phil Young (24:05):You're going to get patronage on 44 cents. Is that right?

Brenna Finnegan (24:08):Yes.

Matt Adams (24:09):It pays to be a member.

Brenna Finnegan (24:10):That'll go far.

Phil Young (24:12):And I guess one of the other things I wanted to talk about is a secondary loan product kind of regarding lines of credit and that's what we call a grain inventory loan. So you may be thinking what in the world's that? A grain inventory loan is a product we offer for guys when it comes really the last like two months ago is typically when someone would do what's called a grain inventory loan. So at the end of the year, you get your crops off, you're not quite ready to sell them, they're sitting in the bin. So obviously if you haven't sold them yet, you don't have the cash on hand that you normally would. So a grain inventory loan is a product that you come to us with and you say, Hey, I want to take out a grain inventory loan.

Phil Young (24:48):Let's say you have $100,000 line, you haven't sold any crop and you just want to take out like a $40,000 grain inventory loan. So what that does is we dump the proceeds from that loan onto your line of credit, that gives you $40,000 of breathing room to basically purchase inputs for the next crop year. And then you roll over to January, you sell some crops, you still have grain in the bin, and then you pay that grain inventory loan off first. And then that allows you kind of the flexibility to hold crop back. Maybe if you're waiting for better prices or whatever that may be, or you've contracted stuff for later in the spring. And that kind of gives you that flexibility to also plan for next year without being cash strapped kind of in the lateness of the year.

Libby Wixtead (25:33):Now, Phil, can you describe, is it just all crops all together or do we have to separate out corn and beans to get that loan amount?

Phil Young (25:43):We do typically have to separate out the different grains you have. So yes, you'll have to separate. And the data you have to give us is what crop you guys have in the bin. So how many bushels of each and so we kind of run analysis on that. So it's not just a I need X amount. There's kind of some analysis that goes into that, but that is another tool for you guys, if you guys want to take a part of that.

Brenna Finnegan (26:04):It just gives guys another opportunity to climb in and do grain bin measure up and all that kind of stuff, right?

Phil Young (26:11):Yeah, right.

Libby Wixtead (26:15):Now, what collateral do we use for the grain inventory loans?

Matt Adams (26:17):So with the grain inventory loans, we're securing it with that crop. And we secure that, just like we talked before, we will have joint checks in place because that crop is our repayment capacity for that loan.

Libby Wixtead (26:32):All right. Well, I think this will wrap up this episode on lines of credit. Again, just a recap. I think it is a great tool to use for an operation when appropriate. So if this is something that you are looking into, reach out to your loan officer and ask some questions and see if they can get you set up for it. If you need a cash flow, again, this is a great tool. So that will wrap up and we would love for you guys to write a review and get us some stars so other people can find us. And then also, if you have any questions, concerns, or other topics that you guys would like us to hear, please email podcast@agcredit.net, and we will see you guys next time. Thanks for listening.

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