When Going for an Ag Loan, Know Your Numbers

Specialty crop markets are notoriously volatile, making the relationship between grower and ag lender especially important. This boom-or-bust environment makes good financial planning a must, according to Curt Covington, Senior Director of Institutional Business with AgAmerica Lending. It also puts a premium on growers building working capital into their balance sheets. Lakeland, FL-based AgAmerica provides a variety of loan products designed to meet the needs of farmers and ranchers across the nation.


“When a lender is looking at financing a specialty crop, working capital is by far the most important consideration,” Covington says. “That’s because these markets are so volatile. And they are different from commodity crops that have more ways to hedge risks. I can’t go to a board of trade and look for futures options for berries.”

How Much Working Capital?

While Covington says the right amount of working capital depends on the grower and what type of specialty crop he or she is growing, most ag lenders want to see at least 20% of the next season’s anticipated operating expenses.

“If a borrower needs $1 million, that borrower should be able to cover about $200,000 of that from working capital,” he says. “Some of these crops are more volatile than others, so that will affect the lender’s perspective on working capital.”

Covington adds having a second source of equity that can be turned liquid quickly — generally land — is important.

“Having a good amount of secondary (land) equity is important, but first and foremost, we focus on the proper amount of working capital. Having that 20% set aside can help growers get through those down years. Take advantage of the good seasons to build up working capital,” he says.

The Loan Game Plan

Covington has been in the ag lending business for more than 40 years and has advice for growers coming to bankers seeking financing. Here are his tips.

BE PREPARED. “When you meet with your banker, have everything you will need to have an open and honest discussion about what your needs are. That means having financial statements and tax returns. If you are renewing a loan before current taxes are complete, have your most recent return on hand.”

LOOK AHEAD. “You need to have budget projections for the coming year and even longer term. This gives the lender a sense of comfort you have a plan in place. What’s your plan for price volatility? And make these budget projections based on reasonable price expectations and achievable yields.”

HAVE A MARKETING PLAN. “In specialty crops, it is important for us to have some level of understanding who is going to process, pack, ship, and market your crop. There are top-tier processors and sellers and lower-tier processors and sellers. You can be the best grower with the highest yields out there. But if you don’t have high-quality packers, shippers, and marketers, that can negatively impact your returns for your crops. Also, very important in this discussion is how you intend to insure your crop. At the bare minimum, lenders are requiring catastrophic coverage, but more and more are looking for growers to sign up for some level of revenue-based insurance. If you have a bad year or disaster, the cost of having the right amount of crop insurance is a bargain.”

COME WITH AN ASK. “Never go into a meeting thinking it is the lender’s job to tell you how much financing they can give you. Always come with an ask. I need this much crop financing, this much equipment financing, and real estate refinancing, etc. It is not the
job of the banker to tell you what you need.”