Who doesn’t like free money?
And who wouldn’t like to turn away a gun pointed at their head?
Apparently, many farmers are in both categories, in a continuing mystery to legions of risk management specialists. Why wouldn’t everyone with debts routinely use the cash advance program? Why wouldn’t farmers with hundreds of thousands of dollars of value in their bins not hedge some portion of it?
“I think the biggest issue that stops people from it, like most things in our world, is that they’re not aware of it, they don’t know about it, they’re not comfortable with it,” said P.I. Financial broker David Derwin as he pondered the issue during a session at Farm Management Canada’s Agricultural Excellence conference in Winnipeg Nov. 27.
It’s long been known that western Canadian farmers have a low uptake of futures and options as hedging tools. While around one-third of American farmers have used derivatives, for Canadians it’s probably less than 10 percent. That’s mostly due to the decades in which the Canadian Wheat Board made most hedging difficult or impossible, as well as the existence of supply management, which takes some farm commodities out of the free market and its volatility.
But I was surprised when Dave Gallant of the Canadian Canola Growers Association told me most young farmers are unfamiliar with the cash advance program and haven’t used it. For older farmers it has been generally used by the majority, but still a significant proportion eschew what it offers.
That’d be fine if all farmers were great marketers, but many aren’t. Many end up selling crop and livestock to pay bills rather than following a marketing plan, and many of those bills come due right around the time of the annual harvest lows, when farmers get the lowest prices of the year.
That’s the problem the cash advance program is designed to allow farmers to avoid.
“Access to cash to give you control of your marketing plan,” is how Gallant described the program, of which his organization is one of Canada’s main providers.
For any farmer needing to cover bills, the program achieves much of that with $100,000 interest-free up front and up to a further $300,000 at prime. Today that equals a blended rate of about three percent on $400,000, which is cheaper than any lender’s prime rate.
It’s pretty easy to sign up for and qualify for, being mostly done over the phone. It’s a handy way to avoid that “gun to the head” situation many farmers face in the weeks after harvest, when the bins are bulging and the bills are looming.
It’s easy to just send some crop to the elevator and cover those nearby debts, but it’d make more sense for most farmers to get comfortable with the cash advance program.
Right now, too many farmers are comfortable with leaving money on the table.