Here’s an interesting idea for obtaining medium-term financing for farm expansion.
One of the tour stops during the recent Canadian Farm Writers’ Federation conference in Prince Edward Island was at Glasgow Glen Farm, an artisanal cheese business. To raise capital for his business, chef and cookbook author Jeff McCourt has sold cheese futures.
For $1,000, investors receive $1,500 worth of cheese over five years. This comes in two shipments per year, each weighing six kilograms.
The cheese is shipped across Canada and into the United States to about 50 investors, who receive a 50 percent return on their money, which is a lot better than a GIC.
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Naturally, these are cheese lovers, so most of them also want the satisfaction of helping out a new specialty cheese business. There is always a risk that the business won’t succeed and they won’t receive their cheese repayment, but if you can afford artisan cheese, you can probably afford to risk $1,000.
For Glasgow Glen Farm, it may seem like an expensive source of financing with loans available at such low rates.
However, there’s a limit to how much a new business can borrow. Plus, the $1,500 worth of cheese has a built-in profit margin, so the actual cost should be considerably less.
McCourt said another benefit is that many of the investors find that they want more than 12 kilograms of cheese per year and buy extra. Plus, after the cheese futures deal has expired, they’ll probably remain loyal customers.
Might this approach be viable for other types of farm businesses?
Input Capital Corp. of Regina has been offering a similar deal to canola producers for the last couple years. The specific terms are rather in-volved and may vary from one producer to the next or at least one year to the next.
However, the premise of the deal is money up front for a set amount of canola going to Input Capital Corp. in subsequent years. A key requirement is professional agronomic advice for the farm operation.
For most producers, regular loans are probably a lower-cost source of financing than this canola streaming deal. However, this deal may be attractive for producers who are rapidly expanding and need money for input costs.
It’s interesting to note that with cheese futures, McCourt has established the terms. With the canola streaming deal, Input Capital Corp. makes the rules.
An individual farmer would probably have little success in getting money up front for the offer of future grain deliveries. Wide price swings would make it difficult to come up with a reasonable formula, even if you could find an interested buyer.
But it could work in the livestock and forage sector. For example, hay futures might work if the payback from a set investment could be a certain tonnage of hay in future years.
This might also work with replacement heifers or bred heifers, and there might not need to be any money involved. For example, producers looking to expand could take possession of 50 bred heifers with the promise to return 75 bred heifers of similar quality and genetics over the next five years. In this way, an established beef producer could give a helping hand to a young operator. The motivation would go beyond pure business considerations.
Debt financing is typically the first option that comes to mind. With a bit of creativity, other options are possible.
