Financing Changes in Soil -Management

J. H. Atkinson and Lowell S. Hardin.

Profitable changes in soil management often cause the farm's capital requirements to snowball. The first changes brought about by the first investment may not pay off for a year or more, and extensive changes, such as establishing new or improved meadows, may actually reduce farm income for the period of development.

This is the first step in the snowball effect of improvement programs the, investment itself plus possible temporary reduction in cash income.

The second big need for dollars comes when the changes start to bear fruit. If new crops are produced, new types of machines or more machinery and farm buildings may be needed. If the farm plan calls for livestock to eat the new crop or larger production of an old crop, added investment in stock and housing for them may be needed.

Further, a growth period of many months may elapse before the livestock or livestock products are sold. Thus the waiting time between the start of a Series of changes in soil management and cashing in on them through sale of livestock products may be 1 to 5 years or more. A farmer needs to know in advance the eventual size of the "snowball" if he is to plan for adequate financing. Some farmers have lined up too little credit and have discovered too late that they could go only part way.

Changes in soil management are difficult to finance if the return from the change amounts to only 5 or 6 percent on the extra investment. Such a return may be enough if you have the dollars and have no better place to invest them.

Suppose the change cost a thousand dollars and 10 percent a year was earned on the investment after the first 2 years. If you borrowed the money, you would need about 20 years for earnings to repay principal and interest at 6 percent. Most farmers prefer to invest first in changes or in enterprises which pay off faster.

If you are out of debt you may find a certain change desirable on your farm. If you are heavily in debt, you may properly omit the same change on your farm because you must invest where the payoff rate is expected to be rapid. Your debt position, therefore, often influences your decision.

If you go through, the thinking and budgeting process already outlined and the changes appear profitable for you, several methods of financing are available. Financing is a greater problem for the farmer who needs to borrow than for the farmer who has his own funds to invest.

The rest of this chapter deals with methods of financing by borrowing once the decision is made to go ahead with the program.

Here the budget again comes into use. Amounts needed by certain dates should be worked out carefully. A schedule of payments, dates, and amounts should be developed. They will have to be estimates. Weather, prices, health, and other factors may upset any budget, but a budget does help your plan.

With your needs and repayment schedules budgeted, you are in a position to talk with lending agencies. Interest rates generally are lower on longer term loans secured by mortgages on real estate than on shorter term loans secured by chattel mortgages on personal property (livestock, machinery, stored crops, and the like).

The longer loan usually provides the borrower more flexibility than a loan that runs 6 months or 1 to 3 years. If income is lower than expected, pressure to repay may be less on the longterm financing plan.

This suggests that you decide whether you want to borrow fora short period or for a longer period. Short-term loans are usually for a year or less. Frequently they are obtained with the understanding that they may be renewed in full or in part one or more times.

Intermediate loans generally are for periods of 1 to 5 years. Such lending plans are a rather recent development. They are made for various types of farm improvements, including drainage, soil conservation, and related programs. Adequate security, often real estate, usually is required.

Long-term loans are almost always secured by real-estate mortgages and are usually written for periods of more than 5 years. A definite repayment plan and provision for prepayment in good years are desirable. On farms already covered with a first mortgage it may be necessary to refinance one's entire debt structure to use this alternative. If the original borrowings have been reduced, such a refinancing plan may be desirable, but care should be taken not to increase the interest rate on outstanding debt if it can be avoided.

When you have determined the time period that appears well suited to your farm, you should prepare a total financial statement. You need to place all the facts before the lenders when you seek advice and funds. It is well to shop for funds, just as it sometimes pays to get prices from several dealers when you buy a tractor. With the financial statement and proposed budget for the loan requested in hand, you can determine rather quickly where you can get your "best buy" in credit. Terms, service, understanding, and interest rates should be considered in coming to a decision. Variation in those items do exist among lenders.

Actual credit sources that should be considered are outlined below. All of them may not be available in a particular community.

COMMERCIAL BANKS lend funds that are deposited in checking accounts. Most of their loans therefore are for short terms. Banks are a major source of short-term credit for agriculture, however. They also make farm real-estate loans for terms up to about 15 or 20 years; the maximum period is determined by State or National law. Banks have become increasingly interested in making intermediate-term loans to farmers.

Bankers in general want to encourage soil-management practices that increase incomes. Many banks are so interested in servicing farmers that they employ men trained in agriculture. These farm representatives promote profitable changes in agricultural production by advising with farmers and serving as loan agents.

The Nation's 20 thousand banks are located throughout the country, and few towns are without one or more banks. Banks generally are locally owned and managed. All conform to State and Federal regulations. Their interest rates may vary, however, from bank to bank and farmer to farmer because of differences in size of loan, collateral, credit rating, and bank policy. Some banks deal largely in agricultural business. Others lend almost entirely for nonfarm business and needs.

IN THE EARLY DAYS of agricultural development in the United States, dealers and merchants were major sources of short-term credit. They still furnish substantial amounts of credit in some areas and in certain enterprises. But most dealers and merchants are not in the credit business as such; rather, they furnish credit as an aid in making sales.

The cost of credit among dealers and merchants usually is high compared to credit from other sources. The charge for credit may be included in the "time price" for goods, or an interest charge may be made. It should be remembered, however, that credit does cost money and that a merchant who furnishes credit usually recovers the cost from his customers.

The merchant who extends credit is interested in making sales, but in extending credit he should be interested in the soundness of the loan and prospects of repayment. Dealers and merchants, in order to make a sale, therefore, may extend credit without full regard for the soundness of the investment. Losses then may be high a reason why the cost of credit from dealers and merchants is often higher than from other sources.