The extra profits of value-added crops doesn’t come without risk. And that concerns bankers asked to help finance new enterprises.
"Bankers have questions about how they account for and measure the risk," says Danny Klinefelter, ag economist at Texas A&M University. "Just because you have a track record as a farmer, doesn’t always give you instant credibility as an investor in a specialized agri-business."
It’s not as much of a worry if a new enterprise just involves land usage. It’s the ones that require specialized equipment that put bankers on edge.
The biggest concern for bankers is farmer co-ops or alliances that want to build processing plants, according to Klinefelter. "If a group wants to build a $10 million dollar plant and generates half that amount themselves, it looks like a reasonable risk," he says. "The problems start when the individual farmers want to borrow their part of the equity. All of a sudden, the bank’s financing 100% of the business."
Another concern is the risk of one farmer getting in financial trouble and jeopardizing the rest of the investors. "A banker can end up putting a number of his best customers at risk with one investment," Klinefelter says.
There are always nagging uncertainties that make bankers nervous. "Do the investors have a well-thought out business plan? Is there already excess capacity within the industry? How strong are the other players in the market? Does the venture involve a few, big buyers, or access to specific inputs? It’s tough for bankers to assess those issues," Klinefelter says.
"Farmers look at the value-added chain and assume if they develop the ability to take over several of the steps, they’ll capture those same profits. That’s not necessarily true," says Klinefelter. "They don’t necessarily have the same knowledge, contacts and reputations of the companies that they’re trying to replace."
As part of your business plan, you need to include "what if" strategies and an exit strategy, says Klinefelter. "Your banker should be looking for that information."
There are some questions you should ask yourself before you even approach a banker, says Klinefelter. "There’s an old business maxim that says if you don’t have a competitive advantage, don’t compete. You need to ask what factors in the business you want to create give you unique capabilities that add quality. What’s your niche or unique advantage? How can you differentiate that value and protect it?"
For more information you can reach Danny Klinefelter at [email protected].