Agriculture Reference
In-Depth Information
Warehouse receipts
represent a means of using inventory as security for a loan.
As inventory is stored in the warehouse, the borrower sells the inventory to the bank, and
then buys back the receipts from the bank as the product is sold. This type of loan is feasible
only on nonperishable items, and allows the borrower to manage with limited working
capital.
Warehouse facilities may represent a large storage building, a grain bin or shed, for
example, or simply be a fence around a large site of coal to be used by a major processing
organization to generate electricity. A major reason for a bank to use a warehouse receipt is
that the bank is aware when the product is sold and can immediately collect the payment
from the agribusiness. The key requirement when using warehouse receipts, from a lender's
point of view, is to know reliably what is in the warehouse facility. Thus, if a borrower has
fi nanced $2 million worth of grain through a warehouse receipt, it is critical the representa-
tive of the bank makes sure the grain is in the storage facility and has the ability to measure
quantity and assess quality. This comes at a cost that is borne by the borrower. Hence,
these loans are used less frequently by most agribusiness fi rms compared to other fi nancing
alternatives.
A
promissory note
is a promise by the borrower to pay to the lender a particular amount
of money and a particular amount of interest after a specifi ed period of time. Promissory
notes are common to agribusiness fi rms and are used by banks, private individuals, and other
creditors. Agribusiness fi rms may also accept promissory notes from their customers.
Such notes may be negotiable, that is, the holder can sell them and the new owner will
have the same claim against the borrower as the original lender. When an agribusiness fi rm
holding negotiable notes from customers needs cash, negotiable promissory notes can
be sold to a bank or other person, usually at a discount. For example, Doug Davies might
sell a farmer some materials to help build a new dairy barn, say $50,000 worth, and accept
in return a negotiable note that is due in 6 months and bears a 10 percent interest rate. In
the meantime, Doug might need cash, in which case he could sell the note to a bank or
other fi nancial intermediary. If the farmer's credit is good, and the banker feels the interest
rate is good, the note might be purchased by the bank for face value or at a very small
discount that refl ects a service charge. The farmer would then pay the bank when the note
was due.
Leasing and renting
An alternative to owning a durable asset is to lease that asset. A
lease
is a contract by which
the control over the right to use an asset is transferred from the
lessor
(owner) to the
lessee
(person acquiring control) for a specifi ed time in return for a rental payment. There are
several types of leases, which are discussed below.
Leasing land is a common method of acquiring control of a durable asset in agriculture,
land. A
land lease
is a contract that conveys control over the use rights in real property from
the lessor to the lessee without transferring title. The contract usually specifi es the property's
intended use and the conditions of payment for that use.
An
operating lease
is usually a short-term rental arrangement (i.e., hourly, daily, weekly,
monthly, etc.) in which the rental charge is calculated on a time-of-use basis. The lessor
owns the assets and performs almost all the functions of ownership, including maintenance.
The lessee pays the direct costs, such as fuel and labor. However, the terms may vary and
may even be negotiated between the two parties.
