By Andrea Hilderman
The Saskatchewan-based company Input Capital is the world's first to offer commodity streaming to farmers to finance new and growing operations, or achieve production goals or yield potential.
Streaming financing is not a totally new concept. It is more often seen in the mining industry where production is capital intensive, and it can be hard to find up front financing to develop new opportunities. In the mining industry, much of the financing is required before a raw commodity can be processed into the final product (such as natural gas, gold or silver), and sold. For mining companies, sources of operating capital can be hard to find and interest rates can be very high.
Now Input Capital is providing this service for farm operations.
Input Capital
Input Capital grew out of another Saskatchewan company that was recently in the news. Assiniboia Farmland Limited Partnership (AFLP) sold its farmland portfolio to the Canada Pension Plan Investment Board, a large institutional Canadian investor, on January 10, 2014. Because AFLP acquired farmland and rented it to farmers to operate, it attracted a lot of young farmers.
"These were not young in the sense most Canadians would consider young," explained Gord Nystuen, vice-president of market development for Input Capital. "These were under-45 year old farmers who saw the opportunity to expand their farming operations. We realized it was easy enough to get land to rent and equipment to lease, but it was not easy to get the financing or working capital to operate the farm to its full potential."
Working Capital
Input Capital provides working capital to farm operations, as a replacement for bank financing or input supplier financing. "When farms have sufficient cash on the balance sheet, farm managers can make business decisions that will improve margins," explains Nystuen. "If inputs are purchased with cash, farmers can get better prices. For example, if cash is available in August or September to buy nitrogen, substantial discounts can be realized versus buying later in the fall or in the spring.
Another example would be discounts for early cash purchases of canola seed. Additionally, a farmer will have better access to premium varieties the earlier he can buy." It's when farm operations have insufficient cash reserves that trade-offs have to be made, like having to sell grain to pay bills as opposed to marketing in an orderly fashion with a deliberate strategy.
Nystuen says another advantage shows up when farmers are planning and budgeting. "If there is a very tight ratio of working capital to farm size, the working capital gets allocated across all acres versus formulating a strategy to optimize returns." An example Nystuen uses is that rather than capitalize on good wheat and canola prices and use more fertilizer, a grower facing a cash crunch will only put on enough nitrogen to grow a decent crop.
"The grower tends to budget from a scarcity of working capital, as opposed to looking at crop potential based on his analysis of the markets, prices and weather. And these two approaches result in very different outcomes." Input Capital requires its clients to work with a consulting agrologist. "This is our way of ensuring the farm and the working capital we supply is put to the best possible use," explains Nystuen. "We don't hand over the cash and walk away; rather, we are invested in optimizing the operation."
"The contract we devised creates a vehicle for us to provide the upfront working capital without taking an ownership position in real estate or assets," explains Nystuen. "Farmers told us clearly that that was not how they wanted to partner with us. So, we invest for a share of the production, a specified number of tonnes of canola over a specified number of years."
This differs from a term loan in that in a streaming arrangement, the streaming partner, in this case Input Capital, takes on the price risk for the commodity in each year. Farmers are committed to deliver a specific number of tonnes, not a specific dollar value of product.
Input Capital's Clients
Input Capital takes on prospective clients only after extensive discussions. "We meet with growers, conduct a financial assessment to ensure the farm is viable, the right equipment is available to farm, the business strategy is in place and the farmland assets are sufficient for the tenure of the contract," says Nystuen. "This is far more than checking your credit score. We want to become a partner. The success of our business depends on the success of our relationship with the farmer."
Input Capital has raised $65 million in capital from investors and has canola-streaming contracts in place with growers for a six year period. It had contracts with 10 producing farms in 2013, its first year of operation.
Input Capital has three seasoned farmers working on business development. "These guys are long-term farmers themselves, all very capable and successful. For the most part, they've lived this story - starting with limited resources and struggling in those first years to build up their operations. When they sit down at the kitchen table with a prospective client, they know exactly what it's like to be on the other side of that table."
Learn more about Input Capital at www.inputcapital.com. The company's shares trade on the TSX Venture Exchange under the symbol "INP".
Previously published in Grainews.
Andrea Hilderman has her master's degree in weed science, is a member of the Manitoba Institute of Agrologists and she is the principal in North Arc Agri-Consulting. She writes from Winnipeg, Manitoba.
