Grain Elevator Financing: Borrowing Base Reconciliation

Where much is given, much is required, and this is certainly true with collateral audits. The recent market volatility has increased financial requirements for grain companies and may have brought higher levels of documentation. The collateral audit or borrowing base reconciliation typically occurs once a month unless the grain company is up against the lending limit or there is extreme volatility in the market. The overriding goal of the borrowing base report is to help the bank and the elevator work together to fund specific collateral positions, and clearly show each partner that they are living up to the agreed upon terms of the operating line. Each asset is given a predetermined advance rate based on the perceived risk of that asset. Advance rates are negotiable just like interest rates, and when the market rallies most elevators are not as concerned about the rate they are paying as long as the money is available to fund their position.

GRAIN HEDGE POSITION REPORT Inventory numbers are typically obtained from Crop: Corn Date: Month End the Daily Position Record LONG POSITION SHORT POSITION or Grain Hedge Position In House (Total Grain on Hand) 400000 Report at the end of the In Transit month. The bank is Total Stocks & Inventory 400000 looking to finance grain Unpriced Inventory In-House Un-priced Sales Contracts - Undelivered Warehouse Receipt March 100000 inventory that is owned, Open Storage 100000 paid for , and properly Delayed Price hedged. To get Total Unpriced Inventory 100000 Total Unpriced Sales 100000 comfortable financing the Net Company Owned Stocks 300000 position, multiple reports Priced Purchase Contracts - Unreceived Priced Sale Contracts - Undelivered including the financial October 40000 October 25000 January 100000 Jan/Feb 50000 statement will be tied Total Priced Purchase Contracts 140000 Total Priced Sales Contracts 75000 together starting with the HTA Purchases - Unreceived HTA Sales - Undelivered Grain Hedge Position October 10000

Report which will show Total HTA Purchase Contracts 10000 Total HTA Contracts 0 the number of bushels Futures Bought - Long Futures Sold - Short financed. DEC 325000 MCH 50000 Total 0 Total 375000 The inventory valuation TOTAL LONG POSITION 450000 TOTAL SHORT POSITION 450000 worksheet will take those 0 bushels and mark them to NET POSITION market.

INVENTORY VALUATION

Company Owned Average Current Current INVENTORY VALUE OF INVENTORY Crop Inventory Basis Market Price Basis (Asset) (Income) DEBIT CREDIT

CORN 300,000 -0.40 $6.17 -0.45 $1,851,000.00 $1,851,000.00 $0.00 $0.00

And these numbers will flow to your balance sheet and income statement.

Income Statement

Revenue $25,000,000

Cost of Goods $20,686,193.75 Value of Inventory $1,851,000 Value of Open Contracts $7,900 Futures Closed Transactions ($15,843.75) Futures Open Trade Equity ($29,250) Cost of Sales $22,500,000 Gross Profit $2,500,000

Balance Sheet

Cash $124,193.75 Futures Account – Cash on Deposit $46,156.25 Futures Account- Open Equity ($29,250) Accounts Receivable $1,000,000 Inventories $1,851,000 Value of Open Contracts $7,900 Total Current Assets $3,000,000

Finally these numbers are put into the Borrowing Base for the elevator. In this example inventory is given an 85% advance rate, as the inventory position and futures markets rise and fall, the loan amount available will change but the advance rate will stay the same. In this example the elevator must always keep 15% of the grain value available to support this position. It is critical that the elevator stress test the credit line and working capital position for potential rallies.

Borrowing Base Report

ELIGIBLE GRAIN INVENTORY BUSHELS PRICE ADVANCE RATE LOAN AMOUNT WORKING CAPITAL

Corn- Total Bushels 300,000 $6.17 $1,851,000.00

Total $1,851,000.00

Inventory Bushels 85% $1,573,350.00 $277,650.00 Value Of Open Contracts $7,900.00 80% $6,320.00 $1,580.00 Negative Equity of Open Contacts -100% Hedging Account Value at Market/ Liquidating Value $16,906.25 90% $15,215.63 $1,690.63

Available Loan $1,594,885.63 $280,920.63

By Jeff Reardon, financial analyst, White Commercial Corp. in Stuart, FL/Kansas City, MO; 800-327-7000;[email protected]