Do Due Diligence

January 16, 2009 03:17 PM

Whether you're in the market to buy inputs, sell commodities, or both, it is your job to protect your business. Grain buyers and input suppliers alike face questionable financial stability, and farmers can't be too diligent when choosing business partners.

For advice on steps you can take, we consulted Jerry Gulke, Top Producer columnist and owner of Strategic Marketing Services; Roger McEowen, attorney and director of the Center for Ag Law and Taxation at Iowa State University; and Curt Covington, senior vice president of Bank of the West.

Creditor status. If you can, get a letter of credit from your business partner's financial institution, McEowen advises. This will put you ahead of unsecured creditors should your business partner file for bankruptcy.

Unfortunately, a letter of credit costs between 0.05% and 1% of the total credit line. In addition, businesses that have many customers will balk. The most practical route might be to get a "letter of comfort," which will ensure there is a line of credit in place, though it doesn't give an exact dollar amount.

Covington suggests forming a marketing cooperative with other corn producers. This allows you to pool production and negotiate for better terms on letters of credit.

Know their plans. Whenever you prepay for products or services, it's your right as a business partner and your duty as a business owner to know how your input suppliers will use the money you are essentially loaning them.

"You want to make sure the money is being used to buy inventory on your behalf or preserved in the form of cash to buy your product when it comes in," Covington says.

"Although you may not feel comfortable asking questions or requesting a letter of credit, I would have less respect for any of my growers who didn't do so," Covington says.

Cash is best. The safest form of protection is to pay for products on delivery and be paid cash at the time you deliver your corn to your buyer. Gulke suggests limiting up-front payments to a downpayment. "You can put 10% down and then borrow the money on the other 90% to be repaid on delivery."

Know state laws. Grain indemnity funds may treat various contracts differently. Weigh that when you choose how to sell.

Secure contracts. "Get written contracts, but of course, they can be torn up in bankruptcy, as the VeraSun matter has illustrated," McEowen says. "Under bankruptcy law, VeraSun has the right to do so."

To contact Greg Vincent, e-mail

Top Producer, January 2009

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