Guidance for Agricultural Loan Officers
Why This Matters to Your Portfolio
Farmers and ranchers often need operating credit long before they sell grain or livestock.
Price swings in corn, soybeans, or cattle can erode collateral value in days.
That’s why most banks set a borrowing base—and apply conservative advance rates—to protect against sudden market moves.
Traditional Borrowing Base Example
- 10,000 bushels of corn at a local cash price of $4.00/bu → $40,000 total value
- Typical advance rate without a hedge: 60%
- Eligible collateral value: $24,000
This haircut guards against price volatility and shrink.
How Producer Hedging Reduces Your Risk
A borrower who locks in a selling price—either with:
- Forward contracts with a grain elevator or packer, or
- Exchange-traded futures or options through a licensed futures broker,
has effectively removed much of the price risk from that collateral.
Impact on the Borrowing Base
When a hedge or forward contract is documented and monitored:
- You can confidently value the hedged bushels or livestock at the locked-in price minus basis and fees.
- Advance rates can often rise to 70–75% without increasing credit risk.
- The customer gains a larger operating line while your exposure to market swings declines.
Controls and Documentation You Should Require
To safely give “hedge credit,” most ag lenders:
- Obtain proof of positions – daily/weekly statements or trade confirmations.
- Establish information rights – view-only access or margin call alerts from the futures broker.
- Maintain reserves – for basis risk, shrinkage, or expected margin calls.
- Monitor margin liquidity – ensure the borrower has cash or a sub-limit to meet calls.
- Incorporate definitions in the credit agreement – clearly define “Eligible Hedged Inventory” and valuation method.
These steps turn volatile farm inventories into collateral with a more predictable value.
Working With Futures Brokers
Collaboration is key:
- A simple tri-party agreement or release of information allows the broker to share position and margin data directly with you.
- This transparency keeps both you and the borrower ahead of potential liquidity issues and builds confidence in the credit.
Key Takeaways for Loan Officers
- Hedging transforms market-sensitive collateral into a more stable asset.
- Proper documentation and margin management allow you to raise advance rates without adding risk.
- Cooperation with the borrower’s futures broker makes the process seamless.
Ready to help your farm clients strengthen their credit lines?
👉 Contact Ag Optimus or call Toll Free: (800) 944-3850
Local: (712) 545-0182 to discuss how hedging strategies can support safer, more flexible operating loans.
Frequently Asked Questions (FAQ)
1. How can hedging help agricultural loan officers manage risk?
Hedging locks in a minimum selling price for a farmer’s grain or livestock. When the market drops, the collateral value is protected, so loan officers can lend with more confidence.
2. Does using hedging guarantee a borrower will get a bigger operating line?
No. Each financial institution sets its own lending standards. Hedging can strengthen a credit request, but loan approval and advance rates are never guaranteed.
3. What proof of hedging should a bank require from a borrower?
Loan officers typically request futures or forward contract confirmations and margin statements, and may establish a tri-party agreement with the borrower’s futures broker for direct reporting.
4. What risks remain even when a borrower is fully hedged?
Basis changes, quality issues, and unexpected margin calls can still affect the bank’s exposure, so reserves and liquidity checks remain important.
5. Should loan officers work directly with the borrower’s futures broker?
Yes. A release of information or tri-party agreement allows the broker to share position and margin data, helping the lender monitor the hedge and protect the loan.