- - AGRICULTURE CORE CURRICULUM - - (CLF1000) Advanced Core Cluster: AGRICULTURAL BUSINESS MANAGEMENT (CLF1400) Unit Title: FINANCE AND CREDIT ____________________________________________________________________________ (CLF1401) Topic: ROLE OF CREDIT IN Time Year(s) AGRIBUSINESS 1 hour 3/4 __________________________________________________________________________ Topic Objectives: Upon completion of this lesson the student will be able to: Learning Outcome #: (F-1) - Discuss the role of credit in agriculture. (F-2) - Define two specific kinds of credit. Special Materials and Equipment: Supplemental Worksheet #1; resource materials for the "Activity" - cost analysis information available through the AgriData Network (as outlined below in the activity); and CLF1406 - Glossary. References: Luening, R. A., Klemme, R. M., & Mortenson, W. P. (1991). THE FARM MANAGEMENT HANDBOOK (7th ed.). Danville, IL: Interstate Publishers. Osburn D. D., & Schneeberger, K. C. (1983). MODERN AGRICULTURAL MANAGEMENT: A SYSTEMS APPROACH TO FARMING (2nd ed.). Reston, VA: Reston Publishing. Evaluation: Quiz by instructor and/or Topic Test (attached) TOPIC PRESENTATION: ROLE OF CREDIT IN AGRIBUSINESS A. Credit provides a means for a business to acquire money for investment in the business or to cover operating costs. 1. Goods used by a farm or business to produce other goods for sale are called capital goods. Examples of capital goods include: a. Buildings b. Equipment c. Livestock B. Money used to purchase capital goods is also called capital. 1. Credit is a resource of the business just as land, labor, and management are resources. 2. Loans for capital improvements allow a business to grow. 3. Businesses can grow in two ways: a. Increasing the size of the operation by purchasing or renting additional property or equipment. b. Increasing the efficiency of the existing business through improvements in existing equipment or the purchase of new, more productive equipment. C. Types of Capital a. REAL ESTATE CAPITAL: Money used to purchase land, real estate, or add improvements to property. b. WORKING CAPITAL (INTERMEDIATE-TERM CAPITAL): Money used to purchase productive inputs that are used for more than one year; examples are breeding stock, equipment, and machinery. c. OPERATING CAPITAL: Money used to purchase inputs that are rapidly consumed in the productive process; examples are feed, fertilizer, and labor. ________________________________________________________________ ACTIVITY: 1. Through class discussion, calculate the amount of capital required to accomplish one major operation such as planting or fertilizing a crop, or purchasing feed for livestock. Alternatively, calculate the amount of capital needed to purchase additional real estate or improvements. Arrive at a very large number and ask students if they expect a business to cover these costs. (Remind students that income is realized sometimes only once or twice a year.) NOTE: Some good examples of production costs and cost analysis are available through AgriData Resources under the AgEd Network listings of FE: 160, 210, 260, 310, 360, 410, 460, 510, 640-650; titles include: PRODUCTION COSTS; LIVESTOCK: VARIABLE COST/HEAD; COST/BUSHEL: MARKETED GRAIN; COST ANALYSIS: CORN; BLANK COST SHEET COW/CALF OVERVIEW. ________________________________________________________________ D. There are three general types of loans for securing (obtaining) capital available to the agriculturalist: 1. Short-Term (operating) loans are made for one year or less. a. They are generally used to purchase production inputs such as fertilizer, seed, fuel, or feed. 2. Intermediate-term loans are generally used to purchase breeding stock, machinery, and equipment. a. These loans can usually be set up on a one- to seven-year (some sources say 10) repayment schedule. 3. Long-term financing (8-40 years) is usually based on real estate or an improvement to real estate. a. There are fewer sources of long-term credit than short- or intermediate-term credit. b. From a lender's viewpoint, there is greater risk in long-term loans because of the uncertainty of the future (the borrower has more time to make mistakes; be ruined by a personal, regional, national, or international economic crisis). E. Credit can be categorized as: 1. Productive Credit: Used to increase production or income; examples are credit used to purchase land, livestock, equipment, seed, feed, fuel, and labor. 2. Consumption Credit: Used to purchase consumable items for the family which do not contribute to the business income; examples are food, clothing, household goods. F. Sources of Credit 1. Short-term credit may be obtained from: a. Trade creditors - Most major equipment manufacturers either own a finance company or have an established relationship with a lending institution. 1) Merchants are often be willing to supply short-term credit for production expenses; it is repaid by installment payments. 2) Equipment dealers often provide financing for purchases with terms similar to those offered by other lenders. b. Contract farming (a form of trade credit) - The dealer supplies all materials and the farmer is paid a flat fee for producing. 2. Intermediate-term credit may be obtained from: a. Production Credit Association (PCA) b. Farmers' Home Administration (FHA) c. Life insurance companies d. Commercial banks e. Individuals 3. Long-term credit may be obtained from: a. Federal Land Bank b. Life insurance companies c. Commercial banks d. Individuals G. Lenders require more than a promise that a debt will be repaid; loans are "secured" with collateral or security. Collateral is the property or assets offered as a guarantee that a debt will be repaid. 1. Long-term loans are normally secured with a mortgage on the property. 2. Intermediate-term loans are normally secured by other assets as collateral. 3. Short-term loans are normally covered by assets as collateral. 4. Some producers with a good reputation may be able to borrow short-term money without any security. a. This is called an unsecured loan or a signature loan. Supplemental Worksheet #1 Name_______________________ Date_______________________ CREDIT 1. What is short-term operating capital used for? 2. What is intermediate-term operating capital used for? 3. What determines the amount of operating capital a particular operation will need? 4. Locate the various sources of operating capital in your area. Compare interest rates, terms, security requirements, and loan limits. Which source would be the best for your needs? TOPIC TEST Name______________________ Date______________________ 1. __________________ and _______________ often provide operating or short- term financing for goods purchased from them. 2. Intermediate-term operating loans are usually repaid over a period of ______________ to _______________ years. 3. When considering sources for long-term loans, there are: a. fewer sources than for the other two b. more sources than for the other two c. about equal numbers of sources as for the other two d. only two sources available to agriculturalists 4. Credit should be used if it increases net income. TRUE or FALSE? 5. Collateral is ______________ or ______________ offered as a guarantee that a debt will be repaid. 6. The Production Credit Association (PCA) provides: a. short-term loans b. intermediate-term loans c. neither a nor b above d. both a and b above 7. Someone covering (securing) a long-term loan would most likely provide which of the following as collateral? a. A new 4 X 4 pickup b. A 3-year-old filly who has been winning at the track c. A house and the property it rests on d. The borrower's long-established good credit record and good reputation. Test Key 1. merchants and equipment dealers 2. 1 - 7 (10) 3. a 4. True 5. property or assets 6. a 7. c 12/12/91 GFV/EEZ/sg #%&C