Dairy producers often seek guidance on obtaining financing for automation. We asked one of our industry partners to help answer many questions we receive.
Mark Peterson is President of Kefa Capital, Inc., an agricultural consulting and management company specializing in financial planning and modeling as well as agricultural real estate sales and financing. Peterson holds the Accredited Farm Manager, Accredited Rural Appraiser, and Accredited Agricultural Consultant designations from the American Society of Farm Managers and Rural Appraisers. He is based in Clovis, California and has consulted with his clients on adding Lely robots.
If a dairy operation is considering investing in robotic dairy equipment, what steps do you recommend they take before seeking financing?
During our research into robotic dairy equipment, we were told by a banker that “lenders do not like new technology.” I believe what he was really saying is that lenders do not like new “unproven” technology. Although Lely’s robotic dairy equipment is not “new technology,” it is new technology to California (and other areas), but in my opinion it will quickly become the standard given California’s employment issues (e.g. shortage of labor, state mandated wage increases, worker’s comp claims, etc.).
We travelled to the Midwest to see first-hand this “new technology” as this area was leading the way in the United States for dairy equipment innovation. From our discussions with dairymen using Lely robots, we quickly confirmed what we already suspected — that the robots, though an investment, would quickly pay for themselves through labor savings and increased production. What we did not expect to find were the qualitative benefits that are, in some cases, difficult to put a dollar amount on, such as freedom from being onsite 24/7 and better herd health management.
Once we were sold on Lely robots, we started working on our lender to sell him on the equipment. This involved taking him on a trip to educate him in the same way we educated ourselves…by seeing first-hand the equipment in use and speaking with dairymen using this equipment. We were not able to get our lender to commit to needed capital for a variety of reasons, but we were able to get him to allow us to obtain the necessary financing for the equipment from Lely Finance. This consent in and of itself was a success as most loan documents contain restrictive loan covenants prohibiting third party financing.
If a dairy operation is considering investing in robotic dairy equipment, research the equipment so that you can:
- Make an informed decision as to the cost and benefits of this equipment.
- Educate your lender as to the cost and benefits, through testimonials from dairymen using the equipment, either through magazine articles, videos and/or trips with your lender, and, most importantly, budgets detailing realistic expectations from the equipment.
- Have alternatives lined up in the event that you are unable to sell your lender on financing the equipment.
What information should they prepare about their operation?
Lenders place a lot of emphasis on historical earnings, so a good set of financial statements (minimum of three years) is a must, with quality of financial information taking precedence over earnings. Fortunately, most dairy operations have a third party CPA firm preparing compiled financial statements annually if not quarterly, containing a balance sheet, statement of income, statement of cash flow, and notes to financials. This is a good management tool for not only the lender, but also the operator and his financial advisor. If an operator does not know where he stands financially, he cannot show his lender where he is at or begin to sell him on “new technology.” In addition, an operator is going to need a detailed budget projection showing the cost of the robotic equipment, how he expects to pay for that equipment and the benefits derived from that equipment. Budget assumptions need to be realistic and supported.
What questions should they be prepared to answer when seeking financing for robots?
The main question or concern a lender is going to have is given the significant capital outlay for robotic dairy equipment, how are you going to repay the debt? There is a difference between answering this question and convincing a lender that the answer is correct and supported. From discussions with lenders that have provided some financing for robotic dairies, it has been clear that dairy operators are using more of their cash for construction and equipment, with relatively minimal borrowed capital. That is not to say that there are not some lenders that are willing to lend more on the construction and equipment. However, you need to find a lender that is knowledgeable about robotic dairy equipment and is sold on the benefits of same. When an operator finds a lender, he needs to be prepared to repay the debt in a relatively short time frame, say 5-10 years, on equipment that will last, by most estimates, 20-30 years. Fortunately, all indications are that this equipment can pay for itself in this short time frame.
Do you have any tips for owners based on your involvement in dairies seeking financing?
Research the different brands of robotic dairy equipment available as well as the type of patterns available for cow traffic that will best serve your needs. Learn from other operators that have been using the equipment for several years to avoid their mistakes and leverage their successes. Also, expect to put more of your own cash into the project than you would typically for a conventional parlor or rotary barn. Finally, whether you are obtaining robotic dairy financing or any other type of financing find a financial advisor that you trust to be your advocate with lenders. The lending industry, in particular agricultural lending, is becoming more of a niche market than it has been over the last 20-30 years, with fewer lenders in the market place. In most cases, you have one opportunity to present your case and sell a lender as to why you are a good credit risk. Obtaining the necessary capital at market rates is every bit as important as your production and marketing. Do not leave your financing needs to chance!