Not too many hands shoot up when Dave Gallant asks a room full of farmers if they’ve used the federal cash advance program before.
“For those who aren’t using the cash advance program, I want you to ask yourselves why you’re not taking advantage of this program,” the Canadian Canola Growers Association official said at a recent Alberta Canola Powering Your Profits event.
“And for those who are using this program already, I want you to ask yourselves if you’re taking full advantage of this program.”
The federally funded program was launched in 1958 to help farmers with cash flow by offering low-interest cash advances on their crops.
The canola growers’ association is one of a host of farm and other groups that administer money from the federal Advance Payments Program, which allows producers to borrow up to $400,000 (secured against the value of grain, livestock, and other farm products) with the first $100,000 of that as an interest-free advance.
“There is no cheaper money out there than interest-free money, unless it’s a forgivable loan from Mom and Dad,” said Gallant, adding the interest rate on the remainder is based on the prime rate, currently 3.95 per cent.
“That means your blended interest cost is somewhere around three per cent — almost a full point below prime. Depending on what you’re borrowing at, this should be an extremely attractive rate. Most of you probably can’t get that rate on $400,000 today.”
The loan allows producers to hold on to their commodities and sell during high points in the market, rather than when they simply need the cash.
“The whole purpose of this program — the fundamental reason it exists — is to give you control of your marketing plan,” said Gallant, the canola growers’ association’s manager of policy development.
“Most farmers sell product at the lowest half of the market, and one of the primary reasons for that is because they need cash. So the whole idea is to put cash in your pocket now so you don’t have to sell when prices don’t make sense for your farm.”
Cash advance rules
There are also no restrictions on how the money can be used and only minimal collateral requirements, he added.
“Whatever you take the advance on, that’s the collateral for the loan. It’s not your land, it’s not equipment, it’s not financial resources. It’s the product on the advance.”
Because of that, the commodities listed on your advance are important.
“That’s the commodity you have to pay the advance off with, so the more commodities you put on your advance, the more options you have when it’s time to pay off your advance.”
And you only pay as you deliver product.
“That’s one of the advantages of this program relative to dealing with a bank or other financial institution — we don’t require you to pay off so much a month or to pay any interest off as you go.”
Elevators can deduct the cash advance from the sale of your grain and submit it to an administrator, although they may take longer than if you were to pay directly. But if you submit the payment directly, you’ll need to provide proof of sale (which isn’t needed when you go through an elevator). Either way, the advance will need to be repaid within 30 days from the day you received payment or 60 days from the day you delivered the product.
But what if the value of the grain isn’t enough to pay back the advance?
That used to happen in the old wheat board days — it’s one of the reasons more farmers aren’t taking advantage of the program today. But it doesn’t work like that anymore, said Gallant.
Instead, the federal government estimates how much the crop is going to be worth for the whole marketing period, and then it drops that estimate by half. So even if prices drop, producers are protected.
For field crops, the program typically starts on March 1, with farmers having 18 months (until the following September) to pay back the advance. Livestock producers have 24 months to pay it back.
There are four time periods when farmers typically apply for an advance. If you apply in the springtime before you seed — the program starts April 1, with applications being accepted as early as March 1 — it’s called an intended advance, and it’s based on what you plan to grow.
“Many farmers aren’t comfortable doing that. They want to at least know what’s been put in the ground.”
For those farmers, there’s the seeded advance, which typically runs until the end of July. But fall is the most popular time to apply for advances — that’s when the grain is in the bin.
“If you’re going to apply for an advance when grain is not yet in the bin, the federal government requires us as the administrator to get security on that advance, like crop insurance or AgriStability,” said Gallant.
“Once you’ve got coverage and you prove to us you have it, then you can get a cash advance. If it’s post-harvest, all you need is grain in the bin.”
Livestock producers also need to have AgriStability, but can apply any time.
For a list of administrators, the commodities they deal with, and links to their websites, go to the AAFC website and search for ‘cash advance administrators.’ Although not on that online list, the Alberta Wheat Commission began offering cash advances this summer.