Robot Rates: How to Finance Robots During Tough Milk Prices

Finance robotic milkers like you would a parlor.
( Courtesy Ashley Messing Kennedy )

When you visit Sheridan Dairy in Michigan, there’s one thing you’ll notice right away: it’s quiet. The cows are quiet and employees are too. Ashley Messing Kennedy will tell you that’s in part because for the past five years, they’ve milked their cows with box robots.

Kennedy is one of a growing number of farmers in the U.S. that have made robots work despite the tough economy. However, she’s quick to add milk prices were better when they installed their robots in 2013. She credits the relationship they have with their banker for the success they’ve had with financing.

“For us, [prepaid labor] was an easy sell [with our banker], but we knew that there were going to be other things that were going to pay back too,” she says. When it came time to figure out how to structure the loans, they would need to buy the robots and modify their facilities to accommodate them. Kennedy says they did their research and then went to their banker with a plan.

“We knew how much the robots would cost, we knew we wanted to have them paid for in 10 years and we knew that we prefer monthly payments,” she explains.

FINANCE LIKE A PARLOR

According to Brad Guse, vice president of agriculture lending for BMO Harris Bank, lenders across the country are reconsidering how they see robotic loans.

“For a long time we strictly did leases for robots,” Guse says. “We didn’t necessarily know early on what the resale value was going to be on the robots. When you start thinking about financing residual risk, what the value is at a later date has an impact, right? So, by paying them off faster, you take some risk away for the borrower.”

He says lenders are starting to finance robots more like they would a traditional parlor. However, it’s still critical to have them paid for rather quickly.

“As we get further into this, we’re realizing how much more like financing a parlor robots should be,” Guse says. “The main components of a robot, just like in the parlor, are essentially permanent, they have a 15-year life expectancy or more. However, there are functional parts that need replacing more frequently.”

The challenge remains paying off the equipment before it is outdated. “It’s a matter of matching useful life of the collateral versus the repayment terms,” Guse says.

That’s how Kennedy and her family decided they wanted to have their robots paid for in 10 years.

“The maximum life of a robot is 20 years. If you’re going to continue to farm, you should plan on replacing them every 12 to 16 years,” she says. “So, we knew that our goal would be to try to pay off the robots in 10 years.”

Like many farmers, Kennedy financed the cost of the robots and the barn modifications separately which allowed them to keep their payments manageable. Still, their farm hasn’t been exempt from milk price pain, and when milk prices hit the floor, they leaned on the strong relationship they have with their lender to refinance their robot loan and ensure they can continue to make their payments.

“Our hope is that when prices get better we will be able to move that up and pay some extra principle, but for now it’s kind of saving our butts,” she says.

LOAN STRUCTURE

There are two separate loans for the barn and the robots but, for many farmers, having a short repayment time frame can be a challenge.

“What kind of payment can you handle?” Guse recommends farmers ask themselves. “You’ve got to know what that payment does to your cost of production and be able to explain how and why you’ll be able to pay it off faster.”

One way some farmers are getting through tough times is by structuring their loan to have a balloon payment at the end, something Guse doesn’t recommend for robots.

“You’re essentially deferring principal payments at the time that maintenance costs may be going up,” he explains. “It keeps the cash flow stable, but you have to be very careful that you don’t outborrow the useful life of the robot.”

According to Guse, one of the other challenges is you can’t get to that point where the depreciation is gone before the loan is paid off, so you end up getting taxed on the amount of principle being repaid.

“It may make sense from a short-term standpoint, but from a long-term look at it, a balloon payment on a robot would not make sense unless it were below the market value at maturity,” he says.

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