AGRICULTURAL LEASING

Agricultural
Leasing
Introduction 1
What Is “Agricultural Leasing”? 1
Why This Focused Toolkit? 1
How This Toolkit Is Organized 2

Section 1: Agricultural Leasing and Conven-

tional Leasing 3
Need for Flexible Payments 3
Significant Role of Government 3
Limited Financial Information 3
Agricultural Leasing in the United States — Implications
for Emerging Markets 3
Lease Types & Structures Common to Leasing Agricultural
Equipment 4
Pricing Calculations for Agricultural Leases 6

Section 2: Agricultural Credit and

Underwriting Considerations in
Emerging Markets 7
Common Credit and Underwriting Conditions Applying
to Agricultural Leasing in Emerging Markets —
Implications for Lessors 7
Documentation of Agricultural Leases 9
Role of Insurance in Agricultural Leasing 10

Section 3: Agribusiness Opportunities 10

Leasing of Irrigation Equipment 11
Leasing of Cold Storage Equipment 11
Leasing to Traders, Distributors and Wholesalers 13

Summary 13
AGRICULTURAL LEASING

Introduction
What Is “Agricultural Leasing”?
For the purposes of this toolkit, the term “agricultural leasing”
includes both leasing equipment used by farmers in their
normal course of business, such as tractors and harvesters,
and also equipment used by companies that are normally
referred to as agribusinesses. Together, farming operators and
related agribusinesses are often referred to as the agricultural
value chain. This toolkit will cover leasing not just to farming
operators, but to the entire agricultural value chain.
Other than farming operators, the agribusiness industry can
include (but is not limited to) the following:
•• Suppliers and manufacturers of equipment
•• Suppliers and manufacturers of inputs, such as fertilizers,
chemicals, and seeds
•• Moveable structures and the like
•• Companies providing services to producers, such as cold
storage facilities, shipping, and contract harvesting
•• Storage facilities
•• Distributors and marketers, including wholesale and retail
markets, and
•• Food manufacturers.
Why This Focused Toolkit?
Agricultural equipment leasing is increasingly thought of as a
specialized form of leasing. While it draws upon the general
principles that govern leasing, which are covered in the Base
Toolkit, at the same time it utilizes a variety of specialized
approaches that are relatively more prominent than in other
forms of leasing.
In emerging markets, leasing has become an increasingly
popular means of acquiring agricultural equipment. It has also
assumed increasing importance in emerging markets for several
broad reasons, including these:
•• Agricultural equipment leasing improves the productivity of
the agricultural sector, especially smaller farms.
Agricultural Leasing 1
•• Agricultural equipment leasing facilitates the expansion of
access to credit, especially in rural regions.
•• In several emerging markets agriculture, including
agribusiness, has become the fastest-growing segment of the
economy and is thus receiving more attention from lenders
and investors.
Equipment for the modern farmer, logger, and rancher has
become more efficient and more sophisticated, but also more
expensive. It is becoming increasingly necessary for farmers in
emerging markets, including small farmers, to have modern
equipment in order to compete with farmers in industrialized
countries. Examples of this include the following:
•• Laser devices for leveling fields
•• Satellite navigation on tractors and harvesters for soil
preparation, the application of fertilizers and pesticides, and
harvesting
•• Electronic sensors to precisely measure soil moisture and soil
type
•• Equipment designs that improve efficiency and fuel
consumption, and
•• Better information technology and faster transmission of
commodity prices
Agriculture is not limited to planting and harvesting cereals, oil
seeds, and fruit and nut trees, but also includes other activities,
such as these:
•• Apiculture: the raising of bees and production of honey
•• Aquaculture: the raising of fish and shellfish
•• Poultry: the raising of fowl and the production of eggs
•• Forestry: logging, sawmill operations, and timber
production
•• Livestock: the raising of cattle, horses, and other animals
•• Viticulture: the planting and harvesting of grapes and the
production of wine
•• Floriculture: the production and marketing of floral crops,
and
•• Landscape horticulture: the production and marketing of
landscape plants, including wholesale and retail garden
nurseries.
2 Focused Leasing toolkit
How This Toolkit Is Organized
As mentioned earlier, the Base Toolkit sets out techniques and
methods common to all leasing situations. The principles and
subjects covered in the Base Toolkit apply equally to agricultural
leasing, as they do to all other forms of leasing. This focused
toolkit applies those principles and subjects to the specialized
requirements of agricultural leases.
Section 1 discusses agricultural leasing and conventional leasing.
Section 2 discusses credit and underwriting considerations that
apply to agricultural leasing in emerging markets. And Section
3 discusses leasing to agribusinesses.
Examples from the Base Toolkit that directly apply to
agricultural leasing include the following:
Part III, Marketing & Sales
Several case studies and examples involving agricultural
leasing, including establishing a finance subsidiary of a
distributor of agricultural equipment, product development for
leasing agricultural equipment, prospecting for lessees in the
Food & Beverage Industry, and evaluating agricultural leasing
opportunities in Ukraine.
Part III, Lease Mathematics & Pricing
The use of principles of lease mathemetics to develop pricing
programs often used in agricultural leasing, including stepped
and seasonal payment programs.
Part IV, Risk Management & Credit
Illustrations, by use of a case study called “Sweet Tooth Bakery
— Bangalore,” of how to calculate the stream of benefits, to
the lessee, from acquiring new equipment. This section also
includes an example (Example 6) describing credit issues
associated with leasing a herd of cattle.
Part IV, Documentation & CD-ROM,
Documentation Samples
Discussion of special lease documents often used in agricultural
leasing (Part IV) and associated documentation samples (CD-
ROM).
Focused Toolkit, Sustainable Energy
An example (Example 1) of a farmer in Tajikistan considering
acquiring a new Indian-made tractor to replace a 25 year-old
Soviet-made tractor. The major considerations for acquiring
the equipment are improved fuel consumption and improved
efficiency, allowing him to reduce operating costs and at the
same time cover his fields at a faster rate.
 Agricultural Leasing 3

Section 1: Agricultural leasing and

conventional leasing
The leasing of agricultural equipment is a distinct discipline AGRICULTURAL LEASING IN THE UNITED
within the leasing industry in three respects: STATES — IMPLICATIONS FOR EMERGING
MARKETS
Need for Flexible Payments
By way of illustration, it is useful to briefly discuss the current
Farming revenues are tied closely to crop cycles and weather. agricultural leasing market in the United States and its
Farmers with one crop per year may only be able to make one implications for, and relevance to, emerging markets.
payment per year, rather than the usual payment schedule
of monthly payments. Loggers in northern climates do not
operate in the winter months and need a lease that allows for
Table 1.
minimal payments during certain periods. Other growers may
Major US Agricultural Equipment
require a seasonal payment structure, where the payments are
lower during certain months than during others. Examples of Finance Lenders in 2008 1
seasonal and variable payment structures are included in Part
III of the Base Toolkit, in the section on Leasing Mathematics. Lenders Market Share (%)
John Deere Credit 18.4
Significant Role of Government
Kubota Credit 17.9
Government policy plays a significant role in the agricultural
CNH Capital America 12.7
sector, not only in emerging markets but also in countries such
as the United States. Examples include export restrictions, Agricredit (a subsidiary of 7.2
nonpayment of Value Added Tax (“VAT”) refunds, and interest De Lage Landen)
subsidies for some types of agricultural loans and not others,
Farm Credit System 5.6
and support and subsidies for crop insurance such as funds used
to pay claims. Government agencies may also be major lessors Diversified Financial, 2.5 for the remaining five
to the agricultural sector. Examples would include the Farm Citicapital Commercial, companies
Credit System in the United States, which is part of the United Wells Fargo Financial
States Department of Agriculture. Leasing, Agstar Financial,
Regions Bank
Limited Financial Information
The above 10 companies accounted for 64.3 percent of the
Small farmers are often financially unsophisticated, deal almost $431 million 2008 US agricultural market or $277 million.
exclusively in the cash economy, and do not prepare detailed It is important for leasing practitioners operating in emerging
financial information. markets to note the following:
Lessors that plan to engage in leasing to farmers and others in •• The three largest agricultural lenders in the United States,
agriculture must be ready to offer flexible payment structures. John Deere Credit, Kubota Credit, and CNH, are all
An agricultural lessor must be more knowledgeable about that subsidiaries of large manufacturers of farm equipment. CNH
industry than any other. is part of Case New-Holland.

•• Kubota Credit is a Japanese company.

1 The Monitor September/October 2009

4 Focused Leasing toolkit
•• John Deere Credit is also one of the largest international
agricultural lenders, with offices located in many emerging
markets.
•• Agricredit is affiliated with DeLage Landen, the largest
specialized lender of agricultural equipment in the world not
affiliated with an equipment supplier.
•• DeLage Landen is a subsidiary of Rabobank, one of the
largest agricultural lenders in the world, which also operates
in many emerging markets.
•• Many banks that are active in leasing agricultural equipment,
such as Citicorp and Wells Fargo, have private label programs
with vendors and manufacturers of agricultural equipment.
It is likely that in emerging markets there will be similar
industry concentrations and similar patterns of agricultural
leasing, especially in the development of specialty products and
services.
Local and regional lessors can compete with these companies
by developing expertise in local markets, working closely
with local vendors, and meeting the specialized needs of local
farmers (such as seasonal or skipped payment structures). In the
current environment, access to credit is the primary driver of
agricultural equipment sales. Local lessors may be less affected
by the global recession and may be able to provide more credit
to well-known local enterprises.
LEASE TYPES & STRUCTURES COMMON TO
LEASING AGRICULTURAL EQUIPMENT
The conventional leases offered to commercial and industrial
customers are also appropriate for farming operators as well as
other agribusiness companies. These include operating leases
(off-balance sheet), as well as capital leases capitalized on the
balance sheet. Leases may be true leases (for tax purposes where
allowed) or finance leases, which are treated as loans for tax
purposes.
Usage Leases
Lessors may offer leases based on machine usage. In such
leases, the lessee makes minimum payments based on a
certain assumed usage, such as hours of use per month, plus a
supplement if the minimum usage is exceeded.
Example 1:
Brazilian Farmer
Brazilian farmer Joao Valdes raises four crops per year
and can make monthly payments. He needs a new
replacement tractor. Since his usage is predictable, the
lessor offers him a lease with payments based on hourly
usage. The lease term is 60 months, and he plans to
purchase the tractor at the end of the lease,
The price of the tractor is $30,000. The lease payment on
a conventional lease would be $700 per month, payable
monthly in advance. His usage is about 450 hours per
month and he will be charged $1.40 per hour of usage,
so his minimum payment will be $630 per month. The
payment increases if usage exceeds 450 hours per month.
The usage lease is payable at the end of the month,
to allow for the usage to be calculated. He makes one
payment at the beginning of the lease as a security
deposit. In a conventional lease, he would have had to
make two payments at the start of the lease; one as a
security deposit and one as the first month’s rent. In a
conventional loan, he would have had to make a down
payment of 10 or 20 percent of the equipment cost.
A usage lease is ideal for a vendor or manufacturer, since they
can easily include maintenance. A vendor offering maintenance
is concerned about how the equipment will be used. In this
type of lease, the vendor closely tracks the number of hours
used by the equipment.
Leases Matched to Equipment Life
While most farm equipment is long-lived, a 25 year-old Soviet
tractor being an example, other types of farm machinery
deteriorates rapidly. For instance, tomato harvesters are affected
by the acid in the crops and require more maintenance or they
will not last.
Leases that match the life of the asset can often be better for
the lessee, since one of the purposes of a lease is to pay for the
use and not for the ownership of equipment. However lessors,
especially in emerging markets, generally prefer leases with a
term much shorter than the useful life of the equipment. One
solution is to write a lease with a long amortization but which
terminates after a relatively short term.

Example 2:
Ukrainian Farmer
Serhiy Ivanov operates a 2,000 hectare farm in southern
Ukraine. He plans to buy 3,000 meters of aluminum
irrigation pipe. The pipe has a life of 10 years. The
lessor offers a lease that is amortized over 10 years, with
a residual payment due in five years. The lessor’s yield
is 12 percent and payments are to be made annually, in
advance.
The annual payment will be 15.8 percent of the cost of
the equipment. The residual due at the end of the fifth
year will be 63.8 percent of the cost of the equipment.
If the lease was fully amortized over a five-year term the
annual payment would have been 24.76 percent of the
equipment cost.
If the pipe costs $100,000, Ivanov will save $8,960 per
year by choosing the longer term. He will either have
to buy the equipment at the end of the fifth year, or
refinance the residual. However, if his farm earns more
than 18 percent per annum, his return after five years
will be greater than the residual.
Seasonal Leases
Payment plans that allow for periods when equipment is idle
are popular. For example, loggers in cold weather areas want
several months of low or no payments. Farmers with one or
two crops a year prefer to make lease payments after crops are
harvested. (See the Base Toolkit, Part III, Lease Mathematics,
“Stepped and Seasonal Payments”.)
Many lessors require a contact payment. A contact payment is a
periodic payment (usually paid monthly) that is substantially
less than the annual rental payment. For instance, in Example
2 above, the annual payment is $15,800. A contact payment
could be a nominal $100 per month, allowing the lessor to keep
track of the lessee in the interim between annual payments.
Agricultural Leasing 5
Example 3:
Amur River Logging, Russia
Amur River Logging in eastern Russia cannot cut and
transport trees during the winter. The company requests
a 60-month lease with payments to be made 8 months
each year. The payment schedule would be as follows:
Year November- March- October
February
1 No Payments Payments
2 “ “
3 “ “
4 “ “
5 “ “
Amur River Logging makes 40 payments during the
60-month term (plus any residual). The lessor accrues
unpaid interest during the period of -0- payments and
adds it to the balance due. Therefore, each payment
would be greater than if the company had made 60 level
payments during the 60-month term.
The lessee makes a nominal contact payment each month
during the 4-month payment hiatus.
(Also see Base Toolkit, Part III — Marketing and Sales,
“Leasing Program for Farm Operators”.)
Leasing Immovable Assets
Agricultural leases often are used to finance assets other than
movable equipment, such as tractors, harvesters, hay bailers,
graders, scrapers, trucks, trailers, and bulldozers. Immovable
assets can include irrigation pipe, fencing, portable buildings
(storage sheds, processing sheds, tack rooms for horse ranches,
greenhouses), pivot and wheel-line irrigators, photovoltaic
systems, dairy cattle, breeding herds, and fruit trees. In short, any
assets with useful lives longer than one year can be considered as
personal property and be financed through leasing.
6 Focused Leasing toolkit
Example 4:
Tatra Dairy, Slovakia
Tatra Dairy in central Slovakia plans to acquire a small
herd of dairy cattle, a milking shed (parlor) and automatic
milking equipment. The herd consists of 50 cows. The
milk parlor is a removable, steel building and the milking
equipment includes automatic milkers, steel stalls and
chutes, milk pumps, and processing equipment.
The cows are leased for five years, the building for seven
years, and the equipment for four years.
A well-managed dairy herd can be expected to increase
over the term of the lease. All offspring become part of
the herd and therefore are owned by the lessor. Even in a
well-managed herd, there are expected losses. Cows stop
producing milk or become ill or die. Often the net effect
is that a herd remains approximately the same size at the
end of the lease as at the beginning.
To additionally secure itself, the lessor takes a security
interest in the proceeds of the sale of the milk, by requiring
the farmer to assign to the lessor the right to collect payments
from the contract for the sale of the milk to a dairy.
In addition to the standard lease documentation, the lessor
requires a Personal Property Waiver from the land owner and
from the land mortgagee. This agreement allows the lessor
to remove any equipment that may be attached to the real
property, such as the steel building, in the event of default
by the lessee. In this example, almost all the equipment,
including the milk collecting and processing equipment, can
be considered to be attached to the real property.
The lessor identifies its property by attaching labels to the
shed and equipment, and by attaching ear tags to the cattle.
PRICING CALCULATIONS
FOR AGRICULTURAL LEASES
The pricing of agricultural leases is often more complex than
that of conventional leases, due to the prevalence of different
types of payment structures, such as seasonal payments, and
skipped payments.
As we saw in Part III of the Base Toolkit, Lease Mathematics,
most level payment structures can be easily calculated with
financial calculators like the HP 12C ™ or 17BII™, including
calculating annual payments rather than monthly. Both
calculators are also available as inexpensive applications for the
Apple iPod Touch ™, iPad ™ and iPhone ™. Lease payment
calculators are also readily available on-line.
Adjustment of Period
The user must remember to adjust the period. If payments are
made monthly, the calculator must be set for 12 payments per
year and the timing set to the beginning of the month or the
end of the month, depending on whether the payment is to be
made in advance (beginning) or in arrears (end).
Other Timing Considerations
If payments are to be made annually, the calculator must be set
to one payment per year. The timing is even more important
when payments are made annually.
If payments are to be made semiannually, the calculator must
be set to two payments per year; if quarterly, to four payments
per year. Again, make sure the calculator is set to advance or
arrears (begin or end). Seasonal payment, skipped payment,
and step payment structures are more difficult to devise on
the calculator. Most leasing professionals use T-Value ™, a
computer pricing program from Time Value Software (www.
TimeValue.com), for finance leases.
Seasonal Payments
In seasonal payment structures, during some months (usually
winter) minimal payments are made. Payments are resumed
after the idle season. This is repeated every year.
Skipped Payments
In skipped payment structures, one or more payments are
omitted, such as the time of the year prior to planting. This
may take place once during the lease term, or more often. For
instance, a company may want to skip making full payments
the first three months of the lease to allow personnel to learn to
use the equipment and for the equipment to slowly ramp up to
full production. The lessor simply accrues the unpaid interest
during the skip period and adds it to the equipment cost.
Step Payments
In step payment structures, payments early in the lease are
usually lower than payments later in the lease. For instance, the
payments in the first year will be low, those in the second year
will be higher, and those in the last years will be higher yet. Step
payments are most useful in situations where the equipment
needs time to develop its full production capabilities.

Section 2: Agricultural credit and
underwriting considerations
in emerging markets
Common Credit and Underwriting
Conditions Applying to Agricultural Leasing
in Emerging Markets — Implications for
Lessors
Credit conditions for agricultural sectors in most emerging
markets are significantly more difficult than those that exist in
most industrialized countries. Lessors who finance agricultural
equipment in emerging markets must possess the following:
•• Proper underwriting and credit procedures to fit local
conditions,
Agricultural Leasing 7
•• Leasing products similar to those described in Part III of the
Base Toolkit (Marketing & Sales), which are attractive to
lessees and are consistent with the lessor’s underwriting and
credit procedures, and
•• Sales and credit professionals knowledgeable about local
agricultural markets.
Without all these conditions, a lessor in an emerging market
will have trouble extending leasing credit to farming operators.
While large farms and other agricultural entities may have
audited financial statements, many small farmers have, at best,
internally prepared statements. Often, there are no conventional
8 Focused Leasing toolkit
financial statements at all. This is especially true in emerging
markets. In addition, small farmers have limited access to
assistance, such as agricultural extension programs, that
could assist small farmers in preparing financial information
sufficient for a lessor to make a credit decision.
How, then, is the lessor to make a prudent and informed credit
decision? The lessor who chooses to lease to the agricultural
community must become a specialist in the equipment and the
industry and, especially, have sales and credit people available
who can evaluate farming credits from the ground up. (See Base
Toolkit, Part IV, Credit & Risk Management “Determining
Lessee’s Ability to Pay When Lessee Has No Financial
Statements”).
What Lessors Must Do
Lessors must have agricultural leasing products available that
are attractive to the lessee and are consistent with the lessor’s
underwriting and credit policies (examples of agricultural
leasing products are included in Part III, Marketing & Sales).
What Bank-Affiliated Lessors Must Do
Bank-affiliated lessors must be able to extend term-debt
(including leasing) to farming customers with existing crop
loans who have paid “as agreed.” They must also be prepared
to allow bank branches in the farming districts where they
operate to provide significant information to the central credit
authority regarding the farmer’s operating history, or even to
render credit decisions.
More than in any other industry, in agriculture the relationship
between the lessee and his bank is vital, since the bank provides
a crop line of credit to the farmer to allow for planting and
harvesting expenses. A prudent lessor will arrange for lease
payments to be included in the crop line, particularly if there is
to be only one payment per year.
What Sales People Must Do
Lessors must rely on sales people to provide accurate
information, be able to verify that information, independently
if necessary, and act upon the information. They need to be
able to do all of the following:
•• Evaluate crops in the ground (“biological assets”), often with
the use of hand-held GPS equipment as in Tajikistan and
other countries
•• Value assets, such as buildings and equipment, that may be
used as additional collateral
•• Ask the right questions in order to establish the lessee’s
historical ability to repay the lease, such as how long the farmer
has been operating the farm, who the farmer’s suppliers are,
who the customers and equipment dealers (and others) are,
and whether the farmer has an existing crop loan, and
•• Evaluate the benefits of the leased equipment to the lessee, as
illustrated in Example 1 of the Sustainable Energy Focused
Toolkit.
The last two factors are critical, because it is much easier for
a lessor to credit-approve a lease for a farmer with a credit
history. Conversely, a farmer with no credit history will have
more trouble obtaining lease financing. Moreover, the benefits
from operating the equipment may be the most reliable source
of repayment available for consideration by the lessor.
What Credit Officers Must Do
Credit officers must be able to understand agricultural markets
and be able to render appropriate credit decisions based on the
information supplied to them by the sales person. At the same
time, if the information is deficient, the sales person must have
the responsibility for collecting complete information. Credit
officers must also be able to do the following:
•• Evaluate the ability of the equipment supplier to perform
warranty work and regular maintenance,
•• Understand the farmer’s financial statement (when available),
especially in instances where the farmer is on a Calendar
Fiscal Year and shows a loss due to payments in the following
Fiscal Year.
•• As discussed in the Base Toolkit, the credit officer must be
sure to make the sales person part of the credit “team.”
Lesson Learned
A lessor engaged in leasing agricultural equipment must
understand local farm economics, how local farmers
declare expenses and/or roll over income into following
years, who the creditworthy farmers are in a district and
above all, how to effectively underwrite a transaction.

Leasing to Farmers Who Rent Their Land
In many emerging markets, it is often the case that farmers
only rent their land. Additionally, in some emerging markets,
farmers are unable to pledge their land as collateral for either
short-term crop loans or term debt, including leasing. In either
of these cases, it is important for lessors to do the following:
•• Consider the amount of time the farmer has been farming on
the land (under present operations),
•• Consider using hand-held GPS devices to measure field size
and thus to determine the value of the crops in the ground
(newer models of agricultural machinery use GPS to more
efficiently determine planting and chemical application
locations),
•• Look more closely at the conventional cash-flow history,
•• Consider taking other equipment or assets (such as
assignment of receivables) as additional collateral to secure
the transaction, and
•• In all cases, require crop insurance (if available) as a condition
of the lease approval.
In situations where a farmer does not own land that he farms,
or is unable to pledge land as collateral, careful underwriting
becomes even more important.
Agricultural Leasing 9
DOCUMENTATION OF AGRICULTURAL
LEASES
Agricultural leases are documented with standard lease
documents. However, some situations require additional
specialized documents, as described next.
Leasing to Dairy Operations
Assignment of Milk Proceeds — This document is to be signed
by the lessor, lessee, and milk purchaser. Dairy farmers usually
have long-term contracts to sell milk to a dairy. This document
gives the lessor the right to require the dairy to make payments
to the lessor and not to the farmer, a right used in the event of
default by the farmer.
Leasing Equipment Affixed to Real Property
Personal Property Waiver — Also called Landlord’s Waiver, a
Personal Property Waiver is used when equipment is affixed
to the real property. It allows the lessor to enter the real
property and remove the equipment. Equipment may consist of
fixtures such as light fixtures, photovoltaic systems, electrical
equipment, removable structures, irrigation systems, fencing,
fruit trees, and the like.
Leasing of Livestock
Brand Agreement — This document details the specific brand
owned by the lessor. It may also detail the description of ear
tags for cattle. Either or both will appear on the cattle or horses
to show ownership by the lessor. (This is also described in the
Base Toolkit, Part IV, Risk Management & Credit, Example
6 – “Leasing a Herd of Cattle”.)
10 Focused Leasing toolkit

ROLE OF INSURANCE IN AGRICULTURAL

LEASING SECTION 3:
Depending on the nature of the business, agricultural insurance AGRIBUSINESS
OPPORTUNITIES
can cover one, or all, of the following needs:

•• Insuring the value of crops in the ground (biological assets)

against weather, pestilence, change in value, and so on

•• Insuring the value of harvested crops in storage As noted in the Introduction, in addition to leasing to farming
operators, agribusiness includes activities that provide services
•• Insuring the value of harvested crops in transit
and supplies to farming operators, processing services for
•• Insuring farm equipment, and farming operators, and leasing to manufacturers of retail
food products. These are often collectively referred to as the
•• Insuring farm buildings. agricultural value chain. Lessors that specialize in leasing
In most cases, the principles discussed in Part IV of the Base farming equipment, such as tractors and harvesters, should
Toolkit, “Insurance,” apply equally to agricultural insurance. also recognize opportunities to expand their services to include
However, there are differences. companies within the entire agricultural value chain. Examples
of leasing equipment to agribusiness follow:
Insuring the value of crops in the ground often requires
specialized local knowledge covering subjects such as local
weather, the possibility of flooding, and pest control. In addition
to general insurance as further described in Part IV of the Base
Toolkit, insuring the value of crops—either in the ground, in
transit, or in storage—can involve financial instruments such as
hedging or forward sales. If insuring harvested crops in transit
involves transit by ship, marine insurance is a specialized form
of insurance that becomes relevant to agricultural insurance.

As explained in Part IV of the Base Toolkit, the lessor must

understand the nature of insurance in his/her market, including:

•• The ability of the insurance company to pay claims on a

timely basis

•• Whether or not the insurance company is properly registered,

and

•• Whether or not the insurance company has the specialized

knowledge needed to offer a competitive product.

As mentioned in Part IV, if an insurance company is not known

to the major international re-insurers, such as Swiss Re and
others, it is best to find an insurance company that is known.
 Agricultural Leasing 11

Leasing of Irrigation Equipment

Irrigation systems include surface and underground pipe, pivot
and wheel-line irrigators, pumps, engines, generators, valves,
and regulators. Suppliers of such systems are a good source of
leasing prospects or may themselves need equipment.
Lessons Learned
Leasing to Business Groupings — As also shown in the
Sustainable Energy Focused Toolkit, a group such as a
farming cooperative or condominium association can
often serve as a lessee, when the equipment serves the
interests of the group as a whole.

Example 5: Assigning Business Proceeds — The lessor can

Leasing Pump Irrigation Equipment
Yasu Irrigation Cooperative, Indonesia
Background/History — The Yasu Irrigation Cooperative
(“Yasu”) is located in Central Java, Indonesia, and has
been in continual operation since the 18th century. The
approximately 75 members of the cooperative, all of
whom are small rice farmers, get their water from one of
the many rivers flowing off of one of the many volcanoes
found in Central Java.
The irrigation system used by Yasu is a gravity irrigation
system, with water distributed to the individual land
plots by ditches and laterals that are maintained by the
district members. The average size of an individual land
plot is less than 1 hectare. Assuming favorable weather,
members are able to bring in two to three harvests per
year. The cooperative uses small diesel pumps to apply
water to individual land plots. Pumps are also used for
drainage.
additionally secure its payments by requiring an
assignment of proceeds from the buyer of the farm’s
product, as in Example 4, where the lessor received an
assignment of milk proceeds from the dairy that bought
from the farmer.
Leasing of Cold Storage Equipment
Cold storage equipment includes portable and walk-in chillers
and freezers, compressors, pumps, electrical equipment,
insulation, flash freezers, and conveyors. Financing grain and
food storage equipment, particularly cold storage equipment,
is becoming a major activity in agricultural leasing globally.
Without adequate storage, farm profits are reduced because
farmers then do not have the option of storing their grain and
waiting for better prices. In addition, without adequate storage
the growth of the agricultural and food processing industries
is severely limited, especially among companies that produce
food products addressing the growing demand from a middle
class seeking more convenience.

The Equipment — The cooperative decided to acquire

two Chinese made pumps and two new Chinese-made
diesel generators, to replace pumps and generators
that have been in service for more than 10 years. The
approximate total equipment cost was $4,000.

The Transaction — After considering several alternatives

for acquiring the new pumps, the cooperative decided to
lease the equipment from the local rural bank serving their
district. The lease was extended to the cooperative, with
individual members as joint and several guarantors. The
lease term was 36 months with a down payment of 20
percent. As additional security, the cooperative agreed that
the payment on lease would be made by the local rice mill,
where the cooperative members sold their crop, in the form
of a deduction from the price paid for their harvest.
12 Focused Leasing toolkit
Example 6
Leasing Cold Storage Equipment
Ninong Frozen Foods, Philippines
History — In 1998 Ninong Frozen Foods (“Ninong”) was
a small six-year-old producer of frozen dinners and desserts.
Frozen dinners were becoming increasingly popular among
the growing middle class in the Philippines, especially in
the major cities. These products could be purchased in an
increasing number of supermarkets serving Manila and
other cities, taken home, and served.
Ninong’s annual sales were running at approximately
$9 million and the company was marginally profitable.
Ninong purchased its raw materials, primarily vegetables,
meat, eggs, and other dairy products from Filipino
producers, including many small farmers and other micro,
small, and medium enterprises (MSMEs). Ninong’s growth
helped foster growth among Filipino farmers and MSMEs
that supplied raw materials to Ninong.
Ninong grew very quickly, becoming one of the largest
producers of frozen dinners in the Philippines, and soon
outgrew its small manufacturing facility. In addition,
it was spending approximately $30,000 per month in
renting space in the cold storage warehouses necessary to
store its finished product.
Equipment — As part of its expansion, Ninong decided to
finance a storage freezer costing approximately $400,000.
The equipment consisted of the following: Compressor;
heat exchanger designed to flash-freeze product that had
just been packaged; insulated panels for the outside of
the storage freezer facility; and a back-up generator, since
electrical service in the Philippines was prone to electrical
blackouts. In addition, the cost of reinforcing the concrete
floor of the facility was included in the cost of equipment.
The floor had to withstand the low temperature inside the
facility, approximately minus 24 degrees Celsius.
The Transaction – Ninong obtained a 60 month lease for
$360,000, covering 90 percent of the cost of the storage
freezer (Ninong made a 10 percent down payment on the
equipment). Monthly lease payments were $8,280 ($99,360/
year). The additional cost of electricity and diesel fuel (for the
back-up generator) was approximately $4,000 per month, or
$48,000 per year.
The lessor set up the transaction using a “co-terminus”
lease, very similar to the example included in Part III
of the Base Toolkit, Lease Mathematics. There were
two vendors: one for the compressor, back-up generator,
and heat exchanger, and one for the freezer itself,
including the storage panels and reinforcement of the
concrete floor. The storage freezer was completed in
stages and disbursements to the vendors were made at
the completion of each stage. Each stage was set up as
a separate lease schedule on a master lease. At the end
of the final stage, payments covering all schedules were
combined into one monthly lease payment.
The net benefit to Ninong of the storage freezer
was $212,640 per year at their then current level of
production, equal to the foregone cost of renting space
in cold storage warehouses ($360,000) minus the
additional cost of electricity and fuel plus the additional
lease payments. In other words, Ninong added $212,640
to its profit, without selling a single additional frozen
dinner! The company has since grown to annual sales
approaching $100 million and is opening a second
production facility near Cebu City, in order to better
serve the growing markets in southern Philippines.
Lessons Learned
Importance of Storage to Ninong’s Growth – Without
adequate cold storage, Ninong’s growth would have been
substantially less than it has been, and the up-stream
benefits to hundreds of Filipino farmers supplying
Ninong with raw materials would also have been less.
Importance of Measuring Benefits of the Leased Equipment
– As discussed in Part III, Credit and Risk Management,
it is important for the leasing practitioner to have a
detailed understanding of the economic benefits of
equipment to the lessee and the reliability of those
benefits as a source of repayment. In the case of Ninong,
although the company did not have certified financial
statements, it did have extensive documentation on its
historical sales volume and the amount of rent it was
paying to cold storage warehouses. Thus the lessor was
able to convince its bank of the credit strength of the
transaction.

Leasing to Traders, Distributors and
Wholesalers
In most emerging markets, traders, defined as those who buy
commodities directly from farmers, play a significant role
in the agricultural value chain. The primary reason for the
significance of traders is often the lack of storage facilities and
the lack of price information. In emerging markets, where
storage is insufficient, existing storage facilities often want to
deal only with large farming operators, or with traders who buy
commodities from a number of small farmers.
Depending on their size and nature of their business, traders
often have significant leasing needs. Their equipment can
include transportation equipment, such as trucks, refrigerated
trailers and warehouse equipment. No matter what the nature
of their business, traders will also need information technology
equipment to keep track of their business and commodity prices.
Agricultural Leasing 13
Summary
Agricultural leasing, as defined for purposes of this Toolkit, is
a major subset of the leasing industry but not separate from it.
The same principles discussed in the Base Toolkit apply equally
to agricultural leasing. However, in order to become proficient
in agricultural leasing, the leasing entity must fully understand
the distinctions that do exist between agricultural leasing and
most conventional leasing, including these:
•• The importance of specialized pricing structures
•• The importance of evaluating credit with limited financial
information
•• The application of standard lease documentation, and
•• The importance of equipment suppliers as a source of business.