Every time I tweet about the cost of money tied up in carrying grain, I get one of two responses (and usually both).

Where can you borrow money that cheap? A money market or savings account only pays x%, why charge myself more than that?

The 6% is not a magic number, the rate of required return/interest expense will be different for every farm. Maybe the average interest rate on operating money isn’t the right number for you, there are several reasonable figures we could land on.

However, to those who say their opportunity cost is equal to a short term interest bearing account, I submit that you’re settling. I would challenge you to get in a creative mindset and imagine what else you could do with your cash that could out-earn your local bank’s savings account?

After all, why are we farming in the first place? We buy inputs every year on the assumption that, over the long term, we can sell the grain for more profit than we would otherwise earn from a savings account. If the equity you have tied up in your farm assets can’t consistently beat the 1-yr CD rate, you might consider liquidating.

Here are a few options for turning grain in to cash and redeploying that capital within your farm for a better return on cash than a savings account.

Paying Down Debt

The most obvious place to generate instant ROI is paying down an operating line of credit. Pay down the line, accrue less interest expense, see instant results on the Income Statement.

If you don’t have an operating line, but have term debt the same principal applies. The bank only charges you interest expense on the outstanding loan balance. Prepay principal and accrue less interest expense. (Consult your loan docs and lender about prepayment penalties.)

Interest expense is one big reason why I advocate for farmers to use the accrual accounting method. Accrual accounting would have you make a journal entry at the end of each of month to record interest expense that accrued since the previous month. This makes you aware of the monthly cost of your debt. On the other hand, cash accounting only requires you to record interest expense when it is paid, regardless of when it was accrued.

Only if you’re completely debt free, do you remotely have an argument that your cost of capital is under 2%.

Prepaying Inputs at a Discount

Prepaid discounts are an excellent way to lock in a return on cash deployed. In the same way that a bushel of corn sold at $3.50 today is more than if it were sold in the future. Inputs purchased today are more expensive than inputs purchased later at the same price.

However, inputs purchased at a discount today might make you better off than purchasing at list price at a later date.

For example, let’s say I normally pay $0.55/lb for my cattle mineral. I ask my sales rep for a discount if I were to buy in bulk, pay, and take delivery today. She agrees to take 5% discount off the list price. The discounted price is $0.5225.

$0.5225 * 6% / 12 * 6 months = 1.57 cents of cost compared to buying when I needed it.

I saved 2.75 cents off the purchase price, I tied up my money at a 6% rate for a cost of 1.57 cents, meaning I returned 1.18 cents per pound above the cost of capital.

Investing in Income Generating or Expense Decreasing Assets

This is where it really gets fun and also theoretical.

You could take on more acres of row crops, expand a livestock herd, upgrade a machinery line to make labor more efficient, build a shed to reduce wear and tear on machinery, or build a storage shed for feed stuffs to reduce wasted hay and bedding.

To justify any of these investments, they must increase income or decrease expenses at a rate that exceeds the cost to implement. If the project decreases expenses, but not enough to exceed the cost of to pay for it, now may not be the right time for that investment.

Pay Yourself Too

Some folks say its ridiculous to charge yourself 6% on your own cash. I would ask them, if the bank’s money is worth 6%, then why isn’t yours?

We’re used to the idea that our corn and soybeans are fungible. There is a going market rate that buyers and sellers agree to accept for #2 Yellow Corn. Once it goes into the country elevator there’s no sorting it back out and taking back your specific kernels.

Cash is also a commodity. There is a market rate for funds loaned at specific intervals to a borrower with a similar risk profile to yours.

I’m a huge proponent of having a savings account to fall back on. But above that emergency fund, put your money where it has an opportunity to grow. I’m confident that you can come up with a few ideas that can beat your bank’s savings account.