Prices up, but some farmers in financial straits
Commodity prices are trending higher, yet many farmers are struggling to pay their bills. The reasons are varied but could spell disaster if producers don’t get a handle on their finances.
So say Joe Peiffer, founder and shareholder of Ag & Business Legal Strategies, and Keith Starr, the firm’s chief financial strategist, as they discuss potential current and future financial challenges. They say decreased government assistance, rising operational costs, and cash shortfalls have created a trifecta of trouble for some farmers.
Assistance is over
Some farmers have been lulled into a false sense of security that their cash flow will be sufficient to meet their financial obligations. It’s easy to see why—with the COVID-19 pandemic came government cash in the form of direct assistance, Paycheck Protection Program (PPP) loans, and Economic Injury Disaster Loans (EIDL) through the federal Small Business Administration.
Through these programs, the federal government dumped billions of dollars into the farm economy. While almost all PPP loans were forgiven, the EIDL loans that many farmers received are not being forgiven. Farmers who took out those loans pledged their assets, including equipment, to secure loans that will be repaid over 30 years. That’s problematic should a farmer wish to trade a tractor, combine, or other assets that are now SBA’s collateral.
EIDLs were great for cash flow in the short run, but even with the recently announced $3.1 billion in USDA debt relief farmers should not expect a repeat of government bailouts on the scale of those in 2020 and 2021.
Passing down the cost
Higher commodity prices have been offset by higher prices of feed, fertilizer, pesticides and other inputs. Cash rents also are going up, especially in those cases where long-standing rental rates are being adjusted as the land is being passed down.
It may have been that a neighbor rented the land at a price that was fair 20 years ago but never adjusted.
Cash crunches from short-term thinking
Finally, there’s always the potential to overextend when financial situations look positive. Purchasing capital assets with cash may look good on the books one year but pulls liquidity for future years when things aren’t as flush. Managing budgets year over year rather than year to year is crucial to preventing cash shortfalls.
A “what not to do” list, to avoid income shortfalls:
- Don’t fudge the numbers. It’s time to be honest with yourself. If your operation isn’t cash flowing, why not? What do you need to adjust? Who can help you properly evaluate these options?
- Don’t sell assets out of trust. If the crop or machinery is pledged to the bank, don’t put the money from a sale somewhere else without permission. Worst case you go to jail over this. Also problematic, if the bank loses trust in you, they can accelerate your loans.
- Don’t use an unrealistic budget. One client we worked with put down that he could live on a low but manageable budget. At the end of the year his yields were where they were projected and the prices close, but he was short. Turns out, he had taken enough money from his operation for a new furnace, water heater, air conditioner, and roof on the house, and purchased a new vehicle for his teenage son. While potentially needed, these were not properly accounted for in the financial planning.
Farmers can avoid such financial pitfalls if they are truthful with themselves and their financial advisors.
At Ag & Business Legal Strategies, we want our clients to be honest with themselves and have a solid business plan. Our attorneys and financial strategist will help you create and execute that business plan, and, if necessary, assist you with the legal, tax, and practical aspects of debt restructuring or bankruptcy.
Don’t wait for the problems to become insurmountable. Connect with someone you can trust today, not tomorrow. Contact ABLS now.