Category: Farm Management

Historically, low commodity prices, high input costs, and expensive financing have been some of the most significant issues farmers have faced in the last few years. Luckily, some financial relief may come in the form of lower interest rates from the Fed reducing COVID-era rate increases (Wright, 2024). The Fed aggressively moved in September to cut 50 basis points, bringing the target Federal Funds rate to 4.75 – 5%, with indications for at least another 50 basis points before the end of 2024 (Fannie Mae, 2024). This article explores a hypothetical situation of a producer leveraging lower interest rates to consolidate debt to improve short-term liquidity. 

Consider a farmer’s debt obligation for 2024 (Table 1). In this scenario, the farmer holds a land loan with an original principal balance of $450,000 at a fixed interest rate over 20 years. As of 2024, the remaining principal stands at $330,000, with 12 years left in the repayment period. Additionally, the farmer has a machinery loan with an original principal balance of $180,000, structured over a 7-year term. The outstanding balance on this loan is currently $110,000, with 4 years left until maturity. 

The farmer also faces a $50,000 operating loan, due at the end of this year. Unfortunately, this year has not been profitable, and he cannot cashflow all his debt obligations. 

Table 1. Current Debt Obligations – Before Consolidation

The farmer’s total current debt obligation amounts to $123,000 for the year (Table 2). To address this financial strain, the producer meets with their lender to explore options for restructuring their debt. They discuss the possibility of consolidating existing debt into a longer-term, more favorable interest rate structure. The lender agrees to consolidate the remaining principal balances on all three loans ($330,000 + $110,000 + $50,000) into a new 10-year note totaling $490,000 (Table 3). The lender agrees to secure this loan using the equity in the farmer’s financed land as collateral. 

Table 2. Debt Financing Structure Before Consolidation

Table 3. Consolidated Debt Structure

Under this new debt structure, the farmer not only relieves the burden of the current year payments, but also reduces the ongoing obligation from $73,000/year to $63,000/year.  While debt consolidation offers advantages, it’s also important to consider potential drawbacks. For example, under the original debt structure, the annual debt service obligation would have dropped to $40,000/year, after the machinery loan was paid off in 4 years.  Under the consolidated note, the producer is committed to $63,000/year for a full 10 years.  Longer-term debt obligations also potentially lead to paying higher total interest expenses, even with an interest rate lower than their original loan(s) due to the extended accrual period. Additionally, creating a new loan comes with closing costs and fees that could offset the immediate financial benefits. Every situation is unique, and the pros/cons are not always clear.  Those looking to consolidate existing debt should meet with their lenders and determine the best strategy for their farm’s short-term viability and long-term sustainability. 

References

Wright, Andrew. “Lower Interest Rates Create Opportunities for Managing Debt on the Farm.” Southern Ag Today 4(37.3). September 11, 2024.

Fannie Mae. (2024). Fed Cuts Interest Rates Amid Sluggish Existing Sales but a Rebound in Starts Activity. Retrieved November 5, 2024, from https://www.fanniemae.com/research-and-insights/forecast/fed-cuts-interest-rates-amid-sluggish-existing-sales-rebound-starts-activity#:~:text=The%20Federal%20Open%20Market%20Committee,rate%20of%202.75%2D3%20percent.

As we wind down the year, an approaching deadline will impact many producers and operations throughout the country. The deadline for filing Beneficial Ownership Information (BOI) is set for January 1, 2025. The Corporate Transparency Act (CTA) is the federal act that requires filing the BOI with the Financial Crimes Enforcement Network (FinCEN). The BOI is sometimes collected by financial institutions, but providing that information does not satisfy filing with FinCEN. FinCEN reporting collects information that is not collected by a financial institution.  FinCEN requirements include: 

1) a unique identifying number and issuing jurisdiction from, and image of, one of the following non-expired documents: 

a) U.S. passport, b) state driver’s license, c) identification document issued by a state, local government, or Indian Tribe, or d) Foreign passport. 

2) Any trade name or doing business as (DBA name

3) Jurisdiction of formation and registration (if a foreign entity)

4) Information about company applicant(s)

5) Certification by the individual filing the report with FinCEN:

a) The report is true, correct, and complete.

FinCEN defines a “Beneficial Owner” as an individual who directly or indirectly exercises substantial control over a reporting company or owns or controls at least 25% of the ownership interests of a reporting company. 

There are two types of reporting company definitions:

• Domestic reporting companies: corporations, limited liability companies, and any other entities created by the filing of a document with a secretary of state or any similar office in the United States.
• Foreign reporting companies: entities (including corporations and limited liability companies) formed under the law of a foreign country that have registered to do business in the United States by the filing of a document with a secretary of state or any similar office.

There is no maximum number of beneficial owners who must be reported to FinCEN. If you fall under the above definition, you should consider filing the BOI application with FinCEN. 

Failing to file can result in monetary penalties and possible felony charges. More information on filing BOI, and updates, can be found here. 

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Martinez, Charley. “Upcoming Deadline: Beneficial Ownership Information.” Southern Ag Today 4(49.1). December 2, 2024. Permalink

This article is a companion to the article titled: The Long Term Economic Struggles of Southern Cotton Farmers published in Southern Ag Today on October 28, 2024.

Besides cotton, another primary row crop suitable to southern soils and the climate is peanuts. As a legume, peanuts are often used as a rotational crop with cotton and/or corn. Peanuts are grown primarily in the southeastern U.S. from Virginia down to Florida and over to Alabama, with some acreage as far west as New Mexico, Texas, and Oklahoma. In 2024, the U.S. is projected to produce 3.2 million farmer stock tons of peanuts (USDA ERS). Market year average prices are expected to be around $530 per ton (USDA FSA), and if realized, the projected total value of peanut production is expected to be $1.7 billion. Not only are peanuts an important rotational crop, but they also contribute significantly to the rural farm economies of the Southern region.

Peanuts are capital intensive particularly because of the specific harvest equipment that must be used to dig up the vines. Then after the vines dry, another machine picks the peanuts from the vines. Analysis of data from the USDA Economic Research Service illustrates the financial challenge of the rising costs of peanut farming. Figure 1 highlights the ongoing profitability challenges southern peanut farmers have faced over the last 29 years. These data account for actual production costs incurred during the production process by farm operators, landlords, and contractors and include expenses for labor, equipment, and other inputs. Revenues generated from peanut sales are also analyzed. The revenues do not include government payments and crop insurance indemnities received by producers. Potential government payments during this time period may include traditional farm bill programs for farmers with base acres, as well as ad-hoc disaster relief programs.

According to Figure 1, the average peanut farmer managed to earn a profit in only five of the last twenty-nine years. On average, peanut growers faced annual losses of $57 per acre. Referring back to the companion article linked above, cotton farmers also faced average annual losses of $94 per acre during this same time period. These long-run average losses per acre show the continued financial challenges incurred by southern farmers despite growing crops that are suitable for the regional climate and soils. As with cotton, long-term economic losses to peanut production put the sustainability of Southern agriculture at risk. A continuation of these trends could result in a prolonged decline in agricultural production, eroding the economic foundation of rural farming communities across the Southern region. It is evident that there continues to be a need for effective agricultural policies and support programs.

Figure 1. Peanut Production Total Costs, Revenue, and Returns for Producers in the United States (1995 – 2023).

References: 

Liu, Yangxuan. “The Long Term Economic Struggles of Southern Cotton Farmers.” Southern Ag Today 4(44.1). October 28, 2024. https://southernagtoday.org/2024/10/01/the-long-term-economic-struggles-of-southern-cotton-farmers/

U.S. Department of Agriculture (USDA) Economic Research Service (ERS), Commodity Costs and Returns for Peanut, Updated on May 1, 2024.

U.S. Department of Agriculture (USDA), Economic Research Service (ERS), Oil Crops Outlook: October 16, 2024. https://www.ers.usda.gov/webdocs/outlooks/110202/ocs-24j.pdf?v=2829.3

U.S. Department of Agriculture (USDA) Farm Service Agency (FSA), Projected 2024/25 Market Year Average Prices. Updated October 31, 2024. https://www.fsa.usda.gov/documents/2024-myapdf-1

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Liu, Yangxuan, amd Amanda R. Smith. “The Long Term Economic Struggles of Southern Peanut Farmers.“ Southern Ag Today 4(48.1). November 25, 2024. Permalink

On October 10^th, Joe Outlaw, Bart Fischer, and Natalie Graff’s SAT article of the day highlighted the need to understand USDA’s net farm income projection. They noted that while the overall projection for farms across the country is down slightly, that masks the commodity-specific variability, where most crop farmers are losing money, and many livestock producers are relatively better off. 
 
In a time of low commodity prices, we often look at economic indicators to help us pin down the extent of the problem. Another approach is to talk to farmers directly about the economic conditions and document their thoughts. This qualitative data gives a much richer description of the issues that underlie the downturn in economic conditions. In July and August of 2024, we held 11 focus groups in Alabama with 115 farmers, producers, growers, agribusiness owners and employees, agricultural processors and manufacturers, and agricultural lenders. The focus groups were intentionally representative of the agricultural commodities produced in the southeast. The goal of the focus groups was to gather their perspectives on agriculture and economic development in Alabama. In the process, we heard an earful about profitability overall and many of the driving factors that affect profitability in the state and region. 
 
One focus group participant stated, “I think the biggest thing is profitability is the leading factor in growing most anything. If it’s not worth doing, you know, why are you going to spend the resources and all your energy just to be at a breakeven point or just barely pay the bills? You know what I’m saying? I think that’s figuring out how to become more profitable, whether it be a niche market or something like that. But I think that’s the main driver.” This sentiment was echoed across all the focus groups. Participants’ central concern for the agricultural sector was profitability. They identified a myriad of factors that contribute to their concerns, and the most common are listed below:
 
Rising input costs and decreasing commodity prices
Participants noted that the high cost of production coupled with low commodity prices for row crops and lack of markets for catfish, fruit, and vegetables affects the overall profitability of agriculture. Livestock producers discussed the increase in input costs eating away at profits. The inverted relationship between input prices and commodity prices and the subsequent impact on profitability is a critical stressor for farmers.
 
 
Equipment costs are skyrocketing with inflation
Participants remarked that the high cost of specific, necessary equipment limits them from diversifying crops as their equipment purchases tie them to particular commodities. The inability to easily diversify crops causes significant stress when specific commodity prices plummet, and producers have to make decisions regarding equipment sunk costs and expected future profitability.
 
Increasing transportation costs and freight charges
This sentiment was shared by producers across commodities indifferent to the mode of transportation. The escalation in costs related to shipping commodities has had a negative impact on the profitability of producers already impacted by low commodity prices.
 
Rising farmland values and rental rates
Participants emphasized the growth in metro areas in the southeastern U.S. and the resulting increase in land values. This has caused the growing inability to find land to purchase or rent that is economically viable for a farming operation. While expenses related to land are existing concerns now for profitability, focus group participants expect land values to continue to increase and have an even greater impact on profitability in the future.
 
Labor availability and costs
Participants discussed the (un)availability and high cost of labor, particularly for labor-intensive operations such as poultry, fruit, vegetable, nursery, and greenhouse production. Regardless of commodity, though, all producers stated that labor issues directly impacted profitability.
 
These issues all affect profitability, and while some will improve with upswings in commodity prices, others are systematically affecting the profitability of the ag sector. Documentation of these issues is the first step in informing decision-makers of what is unique about agriculture and how those in the industry perceive the likelihood of continuing their operations with the next generation of producers.

References:
 
Outlaw, J., B. Fischer, and N. Graff. USDA Farm Income Projections… Misused and Abused. Thursday, October 10, 2024. Available at: https://southernagtoday.org/2024/10/10/usda-farm-income-projections-misused-and-abused/

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Russel, Kelli, and Mykel Taylor. “Profitability According to Farmers.” Southern Ag Today 4(47.1). November 18, 2024. Permalink

 

The most recent agriculture Census defines total farm production expenses as “expenses provided by producers, partners, landlords (excluding property taxes), and production contractors for the farm business” (USDA/NASS, 2024). Based on Census data from 2017 to 2022, all southern states experienced higher overall production expenses (Table 1 in descending order based on change from 2017 to 2022). For 2017 to 2022, the top three states with the highest increases in production expenses were Louisiana (44.4% increase), Alabama (39.5%), and North Carolina (38.5%). The lowest were Oklahoma (15.35 increase), Texas (21.7%), and Virginia (21.6%). For the twenty-year timeframe 2002 to 2022, Alabama, Arkansas, and South Carolina had the largest production expense increases (yellow highlight), whereas Florida, Oklahoma, and Texas had the lowest (blue highlight).

Total farm production expenses in the Census are comprised of the following categories 1) fertilizer, lime, and soil conditioners, 2) chemicals, 3) seed, plants, vines, & trees, 4) livestock & poultry, 5) feed, 6) gasoline, fuels, and oils, 7)utilities, 8) repairs, supplies, & maintenance costs, 9) hired farm labor, 10) contract labor, 11) custom work & custom hauling, 12) cash rent for land, buildings, & grazing fees, 13) rent & lease expenses for machinery, equipment, and farm share of vehicles, 14) interest expense, 15) property taxes, 16) medical supplies, veterinary, & custom services for livestock, and 17) all other production expenses (defined as storage and warehousing, marketing and ginning expenses, insurance, etc.).

For these categories, the top five production expense categories summed across all 14 southern states were feeds purchased (28.9% of the total $112.3 billion); livestock and poultry purchased or leased (15.2%); hired farm labor (8.5%), fertilizer, lime, and soil conditioners purchased (6.6%); and repairs, supplies, and maintenance costs (5.8%). The five lowest were property taxes paid (2.2%); custom work and custom hauling (2.1%); contract labor (1.9%); medical supplies, veterinary, and custom services for livestock (1.2%); and rent and lease expenses for machinery, equipment, and farm share of vehicles (0.6%).

Agriculture producers face many challenges. Combined with low commodity prices, the rising cost of production expenses highlighted here illustrate the financial squeeze to a farmer’s bottom line.  The resulting lean profits, diminished cashflows, and increased credit reliance threaten the financial viability of many Southern producers. That is why understanding your cost of production is imperative. Going into next year, identify your own high expense categories and manage appropriately. 

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Menard, R. Jamey. “Census of Agriculture Production Expenses for Southern States.” Southern Ag Today 4(46.1). November 11, 2024. Permalink