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  • Benefits of Debt Consolidation to Improve Short-Term Liquidity

    Benefits of Debt Consolidation to Improve Short-Term Liquidity

    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.

  • Federal Estate Tax and Gift Tax Limits Announced For 2025

    Federal Estate Tax and Gift Tax Limits Announced For 2025

                On November 2024, the IRS announced the revised federal estate tax and gift tax limits for 2025.  The federal estate tax limit will rise from $13.61 million in 2024 to $13.99 million in 2025.  The federal gift tax limit will jump from $18,000 in 2024 to $19,000 in 2025. North Carolina and Texas have repealed their state estate taxes, and the remaining states in the South have tied their state estate taxes to the federal estate tax limits.  

    Federal Estate Taxes

                For 2025, the federal estate tax limit increases to $13.99 million for an individual and $27.98 million for a couple.  A deceased person owes federal estate taxes on a taxable estate if the value is over the exemption amount.  The taxable estate is the gross estate minus allowable expenses and deductions.  For example, a couple with a taxable estate of $28 million passes away in 2025.  The couple’s heirs may exempt up to $27.98 million from federal estate taxes and only owe federal estate taxes on $20,000.  If an estate is getting close to federal estate tax limits, then please check with your accountant to better understand what potential taxes you would owe. 

                One last note on federal estate taxes: a surviving spouse has an unlimited marital deduction. The surviving spouse can include the predeceasing spouse’s unused federal estate tax limit in their federal estate tax limit. This concept is known as portability, and it provides strategies for estates that may be reaching the estate tax limits.

                It is important to note that the current exemptions sunset on Jan. 1, 2026.  Congress would need to extend the current exemptions, or we would have to revert to the prior exemptions.  The prior exemption is estimated to be around $7 million in 2026.

    Federal Gift Tax Limit

                The federal gift tax limit goes up to $19,000 in 2025.  Federal tax law allows each taxpayer to gift up to $19,000 per year to one individual without incurring federal gift taxes. This exemption is tied to inflation but can only increase to the nearest $1,000 amount.  For a couple, this would be $38,000 in gifting to an individual.  Gifting strategies can be adopted by those individuals nearing the estate tax limits to reduce the value of their estates.  Individuals should talk to their accountant and attorney to consider developing strategies that will minimize the impacts of estate taxes.

    How Does This Impact You?

                Benjamin Franklin once wrote, “In this world, nothing can be said to be certain, except death and taxes.” With that in mind, farm families concerned about hitting the top federal or state estate tax exemption need to begin working on farm succession and estate plans to limit potential estate taxes down the road. Research from USDA’s Economic Research Service highlights that in 2023, 99 percent of U.S. farms would owe no estate taxes with those farms being impacted by federal estate taxes being less than 1 percent.  

                Working with a tax advisor early on can help limit your taxes and devise a tax plan to keep the farm in operation for future generations. Failure to properly plan can force surviving family members to sell family assets to pay taxes on the inheritance. Along with a tax advisor, consider working with additional team members, such as an attorney and financial planner, to begin developing the family’s farm succession plan.

                For those who need to develop estate tax plans, you should discuss with your farm succession team members if the increases in the estate tax limits impact your plan. Although this change may not affect your succession plan, it allows you to discuss other changes in the farming operation over the past year.

    Goeringer, Paul. “Federal Estate Tax and Gift Tax Limits Announced For 2025.” Southern Ag Today 4(49.5). December 6, 2024. Permalink

  • It’s Time for the Panic Button

    It’s Time for the Panic Button

    Recent articles in Southern Ag Today have detailed the financial stress that Southern crop producers are having to endure, although the problems are not unique to the South.  In economics, we talk about the “cost price squeeze” that is created by declining commodity prices and high input costs.  Our work at the Agricultural and Food Policy Center (AFPC) at Texas A&M University – with roughly 575 individual producers from across the country that work with us on 90-plus crop, livestock, and dairy representative farms – has given us a good feel for the relative costs of production and profitability across the country.  Those 575 producers are some of the very best from all regions and commodity types.  They also know that working with us provides them a voice in the policy world they would not otherwise have.  Because of this, I often get calls and emails letting me know when pressure is mounting.  In the last three months, there has been a steady stream of calls and emails saying that this is the worst year they have ever had and getting financing for next year has been incredibly difficult.

    I have heard from some that if it wasn’t for their lender including an estimated payment from the FARM Act, they would not have been refinanced…which is troublesome to say the least.  Why?  Neither the FARM Act nor any other disaster/economic aid has been moved forward by Congress.  Others have commented that they are having to sell land to pay off carryover debt to get their 2025 financing.  All are saying that without pledging their land as collateral, operating loans for next year would not be happening.  Some might say this is business as usual but consider this: the 2025 crop year is projected to be worse than 2024 by the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri, USDA, and our own recent projections for our representative farms. 

    Without getting into doomsday scenarios, I just ask the reader to consider the question that I keep getting asked: why should we continue to risk our financial health and continue to see our net worth evaporate when Congress can’t get their act together enough to pass much needed disaster/economic assistance that will help in the short-term or a new farm bill for the longer term?  My answer to that question is one of hope more than fact, but I am very hopeful that Congress will act decisively and soon.

  • Peanut Stocks Expected to Remain Low in 2025

    Peanut Stocks Expected to Remain Low in 2025

    As the 2024 peanut harvest wraps up, peanut prices remain relatively stable compared to prices of other crops. Corn, soybeans, cotton, wheat, and rice have had significant price decreases since the 2022/23 marketing year, while peanut prices have experienced only a slight decrease over that period. Peanut prices are projected to average $530 per ton for the 2024/25 marketing year, just below the $536 and $538 per ton observed for the 2022/23 and 2023/24 marketing years, respectively. This price stability comes as peanut ending stocks have remained low and stable, which is expected to continue into the 2024/25 marketing year.

    Figure 1: Peanut Production, Disappearance, and Ending Stocks by Year

    Data Source: USDA Economic Research Service. Oil Crops Outlook. November 2024.

    Peanut production is expected to increase in 2024, driven by the 10% increase in planted acreage. If current USDA projections are realized, peanut production would total 3.3 million tons, an 11% increase from 2023, as shown in the orange line of figure 1. Georgia leads the way with an expected 1.65 million tons of peanut production, followed by Florida (297,850 tons), Alabama (297,600 tons), and Texas (262,500 tons). The increased nationwide production comes despite a projected U.S. peanut yield of just 3,723 lb. per acre, which is 1.4 percent below the 2023 yield and the lowest yield since 2016. 

    On the demand side, peanut disappearance is projected to keep pace with the increased production, as shown by the bars in Figure 1. Peanuts processed for domestic food products, which account for about half of U.S. peanut disappearance, are expected to increase by 1% to 1.58 million tons. Peanut crush is expected to increase by 22%. In contrast, exports are forecast to decrease by 18% to 600,000 tons. As a result of the strong production, ending stocks are expected to increase to 823,000 tons, but this would still be the second lowest total since 2016. Overall, these tight supplies may suggest that peanut prices remain favorable next year. Despite the relatively favorable peanut price situation, peanut profitability remains a major concern due to the elevated production costs identified in the article titled “The Long Term Economic Struggles of Southern Peanut Farmers.”

    Sources:

    USDA Economic Research Service. Oil Crops Outlook: November 2024. Available at: https://www.ers.usda.gov/publications/pub-details/?pubid=110380

    USDA. Peanut Stocks and Processing: November 25, 2024. Available at: https://usda.library.cornell.edu/concern/publications/02870v87z

    Sawadgo, Wendiam. “Peanut Stocks Expected to Remain Low in 2025.” Southern Ag Today 4(49.3). December 4, 2024. Permalink

  • A Look at the Livestock Forage Disaster Program 

    A Look at the Livestock Forage Disaster Program 

    The foundation of cattle production is forage availability and management.  Poor forage growing conditions require cattle producers to incur increased feed costs or forced culling decisions. With drought conditions looming it’s a good time to think about the Livestock Forage Disaster Program (LFP) program.  USDA Farm Service Agency (FSA) administers the LFP designed to financially assist livestock farmers burdened with increased costs associated with a loss of forage due to drought and/or wildfire.

    Prior to 2008, livestock and forage producers had limited options to manage risk from disasters, except post-hoc disaster funding.  The Food, Conservation, and Energy Act of 2008 (2008 Farm Bill) formed LFP, funded by the Agricultural Disaster Relief Fund.  Permanent authorization of LFP occurred in The Agricultural Act of 2014 (2014 Farm Bill), with funding authorized through the Commodity Credit Corporation (CCC).

    While the Southeast may not be an area of the country considered prone to drought and lost forage due to drought, from 2011-2021, Southeast livestock producers received approximately $3.7 billion in payments from LFP. Provided that a producer meets FSA eligibility requirements, payments are calculated based on the number of months of eligible drought and a payment rate. The payment rate is based on the type of livestock and also is a percentage of a measure of monthly feed costs or carrying capacity of the land. The number of payments or months of payment is based on drought severity and duration based on the U.S. Drought Monitor.  In this way, total payment calculations are a function of drought conditions, cattle inventory, and producer participation. 

    As shown in Figure 1, at a state level, total payments over the 2011-2021 period are greatest for Oklahoma, Texas, and Arkansas. This makes sense as the 2011-2012 drought resulted in a large number of payments with a high payment amount for producers in Texas, Oklahoma, and Arkansas in 2012 and 2013. Yet, Figure 1 also shows that producers across the Southeast have utilized this program. In 2016 and 2017, a total of $106 million for Alabama producers and $29 million for Mississippi producers was disbursed following a particularly devastating drought. 

    Figure 1: County-level total payments distributed to livestock producers as part of the Livestock Forage Disaster Program for accounting years 2011-2021.

    As 2024 draws to a close, it is important to consider growing conditions over the last year and potential payments under LFP. On November 12th, 83% of the contiguous United States was in D0-D4 or experiencing abnormally dry to exceptional drought. In the Southeast, drought conditions have shifted over the summer, with some parts of the region experiencing severe and exceptional drought. The USDA publishes weekly county-level eligibility for LFP payments based on pasture type.  As of November 14th, 247 counties in the Southern Ag Today region were eligible for payments on improved pastures, 234 counties were eligible for payment for native pastures, and 123 counties were eligible for payments on improved mixed pastures. While some counties are only eligible for 1 month of payment, others are eligible for 5 months this year. Other types of pastures are also eligible for payment but are not discussed here. Eligible producers have 30 days from the end of the calendar year when the qualifying drought occurred to apply. For more information, consult the USDA Fact Sheet and your local FSA office. 

    Figure 2: Eligible counties and number of program months for payment under improved pasture as part of the Livestock Forage Disaster Program for 2024 as of November 14, 2024.

    Figure 3: Eligible counties and number of program months for payment under native pasture as part of the Livestock Forage Disaster Program for 2024 as of November 14, 2024.

    Thayer, Anastasia, Matthew Fischer, and Braeden Mull. “A Look at the Livestock Forage Disaster Program.” Southern Ag Today 4(49.2). December 3, 2024. Permalink