A second round of Market Facilitation Program (MFP) funds are making their way to farm country. Hog producers will receive a payment based on the number of live hogs owned on a day selected by the producer between April 1 and
May 15, 2019.
While the payments are a blanket rate of $11 per head, there’s no blanket suggestion on what farmers should do with those funds. Bankers and business consultants alike agree this must be an individual decision based on your farm’s financial position, debt structure and business strategy.
“Before any decision is finalized, I would suggest producers have a really good understanding of the farm’s current liquidity position,” advises Alan Hoskins, president of American Farm Mortgage. “Also, given the challenges we face from a market and weather perspective, make sure you have a solid estimate of this year’s financials.”
Once a producer has a full understanding of the financial picture, then it’s time to determine how to spend their MFP money wisely. Consider the following five options:
1. Evaluate the financial picture for the current year.
Will you experience a shortfall? Hoskins advises producers to consider this first. If so, the cash needs to be warehoused to cover a potential gap in funds.
“Remember cash is king,” says Chris Barron, a financial consultant with Ag View Solutions.
2. Pay down your line of credit.
“Generally speaking we are seeing larger lines of credit now than we have probably seen in the last five years,” Barron says.
If you are looking at a $1 million line of credit and a $50,000 check comes in, you have no choice, Barron says.
“Absolutely the MFP money doesn’t go to anything except for a reduction of short-term debt. There’s no question,”
he adds. “A bank’s going to look at anybody who does anything different than that and really question their decision-making capacity.”
Ashley Arrington, founder of ag consulting firm Agri Authority, agrees. She is advising her clients to put the money toward 2019 operating lines of credit to reduce what they have to pay at the end of the year.
Some producers might want to keep the cash to operate off of instead of drawing more on their line of credit. Arrington says producers can do that, but sometimes cash isn’t managed as shrewdly as line of credit draws.
“That decision comes down to personal preference and farmers knowing their management style,” she says.
3. Analyze your working capital position.
Do you have an adequate cash reserve? Hoskins asks. He advises farmers to have available cash equal to two years of term debt service payments in the bank.
Barron advises farmers to keep as much cash on hand as they can afford.
“I think a lot of operations are really going to need to plow [the money] right back into working capital,” he says. “Unless you’re really flush on cash, this is just an opportunity to maintain cash flow, at least at a level that will keep you from going backward too far.”
Farmers are one presidential tweet away from the market moving against them, Barron says.
“We just need to be real cautious with any kind of revenue we bring in this year until we know what [the trade situation will] look like,” he says. “I would put that money in the sock drawer and keep it liquid because I think we’re going to need it later.”
4. Fund projects that promise a good ROI.
If the above are met, Hoskins says to consider using the money for any necessary planned projects that will give a good return on investment.
Barron is OK with that thought process as long as the money is positioned to create a high rate of return.
“If you put it in something you know, for a fact, is going to give you almost an instantaneous rate of return then I would buy into that,” he says. “Where I struggle with that is a producer sitting there with $1 million dollars on the line of credit and 6.5% interest.”
In that case, Barron says it would be wiser to use the funds to keep interest from accruing and save 6.5%.
“It has to be an investment with an ROI greater than your cost of borrowing short-term money,” he adds.
5. Look at paying down debt.
“Does it make sense to look at the benefit of using MFP money to accelerate some debt payments,” Hoskins asks.
Arrington is advising her clients to
pay their 2019 annual debt payments coming due at the end of this year or at the beginning of 2020.
While that makes sense, Barron and Hoskins agree paying down debt requires much scrutiny. What kind of debt is it?
Barron says if your line of credit is paid off, the next debt to tackle is an intermediate debt with the highest interest rate.
“After that, then you just work yourway down on the lower interest rate debt,” he says.
However, long-term loans, if the interest rate is good, might be better left alone.
“Don’t accelerate payments on long-term debt until you know for sure you have excess cash. Even then, in this environment, be careful how fast you pay down long-term debt,” Barron says.