November 16, 2022
Government payments have been a larger proportion of net farm income in recent years. According to the FINBIN database, managed by the University of Minnesota’s Center for Farm Financial Management, an average of over 50 percent of net income on grain, hog, dairy, and beef operations in recent years was a result of a government check.
Yes, many operations end up farming the alphabet, flooded with acronyms such as PPP, SBA's EIDL, WHIP payments, CFAP payments, and cover crop subsidies. Some government payments are a result of the COVID pandemic or natural disasters such as hurricanes, floods, or drought if mother nature bestows a financial or economic blow. If the government alphabet is part of net farm income, then a deep dive needs to occur to determine the short and long run financial impact.
Recurring or nonrecurring?
If you receive some of the unexpected funds, the first step is to determine if payments are recurring or nonrecurring. The slug of money into the account needs to be judiciously used in business strategy. Determine if the government payments come with income tax obligations and what year it will occur. You may want to set aside 15 to 25 percent of the funds for income taxes, depending on the financial outcome of your business.
With interest rates rapidly increasing, particularly for variable interest rate debt structures such as operating monies, accounts payable, and farm inputs on credit cards, evaluate using government payments to pay down accrued interest. An evaluation of operating loans and your working capital position will be critical when renewing operating lines of credit. With a recession looming in the broader economy, credit underwriting standards may begin to tighten.
Do not forget the Series I Savings Bonds issued by the U.S. Treasury, which are inflation-indexed bonds. You and your spouse can invest up to $10,000 each. Recently, these bonds have been paying over 6 percent interest. Of course, read the fine print before committing to any investment.
Finally, pay some taxes and maintain a cash reserve. Getting financially liquid increases your flexibility during negotiations for cash discounts, capital expenditures, and in your marketing and risk management plan for commodities.
Farming the alphabet is a reality of the 2020s. Do not become complacent when managing these revenues that often come with little or no cost of production, and take care not to rely on receiving them to remain profitable. Integrating government payments into your business and financial strategies and plans both in the short- and long-run will assist in your business journey from “A” to “Z.”
Source: David Kohl, who is solely responsible for the information provided and is wholly owned by the source. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset.
About the Author(s)
You May Also Like