Farmers: Here's ideas for what you can do with that extra income this year
Through bad bouts of weather and a coronavirus pandemic that had dairy farmers dumping milk in the spring, corn and soybean prices are at an all-time high in some areas of the US and the federal government has made payments to millions of farmers across the country.
Many farmers are making more now than they have in years, said Paul Mitchell, director of the Renk Agribusiness Institute at the University of Wisconsin-Madison. Net farm income has surpassed $100 billion for farmers, on its way to the record-high of nearly $140 billion achieved in 2013, with government program payments making up a lot of the difference for this year.
So what can you do with that extra cash? Mitchell has some ideas for farmers that will improve their business and create a worthy investment for the farm.
Mitchell said that some farmers focus on avoiding being taxed on their farm income, but actually, the strategy should be to increase productivity and/or reduce costs with a higher income. With the average tax rate somewhere between 28% and 31% for farms from $90,000 to $490,000 in gross income, there's no harm in improving profits for a better return on investment, Mitchell said.
Some things you can do are 1) replace capital assets or invest in new assets, 2) increase working capital to reduce financial risk and 3) pay off deadweight debt.
Mitchell said farmers put off asset investments due to tight budgets – but if any time is right to do it, it's now. Use the money to buy new tractors, combines, choppers and other equipment, or use it to expand existing facilities like adding robots to milking parlors or even buying more cattle and land if possible.
"I think the key to really emphasize with these people is that it's not about reducing taxes, it's about improving your productivity and/or reducing your cost of production with productive assets," Mitchell said. "This is an opportunity to take advantage of – if you've got this kind of capital lying around, doing something productive with it, not something avoiding taxes."
Depreciation is a hidden cost of assets, Mitchell warned. Be sure the asset is necessary for increasing profits and productivity before buying it, otherwise it could be a waste of a purchase. The Iowa State University extension system offers a farm machinery cost estimation tool for farmers looking to budget their purchases.
Working capital levels among farmers have decreased since 2014, Mitchell said. But with new income this year, opportunities are there for farmers to increase their working capital to help mitigate the risks of owning and operating a farm. Mitchell suggested keeping cash on hand for a rainy day fund or to cover unexpected costs. It also helps to have more capital so you don't have to rely on a line of credit in order to keep the farm running.
"(A rainy day fund is) for unexpected costs," Mitchell said. "You can also spend less time managing cash flow on your finances. You can actually focus on being a farmer instead of worrying about, oh my gosh, how am I gonna pay this thousand dollar bill that's due at the end of the month. The other thing is that it lets you take advantage of opportunities when they arise."
Mitchell said that paying off useless debt is another priority for farmers coming into a better financial standing. You should pay off debt that doesn't create returns above the loan's interest rate, or if you've only been paying the interest and not the principle amount. Mitchell's suggestions include refinancing operating loans and revolving lines of credit or consolidating them into long-term, low-interest loans so that you will have "breathing room when profitability returns."
Real estate debt is a burden for farmers right now at its highest rate ever of a combined $300 billion. Non-real estate debt sits at about $150 billion having steadily declined since the 1980s, Mitchell said. He said farmers are getting tied up in more real estate-related debt due to fluctuating land prices, although land values in Wisconsin have generally stayed strong for the past five years.
"I think this cash could be a way to offset some of that risk debt and bring this down ... get out from under some of these high interest loans," Mitchell said. "Put more of your money into equity so you can capture some values that hopefully are coming from higher prices."
Farmers have had a lot of help with state and federal programs this year, including the Coronavirus Food Assistance Program, Paycheck Protection Program, WI Farm Support Program, Dairy Margin Coverage program and the Agriculture Risk Coverage/Price Loss Coverage program.
$9.9 billion alone has been paid out to farmers through CFAP in its first and second rounds due to the pandemic causing serious market disruptions for many farmers; an additional $37.2 billion has been paid out through many other programs. Mitchell said these programs are propping up farmers, because if not for them, farmer income would be below the 20-year average at $70 billion.
We've got a lot of money come flying into ag ... and now prices have recovered," Mitchell said. "I’m hopeful and optimistic about Wisconsin ag in the coming future."