Hamburger Prices for Filet Mignon Cattle

Federal relief programs aimed at stemming economic losses caused by the COVID-19 pandemic have fallen short in terms of meeting the needs of the agriculture industry, both in terms of dollars and in terms of murky regulations that seem to exclude many Kansas farmers from eligibility.

The difficulty farm owners have had in accessing federal relief has contributed to the uncertainty and volatile economic factors that are buffeting the agriculture industry right now. These times require farm owners to be flexible and resourceful in identifying strategies for getting through the crisis.

Outlook Changing Day by Day

For businesses in many industries, the outlook is changing day by day. Nowhere is that as true as in the agriculture industry, which has been hit with significant drops in commodity prices, as well as confusion around eligibility for certain federal relief programs.

For now, we recommend that farm owners:

  • Visit your local FSA office and sign up for federal relief programs, particularly the Coronavirus Food Assistance Program (CFAP), a  $19 billion relief program designed to provide support to farmers and ranchers, and maintain the integrity of the nation’s food supply chain.
  • Make sure you’re managing cash flow. If you haven’t reined in unnecessary spending already, now is the time to do it.
  • Communicate with your bank about your challenges. Your banker can help you sort through the options – including applying for relief loans – and come to a decision about moving forward.
  • Understand that the situation is changeable. Options that were not available or attractive to you a couple of weeks ago may look pretty good today. Be open minded and keep revisiting ideas that you have already explored.

While some of the regulatory issues around federal relief programs have been cleared up in recent weeks, the long-term economic outlook still is uncertain due to depressed commodity prices. The damage is different in each sector of the agriculture industry, but the quandary of beef producers is perhaps most telling.

Beef: Shift in Consumer Buying

As consumers returned to their own kitchens while restaurants were shut down during the COVID-19 crisis, the shift in food buying from restaurants to grocery stores caught beef producers in a difficult position. Many producers raise cattle to produce high-quality cuts of meat that are in demand by the restaurant industry. While that market has dwindled, consumers have turned their attention to the biggest seller in the meat aisle at the grocery store – ground beef.

The result is that producers are getting hamburger prices for filet mignon cattle.

The beef situation was complicated by the uncertainty around the operations of four major Kansas packing plants, which collectively process 25 percent of the beef consumed in the U.S. The plants are in areas with the largest COVID-19 outbreaks in the state – Dodge City, Emporia, Garden City, and Liberal. So far, none of the plants has had to close, but if one or more does, it could have a further impact on beef prices.

Commodity prices also are depressed for hogs, grain and, most significantly, dairy.

Relief Programs

Paycheck Protection Program

Under the PPP, loan amounts for farmers are based on the prior year net Schedule F income. Based on guidance that was released mid-way through the PPP loan funding period, farmers are eligible to receive up to 2.5 months of income, based on the prior year’s Schedule F. Affiliations can also apply, and new guidance has clarified that they may qualify for additional funding above what they initially received. Companies that already applied and were approved for PPP funds can now request more funds in a second application, if needed. Any amount that is requested is based on the self-employment income that is passed through to the principal on their K-1.

We recommend that you talk to your Adams Brown advisor and your banker for additional guidance specific to your situation to make sure that everything is being done to maximize the amount of loan forgiveness. The amount of the PPP loan is based on 2.5 months of prior year income; however, the forgivable piece is only valid for eight weeks after disbursement. Only 25 percent can be used on non-payroll expenses, like utilities and mortgage interest.

A few special situations need to be considered when applying for PPP loans:

  • Commodity Wages – We don’t believe that commodity wages will be allowed as part of the forgiveness piece in the wage calculation. Therefore, farmers should pay themselves a cash wage during the eight-week PPP loan forgiveness period.
  • H-2A Workers – Initially, the SBA’s early guidance suggested that wages of H2A workers could not be calculated in the payroll base used to determine the amounts of PPP loans for which farmers could qualify. However, that has changed. Wages of H2A workers who are in the U.S. for more than half the year may be included in the payroll calculation for PPP loans. If you did not apply for PPP loans, or your application was denied based on payroll calculations, we recommend that you reapply with your H2A workers’ payroll factored in.
  • Allowable Expenses – A lot of information still is unknown about how farmers should allocate for PPP loan funds. For example, the house has already passed a bill that would allow an extension of time from eight weeks to 24 weeks to utilize the PPP proceeds, however the extended period of time may come with other consequences so you may still choose to elect to follow the previous eight-week rule in certain circumstances. The deductibility of certain expenses paid by forgiven PPP funds is up in the air, too. Even though the CARES Act provided that the forgiven loan is not taxable as “cancellation of debt” income, the IRS has indicated that expenses paid with loan proceeds would not be tax deductible. It appears there may still be some clarification on this from Washington as various members of Congress have publicly stated that was not the intent of the bill.

While some Kansas farm owners have received Paycheck Protection Program (PPP) loans, many have been unable to because of regulations around the loans. The Economic Injury Disaster Loan (EIDL) program administered by the SBA is available to farmers, but loan amounts recently were significantly reduced and these loans must be repaid, whereas PPP loans are potentially forgivable.

Economic Injury Disaster Loans (EIDLs) for Farmers

Unlike PPP, an Economic Injury Disaster Loan (EIDL) is a traditional loan with a 30-year term at 3.75 percent interest, and is intended to be used for operating expenses.

At the beginning of the COVID-19 crisis, an applicant could apply online and receive a $10,000 advance within a few days if the application was approved. The SBA recently released new guidance that the $10,000 cash advance would be based on the number of employees. Under this new calculation, applicants would receive $1,000 per employee, up to $10,000.

Subsequently, as funding for the loans has been strained, the SBA lowered the maximum loan amount from $2 million down to $150,000.

Initially, EIDL applications did not require personal guarantees and were expected to be unsecured debt. Recently, though, the SBA has indicated it will take a blanket UCC over all assets on each EIDL loan.

We recommend that you go ahead and apply for EIDL loans and take up to 30 days to decide if you want to accept loan funds. Use the 30 days to evaluate your finances until the SBA provides further clarification of some of the regulations. If you qualify and wish to accept the funds, communicate with your banker to be proactive on the coordination of this loan while still allowing them to continue meeting your other financing needs.

USDA Relief Falls Short

In addition, the USDA received $19 billion in food assistance funds from the most recent federal relief legislation, and is directing $16 billion in aid to dairy, beef, and grain farmers. The funds are intended to assist producers with adjustment and marketing costs related to reduced demand and short-term oversupply. Specifically, the funds are designated as follows:

  • $3.9 billion for row crops
  • $9.6 billion for livestock
  • $2.1 billion for specialty crops
  • $500 million for other crops

Regarding the $9.6 billion CFAP allocation for livestock, the USDA has said that any commodity in this category that has seen at least a five percent decline in value from January is eligible. Eligible commodity losses that occurred between January 1 and April 15, 2020, can be potentially reimbursed up to 70 percent. Anything beyond that, for the following two quarters, is reimbursed at 30 percent of the loss. Moreover, compensation is limited to $250,000 with a gross limit of $750,000 per farm entity that has three qualifying owners.  For further details on signing up for this program and payment details see: https://www.farmers.gov/cfap

The remaining $3 billion in USDA funding is being directed toward a commodity purchase and distribution program. The USDA will purchase $100 million each of fruits/vegetables, dairy products, and meat products on a monthly basis and distribute it to food banks, community and faith-based organizations, and nonprofits.

All these factors contribute to the air of uncertainty for Kansas farm owners facing loss of revenues and shifting markets. We recommend that every farm owner explore all the options available for minimizing losses during 2020, taking into account their own unique circumstances.

Contact your Adams Brown advisor for a discussion about the steps you can take to strengthen your farm business and come out of the COVID-19 crisis in the best possible position.