Five Uses For Your MFP Money
Farmers who enroll in the 2019 Market Facilitation Program (MFP) are expected to start receiving payments in mid-August. While the payments are a blanket rate by county, 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.
First, it’s critical to analyze your financial position without the cash injection.
“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 that you know a solid estimate of this year’s financials.”
Chris Barron, a financial consulting with Ag View Solutions is advising clients to break the payment down on a per bushel basis to have a clear picture of what the money means to their operations. For example, a $60-per-acre payment on 200 bu. per acre corn is a $0.30-per-bu. increase in revenue.
Once a producer has a full understanding of the financial picture, then it’s time to consider how to spend the money the wisely. Here are five options.
1. Consider 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.
“Cash is king,” Barron reminds.
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. “It’s been a steady growth and then at the same time, there’s been refinancing going on where people have termed out that short-term debt over a longer period of time and we’re still burning through working capital.
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. 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 from crop proceeds at the end of the year. Some producers 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 kind of comes down to personal preference and farmers knowing their own 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 to do.
“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 people 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.”
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 that 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.”
He says in that case 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,” Barron says.
5. Look at paying down debt. “Does it make sense to look at the benefit of using that money to accelerate some debt payments?” Hoskins questions. “Sometimes.”
Arrington is advising her clients to pay their 2019 annual debt payments that will be coming due the end of this year or beginning of next.
While that makes sense, Barron and Hoskins agree that paying down debt requires much scrutiny. What kind of debt is?
Barron says if your line of credit is paid off, the next debt to tackle is an intermediate debt with the highest interest rate.
“Then you just work your way down on the lower interest rate stuff,” he says.
However, long-term loans, if the interest rate is good, could be better left alone.
“Don’t accelerate payments on long-term debt until you know absolutely for sure that you have excess cash, and even then, I think, in this environment, you’ve got be careful how fast no one would consider paying down long-term debt,” Barron says.
Wed, 08/21/2019 – 14:22
Be smart about how to use your refund.
Source: Dairy Herd