Here’s what you can do with that extra income this year
Due to poor weather conditions and a coronavirus pandemic that prompted dairy farmers to throw out milk in the spring, prices for corn and soybeans have hit record highs in parts of the United States and the federal government has made payments to millions of farmers across the country. .
Many farmers are earning 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 topped $ 100 billion for farmers, en route to the record high of nearly $ 140 billion reached in 2013, with government program payments making up much of the difference for that year.
So what can you do with this extra money? Mitchell has some ideas for farmers that will improve their business and create a profitable investment for the farm.
Mitchell said some farmers try to avoid being taxed on their farm income, but in reality the strategy should be to increase productivity and / or reduce costs with higher income. With an average tax rate of between 28% and 31% for farms with gross income of $ 90,000 to $ 490,000, there is no harm in improving profits for a better return on investment, a Mitchell said.
Some things you can do are 1) replace fixed assets or invest in new assets, 2) increase working capital to reduce financial risk, and 3) pay off debt dry.
Mitchell said farmers have postponed investing in assets due to tight budgets – but if the time is right, now is. 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 livestock and machinery. land if possible.
“I think the key to really stress with these people is that it’s not about cutting taxes, it’s about improving your productivity and / or lowering your production costs with assets. productive, ”Mitchell said. “It’s an opportunity – if you have that kind of capital lying around, do something productive with it, not something that avoids taxes. “
Depreciation is a hidden cost of assets, Mitchell warned. Make sure the asset is needed to increase profits and productivity before you buy it, otherwise it could be a waste of a purchase. The Iowa State University Extension System provides a agricultural machinery cost estimation tool for farmers who want to budget their purchases.
Farmers’ working capital levels have declined since 2014, Mitchell said. But with new income this year, farmers have the opportunity to increase their working capital to mitigate the risks of owning and operating a farm. Mitchell suggested keeping some cash on hand for a rainy day fund or to cover unforeseen costs. It also helps to have more capital so you don’t have to rely on a line of credit to run the farm.
“(A rainy day fund is) for unforeseen costs,” Mitchell said. “You can also spend less time managing the cash flow of your finances. You can actually focus on being a farmer instead of worrying about, oh my god, how am I going to pay that thousand dollar bill that has to be paid at the end of the month. another thing is that it allows you to take advantage of opportunities when they arise. “
Mitchell said paying off unnecessary debt is another priority for better-off farmers. You have to pay off debt that does not generate returns greater than the interest rate on the loan, or if you have only paid the interest and not the principal 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 have “wiggle room when profitability returns.”
Real estate debt is a burden on farmers right now at its highest rate on record of $ 300 billion combined. Non-real estate debt stands at around $ 150 billion and has declined steadily since the 1980s, Mitchell said. He said farmers are taking on more debt in the area of real estate debt due to fluctuating land prices, although land values in Wisconsin have generally been falling. stayed strong since five years.
“I think this money could be a way to offset some of this risky debt and reduce it… get out of some of these high interest loans,” Mitchell said. “Put more of your money in equity so you can grab some values that hopefully come from higher prices. “
Farmers have received a lot of help with state and federal programs this year, including the Coronavirus Food Aid Program, Paycheck Protection Program, WI Farm Support Program, Crop Coverage Program. dairy margins and the agricultural risk coverage / price loss coverage program.
$ 9.9 billion alone was paid out to farmers through COFOG in its first and second rounds due to the pandemic causing severe market disruption for many farmers; An additional $ 37.2 billion has been provided under many other programs. Mitchell said these programs support farmers because without them, farmers’ income would be below the 20-year average at $ 70 billion.
We have a lot of money flowing into agriculture… and now the prices have recovered, ”Mitchell said. “I am hopeful and optimistic about Wisconsin farming in the near future.