Posted: June 06, 2014
Insights into the new farm bill
What it means for agribusinessBill Watson
Every five years, Congress passes legislation know as the Farm Bill that sets policy for our nation’s agriculture, nutrition and conservation. After being without a bill for the last two years due to Congressional differences, Congress recently approved the latest version of the Farm Bill, allowing farmers to financially plan for the next five years. One of the most important components of the new bill is that it provides consistency to the planning process and allows producers to determine their probable cash flows and insurance coverage levels for the years ahead.
There are two major issues that arise with the new bill that require careful consideration for farm financial planning. These are the elimination of direct payments, and the new coverage types and levels for crop insurance. Both of these issues can have a material impact on revenue streams and, consequently, on producers' ability to cover debt payments and input costs in the coming years. This is particularly true with direct payments, which were based on the number of acres farmers owned and not on the condition of their crop. Now, crop insurance will become the foundation of the new bill.
With the demise of the direct payments program to farmers, it is imperative that all producers clearly understand what impact this will have on future cash flows. In many cases this may not be material, but in some cases where new increased debt levels may have stressed cash flows and debt coverage, this reduction in total income can have a serious, detrimental effect.
Producers need to work closely with their banks and financial advisors to review the impact of this change in forecasting the adequacy of future cash flows, and determining if changes in debt levels, loan terms or loan structure need to be made to accommodate lower future income levels. This should be done now rather than waiting until next year when the effect has already impacted the banking relationship. Being candid and straightforward with bankers and advisors as to any problems the reduced payments may potentially bring to operations will be critical for producers and their short- and long-term financial planning.
Additionally, the new crop insurance programs also require immediate consideration, particularly determining which option will work best for producers’ individual farms going forward. Farmers now have the option between two new insurance programs – Price Loss Coverage or Agriculture Risk Protection. Price Loss Coverage pays the farmer or producer when the market price for a covered crop is below a fixed reference price. The other program – Agriculture Risk Protection – makes payments to farmers when either the farm’s revenue from all crops or the county’s revenue for a crop is below 86 percent of a predetermined benchmark level of revenue.
In most situations, the best way to make the irrevocable selection between the two program options is to review how the options would have impacted specific farming operations over the last several years. This distinction is important, as one year’s consideration may prove to be misleading, as weather conditions, crop rotations and other factors could skew results of one option for any individual year. By looking at several years, or by forecasting crop rotations into the next five years (when possible), producers can determine which option will provide the best insurance coverage under a variety of potential circumstances.
Careful consideration of future operations, past insurance costs and coverage, and required levels of risk mitigation can yield significant improvement to overall farm income in the years ahead. Taking proactive steps to evaluate these areas with bankers and financial advisors will be critical in establishing a strategic plan and achieving the best outcomes financially possible for farming operations.
Watch a video about the farm bill.
Bill Watson is the president of UMB Bank’s Agribusiness Division. Widely regarded as an expert in the agriculture and banking sectors, Watson has more than 40 years of experience working with clients in both industries. Watson can be contacted at William.Watson@umb.com or at (316) 266-6016. Bank deposit products provided by UMB Bank n.a., Member FDIC. Equal Housing Lender