We recently interviewed Larry Labowski, a Farm Credit loan officer. A year-end financial check-up has many benefits for farm businesses.

Larry discussed what should be included in a year-end check-up and resources available to help.

Could you share the couple of key items that you feel are important for farm businesses to update during this time and why they are important?
Understanding the current state of your business helps you understand your performance and make a plan for the next year. I’ve found that farms and businesses that take the time for a financial review are better prepared for what may impact their operation in the future.

The first step of a year-end financial checkup is to update your balance sheet, both a personal balance sheet and business balance sheet. A balance sheet is a snapshot of your business at a point in time. Creating a balance sheet on Dec. 31 each year enables you to see how your farm operation has changed. Did your net worth grow or did it regress? If it grew, was it from earnings or asset valuations? If equity is trending downward, how much is the business and/or family willing to lose? Keep in mind that a balance sheet to monitor your operation’s performance may be different than your balance sheet to secure a loan, which often includes your personal assets and liabilities. To measure a business’s performance, the balance sheet should include assets and liabilities only for the business. This requires you to consider who owns each piece of equipment and parcel of land and then determine if it goes on a business or personal balance sheet. These values impact many indicators that are important to evaluating financial performance.

Profitability is critical to the success of any business. To best assess your profit from the previous year, create an accrual-adjusted income statement, which adjusts for items including inventory and prepaid expenses. An accrual-adjusted income statement allows you to generate a cost of production on a per unit basis to use in other areas of decision-making, including the use of risk management tools such as crop insurance. Understanding your income and expenses is important for tax planning purposes, and especially in a year like 2020 where we’ve had many unexpected factors impacting both. Many times, farmers avoid paying taxes at all costs, but don’t make a tax decision that puts your business in a worse position down the road.

Lastly, take time to complete an operating and capital expenditure (CAPEX) budget for the coming year. Remember that failing to plan is planning to fail. Review your income and expenditures from the past year and put together a monthly budget for your business. For your CAPEX budget, consider the capital investments you will make in the next year and how you will pay for those investments. Budgets are never 100% accurate, but they provide a starting point for planning for the upcoming year. As the year progresses, review and adjust your budget often to reflect what is happening in your business.

Those are some important aspects that farm businesses should consider this time of year, but many operations might be concerned about how to accomplish all of these items. What resources are available to help? 
Yes, tackling all of these items with a year-end financial check-up might be intimidating, especially if you haven’t done them in the past. I encourage you to involve your operation’s key advisors in helping with you. 

Lenders like Horizon are particularly interested in your balance sheet to see how your business fared in the prior year and your budgets for the upcoming year. We have a number of resources including forms and instructional guides to give you background on what to include in these areas. In good and bad economic times, it is always a good practice to maintain open lines of communication with your lender about anticipated capital needs. 

I also encourage farms to engage additional advisors, such as the accountant, feed consultant, crop insurance agent and others who are willing to help. All have a vested interest in the success of your operation and can best advise your business with accurate and up-to-date information.

Is there anything else you’d like to share with our listeners today?
I would like to add about the importance of knowing your own records. At year-end, when you are calculating your accounts payable and accounts receivable, be sure to be as accurate as possible. The most common error that I see is reporting an accounts payable when in fact the expense was deducted in the prior year because they signed a promissory note. In this case, you would be overstating your accounts payable and increasing your accrual adjustment to your expenses and then understating your accrual-adjusted net income. 

But that’s getting pretty deep into the weeds, and it is a great discussion after you start your annual financial check-up.

As the year winds down, now is the time to review your year-to-date records with your accountant to discuss tax projections and options for reducing your tax liability.

One of the tools that may be an option for you is leasing. Leasing can provide an efficient cash flow and serve as a tax management tool.

Machinery, equipment, buildings, grain bins and fleet vehicles are examples of the types of assets that are generally leased. Below are a few benefits of leasing:

Accelerated write off. For example, when you purchase a piece of equipment that would normally be depreciated for seven years, leasing provides an accelerated deduction by allowing the amount of lease payment as a deduction against income. The 4th and 40 rule does not apply to leased assets. The 4th and 40 rule means that when 40% of the assets for the year are purchased in the 4th quarter, the law requires that all assets purchased in the year be depreciated using the mid quarter convention method, which results in a minimal deduction.
Leasing allows for preservation of section 179 for other purchased assets that would qualify for the section 179 expense. The current section 179 expense is limited to $25,000.

Saving cash. Leasing saves working capital that would otherwise be used to purchase assets.
If you have already made your capital purchases for the year, don’t fret, leasing is still an option using the lease buy back option.

If you are interested in more information regarding a lease, please contact your loan officer or local Horizon branch.

To our valued customer-owners and friends,

Horizon Farm Credit would like to take this opportunity to inform you of the steps we’re taking to keep our customer-owners and employees safe, and our systems and services running, in response to the new coronavirus (COVID-19).

We have activated our Business Continuity and Disaster Recovery Plan, which includes a comprehensive response that follows guidance from the Centers of Disease Control and Prevention (CDC) and state and local health agencies in the areas we serve. Our ultimate goal is to ensure that we have a dynamic and appropriate response to the risk caused from this virus.

While the following is not a comprehensive list, our plan calls for:

• Increasing our supplies of disinfecting products, and implementing enhanced sanitizing and cleaning protocols at all of our branch locations.
• Keeping our products and services fully available to you.
• Supporting our customers and employees that are at-risk or have special needs.
• Monitoring the financial markets and discussing options for customer-owners to meet their changing financial needs. 
• Limiting business-related employee travel until the end of April. Instead, we will utilize our teleconference and video conferencing capabilities. 
• Modifying, postponing or cancelling large internal and external meetings until the end of April.
• Postponing events scheduled until the end of April. This includes our planned patronage parties, April 1 – 8, and AgBiz Masters meetings.
• Mailing all patronage checks the first week of April from our headquarters office.
• Monitoring and reducing our on-farm travel as business permits to keep our customer-owners and employees safe. Our staff will be conducting more business over the phone and by mail.
• Enhancing our risk monitoring and management protocols.

During this time of stress and uncertainty, we want to make sure you have access to all the financial services we offer. You can access your accounts and services without needing to visit a branch by using our digital banking platform, Digital Banking, or by calling us at 1-800-998-5557 for assistance.

You can find the latest information on the coronavirus and how to limit your risk of infection by calling the CDC hotline at 1-800-232-4636 or by visiting the CDC website. 

As always, our highest priorities are the health and safety of our customer-owners and employees, as well as the communities we serve. If there’s anything that we can do to assist you, please don’t hesitate to reach out to your loan officer. 

Thank you for the opportunity to serve you. Remember: We’re in this together.

In my travels and engagement through webinars, a number of questions are coming from individuals concerning the future prospects of careers and employment in the agriculture industry.

The current shortage of workers in many areas would certainly build a case. Many of you reading this column have children, grandchildren or a neighboring youngster that may be uncertain about future endeavors. Let’s examine some of the prospects for employment and careers in the agriculture industry.

Approximately 6.7 million people work in the agriculture and food industry, including natural resources. However, when food service and related fields are added, the number increases to 22 million or nearly one in nine workers in the U.S. The growth rate for employment is expected to be 60,000 jobs annually or a 2.6% growth rate.

Regardless of one’s endeavors, the agriculture industry represents a wide span of opportunities. Careers range from the knowledge generators with degrees and advanced degrees, the rapidly growing fields of technicians on the innovative forefront, and to the producers working on the front lines. A young person can expect 10 to 20 changes throughout the employment pathway in a lifetime. One size really does not fit all! From practitioners to entrepreneurs, the ability to adapt and be a lifelong learner and student of the field are critical for success.

The following is some advice for individuals considering the field or changing responsibilities.

• Do not limit yourself. The industry, like yourself, may evolve over time with interest and opportunities. Your agriculture career is not a sprint, but a marathon or journey in an environment of accelerated change. 
• Get comfortable being uncomfortable. The industry competition, consumers and trends that influence the industry will require one to be adaptable and pivot quickly. 
• Think outside the box. This way of thinking can lead to unique opportunities that can make a difference in people’s lives while being compensated monetarily. 

A college or university education is not for everyone; however, a skill set with the mindset of being responsible, accountable and able to work with a diverse group of people are critical skills. 

Organizations such as 4-H, FFA, MANRRS and other leadership programs are difference makers. Exposure to contests, debates and teamwork develops life skills that build confidence and self-esteem for young adults.

Horizon recently released its Forest Products Industry Outlook, a document which provides a current assessment of forest products industry in Pennsylvania.

Thad Taylor, executive loan office and forest products specialist, shared highlights from the Outlook document and his perspectives on the forest products industry. Listen to the full podcast episode with Thad here.

Please share a high level overview of your perspective of market conditions in the forest products industry.
Our Pennsylvania forest products industry faces many challenges right now. The global COVID pandemic and trade-related issues in recent years have created challenges specific to both pricing and demand for many forest products. 

First, Pennsylvania kiln-dried hardwood-grade lumber prices are down about 11% year-over-year versus 2019, and down about 27% from the mid 2018 highs. That reduction is somewhere around $375 per thousand since the high point recently in 2018.

Second, Pennsylvania timber stumpage prices are down about $326 per thousand board feet, which is about 36% reduction since the mid 2018 high. That may sound like some help to the industry from a lumber production and margin standpoint, but that reduction isn't quite enough to offset the $375 per thousand board feet reduction in average lumber pricing. In addition to that, hardwood saw timber stumpage sales happened to be the main product for most of our Pennsylvania landowners who sell standing timber. So, to the extent that stumpage price reduction helps some of our sawmill clients, it certainly hurts some of our standing timberland management clients.

The third item is Chinese tariffs and weaker overall Chinese economic demand. Economists can debate whether the tariffs hurt the Pennsylvania forest products industry or the weaker Chinese economic demand to hurt the industry. I think both happen to hurt our industry, and until the Chinese economy picks back up along with the global economy, I think we're going to have some headwinds for overall foreign demand for Pennsylvania forest products. Our industry is somewhat dependent on foreign demand for our forest products. 

Next, export demand for U.S. hardwood lumber is down about 25% in 2019 compared to 2018, and down another 18% year-to-date, May 2020. That has been a significant impact on lumber demand and pricing in Pennsylvania.

Finally, I'll mention pulp and chip demand. Both of those items are down right now in Pennsylvania and throughout the New England region, mainly because of the types of paper that are produced in the paper mills in this particular region. Both pulpwood and chip demand are down. In addition to that, palette blocking industrial lumber railroad tie markets, which were a bright spot in 2018 and 2019, have started getting tight.

Those are some significant challenges, but not everything in the industry is challenging right now. There are some bright spots. One would be diesel fuel prices, which are a huge part of the cost structure of any logging operation and indirectly, then, part of the cost structure for any sawmill operation. Diesel fuel prices are low right now. They're considerably off their 2018 highs. I think they're down about $0.75/gallon, retail basis since the 2018 high. The logging weather, which has been historically unreliable every spring and summer, has been terrific for both June and July here in 2020. We've had good sunny weather with very little rain. A final bright spot is both sawdust and bark demand, which have been very difficult the past few years, seem to be better right now. Both wood pellet manufacturing is consuming a lot of sawdust and various landscaping projects are also consuming a lot of bark and bark mulch. 

Within the Forest Products Industry Outlook, the document outlines six items on a forest products industry ‘Watch List.’ What is on the Outlook’s Watch List?

There are six items on the Forest Products Industry Outlook Watch List. It’s important to note that they are not all the negatives. They can be some positives or can be anything that we find occupying our mindshare to consider. 

1. COVID-19: The global pandemic has caused disruptions to supply chain. It has changed economic growth substantially. We're in a recession now because of the impact to overall economic activity, and restrictions on movement and purchasing behavior. Those things are a big concern. It's hard for me to make any predictions given just the scope of the unknown and uncertainty that surrounds what might happen next regarding economic performance in response to that.

2. Interest rates: This is a positive. Interest rates are very low right now. The Fed has reduced interest rates to near zero and wants to keep them there. I will say that anytime there is a rapid change in interest rate, it doesn't happen in a vacuum. No matter what the reason for the change in interest rate, there's always going to be some kind of distortion that happens in normal purchasing behavior, in human behavior that follows that change in interest rates. So, we might see asymmetric changes in asset values as people use the low interest rates to take advantage of additional longer-term purchasing opportunities they might not have otherwise made. I say all that to say it, it does create some changes, and disruptions, and distortions to normal purchasing behavior and asset values.

3. U.S. housing starts: U.S. housing starts were on an upward trend going into early 2020 until COVID-19. Since then, both U.S. and Northeast housing starts have fallen off a cliff. As housing goes, the forest products industry tends to have economic performance that responds in lock step with U.S. housing. Until U.S. housing recovers and steadiness returns to the economy from the COVID-19 pandemic, I think housing is going to be a concern area for us.

4. Labor: Labor has been a concern for our industry for many years. This is a decades-long change in the skilled labor force, skilled labor available ability, and simple technological trends in our economy has impacted labor availability. It’s going to continue to be a concern. One of the potential long-term solutions we've seen is that many operations have tended to address their labor concerns by adding additional technological capital or machinery capital.

5. Upcoming U.S. election: Before any election, we tend to see purchasing behavior get a little bit more cautious. We tend to see normal levels of risk taking back off a little bit in the months before any election. That's irrespective of which political party is in power at the time. It’s clear that the upcoming election is on all of our minds and is dampening purchasing behavior and risk-taking behavior.

6. Invasive pests: Within our Forest Products Outlook, we highlight the Spotted Lanternfly and the Spruce Bark Beetle. Both pose direct risk to plant health and mortality from an economic standpoint. One of the things that's always concerning is when quarantine zone boundaries change, creating barriers for trade and for logistics. It tends to be a disruptive force. 

Are there any other thoughts you'd like to share today?
The forest products industry is something I am passionate about at Horizon. Forests cover about 60% of our state's land base, and it's always going to be an important industry for our state. The industry is very important to Horizon. It's a large portion of our loan portfolio and a focus for a lot of our time, talent, and treasure here at Horizon. And we want to make sure we stay abreast of everything that is happening in the industry so we can ensure we serve the market appropriately.

We recently interviewed Katie Epstein, loan officer and assistant manager with Horizon Farm Credit.

Katie reviewed CFAP 2, a second round of Coronavirus Food Assistance Program (CFAP) assistance for farmers who experienced losses related to COVID-19. Katie discusses the program and next steps that Pennsylvania farmers need to take to access the funding.

Let’s start with some of the basics. What is CFAP 2, how is the funding different than CFAP 1 and what do farmers need to know? 
CFAP 2 is a second round of funding for agricultural producers who continue to face market disruptions and associated costs because of the COVID-19 pandemic. It totals an additional $14 billion, using funds available from the Commodity Credit Corporation (CCC) Charter Act and CARES Act.

You might remember that CFAP 1 was available this summer and was the first round of direct assistance for farmers and ranchers. For comparison, CFAP 1 totaled $16 billion in direct funding for farmers. CFAP 2 is similar to CFAP 1 in that there are specific guidelines for each commodity on how the CFAP funding is calculated. Under CFAP 1, commodities generally qualified for payments if their price declined by at least five percent for a specified amount of time, typically between January and April 15. Under CFAP 2, the five percent price decline is one of three methods to determine eligibility and the time frame extends from April 15 to the end of the year. Additionally, CFAP 2 is available to a wider range of commodities than CFAP 1 and includes goats, bison, tobacco, hemp, additional classes of wheat and more. 

CFAP 2 is administered through the Farm Service Agency (FSA) and the application period opened earlier this week on September 21. The application period will remain open until December 11.

What’s your perspective on how CFAP 2 will help Pennsylvania farmers and who should apply?
With the expanded scope of CFAP 2, many Pennsylvania farmers will be able to qualify for most, if not all, of their commodities produced. That makes it a great program for Pennsylvania farmers.

In CFAP 2, payments are made for three categories of commodities.

• First is the Price Trigger Commodities which I already spoke about briefly. This is for commodities that meet a minimum five percent price decline over a specified period of time. Price trigger crops include corn, soybeans, barley, wheat and more. Payments are based on 2020 planted acres of the crop, excluding prevented planting and experimental acres. Payments for price trigger crops will be the greater of
  • The eligible acres multiplied by $15 per acre, OR
  • The eligible acres multiplied by a nationwide crop marketing percentage, multiplied by a crop-specific rate and then the producer’s 2020 Actual Production History approved yield.

The CFAP paperwork and your local FSA office can help you determine which method qualifies for your situation.

If you are in the poultry industry, the calculation for broilers and eggs will be based on 75 percent of your 2019 production.

If you are a dairy producer, payments are based on actual milk production from April 1 to August 31 and production for September through December will be estimated by FSA.

If you are a beef, hog or sheep producer, payments are based on the maximum owned inventory of eligible livestock, excluding breeding livestock, on a date selected by you, the producer, between April 16 and August 31, 2020.

• The second category is for Flat-rate Crops. These are crops that don’t meet the five percent price decline trigger or don’t have data available to calculate a price change. For this category, payments are calculated based on 2020 acres multiple by $15 per acre. This would include alfalfa, hemp and triticale to name a few crops here in Pennsylvania.
• The third and final category is Sales Commodities. This includes specialty crops, aquaculture, nursery crops and floriculture and some other commodities not in the first two categories. Payment calculations will use a sales-based approach where producers are paid based on five year payment gradations associated with their 2019 sales.

One item to keep in mind that is that there is a payment limitation for CFAP 2 of $250,000 per person or entity for all commodities combined, which is similar to CFAP 1. This is a separate limit from CFAP 1, so any payments received from CFAP 1 will not impact your limit for CFAP 2.

What else do you think is important for farmers to know about CFAP 2? 
First, I encourage you to learn more about CFAP 2 and the specific details related to the commodities you produce. Information is available from USDA at farmers.gov/CFAP or you can call USDA at 877-508-8364 to speak directly with a USDA employee who is ready to offer assistance. Again, you will apply for CFAP through your local FSA office, so once you have your information prepared you’ll want to reach out to them.

Second, I want to emphasize that while this assistance from the federal government will be helpful to agricultural producers this year, especially with the swings in commodity prices and uncertainty of markets, CFAP funds are taxable and may result in tax consequences on your operation. Tax planning is important every year but especially in 2020 because of the extra government support programs this year due to the pandemic. I encourage you to consult with your accountant or tax advisor in the coming months. 

The Farm Credit Foundation for Agricultural Advancement is now accepting applications for Phase I of its Community Education Program, providing up to $10,000 to local non-profit organizations that benefit agriculture education. The program will offer funding for projects that make a positive impact within MidAtlantic Farm Credit’s footprint and Washington D.C.

“Agriculture education plays a vital role in the future of our industry,” says Charles Wright IV, Chairman of the Foundation. “This program will assist the many local organizations that offer ag-related activities, programs, and trainings to our community. The Foundation encourages those eligible to apply for funding to continue creating educational opportunities.”

Funding options include up to $2,000 and up to $10,000, depending on the size and scope of the project. Applications will be accepted online in two phases:

• Phase I: Now – June 30, 2022
• Phase II: July 1, 2022 – October 20, 2022

Qualified programs must serve communities within MidAtlantic Farm Credit’s 44 county footprint and Washington D.C. and be consistent with the values and mission of the Foundation. Requests that meet the selection criteria are considered by the Foundation Board. Only 501(c)(3) organizations or those otherwise exempt from federal income tax will be considered.

For more information about the requirements, guidelines and restrictions of the Community Education Program and to apply for funding, visit FCFoundationForAg.org.

What is Livestock Risk Protection (LRP) and why do I need it?

With the never-ending fluctuation and unpredictability of the market, Livestock Risk Protection (LRP) is something all cattle producers should consider. The primary purpose of LRP is to protect against the unexpected downward price movement in the marketplace by setting a base on any given date and type of cattle you wish to insure.

The producer should determine when their cattle will be marketed, target weight, and number of head they wish to insure. There are a variety of coverage level options ranging from 70 to 100 percent of the expected ending value. At the end of the selected insurance period, if the actual ending value is below the coverage price, you will be paid an indemnity for the difference in price.

How does livestock risk protection work?

*This is for demonstration purposes only. This scenario is not based on an actual claim and should not be compared to an actual claim. Chart originally produced by Rain and Hail LLC*

It is important to remember that your local selling price has no impact on the LRP policy. LRP coverage uses prices from the CME Group that are announced almost daily.  As of 2020, LRP (Cattle) is now available in all states when the market is available.

LRP has two types of coverage for cattle available:

1. Feeder Cattle with ending weights under 600lbs or 600lbs-900lbs, and

2. Fed Cattle with ending weights between 1,000lbs-1,400lbs that will be marketed for slaughter near the end of the insurance period.

What is the difference between Livestock Risk Protection and Livestock Insurance?

LRP does not cover death, disease, or any other peril, whereas livestock insurance does. It is important that you keep an open communication with your agent if something of this nature should arise. If your policy does trigger a loss, there will be documentation that the agent and insurance company will require you to fill out and turn in to show proof of ownership, and sale or retention within the appropriate sale window of 60 calendar days from the closing date of your specific coverage endorsement. Livestock Risk Protection (LRP) provides you with a defense against declining livestock prices for fed cattle, feeder cattle, and swine by setting a base on any given date and type of cattle or swine you wish to insure.

How to get LRP

You must buy an LRP through a crop insurance agent who has taken the extra training courses for livestock coverage. You can fill out an application at any time, however coverage will not attach until you sign a specific coverage endorsement. Timing on this policy is everything. Once the market closes in the afternoon, you have until the following morning to get the paperwork signed with the agent to attach coverage to your cattle. Like other crop insurance policies, this policy is subsidized by the federal government as long as you meet all the requirement guidelines.

The good news is our crop insurance agents are certified and ready to help you sign up for livestock risk protection through our Crop Insurance program. Give us a call or visit farmcreditcropinsurance.com to request to speak with an agent as soon as possible.