Details on MFP, the Market Facilitation Program, with Paul Neiffer

Chris: Well, we got a little China Grove action here tonight because we're going to talk a little bit about the trade war or not a trade war, or maybe it is, maybe it isn't, depending on what Trump says at the point in time. And this is your Ag View Pitch. You got Chris Barron here. And tonight we have our special guest Paul Niefer. You want to go ahead and say hi, Paul, here and introduce yourself and Sure, Chris.

Paul

Neiffer: Yeah, this is Paul Niefer. I'm a principal with CliftonLarsonAllen. I would— or CLA. I think more people know me as the Farm CPA. I do the column for Top Producer magazine and then the blog on AgWeb and then speak all over the country. So I think most people probably know who I am by now, but just in case, that's a brief background on myself.

Chris: Yeah, you kind of get around. You kind of— you're in, uh, Missouri right now down there getting a little rain down there.

Paul

Neiffer: Actually, it hasn't rained yet. I just got in about 3:30 this afternoon. I know yesterday they had a tornado about 40 miles from where I'm at. So, and then I'm actually Friday morning or Friday late morning, I start driving to Washington, DC. I'm stopping off in Kentucky to visit with some farmers. And I'll probably get a pretty good idea and see what it looks like from, from 800-mile road trip.

Chris: Awesome. Well, so Paul, you know, one of the, the things that's great about you is, is you travel all over the place. I've traveled with you and, and watched you study things, and when you study something, you study it so that you clearly understand it. And so one of the objectives, you know, I thought we would have here on this podcast is to discuss a little bit about the knowns and the unknowns that currently exist with the MFP, or better known as the Trump Aid payment, that's coming out for producers in probably a 3-segment parcel that you'll— I'll ask you to describe to us. And so let's kind of get started on that. If you want to give us kind of a brief outline on what you know are the knowns that we can kind of count on from the MFP or the Trump aid payment. What can you tell us on that?

Paul

Neiffer: Yeah, you sort of highlighted part of it already in that there's about $16 billion that's set aside for the trade aid package. Now, we only know that they're going to do one-third of it here fairly soon. I would guess in the next month or so. The remaining two-thirds, we're not sure if they're going to do. They're going to wait and see if this trade war— what, as you said, is it a war, not a war, doesn't matter— if it continues, then you'll get the second and the third tranche later on this year. But on what we know right now is if you don't have a specialty crop, or excuse me, if you have a specialty crop, you know, you're growing cherries, etc., you're going to get a direct payment based on your production. If you got livestock like milk or hogs, you're going to get a direct payment.

But for everybody else, which is the primary focus of this discussion, wheat, corn, soybeans, those type of crops that are non-specialty crops. Unlike last year where you got a direct payment based on what you produced, this year's payment is going to be tied to what they call a county payment. So let's take Buchanan County there in Iowa where you're at, Chris, they're going to calculate that corn gets so much cents per bushel of aid, soybeans are going to get so much cents per bushel of aid, then they're going to calculate what was the production for Buchanan County. And let's say that was 30 million bushels of corn and 10 million bushels of soybeans, whatever it might be, multiply it by that, by that amount. And then, then they're going to back into a per acre payment. And then that's what you're going to receive.

So it doesn't matter if your yield was 276 bushels, of corn and 97 bushels of soybeans, or your yield was 10 bushels of soybeans and 60 bushels of corn, you're actually just going to be stuck with that payment amount based on where, what county you live in. So that's definitely more unique versus what it was last year. So, you know, in your county, I would say, you know, in the— there's both good news and bad news on having that type of a payment. If your production is normally much lower than the county average, you're actually going to benefit. If your production is much higher than the county average, then you're going to have a negative result because you're not going to get quite as much. Another thing that we know is that, well, I was trying to think. I had, you know, Chris, I'm reaching that senior moment.

I'm almost getting to the point where I forget something and What was I going to talk about on the— well, ask me a question and I'll come back.

Chris: It'll come back to you. Exactly. That senior moment, it'll come back to you after I ask you this question. And it's probably a hot question for a lot of the clients that we work with is, you know, talk to it, talk to us a little bit about, um, and this can be a two-part question, so if you have a senior moment, I can re-ask the second part. But You know, the, the ARC and PLC payment is going to be a factor for some of the guys that we work with. There were some areas in Michigan and northwestern Iowa and a little bit in Missouri and a few other little pockets here and there where there were some counties that the yields weren't so hot last year. You know, the majority of the people had really good yields, but we do have some growers we work with that are going to have an ARC county payment for sure. And so they're going to be up against a limit there.

And if this MFP payment comes in, and the limit on that's $125,000, I assume, and you can address that in a second, but if that's the case, what happens if they're getting $125,000 up against the limit on the ARC? Does the ARC and the, and the Trump aid payment, are those added together and limited, or can you, do you get to double dip and get both?

Paul

Neiffer: And that's the good news, you get to double dip. And we also have to remember that the payment that you're talking about, the ARC payment, is based on the 2018 crop that's going to be paid, you know, October of this year. So it's still based on the '18 crop cycle. So the MFP payment from last year was an '18 payment. Your ARC payment that you're going to get here in October of '19, that's still an '18 ARC payments. So, but the good news is for, for your MFP or Trade Aid payment, that, that limit, at least as far as we know, is $125,000. Your ARC PLC payment is also $125,000. And also going forward for your 2019 crop, which likely is not going to happen, but if you had marketing loan gains, etc., those are no longer capped.

So before in the old 2014 Farm Bill, there was a lot of wheat farmers back in, I think it was 2015 or '16, that got a pretty good size marketing loan payment or LDP. That was capped based on that $125,000. So the good news is you get the $125,000 on the trade aid, you also get the $125,000 on the ARC and the PLC.

Chris: What, what about conservation payments that are going to that entity? Are those added to anything? Are those part of—

Paul

Neiffer: nope, those are again separate. CRP's got a $50,000 payment limit. CSP and so on typically is a $200,000 limit, at least historically has been that over the life of the Farm Bill. EQUIP payments also have a separate payment limit, so You're still allowed to participate in conservation programs separate from the ARC and the PLC, so those don't— essentially you get to double up on those two. Okay, now another— go ahead, Chris.

Chris: Well, I'm going to keep asking a couple of questions. So like the— so that answers that question, but then so there's a— there's already a disaster, well sort of, and you can address that in a second, but we got disaster areas They're going to buy certain counties, have payments. And those were all flood situations. You know, I'm not saying that, you know, we're going to throw in the towel and there's going to be disaster counties just because we can't get planted. But, you know, we've been, we've been seeing some pretty wicked storms flow through here. And it's probably not out of the question to assume that there might be some additional disaster counties as we proceed forward during the growing season here now. How might that be handled if there's a disaster payment in the counties, um, relative to these other payments, or are they both separate as well?

Paul

Neiffer: Those, those are going to be separate as well. Typically those have larger type caps on them. In some cases there's no cap. Under the old farm bill, livestock indemnity payments were capped at— and I can't remember exactly the amount— but they were capped, I think, at around $300,000, let's say. But the, the, there is no cap on the new Livestock Indemnity Program, and that's effective for any disasters that, you know, suddenly you have cattle that get killed because the floods we've had, like in Nebraska. Out in our area, we had about 3,000 dairy cattle get killed in a blizzard back in February. Those are uncapped now. So if your loss is $2 million, you actually can collect Well, on LIP, it's 75% of that. So usually disaster payments are going to be separate from your ARC and from your MFP type payments. So now I'm not saying that all disaster payments are going to be unlimited.

Some of those will have a cap on it.

Chris: Okay, another question. I'm just like whipping all these questions out at you, Paul, but another one, and maybe you don't know the answer, so I'm just trying to see if I can stump you here, but If a grower takes prevent plant, what, if any, impact do we have there on some of this stuff? I mean, obviously that MFP payment, that's tied to planted acres. So if they're prevent plant, those acres are not eligible, right?

Paul

Neiffer: Right. That was my senior moment. That was what I was going to mention. If you do prevented plant or prevent plant and don't end up planting any crop according to the what we know right now from, you know, Secretary Perdue and so on, the farmer is not going to be eligible for the MFP payment. And the reason they say that is that the prevent plant crop insurance provides that benefit. You know, they're getting a benefit for not growing the crop. You know, a lot of people out there saying, well, that's not really fair, because the farmer is still being penalized via the trade war. You know, you've dropped the price. Yeah, we didn't have something that was planted this year. But the problem with this whole thing is it affected our pricing last year. It's affecting the pricing this year, and it's likely going to affect it in the future.

So I don't know if they're going to give on that. I haven't heard anything saying that they're going to allow payments on prevent plant, you know, you're going to get the crop insurance payment, but you're not going to get the MFP payment.

Chris: Okay, and that probably technically falls in the category of an unknown yet too, technically.

Paul

Neiffer: Yeah, I would say it's unknown. I mean, we know what they've said. But if they get enough pushback, we know in the past that they've changed their mind. Now, what could happen in that situation I don't want people to get too excited about that because they're going to say, hey, we're only giving out $5 billion this first round or $5.3 billion. So if we're going to make payments for prevent plant, what that means is everybody else is going to get a reduced payment. So, you know, don't, don't get excited that, you know, the payment— let's say the payment without or not paying prevent plant is $60 an acre. If they incorporate, incorporate prevent plant acres instead of being $60 per acre, now it's $47 or something like that. You know, that's what you got to be careful of.

Chris: Yeah. And some of the, the basic rough math that we've done initially shows in, in some of the counties, maybe on average, you know, that $40 to $45 an acre-ish. But again, that's probably an unknown and probably not something we need to be estimating until we know, probably.

Paul

Neiffer: But Yeah, you know, last year, we— what was soybeans? $1.65. And corn was a penny.

Chris: Yeah.

Paul

Neiffer: You know, if you use those numbers, I think you're right. I think in that $40-$45 range might be a realistic number. Some counties would certainly be less than that. Other counties might be higher. But I don't think it'd be substantially higher than that. Because you don't have too many counties. Well, You know, you could have a county that's got 70 bushel average on beans. I guess if you're in a really good county, uh, that'd be $100 and some dollars times 50%, roughly. So, you know, it could be 50, 60, 70 bucks.

Chris: Yeah. There's some cases, I think, in a few counties that are irrigated that have that kind of history. It's just whether or not there's enough bean acres there in the equation.

Paul

Neiffer: Right, right. I know in our area, you know, like Wallowa County where I, where I grew up, the county average on corn, let's say it's $2.70, but we don't grow that much corn, but we grow 20 million bushels of wheat. Well, wheat, let's say, is 15 cents for wheat, 90-bushel average, you know, that's only $13. So I don't think that's going to help us too much.

Chris: Mm-hmm. Doing the math on the prevent plant too, I mean, one of the things we've been doing is kind of just estimating when we— so we're doing a side-by-side analysis on a prevent plant decision with growers. And so what we're doing is looking at, you know, the, the left side of the equation is doing what we planned on doing, right? It's putting in your cost of production. And then what we do is we put in the yield and the price estimate. And then when we do that and we start looking at that compared to prevent plant, we're seeing some you know, some kind of variations there. So I wouldn't make any at this point. We haven't done enough of them to kind of draw any conclusions or say that we see anything that really rhymes across the board. But what we are doing though is, is kind of assuming that we might get up to maybe $40 on average when we look at if we go ahead and plant.

But that's probably a little dangerous, maybe, is it Paul, if we're making the assumption we're going to get 40, maybe we'll only get a third of that.

Paul

Neiffer: Is that— yeah, you know, I, I— yeah, that, uh, you know, that's pretty skinny. I mean, yeah, yeah, yeah, because one little hiccup, your 40 can turn into zero. So, uh, right. Um, it's, it's, uh— now in your area, when, when was your sort of drop-dead date on prevent plant, when you start losing?

Chris: Well, in, in our part of the world in Iowa, we're, we're May 31st is the final, uh, that's when the prevent plant date, you know, starts. And then you, you start to lose 1%. Yeah, right, every day for 25 days up to a 25% reduction. And I think it's gonna get a little bit more difficult for growers. Um, everybody's really gonna have to run their numbers on that and make some hard decisions, I think, especially once you get past that date. And we're just trying to encourage everybody to make sure you don't do anything knee-jerk reaction, or once the planter gets rolling, you know, if you pull into a field— I was having a conversation with a grower earlier today about, you know, well, do you— you're past the prevent plant, you're in the prevent plant window of approval where, you know, you, you could choose that as an option.

And the fields are sort of ready and some of the guys are planting around you, do you plant? You know, and, and that's the tough call because, you know, like this grower was telling me, he's like, you know, if I've got 160-acre field, it's 50 acres of it's ready and the rest of the field I'm going to be mudding it in or planting it in not very good conditions. I'm not sure I want to screw my field up. So there's going to have to be some individual decisions, I think, this year. And It's starting to look like to us that we're going to have a pretty massive, potentially a pretty massive amount of prevent plant acres. And, you know, I would, I wouldn't even want to guess how many. You hear the numbers of those that have better connections probably than, than we do on, you know, estimates or whatever in that 6 million to, yeah, numbers as high as 10 million.

And I, if the weather continues like it is, I think people are gonna— that sit down and really run the numbers are gonna come to the conclusion that, um, that it's— you, you're gonna have to run the numbers, let's put it that way. I, you know, it's hard to say that there's going to be any massive conclusion across the board, or any mass conclusion I should say, but everybody's got to run it and just see. I mean, do you have any comments on anything that we aren't thinking of on the program, or questions, or ideas?

Paul

Neiffer: No, I think you're right. And I think what's a little bit more unique about this prevent plant, you know, a lot of the prevent plant that we've had in the past that's been a large year is really been more what I call the marginal acres, you know, the Dakotas, although they're not as marginal as they used to be. But it seems like this year, the prevent plant is hitting the heart of the Corn Belt, you know, it's hitting all of Illinois, it's hitting Indiana, hitting some of Iowa, not as much Missouri, you know, all over, it's just it's hammering what I call the most productive ground, you know, versus, you know, and like I said, in some of the years past, it's been more on the fringes, it's been around the Corn Belt, not in the middle of the Corn Belt.

So, so that's, that's definitely something to be aware of that, you know, if it is 6 million, you know, let's say it's 6 million acres at 180 bushels per acre, you know, you're at least a billion bushels of corn that's not going to be there. And you know, your carryout numbers potentially would go down. Now the question is, will it go down as much as everybody predicts? Or will there be some rationing by some of the people that are buying, they don't want to pay that price. So they'll wait for next year's crop, you just don't know. Another thing that we were talking about on the MFP payment, before I forget, is under The 2018 MFP had an adjusted gross income limit, AGI. I'm going to use the word AGI. The farmer's 3-year average for 2014, '15, and '16, because it was the '18 crop, couldn't be more than an average of $900,000. We still have the $900,000 limit for the 2019 MFP payment.

However, at least we think we do, but however, the, the disaster aid bill that, you know, that the House was supposed to pass last week, but the one congressman from Texas delayed it, has a provision in there that states as long as at least 75% of your AGI is from farming, you have unlimited AGI. So there is no AGI limit as long as 75% of your income is from farming. Now, for our entities, you know, for an S corp or for an LLC or a corporation, that's a pretty easy hurdle. You know, most of them, they're— the farm operation is going to meet that pretty easily. Where it gets a little bit worse or potentially worse is at the individual level, because remember, you have a payment or AGI limit both at the entity level if you're not a Schedule F farmer, and then at the individual level.

And so if there's a fair amount of off-farm income from husband and wife or an ethanol plant or salaries, you know, if that's more than 25% of that income, and they're over that $900,000 level, then they're not going to have the payments. So I think that's definitely a benefit that was at the behest of the Washington State Cherry Growers out here because they. They indicated, hey, look, you're penalizing us because our income's too high. All of our income's from farming. We've definitely been damaged. So they have made a good case. So that's in the disaster aid bill that should get signed hopefully here in the next couple weeks.

Chris: Yeah, and Paul, when we were offline, you and I were talking a little bit too. You had another good comment that I think people would want to know about from a tax perspective on the prevent plant. Can you —Yeah, describe real quick too.

Paul

Neiffer: Yeah, farmers are a little bit unique in that when they receive a crop insurance payment related to damage, not price, but they receive a payment that's related to damage, you know, hail, flooding, uh, you know, you got too much water in your field and you can't plant your crop, that is crop insurance related to damage. So in that case, the farmer has the option, not required to, but it has the option if they receive the payment in 2019, they're allowed to report that income in 2020. Now there's a couple requirements. One is that they have to generally, they sell more than 50% of their crop in the year after harvest. You know, just generally that's what they do. And for most corn and soybean farmers, that's what you guys do. You, you harvest your crop in October, November, September, and then You sell part of it this year, but most of the time it goes into the following year.

So that's the one requirement. The second requirement is if you collect, you have to collect the crop, the crop insurance damage payment this year. If you collected in 2020, you've already deferred it effectively a year, so you don't get to push it out again. And also some people have asked me, can we defer that MFP, the trade aid payment? And the answer is no, that's not crop insurance. It's just a regular payment. You're required to report that as income immediately.

Chris: Okay, um, is there any like risk management strategies that you're hearing or seeing as you're floating around the planet here, you know, visiting with growers and stuff, that, that maybe we aren't thinking about or that we need to be throwing into the equation of all this stuff?

Paul

Neiffer: Yeah, we touched on a little bit. I mean, my biggest concern is, you know, we you, when you see a rapid increase in pricing, you know, you sort of get that euphoria, you think it's going to continue forever. And like you and I discussed off screen a little bit or off, off before the call, you know, this is a unique situation. But even though it's unique, these, we got to remember the funds like on corn, the funds have liquidated, what is it, 250,000, 300,000 short contracts, they were short about that many contracts, they've completely liquidated that they're now going long. And when they decide that they no longer want to be long, this market can drop, you know, 3 times faster than it went up. So I think what I'm hearing from some of my farmers that I talked to, and I guess some of my strategy too internally, is that, yeah, I want to be start locking in some of this pricing.

Yeah, prices may go up. But, you know, maybe use some type of a put. So even if they really go up, you're losing a little bit of the insurance cost of the put. But, you know, we've seen, you know, 5 years of bad prices, we're starting to get a price where you can actually lock in a profit, assuming you're going to get the production. I mean, that's the big assumption that you're going to get the production. So just, just, just be careful, you know, don't assume that corn is going to $7 a bushel. That's, that's a drought-related rally. This is not a drought-related rally, I don't think. So we'll see.

Chris: At this point it's not. And, and to your point, you know, the big challenge really is everybody is in a different situation. You know, there's people planted nothing and people that have been done for a long time. And I mean, I keep getting text messages, just got one while we're talking here. You know, just somebody just got pounded again with another rain, rain cell. Not maybe a day or two away from planting again. And I've heard a couple of those other stories earlier today. So yeah, the weather is something we can't control. And it just keeps being relentless with us here. So we'll just have to take things a day at a time and kind of watch this market.

Because one of the things that Dwayne Lowery and I've been talking about too is, you know, I agree 100% with what you're saying, Paul, we need to If we've got production, we need to, we need to make sure that we take some risk off the table along the way. But on the other side of it too, we got to also be careful. It's like walking this tight wire here because you can think you're 20% or 30% sold and all of a sudden real quick you're 60 or 70 or 100% sold. Exactly. Exactly. There's a balance here, you know, that we kind of got to, we kind of got to do. And that really comes back to profit manager and And, you know, looking at these numbers almost daily right now, I mean, if we can't plant, it doesn't hurt to sit at the desk for an hour or two and scratch your head and, and run some of the numbers.

And whether it's prevent, plant, or which crop you're planting or whatever, running the numbers is really, I think, a key thing.

Paul

Neiffer: So yeah, and discuss it with, you know, people that, you know, that sort of live the numbers, that know the numbers. I mean, I'm a numbers guy, but it's more on the tax side. You know, you talk it over with somebody that really has a pulse on the market and, and then plan accordingly. Right, right.

Chris: Yep. So anything else you can, you can think of that we need to talk about, or are we about ready to wrap things up?

Paul

Neiffer: I think we're probably about ready to wrap it up. You know, when we start getting a little bit more guidance, uh, 'cause we certainly know on this trade aid there's certain things that we don't know, but we could certainly circle back with another call at that point.

Chris: Yeah, I think we'll need to 'cause I think we discussed, as we said at the beginning of the call here, as we started with the China Grove and the China situation, and we're always one tweet away from all kinds of interesting news. Yeah. And I think, you know, We really appreciate you bringing some of the things that you know to us and enlightening us on some things that are still on the plate yet and need to be discussed and worked through. And if anybody wants to reach out to you, Paul, how do they get a hold of you?

Paul

Neiffer: A couple easy ways. You know, anybody can call my cell phone. I don't mind that. 509-961-9739. The other option is to email me at Paul neifer, and that's N-E-I-F-F-E-R, at claconnect.com. So C-L-A-C-O-N-N-E-C-T dot com. Or you can probably go to the AgWeb or farmcpatoday.com. That's our blog, farmcpatoday.com. And I know I did at least one post last week on MFP. I've posted on the AGI limit and so on. So we try to post 2 to 5 times a week on that.

Chris: Awesome, that sounds good. Well, Paul, we really appreciate, appreciate you being on here with us and kind of enlightening us on the information and the things going on with the Trump aid package and how that affects the taxes and some of our business decisions as we move forward. And, and we'll kind of wrap things up here. And thanks everybody for, for being here with us again on that the Ag View Pitch, and we'll wrap things up, and we'll be back again with Paul again here in another week or two, or whenever it's pertinent and we get some more information. Thanks a lot, Paul. Appreciate it. Thanks, Chris. Bye-bye.