NEWS for North Dakotans
Agriculture Communication, North Dakota State University
7 Morrill Hall, Fargo, ND 58105-5665

October 15, 1998

NDSU Ag Economist Offers PFC Payment Scenarios

The Emergency Farm Financial Relief Act allows producers to receive 100 percent of their upcoming Production Flexibility Contract (PFC) payments anytime between now and the end of fiscal year 1999, which runs through Sept. 30, 1999. The question is, should producers take their payments early? An agricultural economist at North Dakota State University says most if not all should—but only after careful consideration of their financial situations.

"The payment is not discounted for time value so that money is worth more now than it will be a year from now," says Dwight Aakre, extension farm management specialist at NDSU. "If a producer has any debt at all, applying this money to the debt now eliminates the interest cost that otherwise would accumulate until he makes a debt payment later on."

Producers who are experiencing a cash-flow crisis probably will want to receive their full payment during this calendar year. Because these producers will most likely use the money to pay current operating expenses, there shouldn't be any negative tax implications. But these producers may want to talk with their lenders before making a final decision.

"Some lenders have said that they'd rather see a cash shortfall on `98 income and project a positive cash flow for 1999," Aakre says. "Producers need to find out from their lenders if financing will be available in 1999 if all of their 1998 obligations are not paid."

Receiving their full payment either this year or anytime before next Sept. 30 means that producers will be creating a payment "hole" for themselves, Aakre says. Under the current farm bill, the earliest option for receiving 50 percent of the next PFC payment is December 1999.

"Unless Congress does something to fill that hole, the next payments will be more than a year away for some producers," Aakre stresses.

Regardless of their current cash-flow situations, producers who will be operating farm units next year that have changed due to combinations or divisions may want to complete the paperwork before receiving even a portion of the fiscal year 1999 payment, because farm-unit size affects payment amounts, Aakre says.

"If you take payment and then don't farm that land next year, you may have to refund the payment if the new producer does not succeed to the production flexibility contract," Aakre continues. "A land owner may have a concern about a producer's taking the payment early if there's any doubt that the producer will be farming the land next year."

In these situations, Aakre says land owners and producers will need to reach some type of agreement, which could range from a verbal understanding sealed with a hand shake to a security contract.

Even if producers don't need their fiscal year 1999 PFC payment to remedy immediate cash-flow problems, Aakre says they should receive the money as soon as possible, but without creating additional tax burdens. For some, this move simply may mean postponing the full payment until January 1999.

"The downside to taking this money early if you don't really need it now is that you might be tempted to spend it on a need that is less critical than one that will crop up next spring," Aakre concludes.

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Source: Dwight Aakre (701) 231-7378

Editor: Dean Hulse (701) 231-6136