We recently interviewed Dan Brogdon, a PPP expert, about the recent COVID-relief legislation which passed on December 27, 2020. Dan reviewed the changes to the Paycheck Protection Program (PPP) and how certain farms or individuals may now qualify for the program.

Let's begin helping us understand what key changes to PPP were introduced that makes the program more open to those who might not have applied last year.
The biggest change is that sole proprietor farmers or anybody that files a Schedule F as sole proprietor on an IRS 1040 is eligible to use their gross Schedule F income. Previously, sole proprietor farmers had to use the net profit from Schedule F. 

So what's this mean? If you had a Schedule F loss in 2019, you previously weren't eligible for a PPP loan. However, now you can be eligible for a First Draw PPP loan based on your gross farm income. There's a potential of obtaining up to $20,833 maximum loan, since the gross income's cut off is $100,000 and the formula would yield a $20,833 PPP loan.

However, you don't need to have $100,000 in gross income. Anybody that's a sole proprietor that files a Schedule F with any amount of gross income could qualify. You could be a full-time farmer that has lots of gross farm income, or you could even be more of a lifestyle or a part-time farmer and qualify.

In order to qualify for any PPP loans that I'm going to be talking about today, you must certify, amongst other things, that the current economic uncertainty makes the loan request necessary to support the ongoing operations of the applicant. It’s really up to you to make that determination, and if you're uncertain, you can always contact a financial adviser, such as a tax accountant, attorney or financial consultant.

In summary, the greatest change to the agricultural industry is the allowance of the gross farm income. Sole proprietor farmers who didn't qualify in the past may now qualify. 

I’ll also add, anyone that's in a partnership who didn't use their K-1 net earnings from self-employment, may now qualify for a PPP loan as well.

For individuals that already received a First Draw PPP loan back in 2020, what options are now available given the new COVID Relief Act?
Again, the biggest thing is this being able to use gross farm income to determine the PPP loan amount. Even if you had already obtained a PPP loan, you may apply for an increase in it. We call that a First Draw Increase, and you may use your gross Schedule F income if you're a sole proprietor.

In the case where you have a PPP loan because you have labor and you had a net Schedule F loss as a sole proprietor, now you may use your gross Schedule F income. You will have to reduce that gross Schedule F income by your labor-related expenses, but in many cases, it will be easy to yield the maximum allowable gross from income of a $100,000 which would result in a $20,833 First Draw Increase.

Other farmers who had a net Schedule F profit or less than $100,000 will also benefit from this new rule, because they'll be able to make that eligible amount up to $100,000.

Let me give you a quick example:
If a farmer had a $50,000 Schedule F profit, that would've added about $10,400 for their PPP loan. With the new rule, since the gross farm income will yield the higher amount for sole proprietor, they would qualify for that full $20,833 as a result of their Schedule F income if they're a sole proprietor, so that means they would receive an increase of about $10,400..

There are a couple other cases where you can receive a First Draw Increase, such as if you didn't use your K-1 net earnings from self-employment as a partnership.

Or if you're a seasonal employer (and there's a specific test for seasonal employer), you may use the highest 12-weeks of payroll between February 15, 2019 and February 15, 2020. You would annualize that 12 weeks' worth of payroll, and then use that to determine your PPP loan. So basically, the formula is still the same. It's 20.833% of your annual eligible payroll.

Those are the three cases where you may be able to obtain a PPP loan increase. 

Once you've received your increase, then you may then consider a Second Draw PPP loan. Requirements for the Second Draw PPP loan also include that you must show that you had at least a 25% reduction in gross revenue in any quarter of 2020 compared to the similar quarter of 2019, or for the entire year of 2020 versus 2019. Like a First Draw PPP loan, you will also need to certify that the current economic uncertainty makes the loan request necessary to support your ongoing operations of you. Again, the gatekeeper for a Second Draw PPP loan is the 25% reduction in gross revenue.

In many cases, the amount you could qualify for in a Second Draw loan could be the exact same amount as you qualified for in the First Draw loan plus any increases. Second Draw loans allow you to use 2019 or 2020 payroll to determine your loan amount.

With the new changes and the opportunities to qualify for some of this additional PPP funding, when do you think a borrower should apply for loan forgiveness?
Borrowers need to remember to wait to apply for forgiveness until they’ve received any First Draw increases. The reason is because once a borrower received forgiveness, they’re not going to be eligible for any increases. 

At this point, we're not sure if there might be any additional rule changes that would qualify more increases, but who knows? We’ve seen the PPP program rules change before.

If you're afraid that you might miss out on any rule changes that might entitle you for more increases, you might want to wait until the end of March to apply for your PPP forgiveness.

What else is important for our listeners to know about the PPP?  
If you didn't receive a PPP loan in 2020, consider applying for your First Draw PPP loan if you qualify.

If you have an existing PPP loan and you meet the criteria for an increase as I outlined earlier, apply for your increase. Once you've obtained an increase and you're done with your First Draw loan, then take a look at a Second Draw loan. You will need to certify that you've obtained your First Draw loan and used your funding and increases by the time you obtained your Second Draw loan. Then once you've considered the Second Draw loan and determined whether or not you're eligible, think about when you want to apply for forgiveness and have a strategy in mind.

Horizon will  keep its PPP borrowers up-to-date on any program changes and considerations for forgiveness. There's a new, simplified loan forgiveness process for loans $150,000 or less which includes a one-page form. Listen to our January 12 podcast for further details on loan forgiveness. 

If you're interested in any of these items I talked about today, the First Draw increase, a new First Draw loan, or a Second Draw loan, contact us at Horizon and we’ll help guide you through that process.

Understanding how to buy land to build a house can be overwhelming - we get asked the same questions all the time. To answer some of these questions in a single place, we interviewed Alyssa Harzell, loan officer with Horizon Farm Credit, for all the in and outs of land loans and home construction.

Can you buy land and build a house later, or is it better to do both at the same time?

Many people ask the question if they should buy land now to build their home later, or if they should just wait and do both at once. Neither way is better or worse than the other, it's up to the potential borrower to determine what works best for them and their financial situation. Working with a loan officer is the best way to get information on your particular case, but we can still touch on a few things. 

Is it smart to buy land and then build later?

There are lots of reasons why you may be ready to buy land but not build on it right away. Perhaps there's a perfect property that comes up for sale and you don't want to lose it, so buying the land now and building later makes sense. From a financial perspective, it may be much more feasible to split up the investments and have time to rebuild your savings before being ready to build.

Perhaps most importantly, waiting provides time to:

• get familiar with the ins and outs of the property
• find your ideal building site and
• shop around for builders that will make the construction part easier.

Customers can work with a lender to do the land loan first and then combine any balance into a construction loan when they're ready to build. Your lender can work with you to see what options make the most sense so you can go at your own pace. 

Can I buy land and build a new home, all at the same time?

Yes, you absolutely can. Home construction loans can allow the borrower to buy both the land and construct a home at the same time. This scenario may be a bit more efficient in the long run - saving some fees and doing one closing - as compared to buying the land first and then building. But it's important to be financially prepared. That typically means having a good nest egg and savings. Also, you'll need to have your house plans all sorted out and a builder all lined up to start right away.

What are some other things to consider when buying land and building on it?

It's important to think about things like access to utilities and roads, zoning, permitting, and restrictive covenants and deeds. Some properties could require long driveways or have expensive fees to connect to utilities.

Others may specify the type of home that needs to be built on the property. You want to know this information upfront so you're aware of any major investments that may increase your cost of construction. 

Talking with the seller, your real estate agent, and township municipal office are all good resources. Additionally, I encourage all potential buyers to not only consider your needs today, but what your needs will be for the property in 10 years. Purchasing land is an investment and it's important to make smart choices and purchase a property that will meet your needs as you and your family change.

Is there anything else you'd like to share with us?

I want to emphasize the point that it's important for you as the borrower to be comfortable with their decision on when and how to buy the property and build a home. It's also critical that you work with a lender who understands your needs. At Horizon, we work with customers to help them through this process, step-by-step.

I am one of several loan officers who specializes in home and land loans for Horizon. If you are looking for property in central, western or northern Pennsylvania, reach out to us to help. We can talk through your options with you to determine what is best for your situation and help your dreams come true.

This week's episode is a recap of a recent webinar we hosted on Horizon's Dairy Industry Outlook. Each year, a team of Horizon employees compile a document, which includes an analysis of global, national, and local dairy trends, a price forecast for the current year, and recommended best practices for Pennsylvania dairy producers.

In today's episode, we'll hear from Mike Hosterman and Heather Weeks, who are Horizon Ag Business Consultants, with extensive dairy backgrounds, who together authored The Dairy Outlook document. They'll share highlights from the report, to help us better understand factors impacting the dairy industry. To kick off the discussion, Mike will share the team's projections on 2022 Pennsylvania milk prices and costs.

Mike: 2021 is going to come in roughly at an average year. If you look at Class III and Class IV prices, they're at record highs; so, we're probably going to see a record high milk price in 2022. We are anticipating that the 2022 milk price, the gross milk price for our PA producers, will be $6 to $6.50 higher than it was in 2021. If you look at an EBITDA (earnings before interest, taxes, and depreciation) per cow, this is a way a lot of lenders will make projections without getting into the weeds on feed price or labor prices. EBITDA per cow will be higher than it was in 2021. What we are saying for the EBITDA is to project about $100 per cow higher in 2022 than it was on our five-year average.

Mike: It won't be a record year from a profit standpoint. It will be good profit for most producers when you look at net income per cow or net income per hundredweight. It's probably not going to be like 2018, where we had really high prices, because cost of production is up. When you really think about what's going on there with inflation, shortages of fertilizer, chemicals, and seeds, we are seeing a higher cost of production. We are anticipating that the cost of production, which will cover net worth, equity, and maintaining our balance sheet, will be somewhere around $22 per hundredweight. This will be up significantly from our prior years of $19-$20, up $2-$3 a hundredweight. At the same time, our break-even costs will also be going up to almost $23, based on what debt has done.

Next, Mike and Heather will tag team some areas of focus for Pennsylvania dairy producers this year.
Mike: In the Northeast, when you think about areas for us to focus on, we have an infrastructure that may be somewhat limited. We haven't seen a lot of reinvestment in it. We have typically produced fluid milk with not a lot of other products to go with it, which makes it difficult on us when fluid consumption is down. Dairy consumption is up. It's just not in what products we produce here in the Northeast.

Mike: When you think about being at record high Class III and Class IV prices, a lot of us out there keep hearing this term risk management. Producers have to do risk management. 2022 has some record high prices. Our input costs are up, but there's a lot of opportunities out there, if we focus on a few things.

Mike: One of the things they tell us to focus on is making sure every producer is enrolled in DMC which is cheap insurance for producers to do some risk management. I would say from the producer standpoint, they need to focus on components. We tend to look at Pennsylvania as being lower in milk ship per cow, but if you dig into that deeper, even on an energy corrected milk basis, we ship less components than other producers around the US do. We need to focus on that. We need to increase our percentages of butter fat and protein along with production levels. The more components we can ship and the less water we ship, the more potential there is for profits. We're not paying to haul that water down the driveway to the processing plant.

Mike: They really need to focus on some component levels here in the Northeast to try and improve it. Top herds across the US tend to be greater than six, more around six and a half. There are producers out there shooting for seven pounds of components per cow per day, or even higher levels than that. Again, for me, one of the focus areas that we should be working with Pennsylvania producers on are our component levels and increasing how many pounds of components are we shipping per cow per day.

Mike: With record high prices producers should consider contracting. Producers should consider taking the risk off the table and contracting at these high prices. One of the things I hear from producers all the time, "If I contract, and prices go higher, I left money on the table. I'm losing money." I would argue they aren't losing money. In fact, I tell all the producers I would work with, "The best thing that can happen to you if you contract, especially when you go to the co-op with that contract, is to see a negative on the milk check for those contracts." That means your market prices are higher.

Mike: In theory, we are still making more money, even though we left an opportunity cost on the table with that contract. These prices are at record highs. Our costs are going to be up, but with these record high prices, you can lock in a profit. Producers should be trying to focus on locking in those prices before you see the market turn and then start coming back down.

Mike: If you compare it to corn or soybean producers in the US, usually when you go into a crop season, you aren't pricing the crop, you’re getting ready to plant. We're actually looking to contract or price the crop that's a year away, the following year. In 2022, they'd be marketing the 2023 crop before the 2022 crop is in the ground. This is because the Chicago Board presents a lot of opportunity. The same is true in milk. Producers need to try to focus on where they can lock in these prices at.

Mike: Another cheap way to do that is the DRP insurances. I say cheap, because it is somewhat subsidized by USDA. They are at a higher cost today than what DRP was a few years back when it first came out because of volatility. Again, if you want to look at ways to focus on securing profitability or securing these reasonable prices, there are tools out there that producers should be focusing on.

Heather: Mike talked about prices. When you take your milk price and you subtract your feed costs, you get milk margin. Milk margin is one of those things that we really believe that farms need to monitor this year. Some consultants or people might call it income over feed costs. They are one in the same. There are a few different vocabulary words to talk about them. Farms need to monitor that margin and that cost of production as they are making decisions on their farm. If you are working with farms to help them, try and analyze their business.

Heather: I have had a lot of producers ask me, "Will 2022 be profitable?" Farms are ignoring that amazing milk price, and they are focusing on the cost of inputs and high feed cost. While we are projecting a marginally profitable year this year, I think it's important to recognize that every single farm is different. One thing I love about working with dairy farms is that they are not cookie cutter. Every farm has different inputs and different focuses on their operation. Without analyzing your specific business, we really don't know what your cost of production is and how to incorporate the different input costs that we have.

Heather: A lot of farms have in some ways contracted for certain inputs this year. We do know that there were opportunities to lock in fertilizer, nitrogen, and chemicals, earlier in the fall. There are some opportunities to contract some feed here, going back. These are all things we have to take into account when we're looking at how we're budgeting out for 2022.

Heather: I have had a few people say, "Well, I'm just going to cut costs and put as little crop inputs as I can out. That way I will minimize my costs as much as possible." I think that's a really dangerous thing to do without truly looking at the budget that we have. It's very possible that you can afford to continue with a fairly normal cropping plan, knowing that we do have some of these income factors locked in, especially if you've taken Mike's advice from the first couple slides and contracted some milk, are using DRP, or have DMC locked in. We know that we're fairly confident in our milk price. We can then budget on the input side and know essentially what we have to spend to know that we're getting some quality forages off of our fields.

Heather: I do really caution that if we are taking some shortcuts on the cropping side, we might end up purchasing expensive grain substitutes if we don't get the yields we think we're going to have. If we cut corners on the feed side, it might result in lower components and lower production overall. That really is going to undercut the whole goal, which is to save us money in the long run. We're really just going to cut off that income driver to start out with.

Heather: To really make strong decisions there, especially when we are dealing with so many things that are uncertain, we need to have good numbers and good data to back up the decisions that we're making. We're not asking you to do it alone. There are a lot of people out there that are comfortable helping you work through some of these numbers, whether it's your agronomist, your nutritionist, folks at Horizon, or at Penn State Extension.

Mike: Heather is right. Don't cut costs; try to control your cost. Every time I've worked with producers, and they say, "We're going to cut costs." They end up cutting their costs, but they've also tended to cut their production. The bottom line is, if you don't cut your cost enough and maintain the production, your cost actually goes up. Overall, it works against them.

Mike: I think we have to control our cost. One of the ways you can do that is through what you buy. You can buy in bulk. Again, I know for some of our smaller farms, buying in bulk is not easy and they might come in larger quantities than a single producer needs. Maybe you can collaborate with a neighbor to partner up to buy things together. Heather and I have been involved with a group in Chambersburg that did that on their seeds. There were savings they could get by going in together to buy their seeds.

Mike: Another thing to think about is that whether you have excess heifers or excess crops to sell, make sure they are the highest quality. If you have extra space and you are feeding out a few steers, that can drive the income side of the equation.

Mike: I have found through my career that it’s better to encourage producers to work on the income level, rather than cutting expenses. You can control the costs by focusing on those other enterprises you have. You also need to find efficiencies. If you have employees, can you empower them so that you don't need to watch over their shoulder all the time? This will ensure that they're doing their job well at a lower cost to you. Maybe they will even perform at a higher level. Sometimes giving them the authority to do things so you're not having to supervise as much or watch over their shoulder makes a difference. Overall make sure you stay efficient and that the labor pool is doing the right things that you want. It really is about trying to control the cost and maximize the output.

Heather: One of our areas of focus is to use some of those earnings really wisely to build some cash reserves. That way you can pay down the line of credit where possible. To illustrate that, these are some of the things that we look for on our farms when we are analyzing a farms balance sheet: we look at current ratio and working capital. These show how well the farm is doing at holding onto their cash and how liquid they are. Our estimates go back to where we feel that 2021 has ended up. We don't have the final numbers yet. Current ratio and working capital have been fairly strong for the last couple of years. They do meet our goals; our goals are based on industry recommendations.

Heather: I do want to caution that some of these numbers can be clouded by where those values are hidden. Is it all in inventories or is there some actually in cash? We may need to tease that out by going a little bit deeper. If you are building cash reserves, one of the easiest ways to do that is to pay down the credit line. Some farms think that getting a couple of notes off of their payment schedule sounds really great. If they can get rid of a piece of equipment in order to drop that payment, they think that that sounds like a really great idea. It may only save them a few hundred dollars a month on debt payments, whereas paying down that line of credit really gives a lot more flexibility to the farm. If they are able to get a line of credit paid down, it's still available to draw back out if something happens and they need that cash available.

Heather: Those are some areas we really want to work on. Mike has touched on the debt question a few times here. Even with a strong couple of years from 2019 through 2021, we really haven't seen a lot of movement on that debt level. When we look at debt to EBITA, we're looking at how many dollars of debt the farm has to every dollar of earnings. We really want to see that number below that $5 mark; really under $4 would be great. We just really haven't seen it improve a whole lot at this point. Farms really are re-borrowing. We touched on that capital purchases number that is staying strong whether we have a positive net income year or not. This is something we want to watch and be cognizant of.

Heather: When you're looking at percent equity, how can you really focus on getting that farm in position to make some improvements that are going to position their farms to have that presence and that competitive nature with the rest of the dairy industry? What is the relationship between percent equity, which is the overall health of your balance sheet, and that debt to EBITDA ratio? We want to see that percent to equity looking fairly strong. We want to make sure that our farms are utilizing debt smartly and understand where that debt is going. Is it all in equipment debt? Is it operating debt? Where are they focusing on that, and how can we really get them to address some of these questions that really puts them in a strong position to take advantage of opportunities when they see them? We've got a strong milk price here, so how can we use it as a good opportunity, rather than just looking at some of the challenges that we see in front of us today?

Heather: What's driving all of these numbers is that debt coverage ratio at the bottom line of cash flows. How are we driving the income to be able to cover some of these things and to pay down debt? It looks like we have had a few years of more positive debt coverage opportunities. We have had the cash to be able to cover these debt payments. If you look at that five-year average number, we've pretty much been breaking even. We need to be taking advantage of every option possible to get our balance sheet in a position to where we have the options long-term to be successful in dairy.

Mike: The bottom line to me can be summarized by the 2022 milk prices looking good at $6 higher than last year. We're going to be profitable. We're going to have a positive cash flow. We need to focus on those areas that Heather and I have discussed: build that balance sheet, control your costs, focus on production. If you do that, there are opportunities out there. Again, there is going to be a profitable year here. Talk with advisors, neighbors, and mentors about how you can take advantage of those opportunities, how you control your cost, or how you do risk management.

Mike: If you had to sum it up in a few words, make a budget, monitor it, and adjust it regularly. When I say regularly, do this on a quarterly basis. Again, 2022 is looking to be a good year. It may not be record profits, but it will be a good year where we can rebuild our balance sheet and continue to do some improvements. More importantly, if you are a business owner out there, or you're employed, have fun with what you do. I tend to always want to conclude by telling you to have fun; because if you're not enjoying what you do, you may want to rethink your business plan.

We recently interviewed Devin Winklosky. Devin owns and operates a two-acre hops farm in Western Pennsylvania, which he started into 2020, called Teufel Hunden Hops Company. Devin is also a 2021 recipient of the Horizon Farm Credit Jumpstart Grant, which awarded 15 startup farmers with a $10,000 grant.

Devin, there is a lot more to your story than what I shared in that short introduction. Could you tell our listeners a bit more about yourself and how you became a hops farmer?

I'm a native Pennsylvanian. I was born in Western Pennsylvania in Latrobe, PA but I grew up on a farm in Derry Township. When I graduated from high school, I went off into the military and served about 22 years in the Marine Corps.

My sisters, my brother, and my parents continued to farm in Pennsylvania. When I retired from the Marine Corps and came back to the area, I really wanted to get back into what my family heritage was and what my family had been doing, which was farming.

The Marine Corps made me a lawyer. I loved the law and I loved helping people, but I really longed to do something that was more in my roots. I considered what possibilities were out there, and for me it was a confluence of three things. For one, I looked at the Pennsylvania craft brewing boom that was happening at about that time and that Pennsylvania was really becoming one of the top three states that craft breweries were springing up in. The second was that people were interested in local ingredients. Then the third thing was that I had a farming background, so I hatched this idea to farm hops. I approached my brother-in-law with this crazy plan. A couple years later, here we are. Two years and 1500 hop plants later, we have our Teufel Hunden Hops Company business.

Devin, you are the first hops farmer that we've had on our podcast, and I'm sure our listeners, like myself, are interested in learning more about hops farming. For those of us with limited knowledge, could you share a bit more about how hops are grown, how they're processed, and then how you market your product

I'm honored to be the first hop farmer on the podcast. I hope I won't be the last one on your show, but I'm glad that I can share some information about hops in general and how they're grown.

A lot of people may know that hops are a main ingredient in beer. Beer has four main ingredients: water, barley, yeast, and hops. Hops usually add the bitter flavor to the various types of beer.

As a plant, hops are perennials. You put a rhizome in the ground. It's primarily a root. The growing season is from about March through September. The plant shoots up what are called bines. They're not vines, they're bines because they have these little prickly things that can attach to cord that comes down from a trellis.

We built a trellis that has 18-foot poles, a wire system, and a cable system that is about 18 feet in the air. We have what's called coyer that come down from the wires up at the top and go to the root of the plant. Like I said, the plant has a bine that grows up and spirals around the coyer. From that bine, cones are produced. The cones are what contain the flavoring and the substance that's used in the beer.

We harvest it and cut down the bines. We feed them through a harvester to shake off the cones. We take the cones and we put them in an oast, which is just a fancy name for a dryer. We dry them down to about 8%, and then we put them into a pelletizing system. We put them through a hammer mill, powder them, pelletize them, and then package them into sealed packaging.

The pellets are what are marketed. They are what the brewers use for their particular brews. Before we sell them, we send them off to a lab to get a chemical profile. The acids and the oils that are contained in the hops are what the brewers use to make their own flavor recipe for the particular kind of beer that they want to craft.

That's pretty much the life span of a hop. It goes from being the perennial plant that's in the ground in the trellis system, to the hop yard, all the way through pelletizing into the brew that you get at your local craft brewery. The Ohio Hop Growers Guild, they refer to it as bines to steins. They go from the bine in the hop yard to the stein on your table.

You had mentioned earlier that you grew up in a farming family, but obviously, starting the hops farm was an entirely new endeavor for you. What did you find most challenging in your quest to begin farming, and what resources did you find helpful in getting started?

I think hops farming for farmers in the Eastern part of the United States, is an entirely new endeavor, not just for me, but even for established farmers who are trying to diversify their operations. It's something that's fairly new. I think it's something that's growing. For me it definitely was an entirely new endeavor.

One challenge is the scale. My two acres is really not very much compared to the big hop growers that are up in the Northwest of the United States. One difficulty was trying to find people who had started hop operations or had started hop yards of about the same size as mine. It was good to know the difficulties they had faced based on their location, soil type, and what type of materials were best for them to use to build the trellis. We were practically putting 80 telephone poles into the ground with aircraft cables in the air. That is not something you normally do in the middle of a pasture. Identifying materials, knowing the right place to put it, and establishing the yard itself was challenging.

Putting a cost figure to that was also hard. How much does it cost to do this from the ground up? If I already have some materials or some equipment, how does that remove some costs from the equation?

When you're talking about equipment, the other thing that was challenging to look at was specialty equipment for this kind of crop. You're working up in the air in a trellis. What type of platform system do you need that's mobile enough to be able to work with the bines? What type of harvester do you need? There's a specialty harvester for removing the cones from the bines. Then there is all the processing equipment, like the dryer and the pelletizing system.  Where do you get those? How much do they cost? Is there a market for used equipment?

What really helped a lot was other local farmers, not just in Pennsylvania, but also in Ohio and New York, where there's some burgeoning hop farming groups. They were extremely helpful, forthcoming with information, and cooperative with best practices. They were wonderful to work with. That's typical in the farming community in general, but because hops farming is so new, everyone was really willing to share best practices, tips, and things to avoid.

The other thing that was very helpful were organizations included in the ag extension services and the colleges of ag. At Michigan State University and Ohio State University, they have well-established programs directed at hop farmers. There's also a national organization that has started to look more at small hop farmers called USA Hops. That's the hop growers of America. They have a lot of resources there for folks like me who are starting a new endeavor.

The process is challenging, but there are resources out there that were available to me and to my partner to make sure that we were going in the right direction.

Teufel Hunden Hops Company is a young business that was only started a couple of years ago. What do you envision for the future? What do the next 5, 10, 15 years look like?

Pennsylvania is really growing in the craft brewing area. There are grants available from the state. As of 2020, Pennsylvania ranked third in the number of craft breweries with 444 and growing. Some people don't realize that Pennsylvania is second in the country as far as the economic impact of brewing, with over $5.5 billion in economic impact. That says a lot about the market for the ingredients for beer. It is lined up with our objective, which is to provide local ingredients to local brewers so that they can make fantastic beers.

I just happen to get the latest copy of Pittsburgh Magazine because we're in the Pittsburgh area, and the cover article is about the brewery boom. It doesn't look like it's going to end anytime soon.

With respect to your question about where we are headed with our business, in the short term we want to get quality local hops to our local craft brewers. In other words, we want to get our hops in their beers, see what they think, get their feedback, and ask questions to learn a lot more about what they want to see as far as the quality of hops, the chemical profile of hops, the flavor profiles of hops. The we can see what we can do to work together with them to produce hops that they want to use in their beers and refine our production and processing.

Insofar as midterm goals, we're really looking at establishing regular customers and working together with them to produce specialty brews that include just our hops. We want be known for being the local hop producer for local beers.

Long term, in 10 to 15 years, we are considering expanding the yard. Maybe we’ll add a few more varieties. We’d like to increase the number of plants we have of our current varieties, improving our processes, improving our product, improving our binding area, and getting our name out there as a recognized name for quality hops in the area.

An extended long-term goal that my brother in-law and I have been talking about is maybe even expanding beyond hops and into malt barley. Malt barley is not difficult to grow. It's one of those four ingredients that's needed in beer. Maybe that's another direction for our agricultural operations.

There's a lot ahead of us, but I am encouraged that we can get it done over the next years.

Can you share one piece of advice you have for someone who is interested in getting started farming or starting an agricultural business of any type?

I would have three pieces of advice. One is to plan. Make sure to plan ahead. When I say plan ahead, that means to not just plan for the next year or two, but to plan for 10 years or 15 years. Where do you want your operation to be? Where do you see yourself at that time?

Make sure to be realistic. What weakness are you facing? What challenges do you face? And don't downplay them. If you're not realistic, when face challenges, you're not going to be prepared to overcome them. Work within your means. When you're planning, make sure that you understand that you have limits to what you can do, and work within those means.

My second piece of advice is to persist. Be flexible in what you are doing, just in case you encounter some rough patches, but do not give up. If you put enough effort into planning and you put enough effort into a vision, then it's worthwhile. You should persist at it and not give up on it. If it's meaningful to you, go for it and keep going with it.

Finally, I'd say to listen. Keep your ears open for what other people have done. Even if it's not in exactly the same area that you're considering, you can pick up tips from all kinds of people in all areas if you keep your ears open and listen. That includes asking questions. Don't be afraid to be the one who asks a question. Who cares if it's been answered already? If you don't have the answer, then that's what matters. Don't be afraid to ask questions, and even reach out and ask for help if needed. Part of being successful is recognizing that you don't know certain things, so listening is an important piece of it.

As we wrap up here, could you tell our listeners where they can find you online to learn a bit more about your business and connect with you?
We have a website, which is teufelhundenhops.com, we also have a Facebook page and, of course, as everyone does, we have an Instagram. You'll recognize our logo. It has a dog with a hop bine over top of it and a big old hop. We welcome anyone to visit us.

I'm in charge of updating it, and my daughter also has a role to play in keeping it updated. We try to update it with pictures and information, but if it's not current, don't worry. We're still here. We still know it's out there, and we're still trying to get it updated. You're certainly welcome to visit us nonetheless on any of those platforms.

Devin, thanks so much for sharing your story with us here today, and congrats again on being one of our recent grant recipients.

Rachel, thanks very much for having me, and I just also want to say thanks so much to Horizon Farm Credit for your support and your interest in my operation, but also your support and interest in all young and beginning farmers. It really does mean a lot.

We recently interviewed Jim Hoge who shares about an exciting new program for Pennsylvania agriculture, called the Pennsylvania Agriculture Mentor Program.

Jim serves as a mentor for this program. The program includes five mentors with extensive agricultural backgrounds who assist beginning farmers, agribusiness entrepreneurs, and others in troubleshooting new strategies and ideas for their farm businesses. Spearheaded by a group of Pennsylvania agricultural organizations with an interest in the future of agriculture, the program leverages SCORE, a 501(c)(3) non-profit organization and resource partner of the United States Small Business Administration. The mentoring is free and confidential.

Could you tell us about yourself and your passion for agriculture?

I recently retired from Horizon Farm Credit after 34 years with the Farm Credit system. I spent 25 years as a loan officer working with large commercial ag businesses in dairy, timber, and grape industries. After those years as a loan officer, I transitioned to the Regional Manager for Western Pennsylvania. During that time, I led a lending team in three offices in Western PA and I was responsible for business development and credit decisions primarily. My passion for agriculture goes back to my college days. After I finished my B.S. in Dairy Science at Penn State, I worked with two of my brothers and we started a small dairy farm in Washington County. This experience gave me an understanding of the difficulties of startup businesses, especially in agriculture. The uncertainty of weather, crops, and marketing condition can add a new twist to startup businesses.

Throughout my career with Farm Credit, I worked with many startup businesses and learned what factors made some successful and others not successful. In 2013, before retiring from Farm Credit, my wife and I purchased a small farm near our home. Since then, I've been developing a small blueberry operation as a side hobby. We currently have 400 bushes and run a small pick your own business. We also sell to local farm markets. Agriculture has really been part of my day-to-day life for all my career, and I really enjoy working with the people involved in this industry. This is why I want to continue to stay involved in my retirement.

Why do you feel mentorship is so important for beginning farmers?

I understand how challenging it is to start a farm operation today. The capital involved in many different industries is high, so someone needs to come in with substantial equity or they need to take out loans to fund purchases to get started. Young and beginning farmers certainly have an advantage when they have a mentor that they're working with. The mentor is sometimes able to help them think of different things that they may not have thought of to avoid mistakes along the way. From my own experience, I know it's very helpful to have encouragement and someone to talk to along the way.

Jim, obviously you served as a loan officer for Farm Credit for many years, so in a lot of ways, this is a neat next step for you in retirement, to continue your role helping other in agriculture. What do you look forward to the most in serving as a mentor for others?

I’m not quite ready to kick back and not work, or not do much of anything in retirement. I have many years ahead that I want to be involved in agriculture. While I was at Farm Credit, I really enjoyed working directly with customers as a loan officer and as a regional manager. I worked mostly with large businesses later in my career, but I also worked with many small businesses and some beginning farmers. It was always exciting to work with folks that brought enthusiasm and new ideas to the table or to the industry. I'm looking forward to working with young and beginning farmers that are excited about developing an idea and starting or growing their business.

The new program utilizes SCORE to link the mentors to the mentees, and Jim, I know that you recently became certified through the SCORE program. However, many of our listeners may be unfamiliar with SCORE. Could you share with them a little bit more about the SCORE program?

I think this is a key part of the mentoring going forward. I was not familiar with SCORE myself until this venture. SCORE is the nation's largest network of volunteer expert business mentors, and SCORE is dedicated to helping small businesses get off the ground, grow, and achieve their goals. It's a nonprofit organization and it's a resource partner for the Small Businesses Administration, SBA. It is supported by SBA and the mentors that are SCORE certified have gone through training specific to SCORE. They are utilizing their experience in past business ventures and to serve as mentors for folks that are starting new ventures, or entrepreneurs that might be starting in a new business.

In your previous time with Farm Credit, you worked with a lot of beginning farmers. What advice do you have for someone looking to get started in agriculture?

The number one recommendation I have is to spend time and develop a business plan that is specific to what you plan to do. With that business plan, they're able to create a vision for what their enterprise is going to be, how the production will flow, what their marketing plan is going to be, and they can work on the financial projections of their business. This all is a plan, but without a plan, they really don't have much direction. Develop a business plan, complete that with specific ideas about production, financial projections, and the marketing aspects of what you’re producing.

Also, don't try to learn all aspects of the business at once. I would assume that anyone starting a new venture in agriculture already has an interest or some form of expertise in production for that industry. Taking that to the next level is going to take some experience and maybe some education but avoid trying to do all of that at once. Maybe learn the production while you're working on the business plan and take it step by step. I'd also recommend starting small. If you're able to start your business as a part-time venture and continue to work full-time, you have some added flexibility and insurance against any adversity that you might encounter along the way.

As we wrap up, feel free to share any other final tips or words of advice for our listeners here.

I would just encourage anyone out there that has a dream of getting started in agriculture or starting a new venture to follow it. Agriculture is the largest industry in Pennsylvania, and it certainly has a very bright future. Agriculture as we know it today is going to be much different in the years to come. There is plenty of room for new ideas, new ventures, and new businesses within the industry in Pennsylvania.

Individuals seeking mentorship can apply at www.score.org. Within the application, note your involvement in a food or farm business, and you may also identify a specific mentor, like Jim, that you would like to work with. To learn more about the Pennsylvania Agriculture Mentor Program and all of its mentors, visit pafarmlink.org/mentor. Organizations supporting the development and launch of the Pennsylvania Agriculture Mentor Program include Horizon Farm Credit, the Center for Dairy Excellence, Farm Progress and American Agriculturist, PASA Sustainable Agriculture, the Pennsylvania Department of Agriculture, Pennsylvania Farm Link, and Penn State Extension.

Approach every purchase-price negotiation with the same objective, cold, sober and analytical approach. The time to fall in love with a property is after departing from the settlement table.

This stance allows for a good business/investment decision, lessens or avoids buyers’ remorse and reduces the likelihood of over-paying.

Look at dozens of properties to overcome the potential emotion of the acquisition process. Gaining experience in the art of “walking away from unrealistic sellers” will make you more comfortable with timberland purchase-price negotiation.

Buy quality. Buy site index. Consider real estate tax rates. 

Seek areas with excellent timber species composition and high-quality timber fiber characteristics within key local species. Avoid properties overflowing with undesirable species or abundant defects. Reason: Excess time and money spent to rehabilitate prior owners’ mistakes will create a heavy financial burden that drives down return on investment.

Land (soil) with a high growing-site quality is better than low growing-site quality. A given soil’s “site index” is the average height of co-dominant and dominant trees of a given species, at a given “base age.” For example, “80 feet” is a terrific northern Pennsylvania “age 50 site index” (SI50) for northern red oak. A red oak 70 (SI50) soil is certainly respectable, but isn’t as strong as a red oak 80 (SI50) soil. Small differentials in site indices (between two otherwise comparable properties) will produce substantial differences in timber growth and yield over the course of a 110-year rotation – not to mention over the course of six generations of your family’s ownership!

Depending on a given woodland property’s state, county or municipality, annual combined county and school taxes can range from as low as $2.00/ac/yr all the way up to $31.00/ac/yr.Keep that tax burden in mind as you consider an offering price, otherwise the annual tax bill can eat all the potential investment returns.

Spend appropriate time and money on experienced, professional due diligence. 

None of us would seek discount dental care, or do-it-yourself surgery. Similarly, we want to avoid due-diligence short-cuts on a timberland property acquisition strategy. A good real estate attorney and a title policy are worth every penny before you invest your treasure in a woodland property. The counsel and cost of an experienced forestry professional can improve your timberland investment performance.

Prepare to spend money on proper site preparation, regeneration and pest protection.

Be ready to invest the money necessary to spray and manage cyclical or periodic insect infestations.Reason: A $45/ac, spray treatment is the right medicine to preserve a $1,875/ac oak timber crop which is nearing (but not quite at) financial maturity. Engage a forestry professional early in the ownership tenure. Plan two on-site inspections on your property each year, to detect and react quickly to insect events or wind, ice or fire damage.

The importance of regeneration: The best way to maximize growth per acre per year is to ensure full site occupancy by healthy vigorously-growing trees of desirable species. Open, un-regenerated forest areas can succumb to fern or diseased beech brush and leave your forest unhealthy and underperforming. The proper solution is to invest in regeneration, after considering several options that may include herbicide application or planting.

Please don’t fall prey to the suggestion to “cut the big trees and let the little ones grow.” Seek to keep the best-quality stems in the stand, and remove the smallest and lowest-potential stems first. Given our region’s history (vast forest-renewing clear-cuts between 1880 and 1910), a one stand’s small trees are the same age as its large trees. Within a given stand and species, the difference in stem diameter is a result of genetic potential and fitness – not a result of age.

Bonus: Seek out highly-stocked and larger properties. They generally offer a lower purchase price per acre. An analysis of historic woodland property transactions bears this out, and can allow a savvy investor to minimize the “dirt purchase price per acre”, which can help enhance returns over time.  If you’d like to discuss timberland ownership or a timberland price trend study in your area, call me, Rod or one of our experienced Horizon appraisal team members today.  We’d love a chance to help!

We recently interviewed Joel Semke, REAP coordinator for the Pennsylvania Department of Agriculture and State Conservation Commission.

Details on Pennsylvania’s 2020-21 Resource Enhancement and Protection (REAP) program were recently announced. Joel discussed REAP and program changes for this year.

Let’s begin with the basics of REAP. Could you share with us the background of REAP and how farmers utilize the program?
REAP was started back in 2007 and helps fund water quality conservation practices on Pennsylvania farms to reduce pollution runoff, including nitrogen, phosphorus and sediment runoff. Over the course of the past 13 years, more than 2,500 farmers across the state have been awarded REAP credits for a variety of conservation practices.

Farmers are reimbursed in the form of PA income tax credits, which are based on the cost of implementing those projects that reduce pollution runoff and also enhance farm productivity. The tax credits are used to pay the PA income taxes, dollar-for-dollar. Farmers have up to 15 years to use the tax credits from the date of issuance. So if you want to think about it like a debit account at the Department of Revenue, farmers draw on those credits to pay their PA income tax bill. Whatever they don't use one year rolls over to the following year.

Farmers can also sell those credits. They must wait one calendar year, but then they're allowed to sell whatever's left and turn it into cash. About 35 to 40% of farmers who use the program end up selling credits. 

REAP is a first-come, first-serve program. Farmers are not ranked based on geography or other factors, unlike some programs with NRCS or Chesapeake Bay. 

In order to be eligible for REAP, farmers must be in compliance with PA Clean Streams Law. That means having up-to-date Ag E&S (Erosion & Sediment) plans or conservation plans on all their acres. It means having up-to-date manure plans for their operation as well. If a farmer does not have these necessary plans completed, the cost of getting those plans is eligible for REAP credits at 75% of the cost. When REAP was established back in 2007, some of the primary goals were to increase compliance with Clean Streams Law by having these plans, in addition to increasing no-till farming, cover cropping and other important practices. 

Common practices that are eligible for REAP include no-till equipment (planters and drills), cover crops, waste storages, improved barn yards, precision ag equipment, stream practices and much more.

Farmers can apply for these projects after they're done or they can apply for projects that are proposed. If a farmer is thinking about buying a no-till planter next year, they can apply today. If they're eligible, credits will be reserved for those applicants and then awarded once the project is complete. 

Reimbursement rates range from 50% for equipment and cover crops to 75% for plans and projects that involve animal concentration areas (like an improved barnyard or streambank fencing) which are high priority practices for the state. 

One other important aspect of REAP that I want to mention is the program's ability to work in conjunction with other funding sources. Farmers are often very familiar with NRCS funding, the Chesapeake Bay Program or Growing Greener. They can use REAP in addition to those other programs. So for example, if a farmer has a big project on the farm such as a waste storage facility or barnyard improvement, they might be working with NRCS to fund those practices. Often NRCS will cover a good portion of that, but the farmer is still left with significant of out-of-pocket costs. Those farmers can apply to REAP and whittle down their final cost. 

Now that we have a basic understanding of REAP, could you share any specific details and changes to REAP for this upcoming year?
There have been a number of changes to the REAP program, mostly stemming from the PA Farm Bill that Governor Wolf signed in July 2019. Because of that initiative we have been able to revamp REAP and add some things that farmers had been asking for over the years. 

Some of the biggest changes include:

• The total amount of REAP funding was increased
• Farmers can use REAP credits on a jointly filed PA return for all income from the family farm
• The maximum amount of credits that a farmer or a farm operation can receive was raised 

For 2020, the commission implemented a 90% reimbursement rate for a select list of practices in any watershed with a TMDL. That might sound complicated, but really much of the state is covered by the Chesapeake Bay TMDL (Total Maximum Daily Load). In addition, there are smaller watersheds scattered throughout the state that have TMDLs too. Operations inside those watersheds are eligible for 90% credit on forested riparian buffers and buffer maintenance, livestock exclusion from streams and associated practices (such as stream crossings, fence, off-stream waterers) and soil health tests. It’s important to know that regardless of what watershed you are in, soil health tests qualify for up to 75% back.

This year, we also added some cover crop equipment to the list of eligible practices including spinners on the back of combines and roller/crimpers. Those are the new additions for 2020, but you can always look at our guidelines for the full list of everything that's available for REAP credits.

Is there anything else you’d like to share about REAP?

We're currently accepting applications. The application packet and a lot of other relevant information it can be found on the PA Department of Agriculture website. If farmers prefer a mailed copy of the application, please contact me at the contact information below. 

I manage the REAP program for the state, so if you have any questions I welcome you to contact me. Also, your local county conservation district is a great resource with the REAP program and can assist farmers with the application process.

Remember, REAP is first-come, first-serve. If you are interested in applying, do so sooner rather than later. I can’t accurately predict how long our funding for any given year is going to last. Typically, funding is available until December, but I can't guarantee that.  As discussed, you can apply for projects that you think you're going to do, not just projects that you just finished.

Please contact me at (717) 705-4032 or jsemke@pa.gov.

We recently interviewed Dan Brogdon, Horizon's resident PPP expert. On December 27, 2020 President Trump signed the latest COVID-relief act and government funding bill.

The legislation provides $900 billion in COVID-relief, including several programs to help farmers and agricultural businesses. The interview with Dan focused on the Paycheck Protection Program (PPP), including updates to the program and a second round of PPP that was part of the legislation.

There’s a lot included in the 5,593-page bill on COVID-relief. One of the biggest pieces of good news for the PPP program is the tax treatment of PPP expenses. Could you share with our listeners about that change and what it means for PPP borrowers?

Finally, Congress was able to set the record straight, and now we can deduct the expenses that you used your PPP loan funds for.

In November you might remember that IRS ruled the opposite. They essentially said, "Nope, you got tax-free money. You don't have to count it as income, but you cannot count the expenses." So, in effect, the proceeds were taxable.

The new act changed that, so that's great news. Now you can deduct the expenses and you do not have to include PPP forgiveness as income. If you received forgiveness or when you receive forgiveness, it won't be taxable.

Next, the legislation also simplifies the loan process for borrowers with PPP loans less than $150,000. Tell us more about that simplification.

For PPP borrowers with loans of $150,000 or less, when they apply for forgiveness, it will be a one-page application. The language says that has to be one page, so it shouldn’t be any longer than that. Also, borrowers will not have to submit any documentation.

I've heard some people refer to it as ‘automatic forgiveness’ for loans $150,000 or less. Well, it's not. You're attesting on that form that you used the funds appropriately, and you followed all the PPP rules, such as retaining employees and maintaining pay rates.

One thing that did survive with the new law is the safe harbors. Those safe harbors are cases where you had to reduce your staff due to being shut down, due to the government order. Or if you reduced your staff and then brought it back up to the previous level by a certain date, you won't be penalized on your forgiveness. Also included in that was, for the borrowers with loans of $50,000 or less, the FTE or salary reduction tests do not apply.

In summary, those with PPP loans of $150,000 or less will have to fill out a one-page application. They don't have to give the lender all the documentation they would have had to before. PPP borrowers are going to be very happy about that change, and Horizon is also happy that we don't have to review that paperwork.

The relief bill introduces a new “Draw 2” PPP loan. Dan, what does that Draw 2 loan entail, and who is eligible?

Anyone that received a Draw One PPP loan in 2020 is eligible to apply for a Draw Two PPP loan.

In order to be eligible, one of the big things is you must certify that due to the current economic conditions, funds are necessary to support your ongoing operations. That attestation is a key to your eligibility for the program.

The other big gatekeeper is that your gross income was reduced by 25% or greater in any calendar quarter of 2020, as compared to the comparable quarter of 2019. Or you could simply just look at the full year of 2020 versus the full year of 2019. The SBA already issued the rules and the procedures of the Draw Two program, and the application is available. As of today, only small community lenders are taking applications, but other institutions such as Farm Credit associations should have access to make Draw Two loans later this week or early next week.

So there you go, you have an opportunity for another PPP loan! If you are eligible, it will probably be a similar amount to your Draw One PPP loan because the formula is basically the same. The only exception is that you can choose to use either 2019 or 2020 payroll expenses when calculating your loan amount, if you qualify for Draw Two.

Again, the big key is the attestation that it's necessary to support ongoing operations. The other thing is the 25% drop in gross income comparing a quarter in 2020 to the comparable quarter in 2019.

There have been some changes that could impact borrowers of a Draw 1 PPP loan, for individuals that received a PPP loan last year. Could you help us understand who may have the opportunity to apply for an increase of their Draw 1 PPP loan?

This is another very exciting part of the new act! It only applies to those who received a Draw One PPP loan and have not yet received forgiveness, and if the borrower fits any of the rule changes that I outline. If you already received forgiveness, you would not be eligible.

The situations for potential Draw 1 increase include:

1. Sole proprietors only (partnerships and corporations don’t qualify): If you filed as a sole proprietor, you can use your 2019 gross Schedule F income instead of your net Schedule F income to calculate your eligible PPP loan amount. What this means is that farmers filing a Schedule F, sole proprietors could be eligible for a PPP loan increase of up to $20,833. Before you only qualified if you had a profit on your Schedule F. Now, if you had a net loss, you could qualify for that full $20,833, provided you have at least $100,000 of gross income. So you can have less than $100,000 of gross income and still qualify for an increase, but that's the maximum amount when we're looking at the calculation.

Another thing to add, anyone that has not received a Draw One PPP loan because they weren't eligible before, could now apply for a Draw One PPP loan. If you know of anybody that's in the circumstance that they didn't qualify because they didn't have a profit on their Schedule F to be able to qualify for a PPP loan, now they can apply and get their first PPP loan because of this gross income ruling. This is big and we'll be talking more about this, I'm sure.

2. Partnerships: Another situation where existing PPP borrowers can apply for an increase, if they haven't received forgiveness already, is partnerships. If you didn't include your K-1 net earnings from self-employment when you calculated your Draw One PPP loan, you can now include that and apply for an increase.
3. Seasonal employers: The third situation is seasonal employers. Make sure you qualify for the seasonal employer definition that has been released by SBA. You might be a seasonal employer if you have cyclical income or cyclical periods where you hire labor. You can choose from any 12-week period between February 15, 2019 and February 15, 2020 to calculate your maximum PPP loan amount. If that calculation yields a better result than what you had attained with your original PPP loan, you can apply for an increase.
4. New eligible payroll expenses: The fourth situation is all borrowers may include the payments they make towards employee fringe benefits, such as group life, dental, disability and vision. They can include those in the payroll expense and get it increased in their Draw One PPP loan. Originally the fringe benefits that were included were only retirement and health insurance, it was what the employer paid for the employee. Employer owners like sole proprietors, their health insurance and these fringe benefits don't count towards the PPP calculation. (Updated information: These new eligible payroll expenses won't alone qualify a borrower for a First Draw PPP loan increase. However, if the borrower qualifies based on other factors, they can take these new eligible payroll expenses into account).
5. Restaurants: The fifth reason for an increase is if you are a restaurant. You can apply for an increase if you did not include tips as wages when you calculated your original PPP loan.
6. You paid off your PPP loan prior to forgiveness: The sixth and final reason where you may qualify for an increase is if you paid off your PPP loan or you reduced the amount that you would have been eligible for, if you'd returned part of your PPP loan, you can now apply to get that reinstated. Either receive an increase or just a re-advance of that loan. The reason that they did that is there was a lot of confusion around about the necessity test and the safe harbor. SBA finally released that they weren't going to test loans under $2 million for that economic necessity test.

Those are the reasons that you can apply for an increase. We don't know what the process is, nor has the application for an increase been released. We'll be keeping our customers informed as to when they can apply for an increase. We do know that the deadline to apply for a PPP loan, a new Draw One, Draw Two, or an increase, is March 31, 2021. That's a lot to cover, but we'll be summarizing this on our website so you can review it there as well.

I understand there were some updates on the Economic Injury Disaster Loan (EIDL) program and also how EIDL interacts with PPP. Could you share with us those EIDL updates?

Another big change for the better is for anyone who received a EIDL loan advance. The advance was the initial amount up to $10,000. SBA had calculated that as $1,000 per employee, up to $10,000 maximum. The old rules had that reducing your PPP forgiveness. It was so that you couldn’t double dip. If you're were going to get your PPP loan forgiven and you got a $10,000 EIDL advance, SBA originally said they would reduce your forgiveness by $10,000.

The new act got rid of that reduction, so you're going to get your full PPP forgiveness that you're eligible for, and the EIDL advance will not impact your PPP forgiveness. So there's an extra up to $10,000 for folks that received EIDL advance, and they won't have to pay it back. The advance was never intended to be paid back, it's considered to be a grant.

The other thing is, SBA was applying that formula of $1,000 per employee up to $10,000. Well, Congress didn't like that. They thought everybody should have been treated equally, whether you're a big business or a small business. So the new act has SBA to digging back into the funds that they've appropriated for the program. If you received less than $10,000 for your EIDL advance, or you didn't get an advance when you have a loan or if you applied for a loan, you're going to get the difference between your original advance from that $10,000.

Again, there's been nothing released yet. Horizon does not administer EIDL loans. But if you did receive EIDL funds, we encourage you to check in with SBA.

The final thing I'm going to say about EIDL, is there is now a round two of EIDL. It has the provision for the advance, but the program is focused in on highly impacted businesses in low-income areas. There's about $20 billion allocated to this program, which, from what I've heard from other experts, they think that's going to be used up pretty quickly. It's going to be difficult to qualify, because businesses need to show a 30% gross revenue reduction from 2020, versus 2019. The test period is any eight-week period. For 2020 compared to a comparable eight-week period in 2019, you would need to show your revenue reduced by at least 30%.

The EIDL attestation, as far as economic necessity, is at a higher level from what I understand, as compared to the PPP program. You need attest that you essentially need this money to stay in business.

When it comes to the economic necessity attestation, whether it's PPP or EIDL, lenders can't really encourage or discourage anybody to apply. Or if you're going to go to SBA for an EIDL loan, the answer to that question is case-by-case. It's up to you, because we're not going to be evaluating that. You're the one that's answering that question and putting your integrity on the line.

If you're uncertain as to how to answer that question, we advise you to talk to your tax advisor, attorney or other financial consultants.

This is a lot to take in, but certainly some good opportunity for farmers and agricultural businesses to receive additional relief. What’s your recommended strategy on how existing PPP borrowers should approach these changes?

The big thing is, first determine whether you qualify for a Draw One increase before you look to apply for loan forgiveness. Information will be released within the next few weeks with the procedure on how to apply for your increase.

Once you've applied for that increase and received the increase, then I'd encourage you look at applying for forgiveness of your loan, using the $150,000 or less simplified forms. Or if you're above $150,000, you’ll follow that process which will be similar to what was previously in place. They've reduced some of the documentation retention requirements, but they might revise the form a little bit to account for the addition of the new fringe benefits that are allowed to be included in the PPP forgiveness calculation.

Again, to summarize: if you are an existing PPP borrower, first determine whether you qualify for PPP Draw One increase. Apply for that increase, attain that increase and then look to apply for forgiveness. You have until March 31 to apply for the increase. Then you have up to 10 months from the end of your cover period to apply for forgiveness.

Just as a reminder, your forgiveness covered period was up to 24 weeks from the day you received your PPP loan. Your covered period, always, always, always began on the day you received your PPP loan or the day that Horizon wired the money to you. The covered period ended between eight and 24 weeks from that date. So your deadline is 10 months from the end of that covered period.

Horizon supports its customers and community during this uncertain time by offering assistance and sharing important information that could be beneficial to you.

Below is an overview of federal and state programs that have been released in recent weeks. This list is not all inclusive, but it has many of the programs that Horizon feels will be of highest importance to our customers and partners.

2020 Recovery Rebates for Individuals (CARES Act; Title II; Section 2201): All U.S. residents with adjusted gross income up to $75,000 ($150,000 married), who are not a dependent of another taxpayer and have a work eligible social security number, are eligible for the full $1,200 ($2,400 married) rebate. In addition, they are eligible for an additional $500 per child. Watch for these checks to be direct deposited to your bank account or hit your mailbox in the coming weeks.

Small Business Association (SBA) Paycheck Protection Program (PPP): SBA PPP provides $350 billion to help prevent workers from losing their jobs and support small businesses due to COVID-19 disruptions. The Paycheck Protection Program provides eight weeks of cash-flow assistance through federally guaranteed loans to small employers who maintain their payroll during this emergency. If the employer maintains its payroll, the portion of the loan used for covered payroll costs, mortgage interest, rent, and utilities would be forgiven. The proposal would be retroactive to February 15, 2020, to help bring workers already laid off back onto payrolls.

Eligibility details include:

• Employers with fewer than 500 employees
• Self-employed individuals
• Loans could equal up to 2.5 times an employer’s average monthly payroll, with a maximum of $10 million
• Covered payroll expenses include salary, wages, and cash tips up to an annual rate of $100,000 per employee, health insurance, retirement contributions, and covered leave. It excludes sick and family leave wages for which credit is allowed under the Families First Coronavirus Response Act (FFCRA)
• Rent or Lease agreement payments are eligible expenses, as are utilities, and interest on mortgages that were originated before February 15, 202
• Payments can be deferred for at least six months up to one year
• The loan period runs from February 15, 2020 through June 30, 2020

The borrower is eligible for loan forgiveness equal to the amount spent during an eight-week period after the origination date of the loan on payroll costs, interest payment on any mortgage originated prior to February 15, 2020, payment of rent on any lease in force prior to February 15, 2020, and payment on any utility for which service began before February 15, 2020.

Amounts forgiven may not exceed the principal amount of the loan. Eligible payroll costs do not include compensation above $100,000 in wages per employee. The amount forgiven will be reduced proportionally by any reduction in employees retained compared to the prior year and reduced by the reduction in pay of any employee beyond 25 percent of their prior year compensation. To encourage employers to rehire any employees who have already been laid off due to the COVID-19 crisis, borrowers that re-hire workers previously laid off will not be penalized for having a reduced payroll at the beginning of the period.

Upon a lender’s report of an expected loan forgiveness amount for a loan or pool of loans, the SBA will purchase such amount of the loan from the lender. Canceled indebtedness resulting from this section will not be included in the borrower’s taxable income.

SBA has determined that any loan amounts not forgiven at the end of one year is carried forward as an ongoing loan with a total term of two years at 1% interest.

Many details and regulations around this program are still being developed. Horizon will provide updates as more information is received and how Horizon can be a resource as a lender for this program.
SBA PPP Borrower Fact Sheet
SBA PPP Application

SBA Economic Injury Disaster Loans (EIDL): This program is open to small businesses, agribusinesses and farms which add value to their products. EIDL offers up to $2 million in assistance and can provide vital economic support to small businesses to help overcome the temporary loss of revenue they are experiencing. These loans may be used to pay fixed debts, payroll, accounts payable and other bills that can’t be paid because of the disaster’s impact. Program participants must not have the availability to obtain credit elsewhere.
SBA EIDL Program Facts

Modifications for net operating losses (CARES Act; Title II; Section 2303): The provision relaxes the limitations on a company’s use of losses. Net operating losses (NOL) are currently subject to a taxable-income limitation, and they cannot be carried back to reduce income in a prior tax year. The provision provides that an NOL arising in a tax year beginning in 2018, 2019, or 2020 can be carried back five years. The provision also temporarily removes the taxable income limitation to allow an NOL to fully offset income. These changes will allow companies to utilize losses and amend prior year returns, which will provide critical cash flow and liquidity during the COVID-19 emergency.

Families First Coronavirus Response Act (FFCRA) Leave Expansions

• Emergency Family and Medical Leave Expansion Act: Provides 12 weeks of job-protected paid leave for employees who are unable to work or telework so that they may care for children if schools are closed or their daycares are unavailable.
• Emergency Paid Sick Leave Act: Employers with fewer than 500 employees will be required to provide full-time employees with 10 days (80 hours) of paid sick leave when the employee cannot work or telework because they are quarantined or caring for others who are quarantined or if schools are closed. Part-time employees are entitled to the number of hours of paid sick time equal to the number of hours they work, on average, over a two-week period.

Emergency Family and Medical Leave Expansion Act and Paid Sick Leave Act Information

Pennsylvania Unemployment Compensation: Stay informed with unemployment compensation information.
PA Unemployment Compensation Benefits and COVID-19 FAQs

CARES Act Unemployment Information:

• Pandemic Unemployment Assistance (CARES Act; Title II; Section 2102): A temporary Pandemic Unemployment Assistance program through December 31, 2020 to provide payment to those not traditionally eligible for unemployment benefits (self-employed, independent contractors, those with limited work history, and others) who are unable to work as a direct result of the coronavirus public health emergency.
• Emergency Increase in Unemployment Compensation Benefits (Cares Act; Title II, Section 2014): Provides an additional $600 per week payment to each recipient of unemployment insurance or Pandemic Unemployment Assistance for up to four months.
• Pandemic Emergency Unemployment Compensation: Provides an additional 13 weeks of unemployment benefits through December 31, 2020 to help those who remain unemployed after weeks of state unemployment benefits are no longer available. Pandemic Unemployment Assistance Information

Special Rules for Use of Retirement Funds (CARES Act; Title II; Section 2202): The provision waives the 10-percent early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for coronavirus-related purposes made on or after January 1, 2020.

Exclusion for Certain Employer Payments of Student Loans (CARES Act: Title II; Section 2206): The provision enables employers to provide a student loan repayment benefit to employees on a tax-free basis. Under the provision, an employer may contribute up to $5,250 annually toward an employee’s student loans, and such payment would be excluded from the employee’s income.

Delay of payment of employer payroll taxes (CARES Act; Title II; Section 2302): The provision allows employers and self-employed individuals to defer payment of the employer share of the Social Security tax they otherwise are responsible for paying to the federal government with respect to their employees. The deferred employment tax required to be paid over the following two years.

Employee retention credit for employers subject to closure due to COVID-19 (CARES Act; Title II, Section 2301): The provision provides a refundable payroll tax credit for 50 percent of wages paid by employers to employees during the COVID-19 crisis. The credit is available to employers whose (1) operations were fully or partially suspended, due to a COVID-19-related shut-down order, or (2) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year.

Due to the impact COVID-19 has had on many businesses, program resources are being depleted quickly. At this time we know that Pennsylvania’s Working Capital Access Program offered through economic development organizations has reached its maximum and is now closed.

Dan Brogdon, lender development coach, recently reviewed the Small Business Administration’s Economic Injury Disaster Loan (EIDL) program on our Field Notes podcast.

Help our listeners understand the basics of the EIDL program. How is the program structured and who is eligible to apply?
The CARES Act expanded SBA’s longstanding EIDL program which assists businesses in regions affected by declared disasters. The first round of EIDL excluded production agriculture, but on May 4, SBA opened the EIDL application portal for agriculture producers only. Businesses with 500 or fewer employees are eligible to apply, as well as sole proprietors, independent contractors and most private non-profits.

EIDL offers loans up to $2 million to cover working capital at an interest rate of 3.75% on a 30-year term. These loans are offered directly through SBA. Payments on EIDL loans are deferred for one year and eligible applicants may also receive an emergency grant of up to $10,000 within three days of application. Emergency grants do not need to be repaid, and applicants do not need to have an approved EIDL loan to receive the grant.

While the EIDL loans seem attractive, they might not be a fit for every farm. Before signing for an EIDL loan, first talk with your lender or financial advisor. 

What should farms consider before applying for EIDL?
SBA EIDL is a program that may be useful for some farms, but there are implications that should be considered first. These items include:

• EIDL paperwork includes language about needing to obtain SBA concurrence before seeking a future advance on a senior secured credit line. It is unclear to what extent this will be enforced, but it may cause issues for farms if they have credit lines with other lenders besides SBA.
• Pledging collateral to SBA may impact your current lender’s ability to lend additional funds in the future.
• SBA consent is needed prior to any ownership transfers, so if your farm is planning an upcoming farm transition it may be impeded.

There are other impacts on EIDL are if your farm received a SBA Paycheck Protection Program (PPP) loan. The amount of your EIDL grant would be subtracted from the PPP forgiveness amount. You will also not be able to use EIDL proceeds for payroll, mortgage interest, utilities or rent since that is the intended purpose for PPP.

Are there any other thoughts you would like to share?
EIDL program is just another tool in your COVID-19 crisis toolbox. It is up to you to evaluate the details of the loan program and decide if this is the right fit for a financing tool for you and your operation. Having a conversation with your lender or financial advisor will help you make that decision.