We Have ERP Phase 2

USDA released regulations last week on Phase 2 of the Emergency Relief Program. We review some of the major details.

USDA released the details on Emergency Relief Program Phase 2 (ERP) and Pandemic Assistance for Producers (PARP).  The original guidance on Phase 2 indicated that producers would be relying on income tax information to be provided to the local FSA office.  This has now been eliminated and changed to filling out Form FSA-521, Emergency Relief Program Phase 2 application.  As of the time of writing this post I was unable to download a copy of this Form.  I am guessing it will be released later since you can't apply for this program until January 23.  The final deadline is June 2, 2023, unless extended.

Now for some of the key details.

The producer will need to calculate their Allowable Gross Revenue (AGR) for both a benchmark year and the applicable disaster year.  The producer can elect either 2018 or 2019 as their benchmark year.  The applicable disaster year is either 2020 or 2021.

AGR is comprised primarily or crop or livestock revenues plus crop insurance, almost all types of other FSA assistance, cooperative proceeds, CCC loans if treated as income on the tax return.  For the benchmark year you also need to include all 2018, 2019 and 2020 WHIP+ and QLA payments even not collected in that year.  Items that are not included in revenue that may create an issue for the producer (or a benefit) is as follows:

• Hedging gains or losses,

• Custom hire income,

• Any resale items where no additional maturity has occurred,

• Conservation program payments

• Contract producers

The calculation of the payment amount can be very complicated, but I will try to review and explain it here:

• We take the producer's benchmark revenue and multiply it by a factor of 70%, then subtract

• The producer's disaster year benchmark revenue, then subtract

• Any Phase 1 payments received for the applicable disaster year, then subtract

• Net CFAP, net WHIP+, net 2020 Quality Loss Adjustment payments, if the calculation is for the 2020 disaster year.

The producer will need to provide the percentage of revenue for each year that is specialty crops and non-specialty crops since each of these have separate payment limits.

The initial payment is the LESSER of:

• The amount calculated above, or

• $2,000

This means the maximum initial payment will be $2,000, however, it will then be reduced by any Phase 1 payments already received by the producer.  Based on the expectations in the Regulations, it is estimated that only about 80% of overall payments will be allowed.  The table shows total qualifying payments of $1.504 billion but only paying $1.2 billion.

Let's review a very simple example:

Jane has benchmark revenue in 2018 of $1.5 million and has benchmark revenue in 2019 of $2 million.  She elects to use 2019 as her benchmark revenue.  Her AGR for 2020 is $1.5 million and for 2021 it is $1.3 million.  70% of $ 2 million is $1.4 million.  She is not eligible for any 2020 payment but is eligible for $100,000 payment for 2021.  Her initial payment is $2,000 and perhaps she may get another $75-80,000 of payments plus or minus.  Nobody knows the final percentage payout since it will be determined by FSA after all applications are processed.  They have allocated about $1.2 billion to Phase 2.  If Jane is an underserved farmer, then her percentage will be 15% higher than non-underserved farmers.

The Regulations do clarify that if an entity is trying to qualify for increased payments based on their farm AGI being over 75% of total AGI, then each owner of the entity must also qualify.  If not, the payment will be reduced by their applicable ownership percentage.

Also, note that if you have already maximized your payments from Phase 1, there is no reason to apply for Phase 2 since the payment limit applies in the aggregate to both Phase 1 and Phase 2.

Phase 2 was only allowed if the producer had at least a 30% reduction in AGR.  PARP will make a payment if the producer had at least a 15% reduction in AGR.  The payment will then be multiplied by 90% for underserved producers and 80% for all others.  However, FSA is only allocating $250 million for PARP, so my guess is that payments will be substantially limited since their Regulations estimate total qualifying payments of $2.662 billion with a limit of $250 million.  Therefore, you should estimate that you will only receive about 10% of your calculated payment amount.

The definitions for PARP is very similar to ERP, however, there is a $900,000 AGI limit for PARP unless your AGI in the disaster year is under that level.  You may need to do additional paperwork if you are over the limit.

The bottom line is if you received a large Phase 1 payment, it may not be worth applying for Phase 2 or PARP.  If you did not receive any Phase 1 payments, then you should take a quick look at your revenues for those 4 years to determine if you qualify for a payment.  If you have large hedging gains or losses, you must back those out to determine your AGR.  It appears this based solely on sold items, therefore inventories are year-end are ignored unless you are on the accrual method.

I am sure there will be more details that come out, but this will give you an idea as to how this will work