Test Your Grain in the Field
Late planting combined with a number of other weather trials this summer resulted in some quality issues such as cob rot, agronomists report. If you think any of your crop may be affected by damage that will reduce the price you receive—and especially if you suspect molds or fungus—you would be wise to get samples checked before you bin the grain.
Crop insurance policies for corn, grain sorghum, barley, rye, wheat, oats, sunflowers, soybeans, canola, flax, and safflowers all may qualify for quality adjustments. "Your policy and its special provisions list will tell you the types and levels of quality deficiencies that are covered, describe how and under what circumstances various discounts will be applied and specify who must obtain the samples and can perform the determinations," says Laurie Langstraat of National Crop Insurance Services. "Contact your agent or insurance company if you have any questions."
Tax Treatment. If you receive crop insurance indemnity payments, they generally have to be declared as income in the year received, says Rob Holcomb, University of Minnesota Extension economist. "You can postpone reporting the proceeds for actual physical damage until the next year," he adds, if you meet all the following conditions:
• You use cash accounting.
• You receive the insurance payment in the year the crop was damaged.
• You can show that under normal business practice, the crop income would have been in a year other than when the damage occurred.
Payments on policies that aren't based on actual losses by the insured, such as county-based coverage, cannot be deferred under I.R.C. Sec. 451(d).
If you have revenue-based coverage, there's a formula to compute the portion of the payment deemed to be tied to crop yield versus price changes. Your claim report may show the computation. For more information, see www.taxworkbook.com and www.irs.gov (Publication 225). —Linda H. Smith
Guidelines on Pay
Many farm operations don't really treat management and labor as defined expenses—the owner "pays" himself whatever is left over. Roy Ferguson of the Ferguson Group, a financial consulting firm, suggests some guidelines to help you calculate where you stand:
1. Management Comp. This should be 4% to 6%, occasionally as high as 8%, of total sales. "If your farm generates $1 million or more, you should have no difficulty justifying $40,000 to $80,000 management compensation," Ferguson says. "A $100,000 operation, on the other hand, needs to expand or get additional funds elsewhere."
2. Total Labor Costs. These are about 8% to 9% of annual sales. "Payroll taxes, vacations, housing, bonuses and so on should be included. Operations with total sales of $500,000 should have no difficulty." Labor includes any person who does not participate in ownership, planning or supervisory responsibilities, as well as custom hire payments.
3. Sales-to-Labor Ratios. Grain farms should have $12 to $14 in sales for each $1 of labor cost (7% to 8% of total sales) to ensure they are efficient in labor. Confinement livestock operations should have ratios in the $16 to $20 sales range (5% to 6.25% of total sales), Ferguson says. "Small operations might want to combine management and labor costs, in which case it should total 12% to 16% of total sales, providing a $6 to $8.50 ratio." —Linda H. Smith
"For livestock producers, lower feed costs are like coming up for air, not a reason for a sigh of relief." —John Lawrence, Iowa State University ag economist
Top Producer, October 2009