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February 2012 Archive for The Farm CPA

RSS By: Paul Neiffer, Top Producer

Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.

Join Us at the Commodity Classic

Feb 29, 2012

Tomorrow I head out from warm and sunny Yakima, Wash. (after 4" of snow the night before) and travel to Nashville, Tenn., for the Commodity Classic. I will be walking the trade show on Friday and on Saturday, and Nick Houle from our Minneapolis office will be giving a keynote speech on estate planning from 1:30 to 3:30. I will be helping him with this event and if you are attending this or see me around the show, please stop me and say hi.

Just finished up my last farmer (at least the ones due on March 1) this afternoon and we have less than 50 days of tax season left.

 

The $5 Billion Corn States

Feb 28, 2012

USDA has reported that there were five states in 2011 that generated more than $5 billion in corn sales:

  1. Iowa -- $14.5 billion
  2. Illinois -- $12.3 billion
  3. Nebraska -- $9.4 billion
  4. Minnesota -- $7.0 billion
  5. Indiana -- $5.3 billion
     

These five states generated 63.4% of all corn sales in the U.S. for 2011. The states of Ohio, South Dakota and Wisconsin each generated between $3 and $4 billion of corn sales.

For soybeans, there was only one state over $5 billion and that was Iowa, at $5.5 billion, with Illinois at $4.95 billion. The top three corn states generated more in sales than all of the U.S. soybean production of $35.8 billion.

There were only four wheat states that generated more than $1 billion in sales:

  1. Kansas -- $2.0 billion
  2. North Dakota -- $1.7 billion
  3. Montana -- $1.3 billion
  4. Washington -- $1.1 billion
     

Iowa generated more in corn sales at $14.5 billion than the whole U.S. wheat crop of $14.4 billion.

We can see why corn is king in the U.S. based on these statistics.

Production Down, Income Up in 2011

Feb 26, 2012

We posted a couple weeks ago about production for almost all of the major crops in 2011 being down from 2010. Even though production was down, income for most of these crops seems to be up in 2011 from 2010. A recap of the major crops is as follows:

  • Corn -- $76.5 billion, up from $64.7 billion (18% increase)
  • Soybeans -- $35.8 billion, down from $37.5 billion (4.5% decrease)
  • Wheat -- $14.4 billion, up from $12.8 billion (12.5% increase)
  • Hay -- $17.8 billion, up from $14.7 billion (21% increase)
  • Cotton -- $7.3 billion, unchanged
  • Potatoes -- $4.0 billion, up from $3.7 billion (8.1% increase)
     

As you can see, almost all crops yield more sales volume than 2010 with lower production. This year, my guess is that we might see higher production, yet lower sales.

We will recap some of the income numbers by states during the rest of this week.

MF Global Loss (If Any) Will Be Deductible in 2012, Not 2011

Feb 22, 2012

We got the following question from one of our readers:

" I made profits on commodity trades in 2011. The amount was $20,000. The 1099 from MF Global shows $20,000. However, I have received only $14,000 and probably will not get the entire $20,000. How much do I have to pay tax on?; the $14,000 that I received in 2011 or the 1099 showing that I made the entire $20,000?"

This situation is really two separate tax issues.  The first issue is the reporting of the gain on the 2011 commodity trades.  This $20,000 will be reported in 2011 just like any other year.  The taxpayer had gains of $20,000 in the account and they are taxable as realized (we are assuming these are speculative trades; if a hedge, the amounts may be different).

The second issue is whether there is a "theft" loss due to MF Global's actions.  If it is finally determined that there is a loss and it is considered theft, then it should be fully deductible in 2012, not 2011.  The tax laws indicate that if the amount of the theft loss is not known by the end of the tax year, the loss is not deductible until the amount is known.  In the MF Global case, that will be 2012 at the earliest and could be 2013.

This is a very complex case, but the bottom line is the loss is not deductible in 2011.

Update on 2021 Apple Production

Feb 21, 2012

It is not too often that we do a post on fruit ag news, but we just recently came across an article in the Good Fruit Grower, which is based in my home city of Yakima, Wash.

In the article, a Washington State agricultural economist predicts apple production in the state for 2021. (Washington is by far the largest producer of apples, and for 2012 total apple sales may be close to $2 billion.) For many decades, the largest produced apple in our state was the Red Delicious. However, this variety is expected to decline from 33 million boxes (42 lb.) to 25 million boxes.

The Gala apple will overtake Red Delicious by about 2018 and be the No. 1 variety in 2021 with a production of about 29 million boxes. The Fuji variety will be No. 3 at about 21 million boxes.

The big mover, however, will be the Honeycrisp, which appears to be the current favorite apple with consumers. This variety is expected to jump from the current annual production of about 4 million boxes to well over 13 million boxes in 2021. This apple is probably my favorite one to eat, and we have had several plantings of this variety near our house in the last couple of years.

Let me give you some numbers on potential revenue from Honeycrisp based on current all-time prices. Assume a corn grower is able to get 250 bu. of corn at $7 per bu. This is a gross of about $1,750 per acre, which is probably an all-time high. Some Honeycrisp growers may get production in excess of 100 bins per acre, a pack-out of 14 boxes per bin and $35 or more per box. This equals gross revenue of $49,000 per acre or more in many cases. Before all the corn farmers start growing Honeycrisp, you need to realize that the costs of growing and packing this crop are extremely higher than corn growing.

Total apple production in Washington State is expected to increase from the current 105 to 110 million boxes to about 115 to 130 millon boxes by 2021. Apple growers, like most farmers, are having better revenue years than in the past, but the future trend of production still appears positive.

Congress Extends 2% Payroll Tax Cut Till the End of 2012

Feb 20, 2012

Congress late last week passed a new bill (and President Obama has already indicated he will sign it) to extend the 2% payroll tax cut from February 29, 2012 till the end of 2012.  This means that your employee's FICA contribution will remain at 4.2% for the rest of the year instead of the schedule return to the normal 6.2% rate.

For self-employed farmers, your total FICA contribution will be 10.4% instead of the normal 12.4%.  As normal, it appears that election year politics is in play here and we would not expect this to continue into 2013.

I have seen several taxpayers calculate their employee's paychecks for 2011 incorrectly and hope most of our farmers have already updated their payroll system to deduct and pay the proper amount.

Don't Forget Farm Income Averaging

Feb 16, 2012

With the March 1 farm tax return deadline rapidly approaching, I want to remind our farmers to make sure they actively review their tax return to see if farm income averaging will save them money this year.   Farm income averaging allows you to smooth out your income tax liability for the current year if this year's income spikes from the previous three years.  Without farm income averaging, a farmer may end up paying tax in a much higher tax bracket than they need to.

For example, let's assume a farmer had exactly zero taxable income for 2008, 2009,  and 2010.  In 2011, the farmer has taxable income of $270,000.  At this level of taxable income, his income tax for the year would be approximately $66,500 and he would be in the 33% tax bracket.  With farm income averaging, we could assign between $65,100 and $68,000 of income to 2008, 2009 and 2010.  This would soak up the 15% and 10% tax brackets for those years.  We then pretend the farmer paid the respective tax for each year and add those taxes to  the remaining amount taxed in the current year.  This results in  all of the taxable income being taxed at either 15% or10% for a total tax of about $37,200.  By making this election in 2011, the farmer permanently saves over $28,000 of income tax for the year.

This is a great provisions for farmers, but you must review the return to make sure you or your tax advisor took advantage of it.  If you don't; it can cost you a lot of money.  The rules can be complicated so you need to review it with your tax advisor.

Almost All Crop Production Was Down in 2011

Feb 14, 2012

With another year of low corn production but high acres, did this negatively affect the total production for other crops in 2011? The USDA just released the final numbers on U.S. crop production for 2011 and I thought I would take a look. The major findings are as follows:

  •  Corn production down 1% to 12.4 billion bushels
  • Soybean production down 8% to 3.06 billion bushels
  • Wheat production down 9% to 2 billion bushels
  • Cotton production down 13% to 15.7 million 480-lb. bales
  • Sorghum production down 38% to 214 million bushels
  • Dry edible bean production down 38% to 1.972 billion pounds
  • Potato production up 5% to 426 million cwt.
  • Barley production down 14% to 155 million bushels
  • Peanut production down 12% to 3.648 billion pounds
  • Sunflower production down 24% to 2.091 billion pounds


Every crop listed here but potatoes was down in production, in some cases substantially. We know that the drought in the Southern U.S. caused part of the drop in several of these crops, but for almost all crops to be down across the board was great for prices in 2011. But if we have a "normal" crop in 2012, how will prices respond?

My guess is that prices will come down some for most crops in 2012 unless we have another weather issue, and since this would be three crops in a row dramatically affected by weather, all bets on pricing would be off.

We shall see.

Be Careful When You Value Conservation Easements!

Feb 13, 2012

Many farmers want their farm to continue as farmland as long as possible. In many circumstances, they will donate an easement to a conservation charity that will restrict the land to farming and not allow it to be developed. In these cases, the tax laws allow the farmer to take a deduction for the "value" that has been lost due to the granting of the easement.

The tricky point is how do you value this easement. There have been many battles with the IRS over these values and in a recent tax court case involving Esgar Corporation et al., the IRS won. In this case, the taxpayer argued that the highest and best use for their irrigated farmland in Colorado was for gravel mining since there were gravel pits operating in their immediate vicinity. The IRS argued that the highest and best use was as irrigated cropland and that is what the court decided.

The court maintained that the highest and best use for any land is its current use unless the taxpayer can show a compelling reason for a different use.

In this case, the deduction that the taxpayers claimed on their original tax returns was in excess of $2 million and the final number that the court allowed was approximately $100,000.

If you are considering this type of conservation easement, it is very important that a reasonable valuation be obtained. If the conclusion is that the highest and best value for your farmland is for other purposes, be prepared for a fight with the IRS.

Some Interesting Dairy Cow Facts

Feb 09, 2012

We like to poke around in the Census of Agriculture report that is issued every five years.  You can always find something interesting in these reports.

For today, I wanted to review some of the information about dairy cows from the 2007 census.

For that year, there were a total of 69,890 farms that were considered to be a dairy farm and included a total of 9,266,574 dairy cows.

The top five dairy states for cow numbers were:

  1. California 1.84 million
  2. Wisconsin 1.25 million
  3. New York 626 thousand
  4. Pennsylvania 553 thousand
  5. Idaho 536 thousand

 

Idaho has a population of a little more than 1.5 million people, therefore the people to dairy cow ratio is 3 to 1.  Continuing this analysis, Cassia county in Idaho has about 21,000 people and 54,000 dairy cows, so here the people to cow ratio is 1 to almost 3.  The biggest cow to people ratio in Idaho was Gooding County.  This county has about 140,000 cows and only about 14,000 people.  This results in 10 cows for every person in this county.  There may be other counties with more cows per person, but this one jumps out at me.

I will continue to look for little nuggets of information like this and am eagerly awaiting the 2012 farm census to update the numbers.

Not All Farmland Values are Going Up!

Feb 07, 2012

When we see in the headlines that farms in Iowa and other parts of the corn belt are going for $10,000, $15,000 and perhaps $20,000 an acre, I think we automatically assume that all farmland values across the US are increasing.

However, in reviewing the Federal Reserve Bank of Richmond, VA agricultural survey for the third quarter of 2011, it indicated that farmland values for their region (Maryland, Virginia, North and South Carolina and most of West Virginia) had actually declined in value.  The decline from the second quarter of 2011 was 1.5% and 4.5% from the same quarter in 2010.

The survey presented a chart of farmland values from 2002 until 2011 and most farmland values in this region peaked in early 2007 and have not recovered to that value since.  The average price of farmland during the third quarter was $3,263. 

In the fourth quarter survey done by the Dallas Federal Reserve, this region actually had an increase in irrigated land values and dry-land and ranch values held fairly steady.  Even with the drought conditions in the area, most of the bankers are expecting prices to rise over the next three months.

As the saying goes in real estate, "It is Location, Location, and Location"; it is certainly true about farmland prices.  The increase in price depends on where it is located.

What Happens If Bonus Depreciation Stops?

Feb 06, 2012

At the Top Producer Seminar last week, I received several questions about my opinion on whether Congress will extend bonus depreciation or increase it from 50% to 100% for 2012. President Obama has already proposed increasing it to 100% for 2012; however, a more major issue is what happens if bonus depreciation stops.

In reviewing several of the farmer tax returns that I have been working on lately, I have noticed that most of them are running out of any depreciation except for what they get from placing equipment in service in the current year. Therefore, if Congress suddenly stops bonus depreciation in 2013, many farmers will be in the situation of having little or no depreciation deductions, large equipment loan payments and much higher income taxes. This is what I would call a triple whammy.

I think if the bonus depreciation is eliminated, it will be over a couple of years to give the farmer enough time to plan accordingly or the Section 179 deduction will be adjusted back to the $500,000 range. However, we are dealing with Congress and the President, so any prediction is not worth much at this point in time.

If you have never been to a Top Producer Seminar, you should go. It is both informative and entertaining and is well worth attending.

Top Producer Seminar - Day 2

Feb 03, 2012

Wow, what an action-packed day! First, breakfast was at 6 a.m. to get the day started. At 7, we had the taping for the "U.S. Farm Report" to air this weekend.

At 8:15, my breakout sessions started. Each one lasted 55 minutes and they were back-to-back-to-back. I thought the last session would be the smallest, but it turned out to be the largest, and each session had many good questions (and I think I gave good answers).

Ann Duignan of JP Morgan gave a presentation on how the global economy is affecting the farm machinery business and then its effects on our farmers. The presentation was very informative.

Last night we had the Top Producer of the Year award dinner. There were three finalists and, based on the video presentations for all three, I could not tell who was going to win. Each farmer has been very successful and will continue that success. The one thing that was brought out to me by all three was their passion for the employees who work for them. The employees are like part of the family, and it showed.

I think this is the first time I have ever seen a farmer use a pink flamingo as part of his branding process.

I won't tell you the winner here, since it will be posted in the Top Producer section of www.agweb.com.

 

Top Producer Seminar - Day 1

Feb 01, 2012

The Top Producer Seminar started out today with a bang. Peter Zeihan of Stratfor Group gave an interesting presentation on the economic outlook for ag and in general. It was very interesting to see a map with an outline of the world's river systems and learn how they have affected the world's economy over the last couple hundred years or so.

America, with the Mississippi River system and intercoastal waterway, has by far the best series of cheap river and water systems in the world. That is why it is cheaper for an American farmer to ship his corn from Minnesota all the way to New Orleans than it is for a Brazilian farmer to ship his corn by truck for a hundred miles.

The only other water system that comes close to ours is Argentina's, with three rivers that flow eventually down to Buenos Aires. Because of this waterway system, Argentina's standard of living in 1900 was about 90% of ours.

There was a group panel on where the new farm bill is headed. Consensus was for a bill in 2013, but we may still get one this year. Direct payments will no longer be there, and some expanded form of crop insurance is most likely to happen.

The value of peer groups was discussed in the afternoon, and I believe that these have great potential value to all farmers. It is always good to get another opinion that you value, and it is much easier to be held accountable by a peer.

All in all, the first day of the Top Producer Seminar was very productive, and I had several readers of the blog come up and say hi. I hope to see more tomorrow, and, with three back-to-back presentations, I know I will be more tired tomorrow.

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