There is a provision in the Income Tax Code that disallows certain farm losses that are in excess of $300,000 (or the aggregate farm income for the last 5 years).  This excess amount is not allowed in the current year, but is carried forward and allowed as a deduction in the next tax year (assuming you still meet the requirement in that year).

This provision only applies if the farmer is receiving any direct or counter cyclical payments under Title I of the 2008 Farm Bill (as extended last year).  The proposed 2013 farm bills by both the Senate and Congress eliminates these payments, so there is a strong chance that after passage of this farm bill and full implementation that this provision will no longer apply.

We have seen several of our clients that were unable to fully deduct their current farm loss even though they had received less than $5,000 in direct payments.  The farmer does not lose this deduction, but simply carries it forward.

Also, with the drought last year, any expenses that are a direct result of the drought are not included in the calculations for this limitation.

We will keep you posted if this provision no longer applies.

Gladstone Land Corporation (LAND) just recently raised $50 million in their IPO at a $15.50 price to invest solely in farmland. To date, they have purchased acreage in California and Florida (primarily berry related) and just closed on a blueberry farm in Michigan. Since its IPO, the price has increased almost 10% to close at $16.80 on May 20, 2013.

The company intends to elect Real Estate Investment Trust (REIT) status which allows the company to pay no income taxes assuming at least 90% of its taxable income is distributed as dividends each year. In reviewing their balance sheet, it does appear their farmland purchases to date are fairly leveraged. As of March 31, 2013, they have incurred total purchases of about $40 million with almost $30 million of long-term debt. Their current long-term debt bears interest at 3.5%, but is scheduled to reset in another year or so.

Their margin is in good shape now, however, if rates rise a couple of points, it may be difficult for them to maintain their expected dividend payout.

I have seen many private farmland investment funds get capitalized over the last few years, but this is the first publicly traded farmland REIT in the US that I am aware of. There are many similar companies in Europe and Asia. Normally, if we see a flood of these type investments on the public market, a top in the market may not be far off. We shall see.

After the House passed their Farm Bill today, it appears that their version on the Senate version are not too far apart.  The key points for both are:

• An elimination of all direct farm payments
• A reduction in CRP acreage to either 24 or 25 million acres
• Consolidation of many farm programs
• A Price Support program that guarantees a farmer a minimum price for their crop, or
• A Revenue Program that a farmer can elect (they have to elect one or the other).

The Price Support program is either based on a price set by Congress (the House version) or based on the average Olympic average of the prior 5 years of prices (the Senate version).  If a farmer elects the Price program, they cannot participate in the Revenue program and vice versus.

A couple of key differences is a payment limitation in the Senate of $50,000 per person for the Senate and $125,000 for the House.

The Senate also eliminates these payments if your adjusted gross income is over $750,000 while the house boosts this to $950,000.  This will most likely make the accounting simpler than it is now since you will most likely only need to look at the bottom line income shown on the bottom of your Form 1040 page 1.

We would guess that a final farm bill will be ready for a vote in the  next week or so, but with Memorial Day only a week from Monday, who knows long Congress will take off for that Holiday.

We will keep you informed.

I was doing a google search on the House Farm Bill today and the 10th item that showed up in my search was this article.  With a title of "House Ready to Make Draconian Cuts to Food Stamps in House Bill" I was interested in what these "draconian" cuts were.  As you read the article, you will note that the author point out that the House Farm Bill is proposing cutting "Food Stamps" by about $2.5 billion per year or $25 billion over the 10 years.  This compares to the Senate Bill which calls for lower cuts of about $4.1 billion in total over 10 years.

On the face of it, $2.5 billion might be a lot of money, however, the total "Food Stamp" portion of the Farm Bill is close to $60 billion per year.  The proposed $2.5 billion cut equates to a 4% reduction.  I would normally not consider that to be "Draconian".  The House is most likely battling this issue as I write this post and it will be interesting to see what final number they pass onto the floor for a vote.

It also appears that the Dairy margin management program is still part of the Bill, but this may get eliminated or changed in the committee between the House and Senate.  We will keep you posted on any material changes in both versions.  So far, the Senate Bill appears to mostly follow the bill passed last summer.

The University of Illinois puts out a great daily email called the "Farm Doc Daily".  In today's email, they summarized the debt to asset ratio from 2005 through 2011.  The lower this ratio goes, the better.  Their database showed that the average farmer in Illinois for 2005 had total assets per acre of $1,267 and related debt of $365.  This resulted in a debt to asset ratio of 29%.  For 2011, the total assets had increased to $2,385 while related debt increased but by a lower % to $500.  This resulted in the debt to asset ratio declining from 29% to 21% in 2011.

Farmers have done a great job over the last few years in keeping this ratio low, however, you can note that total debt has increased from $365 to $500 per acre.  I wondered how this ratio would change if we assumed that the three major asset categories used (crop and feed inventories, machinery and farm land) would each decrease by 10% or 20%.  A 10% reduction would lower total assets from $2,385 to about $2,150 and would increase the ratio from 21% to 23%.  A drop of 20% would put total assets at about $1,900 resulting in a ratio of 26%.

As you can see, even if all asset values decrease by 20%, farmers are still better off (using this ratio) than they would have been in 2005.  To get to the same 2005 29% ratio would require an almost 28% drop in asset values.

Keep up the good work.