This is a tale of two farmers. Farmer Hare seemed to have all of the luck growing up. He spent some time working on the farm, but his parents didn’t require it. He primarily enjoyed playing any and every sport at school.
Farmer Tort, on the other hand, had little luck on his side. He had to work alongside his parents on the family’s relatively small operation. He did save enough to buy 80 acres at age 17, though.
When Farmer Hare graduated from college, he accepted a job as a salesman for a national seed company. Farmer Hare always let Farmer Tort know how well he was doing, but his credit card debt grew by $5,000 to $10,000 each year.
When Farmer Tort graduated from college, he farmed with his parents and got a job in town working for a fertilizer company. By saving about 50% of what he earned from the fertilizer company, he was able to purchase another 160 acres at age 24.
When Farmer Hare was 30, his parents were killed in an auto accident. Since he was an only child, he took over his parents’ 640-acre farm and quit his job selling seed. Since the farm had no debt, Farmer Hare felt it was best to hire a hand to farm the land for him. After a couple of years, he bought another 320 acres with the help of a loan from his banker for the 20% down payment.
At age 30, Farmer Tort had saved enough money to purchase the 320 acres owned by his parents. At the time, he was cash-renting another 640 acres from a neighbor and still working full-time at the fertilizer plant. Farmer Tort also started doing equipment repairs for local farmers.
At age 40, Farmer Hare decided to leverage his farm, and his banker loaned him enough money to purchase another 2,000 acres. By this time, he was farming more than 6,000 acres. Each year, he purchased a new combine or tractor since his CPA said he could deduct it against his taxes. It had been several years since he had paid taxes. The only problem was that his corn and soybean inventory increased each year.
At age 40, Farmer Tort was farming 4,000 acres and owned 2,000 acres free and clear. For the next 10 years, he added rented acres each year. He used the accrual method of farming and was content to pay taxes on his net farm and repair business income each year. He continued to save 50% of his net after-tax income each year.
During the next 15 years, farmland prices jumped 5%. Farmer Hare continued to leverage his operations by buying new land, using his other land as collateral. Farmer Tort was content to maintain his machinery, add rented ground, pay his taxes and save his money.
Down the Drain. When both farmers were 55, farmland prices leveled off and started to decline at a 3% rate for a couple of years due to an extended period of lower commodity prices. Farmer Hare’s cash flow wasn’t sufficient to pay his bills, and he decided to cash in his deferred inventory. When tax time came around, his tax bill on cashing in the deferred inventory was more than $1 million, which he did not have. His banker had retired and the new banker was not as kind. For a couple of years, he was required to rent less land and sell off some equipment. This was not enough for the banker, though, and, at age 60, Farmer Hare was required to put up his land at auction to pay his debts.
On the day of the auction, Farmer Hare was sure his property was going to be sold to the largest farmer in the county and he would get enough to pay off his debts. The bidding was slow and the largest farmer in the county dropped out of the auction fairly quickly.
It finally came down to two bidders, an out-of-state investor and Farmer Tort. In the end, Farmer Tort was the winning bid and paid cash two days later at closing.
When Farmer Hare asked Farmer Tort how he could afford to purchase his land, Farmer Tort said, "It’s not what you make farming each year, but how much of it you keep and grow."
Which farmer are you?
Paul Neiffer is a tax accountant with LarsonAllen LLP and author of the blog The Farm CPA. He grew up on a wheat farm in Washington and owns a corn and soybean farm in Missouri. Contact him at firstname.lastname@example.org.
- October 2011