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Moneywise

July 28, 2010
 
 


See Land Opportunity, Not Threat

While some producers hate the thought of an investor outbidding them on land (see "Funds Enter Farmland"), others see an opportunity to lease or custom farm the land, allowing expansion without the capital investment required for a purchase.

"We have 10,000- to 15,000-acre farmers who know that they have to double in size and are coming to us to buy land so they can farm it," says Gary Taylor, president of Agri Cura, which buys and manages farmland in the U.S. This sometimes results in a direct sale. Taylor, who owns 7,000 acres himself, says he bought 17 properties and 14 of them were never on the market.

Randy Hertz of Hertz Farm Management says that sometimes an operator knows the owner who is planning to sell. "They come to us and ask if we could put the deal together. Networking is everything—get to know the farm managers in your area and scout for land for sale." —Linda H. Smith



Gap Widens for Farm and Retail Milk Prices

Dairy producers understand the market forces behind the 50% decline in milk prices during this past year’s Great Recession. What frustrates them is that it took months for those low prices to be reflected in the retail dairy case—if they ever were. This widening gap between farm and retail prices came under scrutiny during the third hearing on consolidation in agriculture conducted by USDA and the U.S. Department of Justice, held in Madison, Wis., in late June.

"When dairy farmers were losing $100 per cow per month, there was no change in retail prices and processors were posting record profits, you have to ask: Where is the money going?" said Sen. Russ Feingold (D-Wis).

The U.S. Bureau of Labor Statistics has documented dairy farmers’ shrinking share of retail milk prices. In 2001, the retail markup on milk was about $1.50. In 2009, it was $2 per gallon.

"Milk is the cash cow with 40% to 45% [retail] margins. It used to be 20%," says Ron Cotterill, University of Connecticut economist. With 11.6 gal. of milk per cwt., a 50¢ per gallon loss equates to $5 per cwt. This loss adds up to thousands of dollars
for a 150-cow herd.

Even today, with the merger of regional co-ops into megacooperatives, the total revenue of all dairy co-ops is still less than $40 billion.

Part of the problem is that there is far more Grade A fluid milk available than what is needed to meet fluid demand. Fluid use averages just 37%. Yet 90% of milk is produced under Grade A permit.

At the same time, fluid processing is consolidating rapidly, leading to less competition in local markets. In Wisconsin, Dean Foods recently purchased two fluid bottling plants from Foremost Farms USA, further dampening competition in a top supply region. —Jim Dickrell

By the Numbers  I  Statistics on the widening gap between milk prices and retail dairy prices

30% Average return to dairy producers on every retail dollar of milk
37% Average amount of Grade A milk that is sold as fluid milk
90% Amount of fluid milk produced under Grade A permit
136 Average number of cows on today’s American dairy farm



Equipment Depreciation Shift


Last year, in the Renewable Energy and Job Creation Act of 2008, Congress changed the depreciation schedule for agriculture equipment from seven to five years. This modified depreciation schedule was extended for one year, and now ag groups are asking Congress to make the five-year schedule permanent. Congress, however, is still debating the merits of a shortened depreciation schedule despite lobbying by farm groups.        

The American Farm Bureau Federation estimates the five-year depreciation schedule would boost farm income by $850 million in a typical year. In addition, it would support demand for the agricultural equipment industry, which adds more than $82 billion in gross domestic product to the U.S. economy and accounts for approximately 250,000 jobs in the country.

Furthermore, the environment stands to benefit by giving farmers and ranchers incentive to purchase new, more efficient equipment with lower emissions, explains John McCoy, president of Orthman Manufacturing Inc., and also of the Farm Equipment Manufacturers Association. McCoy believes that in these challenging economic times, a change in depreciable life from seven to five years is critical for agricultural producers.

"The five-year schedule for agricultural equipment adds consistency and fairness to the tax code because construction equipment, which has similar use patterns and lifespan, already has a five-year schedule," he says. For more information, visit www.TopProducer-Online.com.—Jeanne Bernick



Poll Shows Seed Biggest Cost in 2010

A recent online poll on AgWeb shows that more than 500 producers believe seed, followed by fertilizer and machinery, will be the biggest input cost in 2010. Parts of the country, such as Texas and Indiana, report that fertilizer is a higher expense, but all told the cost of seed ranks as the top concern for farmers.



Give to Charity Without Penalty

The idea of pledging the production from a number of acres to a charity has caught on because it removes income "above" the adjusted gross income (AGI) line. With regard to farm program rules, however, you’ll want to handle the gift correctly.

"If you annually certify your bushels of production for farm program purposes, be sure to accomplish your certification before making any donation to charity," says Roger McEowen, ag law professor at Iowa State University.

He recommends you deliver the crop to the elevator after harvest and have the elevator make the storage receipt out to the charity. The receipt is delivered to the charity with a donor letter indicating that the commodity now belongs to the charity, which may sell it as it wishes. No check is made payable to the charity at the time the farmer delivers the crop to the elevator, he adds.

"Eligibility for farm program benefits would not be adversely affected," notes Neeru Gulati of USDA’s Farm Service Agency. "The average AGI for 2010 is based on the average AGI amounts for the years of 2008, 2007 and 2006. Any gifting of this nature that occurs in the current year will not affect the average AGI for 2010 payment eligibility."

However, if a producer pledged all of current-year production for a Commodity Credit Corporation loan, the gifting of the production may not be possible [until the loan is repaid], Gulati says. 

To determine total farm revenue for the Supplemental Revenue Assistance Payments program or Noninsured Crop Disaster Assistance Program, "all production gleaned from harvested and unharvested crop acreage would need to be reported," he says. —Linda H. Smith



"In the age of derivatives and evaporating valuations, farmland is gold with a cash flow."
–Carey Gillam, Reuters, "Pinstripes, Pitchforks and Profits"



Top Producer, Summer 2010

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FEATURED IN: Top Producer - Summer 2010

 
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