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September 2010 Archive for Out to Pasture

RSS By: Steve Cornett, Beef Today

Read the latest blog from Steve Cornett.

Death Taxes: What Would Willy Do - Part 2

Sep 27, 2010

Let's look at some scenarios I mentioned in last week's blog. I picked, at random, from a real estate googleizaton, a place that is listed for sale in Texas. It is not, of course, representative of agriculture overall. But then, which piece of land is?

http://www.landsofamerica.com/america/index.cfm?detail=&inv_id=97658

A generation ago, about the time I would have bought that place, it would probably have been worth $600 per acre. It probably didn’t have the improvements. It certainly, at that time, didn’t have the “recreation value” that now drives real estate prices in that part of Texas. I still couldn’t have bought it and expected it to pay for itself without bringing something major to the table—capital, extremely good market timing or extraordinary management of some sort. I suppose there are times in history when you could buy land and expect a plain old commercial cow herd to pay for it, but I missed them.

So, somebody bought it anyhow. I have no idea who or why, and didn’t want to call to find out. It doesn’t matter, because there are only a few scenarios likely:

Scenario 1: It was a place for some Dallas lawyer-type, W. Robert, we’ll call him, to spend the weekends, impress his drinking buddies and clients, and manage some taxes.

So let’s say W. Robert passes to the court room in the sky

The place is now worth—you can see it plain as day in the ad--$13 million. So the tax bill, at the 55% we’ll see next year, would be over $7 million. More than $1600 per acre.  That is almost $12,000 per (advertised, of course) animal unit.

Scenario 1A: His kid, J. Robert, II, is a lawyer as well. There is other money out there, so he can afford the $7 million if he wants to pay it. But does he? Did he also inherit his dad’s affection for slaying deers and managing hired help from his Dallas office?

If not, that place goes on the market.

Scenario 1B: His kid teaches school. The old man tied up most of his cash in the family ranch. Sure, there’s a couple million in bonds and stocks and cd’s, enough to provide the cash flow for a comfy retirement. But the IRS wants 55% of that, too. So, the son has a million in cash, but there’s still that $7 million bill to pay.
That place is going on the market.

Now, scenario 2. It’s a family ranch. Old Jim Bob is out there scratching a living out of 600 cows and a deer lease. His boy, Junior, teaches ag in town and helps out on the weekends. All he really wants to do is ranch.

So, Jim Bob falls over dead on Jan. 2, 2011.

Where is Junior going to find $7 million? That’s real money outside of D.C.  Jim Bob might have had enough stocks, bonds, cash, cattle and marketable old clothes to cover his production note at the bank. More likely, he had refinanced at some point. There aren’t many bankers out there anxious to write a note for $12,000 per animal unit, and even if Junior found one, 600 cows aren’t going to make the payments.

Now, here’s my guess. J. Robert probably has a nice estate plan that protects his kids. They may not be able to derive a lot of income from the place. It may be locked away like the Kennedys’ trust funds, or grandma’s wedding ring, but they won’t have to come up with $7 million. If they do, Daddy probably had an insurance policy to cover it.

Lawyers and rich guys have the resources to do things like that.

So, that place might stay in the same hands. If the kids want their money, they’ll put it on the market. But, assuming they don’t need the cash and they enjoy owning the land, they’ll figure there are worse places to leave your $13 million than in real estate.

But what about Jim Bob’s kids?

Jim Bob’s estate management options were much more limited. He needed every penny those cows could generate. He probably couldn’t afford the premiums on a 70-year-old cowboy’s $7 million life insurance program.

At least half of that country is going on the market pronto. Junior will have to try to make a living with 300 aum’s or keep his job.

Now, let’s all make a value judgment here. What should we wish for? I don’t mean us, actually. We’d be inclined to vote for keeping our places in the family, of course. But if we really, really, believe there should be more opportunity for young people.

The typical argument from the Willy Nelson lobby is that higher prices for cattle and corn and cotton would fix that. That’s bunk. How are higher prices for cattle going to help a kid with no cattle compete with a guy with thousands of them?

We’ve all spent our lives in an agriculture where land ownership is the only retirement program we know. Real estate inflation has always been agriculture’s greatest economic return. Take that away and where’s the reward?

We’re all agreed that we need more opportunity for young people in agriculture, aren’t we? How are we going to do that if J. Robert II keeps it, living like some feudal landlord? Is it ok to rely on absentee landowners? Let the rest of us rent or work for wages? Is that the opportunity we want for young people?

Or do we want them to share the old American farm dream of land ownership?

We all agree that Junior should be able to keep the family ranch. But do we all—including Willy Nelson--agree that the heirs of the Ted Turners of the world should be able to own unlimited amounts of land, and own it in perpetuity?

Under which of these scenarios are we best served?

  • Keep the 55% rate, so that only the lawyer’s rich lawyer son gets to keep owning the place? He’s probably going to hire a local—maybe the local ag teacher--to manage the outfit. Or he’ll rent it out. Either provides a way for the local, under-capitalized, boy to get a start in agriculture. If it’s really agriculture he wants, and not land ownership.
     
  • What if we stay where we are now, with a 0% estate tax? Jim Bob’s boy can just move in and start ranching. The lawyer’s teacher kid can either keep the place (and hire the local ag teacher to manage it or rent it out). In either case, you’ve giving a young person a more realistic entry.
     

But only if his daddy has something to pass down, so it’s not going to reverse the concentration if that’s you big concern.

Where, along the bell curve with the Kennedys and the Ted Turners on one end and the Jim Bobs and Juniors on the other, should we ask Congress to draw the line?

That’s the question Congress has to decide in the near future. You should consider that before you choose your candidate this fall. Just how big a Willy Nelson fan are you?

Death Taxes: What Would Willy Do

Sep 20, 2010

The estate tax—“death tax” I’m supposed to call it—is zero today. It will revert to 55% next year if this most fractious Congress in memory doesn’t act between now and then.

Many if not most of the people who read this will be impacted. Many, if not most, would just prefer their heirs keep as much as possible.

On the other hand, whatever else seems to have been agreed upon at that Ft. Collins concentration hearing last month, it seems everybody wants to make it easier for young people to get started in agriculture. At least nobody spoke in favor of making it harder.

This is an argument we’ve been having since it applied to me. The average age of farmers is getting older. It costs too much to get started farming. We should do something.

That’s the Willy Nelson argument. Farmers are good. Agriculture is a noble pursuit. We should do something. That is so right and so easy to think and say.

And so hard to figure out.

The government folks didn’t mention the estate tax in Ft. Collins, but several producers did. It’s hard to think how even people in D.C. can proclaim themselves dedicated to providing young people opportunity without considering the implications of the estate tax.

They are many. We’re all agreed that if the tax is too heavy, you limit incentive and make it difficult to pass along the sort of capital it takes for young people to succeed in agriculture, and cattle in particular.

But is there some value to that? If your goal is to provide opportunity to young people in a profession that has always centered around “living payment poor” and “dying land rich,” would it be better to force land back onto the market each generation? To force each new generation to earn its own way?

In other words, what if congress doesn’t renew the estate tax deductions? Fifty-five percent of current land prices is more than the stuff is worth. Your kids would have to pay more in taxes than you paid for the place to begin with.

You can do the math on your own place. Or your parents’ if you’re of that age. But what of the impact on the general cattle business?

Check this blog next week for some scenarios that look at that potential impact.

Guilty as Charged

Sep 09, 2010

Ok, ok. I said it, and I regret it. In a blog "Cattlemen Shouting into the Wind," I painted with too-broad a brush.

Of course auction markets provide an essential service, and so do order buyers. I know that. And I don’t know any order buyers who drive BMWs. (But I did have one show up in a big Mercedes once and offer me $5 under the market for a set of calves and assured me they weighed a hundred or so more pounds than they actually weighed.)

I have used them both and will continue to do so. I quit one auction market once because the auction operator at that time played favorites with traders, or at least that’s what one of the traders told me. I have no reason to assume that is common.

I’m going to reprint three well-composed, thoughtful letters that popped into my inbox after a recent post. They’re right and I was wrong.

Blame me, but blame the Internet, too. In the good old days, a writer had time to think about what he was saying. These blog posts are, at least when I do them, more like running off at the mouth during an argument. You kind of say what you mean, but you may not say it with the considered judgment you employ upon second readings which, in the good old days, we called “editing.” In those days, “clarifying” was what you did to butter. Now it’s what you do to stuff said in haste.

At least in my case.

That is not to say I am a big fan of auctions or other middlemen. The concern I was getting at is that too many producer pay too little attention to marketing. That is one of the big reasons small producers are less profitable than larger producers. Were I an animal rights guy, I would argue that it should be illegal to wean calves on a truck. I’d say preconditioning should be an “animal right."

I am aware that many auctions and buyers are among the most effective advocates of intelligent marketing.

So, as you read these notes from readers, just pretend that after every paragraph I say, “Yes. I know. I apologize.” Because I do.


Mr. Cornett,

Coming from a fifth generation agricultural family and marrying into a fourth generation livestock auction family I am appalled at the bias and one sided views you have chosen to print in your article.   The agricultural industry was built on the family farms and rural America values.    I can assure you that livestock auctions do not let anyone "scalp" their customers because that is how they make a living.   Livestock auctions work on commission and in case you do not know that is a percentage of the gross sales.   This commission is then spent in the area to support the local economy through employees who in turn buy groceries, gas, clothing and so forth.    As for your comment about order buyers it is evident that you have never tried to spend your days driving a pickup (I do not know even ONE that drives a BMW) many miles to attend the auction, help your customers fill their orders at the specifics they requested, locate trucks, fix load cards and walk through the cattle before they start the drive home where they STILL have paperwork to complete before they try to grab a few hours with their families and a few hours of sleep before starting this same day all over again.  

The fact the you are in the cattle business states the you are interested in the agricultural side of America and that you are free to choose the way you conduct your business but I would encourage you that before you completely condemn SEVERAL different aspects of rural America you should check your facts.   Maybe you should step into rural Oklahoma and meet some of the intelligent, good hearted people that work hard to run livestock auctions as well as get to know a true order buyer and you will see that you might realize we all need to work together in positive ways to promote the valued agricultural way of life that America has been built on.

Sincerely,

Sam & Melody Varner
Varner & Varner, Inc.


Dear Mr. Cornett,

I am writing in reference to your recent Beef Today Blog posting entitled “Cattlemen Shouting in the Wind.”  As a livestock auction market owner and operator, I take exception to your stereotyping of auction markets, and your inference that an auction market operator would ever allow a consignor’s cattle to be “scalped” by an order buyer.  Our job is to see that our consignors receive full and fair market value for their product on that given day, and that is what we do.

In every industry, from cattle marketing to journalism, there are bound to be dishonest individuals, and I find being painted with the same brush as these people by someone who has never met me, and has never attended my auction extremely insulting.  Rest assured that the vast majority of us make our consignors’ bottom line our top priority.  A successful auction market is built upon repeat business, and no market ever kept its doors open for long by getting less than market value for its consignors’ product (which is what I assume you mean by cattle being “scalped”). 

A healthy auction market is a great asset to its community, and the effects go far beyond the actual sale of the cattle.  How many people are employed?  How many meals are purchased in town on sale day?  How many tanks of fuel are sold to sale day traffic?  It goes on and on. 

Finally, we offer producers in our area what, for some, is the only viable outlet for their cattle.  In many cases their herd size is such that it is not feasible to market anywhere other than at auction, where their cattle can be commingled with other producers’ cattle into load lots, thus sparing them from discounts due to their small numbers.  We take the producer with ten head just as seriously as the producer with two hundred.

The days of having a sale barn in every small town are long gone.  However, the modern, well maintained, well operated, centrally located auction markets are here to stay because we provide a needed service, and I believe we are owed an apology.

Sincerely,

Justin Gibson
Lamoni Livestock Auction


Steve,

I am a long time reader of your work and as you may remember have been part of some articles on Value Added Marketing. I was disturbed by your blog posting “Cattlemen Shouting into the Wind” and the stereotypical references you made toward auction markets.

I have worked in many different segments of our industry from producer to educator to service provider and now as a market manager. I know that there are bad players in every segment of business(a condition not exclusive to the livestock industry), however I don’t appreciate being lumped in with those folks just because I am involved in the same segment of the industry. My organization works very hard every day of the week to create an environment where producers can garner the highest possible prices for their livestock. We have been innovators and while being committed to the traditional auction marketing system as the very best method of price discovery, have ventured into new territory to provide choices and options for our customers.

My customer is the small to mid sized cow/calf producer along with a large population of backgrounders. I am very proud of the work that we do and the job that we get done for these people, they are the backbone of our industry. Most of them are not interested in feeding their own cattle and probably are not engaged enough in the business day to day to do so. Don’t accuse me of talking down to or criticizing my clientele, I am not, just stating a fact that I hear from them daily. Just because they are perfectly fine to ride the ups and downs of the market and book a reasonable profit doing so does not make them bad business people or bad cattlemen. Just remember we don’t all sit in the middle of the feeding industry, for folks in this part of the world to feed cattle means sending them 1000 miles from home to someone they probably have not and will not meet to hold and manage an entire years production and income. I would remind you that history has also uncovered a few unsavory and several unsuccessful characters in that segment as well. Your accusation that all market operators are running a “lottery” is no more accurate than saying it is a great deal for everyone to feed their own cattle.

I don’t want to go on a rant as I respect your opinions on many issues and appreciate your work, however, I was deeply bothered by your comments and hope that in the future you will think a little deeper before you lump an entire segment of a huge industry into one stereotypical category. You are always welcome to come see our operations and learn about the many options we offer our customers, based on your comments I think that you will be very surprised at what transpires.

In closing our organization and most livestock auction markets contribute very significantly to our local ag and business communities by supporting youth livestock activities through 4-H and FFA, sponsoring untold numbers of producer education meetings and tours and cooperating with our Extension Service and ag media outlets to provide quality and timely marketing information to farmers. Trying call the guy in Kansas, who fed a load of cattle for you last year, and get him to buy your kids steer at the county fair. I am not attacking your opinion on the GIPSA rule, separate issue, I do hope that as a credible journalist you will take time to rethink the characterization that you made in your article.

Jim Akers
Chief Operating Officer
Market Management Services, LLC


 

 

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