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August 2010 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.

Hedging is Good - Speculation is Bad

Aug 31, 2010

Many more farmers are using futures contracts to hedge their crops these days than 20 or 30 years ago.  Hedging income and losses are treated as ordinary income or loss as part of the farming operation.  What many farmers do not know is that if they are using futures to speculate in other commodities or crops that these transactions are considered speculation and the income tax treatment is very different.  If a farmer is speculating, then these losses are treated as capital gains and losses.

I will give you an example from when I was in college.  I had a very good friend that was speculating in the commodity market.  During year #1, he enjoyed a very profitable year and lets assume he made $300,000.  All of these gains were short-term and at that time, the top rate was 50%.  Therefore, his tax bill from his speculation that year was $150,000.  During year 2, he lost the $300,000 he made in year 1 and then lost another $300,000.  When he filed his tax return for year 2, he deduction, the net loss of $600,000 on the return, but the capital loss rules limit you to only claiming a net capital loss each year of $3,000.  Therefore, he got a credit of $1,500 for year 2.  Adding the two amounts together resulted in net tax due of $148,500.

If he had all of the transactions in one year, he would have gotten a net refund of $1,500.  As you can see, if your capital gain income occurs earlier than your losses, the tax laws provide a large penalty to taking advantage of any future capital losses.  You can use $3,000 each year or use your capital losses to offset other capital gains.

In your farm operation, make sure to note what is actually hedging and what might be speculation and subject to the rules above.

What Will Yields Look Like in 50 years

Aug 29, 2010

I have read several articles recently regarding the trend in yields for corn and beans over the last 20-30 years.  During the 1980's and early 1990's, the average increase in corn yields was about 1.5%.  During the last 15 years or so, the yield increase has been closer to 2%.  How will corn yields look over the next 50 years assuming that they increase by either 1.5% or 2%.  This table recaps those potential yields based upon using the 2009 average yield of 162.9:

                               1.5%                           2.0%

  • Year 10                 189                             199
  • Year 20                 219                             242
  • Year 30                 255                             295
  • Year 40                 296                             360
  • Year 50                 343                             438

Just a .5% difference in yield results in overall yield in year 50 being 438 bushels per acre instead of 343 or a difference of about 28%.  These numbers do look very high, but think back 20 or 30 years.  At that time, did you think that corn yields would go from less than 100 bushels per acre on average to an estimated 165 bushels for this year.  I know that several of the seed companies are discussing 300 bushel corn as not being too far off for the average farmer in the corn belt.

For beans, the average increase has been lower on average per year at about 1.3%.  Plugging these numbers into the same table basing it on the 43.3 2009 bean average results as follows:

                              1.3%                          

  • Year 10                 49                   
  • Year 20                 56                            
  • Year 30                 64                            
  • Year 40                 73                            
  • Year 50                 83

These increases in yields probably account for some of the increase in land prices over the last 10 or more years.  With yields going up by around 1.3% to 2% per year, the return per acre is going up by this amount (assuming prices stay steady).  This would result in prices going up by at least this same amount to reflect the extra income.

You Do Not Need to Own Land to Farm

Aug 27, 2010

Moe Russell, of Russell Consulting Group wrote a very good article in the Corn and Soybeans Digest clear back in 2007 on the fact that you do not need to own land to be a farmer.  I personally think in today's environment, most farmers who already own a bunch of land with no debt are most likely not maximizing their return as a farmer.  They are probably doing a good job of maximizing the return to them as land owners since they are farming it themselves. 

However, as both a landlord and a farmer, you need to review each year what your return has been as both.  Make sure in your management reports that you have allocated cash rent to yourself as landlord that is reflective of what cash rents are bringing in your area.  Make sure that you do not use the highest or lowest, but somewhere in a median range.  Once you allocate this cash rent to your farming operation, how profitable was your farm for the year and what is the trend.  I believe, in many cases, the farmer will find out that it is earning a good cash rent return, but as a farmer, it is generating a loss or very little profit.

If this situation continues for too long, the farmer has two good options:

  • Stop farming and either sell the land or cash rent (this would probably be the most difficult for most farmers), or
  • Increase the profitability of the farming operation to take advantage of the land that the farmer owns.  This may require renting more acres, sharing equipment with other farmers, etc.

Have you taken the time to do this analysis on your farm.  If not, I think the results may surprise you.

Bring Home the Bacon

Aug 25, 2010

After at least two years of massive losses, hog farmers are now starting to enjoy much higher prices for their products.  Most of the studies I have reviewed indicated that most farmers that raised hogs probably lost anywhere from $20 to $60 per hog produced in 2008 and 2009.  Based on the higher current prices, I would estimate that they are making at least this much per hog raised right now.

During 2008, the hog farmer had a double whammy of low price for their product and much higher feed costs.  Right now, they have a high price for selling the hogs and feed prices have not rallied too much (as compared to 2008).

Prices for pork bellies which makes up our bacon have risen about 72% in the past year to around $1.43 per poundaccording to an article I read in this Kokomo, Indiana newspaper.  Bacon prices have averaged more than $4 per pound which is the highest price since at least 1980 (although on an inflation adjusted basis, it is still much lower than 1980).

This is a good article to give you perspective on where the pork industry is at right now.

How High will the Potash Corp Price Go

Aug 24, 2010

Reuters is reporting that Potash Corp. has formally put pressure on BHP to raise the price for its takeover of Potash Corp. or have the company get sold to some other company.  BHP originally bid $130 per share for the company or $39 billion in total.  The price has already jumped to over $150 per share and there are rumors that if BHP raises their bid to $162, the company would be theirs.  However, BHP may not want to go that high.

It is interesting that the CEO of the company, Bill Doyle will earn over $500 million if the deal goes through.  One party that may come to the rescue of Potash is the Chinese company Sinochem, China's top fertilizer firm and No. 4 oil company.  Sinochem's Chinese connection is significant due to an expected surge in fertilizer usage by China, India and other emerging economies.  China has bought resource companies located in Canada before (Potash headquarters is in Saskatoon).

Another bidder may be the Brazil mining company Vale, however, it appears they have backed out of the process.

Another option is to break up the company or sell out to a consortium of companies that would jointly bid for the company and then divide it.

Based on where the market price is and the ability of BHP to make the deal, I have a feeling that this will happen and soon.

Crop Tour Recap

Aug 23, 2010

    Here are my comments regarding the crop tour:

    • The corn crop looked good, however, most of Iowa had issues with tip-back where the water on the ground deprived the ear of the nutrients to get the last full inch of the ear filled.  This is the main reason why the Iowa crop looks like it will be lower than last year.  We also saw a lot of nitrogen loss again due to the standing water, etc.
    • The soybean crop looked excellent.  On our tests, we actually had two plants with over 200 pods with the highest at about 240.
    • South Dakota corn and bean crop looked good, however, there are a lot of fields with 10% or more of the field under water so the actual yield with be difficult to calculate.
    • Northern Nebraska is going to help keep the Nebraska yield overall even with last year since the southeastern part of the state does not look as good as last year.  Our night in Grand Island was nice, however, the next morning we woke up to rain all day, so that part was not great for counting crops.
    • Iowa is down due to the reasons above, however, for us, southwestern and northwestern Iowa looked pretty good.
    • Minnesota was not quite as good as we thought it would be for corn, but still pretty good overall.

    From Sunday afternoon after landing in Kansas City to Friday afternoon getting on the plane in Kansas City to fly home, I put on over 2,000 miles on the auto driving the tour.  On the western leg, there were about 40 participants with about the same on the eastern leg.  Participants included farmers, the Pro-Farmer staff, media, agronomists, crop insurance agents, seed consultants, etc.

    The meetings each night had at least 150 participants with the local farmers turning out to see how the corp looked, etc.  I enjoyed these meetings immensely since it allowed me to see how the local farmer thought there crops were doing and it allowed me to ask questions regarding their farming practices, etc.

    Again, I had a great time and highly suggest you consider attending the tour at some time.

    •  

The Crop Tour - Day 4

Aug 19, 2010

Today, we have a very long drive ahead of us as we traveled from Spenser, Iowa, headed north into Minnesota.  We then headed west almost to the South Dakota border.  We then turned north and started to do our counts in those four counties along the border.  At Canby, we then turned south and east and worked our way back to Interstate 90.  All in all, we put on about 350 miles today.

Corn yields were all over the map and we saw a lot of lodging that will show up at harvest.  That will not be fun to combine this year.

We got into Austin, Minnesota tonight and had our final meeting with the local farmers and met up with the eastern crop tour participants.  The estimated yields were given at the meeting and the early call on Minnesota was a .08% increase in yield.  The big surprise was an estimated 6% plus drop in Iowa corn yields.  There are a lot of soybeans out there, however, the crop is much further along this year than last and so many of the pods last year were still blooming and not counted.

This was my first crop tour and I really enjoyed it.  It is hard work driving that much and making that many stops, but very rewarding.  I would higher encourage any of my readers to do it at least once.  You meet a lot of interesting people, not just farmers, but traders, USDA personnel and many others involved in ag.

I look forward to doing it again and we will see what the final numbers look like tomorrow.

The Crop Tour - Day 3

Aug 18, 2010

Today was a free form day for us.  We had Brian from Pro Farmer with us and he was doing multiple radio interviews through out the day so we had to stop at various times and let him make his calls in the best cell phone area that we could find.  I have A T & T and I can tell you that there is almost no coverage unless you are near a city with at least 5,000 in population or more.

The corn and beans looked very good down in Southwest Iowa.  Our counts were about 200 bushels or a little better for corn.  As we moved north and a little east, the corn count dropped off dramatically into the low 100's.  Then, as we moved into District 1 in Northwestern Iowa, the corn counts started going over 200 bushels topping out at about 230 bushels per acre.

We saw some really good soybeans today.  We had two separate plants with more than 200 pods on each plant topping out at almost 240.  We also started noting some sudden death syndrome in the soybeans as we got farther north.   A couple of fields had several spots, but overall, I do not believe we saw more than a couple of acres of total loss during the whole day.

We are spending tonight in Spencer, Iowa and we will have a meeting to discuss how all of the other routes went.  If there is any important news from that, I will let you know tonight.

As always, please go to www.agweb.com to get any updates on the crop tour.

The Crop Tour - Day 2

Aug 17, 2010

We spent the night in Grand Island, Nebraska last night.  It had rained a little bit last night during the update, but I did not expect to wake up to constant rain and to find out that we had gotten 2.44 inches of rain overnight.

We left the hotel at about 6:45 and headed due south.  Our first stop was just about five miles from the hotel and we ended up scouting the best beans that we saw all day and pretty good corn at around an estimated 200 bushels per acre.  After the next stop, the rain gradually tapered off to a mist or no rain at all.  We headed south almost to the Kansas border and then turned due east and went almost to the end of Nebraska and then turned north to spend the night at Nebraska City.

Our biggest estimated corn yield was about 240 bushels and we had at least 8 samples greater than 190.  Soybeans looked good and consistent.

At the meeting that night there were about 200 people in attendance and it appears the Indiana crop will be about 6% higher than what USDA projected.  The Crop Tour is pegging the Nebraska crop at almost exactly the same yield as last year.  What the Southeast part of the state lost, the Northeast part gained.

Tomorrow, we head east and due north to Spencer, Iowa.  It looks like there will be sunshine and I hope my first step tomorrow does not involve the sucking sound of wet mud like today's first step was.

First Day of Crop Tour - Part 2

Aug 16, 2010

Just got back from the meeting with the other participants and local growers.  Looks like there were about 200 people or more in attendance.  Our counts versus the other routes for the day seemed very similar.  The one thing that stood out to me was the drilled soybeans in South Dakota had some wildly high pod counts.  If they get enough rain, the yield up there may be another record.  But that is a big if.

We will be headed out at 6:30 in the morning, but our route appears to be much shorter than today.  We probably put on over 350 miles today and tomorrow is closer to 150 miles.

I will report tomorrow evening and let you know how Nebraska turns out.

Large Farms Over $1 Million in Sales Account for Half of Total Farm Sales

Aug 13, 2010

According to the USDA (using 2007 information) farmers who grow and raise more than $1 million in annual farm sales account for 47% of total farm production.  The survey done by the USDA compared 2007 to 1991 and there are several interesting facts in the survey:

  • Very small farms have increased by over 315,000 during the  period and large farms over $250,000 increased over 50,000 while the small commercial farms between $10,000 and $250,000 decreased by about 275,000 (all of the revenue numbers have been adjusted to reflect 2007 values).
  • In 1991, farms with less than $250,000 in sales represented 42% of the total farm sales.  In 2007, this had dropped to 23%.
  • Farms over $1 million in sales increased from 28% of the total to about 47%. 
  • Farms between $250,000 and $1 million held steady at about 30% of the total, while farms between $100 thousand and $250 thousand decrease from 23% to only 14%.
  • Operating margins were the highest in the over $1 million farmers with at least 60% of the farms showing an operating margin of 20% or more.
  • In all categories of farms, the farmer aged 65 or greater grew from 1991 to 2007.  For example, in those farms between $100 thousand to $500 thousand, the percentage of farms over age 65 grew from about 10% to about 20%.  Even the large farms say a small increase in these age groups.
  • Farms under $250,000 continue to be a large factor in the growing of hay, tobacco and small grains with their production ranging from 24% to 30% of these commodities

I think the trend of larger farms will continue especially as the older farmers pass on their land to children that are not in farming.

Pre Crop-Tour Comments

Aug 13, 2010

I am flying out of Seattle early Sunday morning and meeting up with my farm partner at the Kansas City airport.  We are then driving up to Sioux Falls, South Dakota to meet up with all of the Crop Tour participants that are doing the western leg of the tour.

The plan is to spend Monday to Thursday traveling through South Dakota, Nebraska, Iowa and Minnesota.  Another set of participants will leave Ohio on Monday and then meet up with us in Austin, Minnesota on Thursday afternoon. 

I plan on writing a updated post each night and let you know what we did that day and what my thoughts about the corn and bean crop are.  This is my first time of participating and I look forward to it.

Watch for Farm Partnership Tax Penalties

Aug 11, 2010

In the recent Holdner Tax Court case, the IRS was able to make an argument that the farming operations carried on by father and son were in fact a partnership and not two separate farming operations that should be reported on their respective schedule F.

In the case, the father and son had operated the farm business together since 1977.  However, during these years, the father and son each reported one half of the income on their schedule F.  However, the father arbitrarily reported most of the farm expenses on his return.  Upon audit, the IRS took the position that the farm operation was in fact a partnership and allocated one-half of the income to each and disallowed all of the farm expenses to both.  In addition, the IRS assessed the 20% accuracy penalty against the dad.

The Tax Court reviewed the case and agreed that the farm operation was in fact a partnership, however, they did allow the deductions to be split 50/50.  The Court did uphold the extra 20% penalty assessed against the dad.

I know that many farmers who farm either with their children or siblings do so in an informal farm partnership and usually report their income and deductions on schedule F.  If this allocation is based upon a formal accounting process, then the IRS is not going to have an issue with the reporting.  However, if the income or deductions are allocated based upon the whim of the individuals involved, then the IRS may come in and both disallow the allocation and assess an extra 20% penalty of the tax owed.

If this applies to your farm operation, make sure you review with your tax advisor that you are handling your allocations correctly.

Should Wheat Farmers Lock in 2011 Prices

Aug 09, 2010

As I write this post September 2011 wheat futures are trading at slightly more than $7 per bushel.  If I had asked any wheat farmer three months ago would they like to lock in $7 wheat for next year's crop, I am fairly certain that 100% of them would have said yes.

These farmers now have that choice, subject to the basis issues as discussed in a previous post.  I would strongly suggest that all wheat farmers review their budget for next year and see if it makes sense to try to lock in prices near the current level.  Any time that a farmer can at least lock in good prices to cover all of their estimated production costs allows the farmer greater flexibility in marketing their crop and it also pleases the banker.

In a side note, I spent Friday and Saturday driving combines for my cousins down in Walla Walla.  I drove a Case IH 2388 and 1470 for about 18 hours and that was my idea of a vacation.  Yields ranged near 125 bushels for dry land wheat and with the current good prices, I think my cousins might have a good year in farming.  They have some steep hills down in this area and kicking in the 4 wheel drive is always fun for a combine driver.  Using three machines, you can cover a lot of acres in a day, however, this year the fields had a lot more down wheat and the speeds are much lower than normal.  it is fun to see 3 combines, 2 bunk-out wagons and 2 semis all going strong.

 

Rise in Wheat Futures has not carried over to Cash Market

Aug 09, 2010

It appears as usual that there is a buying frenzy in the wheat futures market that has not totally transferred over to the cash market.  Since early June, the Wheat Futures market has gone up by about 80% whereas the cash market has gone up by much less leading to a large widening in the basis.

For example, the wheat futures on Thursday locked limit up at a 60 cents gain while the CIF bids for August fell 10 cents per bushel and September bids fell 30 cents per bushel.

Unlike 2008, there is ample wheat stocks in the US (at a 23 year peak) and there are supply disruptions from the Russia and Ukraine regions, however, we will see a drop in wheat futures prices if cash prices do not rise.

Most of this rise is wheat futures is attributed to the massive fund buying.  Just on Thursday alone, the funds purchased a net 20,000 contracts which is equal to 100 million bushels.  This led to the increase in wheat prices on Thursday, but this price will drop once the funds sell these contracts.

US Wheat stocks are at about 30 million tons which is more than twice the amount of production loss from Russia.

The bottom line is that wheat prices are up, but I would not expect a repeat of 2008.

For more information, please see this article posted at Reuters.com.

US Farm Managers are on a roll

Aug 06, 2010

I was skimming through the Reuters.com website the other day and came across an article on how US Farm Managers are enjoying the benefits of the Baby Boom Generation of farm land transfer and the continued high farm land prices.

Most of these larger national farm managers went through crisis in the early to mid 1980's as they struggled with many foreclosed farms.  However, since the late 1990's they are enjoying a fairly successful business climate.  According to the article, about 80% of the farmland in the US is owned by people age 65 and over and this property will be transferred to the Baby Boom Generation, of which almost all of them are not farmers.  This requires the use of a competent farm manager to manage the whole farm process in many cases. 

The largest US farm manager is Farmers National out of Omaha.  It was founded in 1929 right at the time of the stock market crash and like many others struggled with the 1980's farm crisis and was sold to MetLife.  In 2000, MetLife sold the company back to the employees and it now employs over 200 employee/owners and sell well in excess of 25 million bushels of corn, 5 million bushels of beans and over 1 million bushels of wheat.  They actively manage 1.5 million acres of crop land in 23 states.

I believe that most newer farmers should view this as an opportunity to get to know these farm managers well and show that you can be a profitable farmer for them.  This trend will continue and it provides a great opportunity to acquire more acreage to farm.

Rural Index Turns Negative Again

Aug 05, 2010

The Rural Mainstreet Index maintained by Creighton University dipped below growth neutral in the latest July posting.  This marks the first time since April that the index dipped below the neutral 50 level by sinking to 49.3 from 52.6 in June and 54.3 in May.

Like other economic indicators, this index appears to be signalling that there is slowing in the national economy including rural areas, however, the farmland-price index continues to move above growth neutral for the sixth consecutive month to close at 52.5 down slightly from June's 54.7.  One banker noted that "The farm economy has clearly improved from last year and we are seeing that reflected in farmland prices."  Also, with the recent dramatic rise in wheat prices, I would expect this trend to continue or even accelerate.

The farm equipment-sales index slipped from 53.1 in June to 51.8 in July.

Bankers on an overall basis do not believe that the financial reform bill passed by Congress will help their borrowers.  About 29 percent view it as positive while 66 percent anticipate a negative effect on the economy.

Retail sales for the rural area took a nosedive in July with a reading of 41.7 down from 52.6.  This represents an almost 21% drop in the index.

A lot of analysts are talking about a double dip recession and these readings may reflect those opinions.  We will have to wait and see how the next few months turn out.

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