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Moneywise

February 6, 2009
 
 


Shorter depreciation period

As part of the stimulus package, farm equipment placed in service during 2009 will qualify for a five-year depreciation schedule. Grain bins, cotton gins, fences and other land improvements are excluded and must follow their former schedule. The Association of Equipment Manufacturers vows to work to make the change permanent. —Linda H. Smith

 



Look up, General!

As a business manager, you need to develop strategy like an army general, says Purdue University economist Allan Gray.

"Now more than ever in this marketplace, it's an important place for a general," he says. "There are so many battles coming at us. If we keep our eyes only on the battle, when we look up, we're probably somewhere we don't want to be."

 



Positive peer pressure

Speaking at the annual TEPAP (The Executive Program for Agricultural Producers) conference in Austin, Texas, Danny Klinefelter, Texas A&M economist, pointed out several instances where peer groups and business networks can benefit farmers.

• Land investment companies. The idea is for a farmer to team up with local investors who would like to own farmland. For the investors, it is a way to diversify retirement funds and avoid overdependence on 401K or IRA investments, a situation many near-retirees regret today. Typically set up as an LLC or S corporation, it may call for an upfront investment with yearly additions. The farmer is guaranteed rental of the property for a given time—perhaps 10 years—and gains the ability to grow his land base without assuming the risk of land ownership and tying up working capital in land purchases. Rents may be adjusted annually based on land value indexes.

Health insurance. With rising health care costs a concern, a group of growers in the Texas Panhandle have joined together to form their own insurance group. "They have an underwriter for any really big insurance needs, but for basic health care, they have funded this group and they are insuring themselves," Klinefelter explained.

Cost accounting groups. "In a town in Indiana, there are several farms that use management accounting, and they have the same systems in place. In their town, there is a CPA who wants to stay in the profession, but she wants to live in the small town and not have to commute an hour to Indianapolis, and also not work full-time. The farms have hired her for 30 hours/week at a $75,000 annual salary," Klinefelter said. The farmers also have hired a full-time assistant for the CPA who does data entry. "This is a way to acquire a dedicated professional accounting staff that a single farm would find costly," he explained.

Peer advisory groups. Nearly all businesses have a board of directors, and a thriving farm business should be no different, Klinefelter said. Forming a peer advisory group of like-minded farmers will allow you to share ideas and learn from each other. This group can act as your board of directors, and in the same meeting, you will act as if you're on their board of directors. You just have to be sure everyone will be honest with each other and they won't gossip. The true value of these groups is that they will hold you accountable for getting things done. "Most major goals are never accomplished because we tend to do everything else first," Klinefelter said. —Greg Vincent

 



More sales = more profits

Farm profits are strongly associated with farm size, USDA reports in a study of million-dollar farms. Most farms with sales below $175,000 have negative margins; about 80% with receipts over $250,000 have positive net farm income, regardless of sales category. Million-dollar farms average 20% profit, and $5 million farms average over 26%. Return to assets also rises with net worth (see graph).

Debt-to-asset ratios are highest for $5 million farms, but higher cash income per dollar of assets allows them to pay more interest and reduce loans. "These farms are taking on more financial risk," says USDA economist Robert Hoppe. "But they also employ strategies to manage this risk. About two-thirds have marketing or production contracts, for example."

Roughly three-quarters of $1 million farms specialize in five commodities: high-value crops, dairy, hogs, poultry and beef (specifically feedlots). They already account for half to three-fourths of the production of each of these commodities.

However, "the competitive advantage for expanding farms also applies for specializations beyond the five listed," Hoppe says. —Linda H. Smith



 



See your banker SOON

Your bank's profitability, not your own, may determine your line of credit in 2009, cautions risk management consultant Moe Russell of Russell Consulting in Panora, Iowa.

"Banks that have lost money due to the economic crisis may need to reduce their loan volume to maintain their capital ratio," he explains. "We've already seen it happen with a farmer who, unfortunately, is his bank's largest ag customer.

"And it isn't just small, local banks that are facing the problem," he adds. "Midsized regional banks with heavy real estate losses also are reducing credit availability to farmers.

"In past years, most losses came from loans," Russell notes. "But in 2008, banks also lost money on securities like Fannie Mae or Freddie Mac."

Russell recommends you sell 2008 grain to reduce borrowing needs this year. "Poor kernel quality and inadequate drying is causing the crop to not store well. Selling sooner than you had intended may save you some storage loss," he says. —John Russnogle

 



Relief at the pump to continue

Direct energy consumption accounts for about 12% of total corn production costs, and indirect energy inputs like fertilizers and pesticides account for more than 50%, according to John Miranowski, Iowa State University economist.

So it's good news that since July, the monthly average price of West Texas Intermediate crude oil fell from $133/barrel to $41. The U.S. Department of Energy's Energy Information Administration forecasts an average of $43/barrel this year and $55/barrel in 2010. Regular gasoline should drop to $1.87/gal. this year and diesel, $2.27/gal. At their July peak, they averaged $3.94 and $4.70. —Linda H. Smith



One-liners

"You will either step forward into growth or you will step back into safety." Abraham Maslow, American psychologist

"Your business in the next 10 years is all about margin. Margin!" David Kohl, Virginia Tech University ag economist

"I've never experienced the nervousness and fear people are feeling right now." David Downey, Purdue University agricultural economist

 

 



Top Producer, February 2009
 

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