Farm finances in perspective
Beware statistics. They can frighten or reassure. One financial adviser recently raised red flags based on this sobering fact: In the just past four years, U.S. farms and ranches have added total debt equaling $28.78 billion. That's a lot of debt.
In fact, total nominal farm debt is higher today than during the mid-1980s peak! But in inflation-adjusted terms, debt has been more or less steady, so maybe things aren't as bad as they sound.
During the four-year period in question, ag assets increased $741.5 billion, meaning each $1 in debt increase equaled a $26 asset increase. The debt-to-asset ratio continued to drop, to 9% this year. Contrast the 1980s, when debt was 16% to 22% of assets.
But that's not the whole story, says Purdue University Extension economist Chris Hurt, who expects USDA to downward adjust asset values. "The financial category and machinery account for $7.6 billion. Commodity prices have fallen since USDA's income report, and it will not take much more of the current farm economic conditions for land values to begin to drop,” he says.
Repeat of the 1980s? Hurt says balance sheet lending (lending on the assumption that values will continue to rise and improve balance sheets) in ag in the 1970s is similar to what has occurred in the general real estate market during the past decade. "It's too bad housing lenders did not study the lesson ag learned in the 1970s,” he says.
Following the 1972–75 income boom, we dropped to 1960s levels, but inflation and balance sheet lending drove land values upward. "This time, we have had the surge in income and that gave an initial burst to land values, but we hope to avoid the inflation period that led to sharply overinflated land values and the horror of the 1980s,” Hurt says. "Of course, there remains the possibility that our federal government will elect to have a more inflationary monetary policy as a way to reduce the pain of paying back the huge debts that we are taking on as a result of rescue packages, and that will unfold in 2010 to 2012.”—Linda H. Smith
How is your co-op's health?
For farmers and co-ops alike, it's a new and fast-changing economic world, says Bob Engel, president and CEO of Denver-based CoBank, which lends money to farmers in some regions as well as to co-ops.
"There's more stress on farmers, co-op managers and bankers than ever. But the health of agriculture is good,” he says, with the caveat that the livestock complex has been "hit hard.”
"Farm co-ops will face their own unique funding challenges over the coming months. Cooperatives will continue to have consolidation from the standpoint of both the financial side and in human capital,” Engel says.
Lower crop prices are easing the situation, because co-ops now need less working capital. But their problems are far from over.
"The tougher challenge for farm supply co-ops is they've contracted fertilizer. Now that the fertilizer market has gone down, at what price do they sell?” Engel asks.
"Farmers now are much better positioned coming into this; most are not highly leveraged. The lesson is not to buy land like some people buy spec homes. It's to grow crops, not for speculation,” Engel says. "We'll probably get some depreciation of land, but it'll be 10% or 15%, not 50%. I'd be more worried about loans to gentleman farmers.” —Charles Johnson
Capital gains hit coming?
President-elect Barack Obama proposes raising the top personal capital gains tax rate. Families with less than $250,000 income would still pay 15%, but families over $250,000 would pay in the 20% to 28% range. If Obama allows President Bush's tax breaks to expire, the top rate could hit 39.6%.
"Business owners considering selling companies in the next several years may find sooner is better for their bottom line,” says James Still, managing director of Boenning & Scattergood, an investment bank near Phila-delphia. "Expect an increase in the rate at the earliest in 2009 and at the latest, 2011.”
Few affected by lower payment limits
According to USDA Economist Ron Durst, farm bill changes to payment limitations will affect very few farmers. Under the 2002 Farm Act, total payments from direct, countercyclical and marketing loan program payments could not exceed $360,000 for couples or farmers with multiple operations. The 2008 Farm Act retains the limits on direct and countercyclical payments but removes limits on marketing loan benefits.
Under 2002 law, a farmer was not eligible if adjusted gross income (AGI) was more than $2.5 million, unless 75% of his income was from farming. Fewer than 0.1% of all farmers reported AGI over $2.5 million.
The 2008 act says you are not eligible for payments if nonfarm AGI is over $500,000 ($1 million for couples) and farm income doesn't represent two-thirds of your total AGI. If nonfarm income is over $1 million (and farming isn't at least two-thirds of total AGI), you are ineligible for conservation payments.
Finally, an individual with farm AGI over $750,000 can't receive direct payments.
In 2005, less than half a percent of sole proprietors had AGI over $1 million. Less than a third of farm operators report a farm profit and fewer still report farm income over the $750,000 cap for farm income that applies to direct payments.
However, watch out for traps outlined in the Summer 2008 "Moneywise.”—Linda H. Smith
"Debt is a four-letter word.” Jerry Gulke, Strategic Marketing Services, Chicago, and farmer in Illinois and North Dakota
"Change is an event; transition is a process.” David Thompson, Laminators Inc.
"Day-to-day worries can be like spyware, clogging your mind's ability to function.” Jim Huling, The Jim Huling Group, in August 2008 Smart Business
"Farming looks mighty easy when your plow is a pencil and you're a thousand miles from the cornfield.” Dwight D. Eisenhower
"We tend to overmanage and underparent our children.” John Fast, John Fast and Associates, Waterloo, Ontario
Top Producer, December 2008
- DECEMBER 2008