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September 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.

The 3.8% Sales Tax on Home Sales

Sep 29, 2010

I have received multiple e-mails in the last month or so about the Obama 3.8% sales tax on the sale of your home starting in 2013. 

There is no federal sales tax on any home sale in today's tax law.

However, there is a provision in the Health Care Act passed earlier in the year that will assess an extra 3.8% surtax on investment income starting in 2013 including capital gains.  This surtax applies if a farmers adjusted gross income is greater than $200,000 or $250,000 if married.  This is an extra income tax on capital gains, not a sales tax.

Let's compare the effect of this tax compared to a sales tax.

Let's assume a farmer has a house that they have owned for many years.  They paid $50,000 for it 30 years ago and it is now worth $500,000.  Under current income tax law, the gain on sale of this house is completely tax free.  A sales tax of 3.8%, if it applied, would cost the farmer $19,000.

Now lets assume the house is not the farmer's personal residence and they sell it for a $450,000 gain in 2013 and their other income is over $250,000.   In this case, their capital gain of $450,000 would be subject to an additional surtax of 3.8% or $17,100 which would almost be equal to a sales tax but not quite. 

The only time the surtax is equal to a sales tax is if the cost basis is exactly zero.

One other Internet based e-mail that I have seen several times is that we are now required to report our health insurance premiums paid for our benefit on our W-2 at year-end as taxable income.  The e-mail will site the health care act as the requirement, however, they mis-intepret the actual wording of the law.  What is actually required is that the premiums do need to be reported on form W-2, however, not as income.  It will be reported in a separate box similar to other reporting that is already being done on the W-2 for other non-taxable items.

Some CPA Humor

Sep 29, 2010

I know some farmers probably feel that CPA do not have any humor, but I think we enjoy jokes about our profession a lot.   So, in that spirit, I am listing some humor below.

Trick or Treat

The doorbell rings, and a farmer answers it.  Here stands this plain, but well dressed kid, saying "Trick or treat?".

The mans asks what the kid is dressed up as for Halloween.

The kid replies, "I'm an IRS agent."

Then the kid takes 35% of the farmer's candy, leaves and doesn't say thank you.

Ashes to Taxes

A farmer on his deathbed called his frient and said "I want you to promise me that when I die you will have my remains cremated."

His friend asked, "And what do you want me to do with your ashes?"

The man said "Just put them in an envelope and mail them to the IRS.  Write on the envelope 'Now you have everything.'"

Income Tax Law

All the Congress, all the CPAs, all the tax lawyers, and a convention of wizards can not tell for sure what the income tax law says.

The Oldest Profession

A surgeon, CPA and a lawyer were arguing about which of them was practicing the oldest profession.

The surgeon said "God created Eve from a rib from Adam.  Obvisiouly, God is a surgeon, so medicine is the oldest profession."

The CPA protested, "Before God created Eve from Adam's rib, he created an orderly universe from chaos.  That clearly shows that God was an accountant before he was a surgeon.  Accounting then has to be the oldest profession.

The lawyer sat for a moment smiling, looking at the surgeon and the CPA.  "That may be true," the lawyer said shrugging his shoulders, "but who created the chaos?"

Pakistani Floods Destroy Over $3 Billion in Crops

Sep 28, 2010

The recent deadly floods in Pakistanhave destroy $3.27 billion of rice, cotton and sugar production according to is Farm Minster Naza Muhammad Gondal.  The country lost about 2.4 million metric tons of rice (about 80 million bushels) and 10.4 million metric tons of sugar can.   The country may also need to import almost 3 million bales of cotton which would be a 1 million bale increase from last year. 

The cotton loss is one of the primary reasons why cotton prices have gone of $1 per pound and have reached a 15 year high.

Over 2,400 miles of roads have been destroyed and food inflation for the current year may exceed 20%.

Rice exports may plunge up to 35 percent for the year reaching no more than 3 million tons from last year 4.6 million tons.

About 15 percent of the sugar crop was destroyed and the county may need to import a million tons of raw or refined sugar to meet demand.

It seems almost anywhere we look in the world weather problems are raising the price of food.  It will be interesting to see if the trend continues or if things get more back to "normal".

IRS Updates List of Extreme Drought Counties

Sep 28, 2010

The IRS has released the fifth annual list (published each September) of counties or parishes in which exceptional, extreme, or severe drought has been reported during the preceding 12 months.  This list can be used instead of the U.S. Drought Monitor maps to determine whether an extended replacement period applies for livestock sold because of drought.

If a rancher sells livestock due to drought, the rancher is allowed a certain number of years to replace this livestock with new livestock and report no gain from the sale.  This period is normally four (4) years, however, if the county where the ranch is located is still subject to drought during the three years preceding this four year term, then the time to replace the livestock is extended until the county has been drought free for a year.  The first drought-free year is the first twelve month period that :

  • ends on August 31
  • ends in or after the last year of the taxpayer's 4 year replacement period; and
  • does not include any weekly period for which exceptional, extreme, or severe drought is reported for any location in the applicable region.

In brief, the rancher is allowed a full year after the county is completely drought free before the rancher is required to purchase their livestock to replace the herd sold.  In some cases, the rancher may have five or ten years to replace the stock if the county has extreme drought for at least one week in each year during this time period.

The rancher can either look at the Drought Map to determine whether this applies or just review the IRS notice that is prepared each September. 

If this situation applies to you, check with your tax professional to see how much time you have to replace your livestock without incurring a tax penalty.


New Tax Goodies - Updated

Sep 25, 2010

A very observant reader spotted an error in my last post on the new tax goodies.  In the reporting section for real estate rentals, the form 1099 reporting is for services provided to the real estate investor for items such as repairs, accounting, etc.  The payer of the rents was already required to report this information.

I enjoyed getting your feedback and appreciate bringing to my attention any errors that I write from time to time.

New Tax "Goodies" Are Here

Sep 24, 2010

The Small Business Jobs Act of 2010 was just recently passed by both the House and Senate and President Obama will sign it when he gets back from China.  This Act has several tax "goodies" for farmers and it also has some not so good "goodies".  A recap is as follows:

Section 179 Expensing  - Earlier in the year, the law increased the expense deduction up to a maximum of $250,000. This Act increases that amount to $500,000 and the phaseout does not start until you purchase at least $2 million of equipment.  For almost all farmers, these numbers will be more than enough.  This provision applies to any tax years that begin in 2010 and 2011.  Therefore, for this year and next, a farmer could purchase up to $1 million in equipment and deduct the whole amount.  Again, the income limitations of Section 179 apply and remember to not buy equipment just for the tax deduction.

Bonus Depreciation- The 50% bonus depreciation has been extended to December 31, 2010.   This means that any equipment will qualify for immediate 50% deduction and the remainder will be depreciated using current methods.  Most single purpose agricultural facilities will also qualify.

First year Auto Deduction - Depreciation deductions for autos and light trucks have been increased by $8,000.  Therefore, instead of the current deduction levels of about $3,000, you can now write off $11,000 in the first year.

Five-Year Carryback of Small Business Unused General Business Credits- Many farmers have accumulated general business credits that they may not have been able to offset against income tax due to the alternative minimum tax (AMT) or other reasons.  The new Act allows these credits to now completely offset the AMT and if there are any excess credits, they can be carried back five years instead of the current one year.  A small business is defined as revenues of less than $50 million so this provision should apply to almost all farmers.

Reduced Recognition Period for S Corp Built In Gains - Previously, if you converted from a C corp to an S corp and you sold in property with in a 10 year period that had a built in gain, you were required to pay an extra tax on these gains.  For tax years beginning in 2011, this period has been shortened to five years for all of the S corps who have been changed for at least five years.  Therefore, if you converted to an S corporation on or before January 1, 2006, you no longer have to worry about the built-in gains tax at all.  If you converted after that date, you are still subject to the 10 year rule.

Deduction of Health Insurance Against Self-Employment Taxes - This provision will apply for almost all self-employed farmers.  Currently, you could deduct your health insurance premiums for your family against other income, but could not deduct it against your self-employment taxes.  For 2010 only, you can now deduct these costs against your self-employment income.  This could easily save up to a $1,000 in self employment tax for many farm families.

Cell Phones Are No Longer Listed Property- Under the current law, cell phones and other similar telecommunication devices were considered listed property which means that a taxpayer needed to keep a log of their business use of these devices and back out the personal use on their income tax return.  I am sure all of our farmers were following this rule closely.  However, beginning with this year, you no longer need to keep track of this use and a cell phone paid for by the business should be 100% deductible.  Now if the business is paying for all minor children's cell phones, that would probably still not be deductible.

These are the tax goodies.  What are the "baddies"?

Information Reporting for Rental Income - Beginning in 2011, you will now be required to file a form 1099 for all services provided real estate rental investors paid in  excess of $600 for the year.  This means you will need to get the name, address and identification number from all of your service providers for repairs, accountants, etc.  and report those payments beginning in early 2012.

Increase Penalties For Not Filing Information Returns - Beginning with 2011, if you fail to file any information return timely, the penalty for this failure to file increases dramatically.  There are three different tiers of penalties related to the type of information return such as 1099, W-2, etc.  In summary these penalties will increase as follows:

  • Tier 1 - From $15 to $30 per return, maximum from $25,000 to $75,000 per calendar year;
  • Tier 2 - From $30 to $60 per return, maximum from $50,000 to $200,000 per calendar year;
  • Tier 3 - From $50 to $100 per return, maximum from $100,000 to $500,000 per calendar year.


These penalties can be dramatic, however, the IRS has some leeway in waiving the penalty for reasonable cause, etc.  For example, assume you are a large orchard operation that hires up to a 1,000 workers to pick your fruit, etc.  If you fail to timely file your W-2 for the year, the penalty for this failure could be $100,000 or more.  With the other new rule passed earlier in the year for filing form 1099 for all transactions exceeding $600, any failure to file these returns can cost a farm easily $25,000 to $100,000 or more.  Start getting your record keeping system updated now.

As you can see from the recap of provisions, there are more substantial tax "goodies" than "baddies".  As long as you properly report your information returns, the benefit from this Act far outweighs the cost.

Any farmers who are having a good year and need to upgrade their equipment, this is the year to take advantage of the expanded Section 179 provisions or purchase the maximum amount by the end of this year and another $500,000 in 2011 and you will be able to write all of the equipment cost off.  With a combine at $300,000 or more, it does not take too much new equipment to get you to the $500,000 ceiling.

How to Time Your Equipment Purchases

Sep 23, 2010

We got a question from a farmer as follows:

"My tax year ends October 31.  I've spent about $250,000 on equipment in the last year.  I am looking at buying a planter which will cost from about $60-90,000.  Should I wait until November or buy it before my year end of October 31."

This is a great question that almost applies to all farmers.  I am going to make a couple of assumptions in this case with my answers to each assumption.

Assumption # 1 - We are assuming that this is probably a C corporation (due to the October 31 year-end) and we are assuming that the farm operation is fairly profitable.  In that case, since the farmer has already spent $250,000 on equipment, for this year, their maximum Section 179 expense deduction of $250,000 has been reached.  Therefore, by putting this equipment into service before year-end, most likely the deduction will only be about 15% of the purchase cost.

Therefore, under this assumption, assuming a budgeted profitable year in 2010/11, we would recommend waiting till November to purchase since the corporation would be able to take a full Section 179 deduction in that year.

Assumption # 2 - The same as assumption #1, however, the farmer will spend at least $200,000 on equipment in 2010/2011 besides the planter, we would recommend that the purchase take place in the current year.  Even though the current depreciation deduction is only 15%, in the next year, the depreciation deduction would be about 25% of the original cost and the farmer will be able to take the maximum Section 179 deduction on other equipment.

Assumption # 3 - The farmer's income is less than the amount of equipment purchased.  In this case, it will not be able to take the maximum Section 179 deduction in the current year.  If the farmer believes his income for 2010/11 will be higher, we would recommend purchasing the equipment in that year to take advantage of the full Section 179 deduction then.

Wall Street Press Pays Attention to Ag Commodities

Sep 23, 2010

When farm commodity prices are increasing, the coverage of Ag tends increase by the Wall Street press.  In today's Wall Street Journal, there were two articles related to Ag commodities.

In the Ahead of the Tape article, there was a discussion on how the price of cotton going over $1 per pound for only the second time since the Civil War will affect apparel retailers.  The article mentioned that for every penny increase in cotton prices, Hanesbrands, Inc. would have their raw material costs go up by $3 million.  Now, the interesting thing to me, is when cotton is at 50 cents a pound, you would never see the Wall Street Journal having a front section article on how a 1 penny decrease would save $3 million.

On page 2 of the Money and Investing Section was a featured article on how a timely rain in Russia is helping Black Earth Farming Ltd. get their entire 44,000 acres of winter wheat planted in Russia.  The gist of the article is that rains have come to Russia to save the crop, however, when you read the article in detail, there are still many sections of Russia that have not gotten any or much rain and their winter wheat crop will only cover 15 million hectares (about 37 million acres) at best.

When prices are low, you almost never see any articles on Ag commodities in the Wall Street Journal, however, when prices are high, you tend to see lots of them.  I am hoping to see a lot more.

Please note that the Wall Street Journal site is a paid subscription site, so you may not have full access to the article without being a subscriber.

Farm Tax Resources

Sep 22, 2010

A reader asked me for any books that I would recommend regarding farm taxes.  As a CPA, there are several courses around the US that I can attend to get my continuing education and these courses do provide workbooks for us as CPAs.  However, they are not designed for reading by a farmer since they are more in a outline format.

I have researched this on the Internet and have found a couple of small booklets on the subject that I think can help farmers.  You do need to make sure that these resources are updated each year since the tax law does change and lately, it changes rapidly.  Two that I find helpful are:

  1. University of Minnesota Extension has a "Ag Income Tax Update for Farm Families".  This gives a good overview of farm taxation including some Minnesota specific data.
  2. North Dakota Extension Service has a good guide on tax records retention labeled "What to Keep Where and For How Long"
  3. Washington State University prepared a "Federal Income Tax Management for Farmers and Ranchers" guide back in October, 1995.  Although this is outdated, the actual guide has very good income tax planning principles that will not get outdated.
  4. Another slightly outdated manual was prepared by Purdue University titled "Income Tax Management for Farmers in 2008".

Finally, the old standby is Publication 225 from the IRS - "Farmer's Tax Guide".  This is a very comprehensive outline of farm taxation from the IRS standpoint.  It does a great job of explaining the tax law, but you will not find any tax planning or strategies in this guide, but you need to be able to use it.

There are a couple of out of print books that you may be able to find on Amazon or the net.  The  first book is "Farm Estate and Business Planning" by Neil Harl, long-time instructor at Iowa State University.  I have the 1994 version in my library and I think the last time it was updated was 2001.  As the title indicates, this is primarily a book on tax and estate planning for farm families and does a great job on that subject.  You will not find much current income tax planning in this book.

Another book is Ag Executive's Tax Guide for Farmers and Ranchers by Davenport and Dunteman.   This book was published in 1993, so a lot of the material is outdated, but a lot of planning topics are still pertinent.

Some of the paid marketing services such as Pro Farmer, DTN, and others have several income tax related sections and most of these are quite good and are updated at least annually.

My personal goal assuming I find the time is to come up with my own "Farmers Tax Guide" and post it on my site and keep it updated at least annually.  With the personal extensions almost done, this will give me about 3 months to get it done before tax season.

This Land of Ag Diversification

Sep 21, 2010

I spent this weekend and Monday traveling to Boise from Yakima and back again.  On the trip down to Boise, I drove through the irrigation section of the Columbia Basin.  This area grows a wide variety of crops such as onions, potatoes, wheat, corn, peas, beans, hay and lots of vegetable seed crops.  After that, I drove through Southeastern Oregon with its range land for cattle.

As I was driving into Idado, I noticed sugar beets, a lot of dairy, corn, wheat, and other related corps.  I spent some of my time on Monday driving around the Treasure Valley of western Idaho.  There is quite a bit of fruit trees and vineyards in this area along with the row crops.

On Monday, I drove north through the Payette River and Salmon River valley.  If you have never made this trip, you must go on it.  This is some of the best scenery in the US.  I met with  a farmer near Lewiston that grows twelve different crops.  From Lewiston, I drove home through the Palouse Country and again back through the Columbia Basin.

After putting on 1,100 miles, I can tell you that just the Northwest part of the country grows a bountiful range of crops and I am proud to be part of American Agriculture.

Begin to Lock in 2011 and 2012 Profits?

Sep 17, 2010

As corn starts to exceed $5 in price and pricing can be locked in 2011 or even 2012 crops, have you checked your budgets for those years.  If you have and are able to lock in your major input prices such as fertilizer and diesel, you should be looking at making $250 per acre or more on corn.  This is some of the highest profits in the last 10 years.  In order to accomplish this now by hedging your corn price, you must be able to also hedge your input prices.

I have listened to several marketing experts on ways to accomplish this and I think several of them have merit.  Therefore, make sure to review your budgets for these years and at least consider locking in both revenue and costs numbers for 50% or more of your corn and bean and wheat crop.  We do not get opportunities like this too often, so make sure to take advantage of this.

I would welcome comment on what steps our farmers have taken to lock in input prices.

What is a "Super Juice"?

Sep 16, 2010

I was reading this article on about a "Superfoods Company" Genesis Today revealing a new advertising campaign for their line of "super juices".  These juices are comprised of fruits that tend to have a perceived health benefit such as anti-oxidants, etc.  Fruits involved are cranberry, pomegranate, acai and most berries.

Their campaign will strive to make their juices sound much more appealing to the general public than the traditional orange or apple juice.  They are touting the health effects of the juices along with the extra vitamins and natural sugars that the juices have.

I am starting to get the feeling that these companies have become more of a marketing company than a "real" food company.  Based on these trends, I think most farmers should try to start marketing their products as "Super Corn", "Super Soy" to compete. 

I have sampled some of these juices and hope they have very good health benefits since some of them do not taste very good to me.  It will be interesting to see if in ten years these are still "Super Juices" or if orange and apple have made a comeback.

We shall see.

Cotton Rallies to 15 Year High

Sep 15, 2010

As cold weather threatens the crop in China, cotton has reached a new 15 year high in prices.  At the beginning of 2009, cotton prices were approximately 50 cents a pound.  As of today, the price is well over 95 cents a pound and if the adverse weather in China continues, the price may go even higher. 

Global inventories fell to 45.4 million bales in the 12 months ended July 31, 2010, the lowest levels in 14 years.  A bale weighs 480 pounds.  O.A. Cleveland, a professor emeritus in agricultural economics at Mississippi State University indicates that prices may rise to $1.25 per pound by January as supplies dwindle.

Brazil, the world's fifth largest exporter, cut the tariff on imports of the fiber to zero from 10% from October to May as domestic supplies fell well short of demand.

India, the world's second largest exporter, plans to delay registration of export contracts by two weeks until October 1.  The nation, estimated by the USDA to account for 18% of global cotton exports in 2009, is limiting overseas sales to 5.5 million bales in the year starting October 1 and impose "prohibitive" duties on an shipments over that amount.

As the world adds more and more people and we lose arable land, I believe these types of pricing structures will become more the norm than the exception.

Is an Unlimited Estate Tax Exemption for Farm Estates Harmful?

Sep 10, 2010

I came across an article put out by the Center on Budget and Policy Priorities from Washington DC.  The gist of the article was that having an unlimed estate tax exemption for farm estates is unnecessary and likely harmful.  The focus of the article is that this policy would create 3 harmful situations:

  1. First, according to the article, there is overwhelming evidence that the estate tax does not pose a significant problem for farmers.  The Urban Institute-Brookings Institution Tax Policy Center estimated there would be fewer than 110 small farm estates for 2011 if we used the 2009 estate tax exemption of $3.5 million (their definition of small farm estate is less than $5 million in assets or less than 1,000 acres of good Iowa farmland).
  2. Second, an unlimited exemption for farmland would promote tax sheltering by giving wealthy individuals whose primary occupation is not farming a strong incentive to sell financial assets and purchase large tracts of farm land to avoid paying the tax.
  3. Third, an unlimited farmland exemption could hurt ordinary farmers by driving up the price of farmland as wealthy individuals buy farmland for use as an estate tax shelter.  This would make it harder for young aspiring farmers to enter the farming industry and for families to hold onto true family farms.

Remember that these are their conclusions, not necessarily mine.

My comments are as follows:

  • They stated that estate tax opponents have not been able to come up with one case where the estate tax forced a family farm to be sold.  I would be curious to hear from my readers if they have any experience of a family farm being sold because of the estate tax.
  • Their definition of a small farm being less than $5 million in today's environment very likely understates what I would consider to be a family farm anymore.  Many typical family farms these days have at least 1,500 to 2,000 acres of owned land plus equipment and other non-farm assets.  This could very easily result in a taxable estate of $10 - $15 million or more.  Under this scenario, the estate tax using 2009 rates could be in excess of $5 million.
  • There are several estate tax provisions to reduce or defer the amount of tax that a farm family would owe, but these items have not been indexed with inflation and the value has decreased dramatically with the rise in farmland prices.
  • The one conclusion that I probably agree with the most is that it would promote a desire by wealthy families to invest substantially in farmland to escape estate taxes.  This would drive up the value of farmland leading to much higher cash rents, etc.  I would not be in favor of exempting only farmland for that reason.  If all small businesses were exempted, then the effect would be much more minor.

My personal opinion is that I would like to see an estate tax exemption in the $3.5 to $5 million range for each spouse and allow this exemption to be combined in any manner that the family chooses.  We will most likely see a new estate law sometime in the next year or so, but who really knows what it will look like.

Better Investment - Farmland or Stocks?

Sep 09, 2010

As you can probably guess this headline that the answer is - "It Depends".  Iowa State University economist Mike Duffy ran some numbers comparing the return from owning farmland to owning stocks over certain time frames.

Returns are comprised of two components:

  1. Yearly return - Cash dividends on stocks and cash rents (or the equivalent on farmland), and
  2. Change in market values

Mr. Duffy assumed that a farmer invested in land on January 1, 1960 paid $1,000 or the equivalent of 3.83 acres.  He also assumed a farmer bought 17.60 shares of the S & P 500.  The farmer then took his net cash return (after 7% for management fees and 6% for taxes and insurance) and reinvested it in more land each year.  At the end of 2009, the farmer would have owned 32.87 acres worth about $143,672.  He would have owned about 75.58 shares of the S & P 500 worth about $83,805.  The land outdid the stocks by about 72%.

However, Mr. Duffy then redid the analysis assuming purchase of farmland on January 1, 1980 (at almost the last farmland value peak).  In the scenario, the farm would have only grown to a total value of $8,314 whereas stocks would have grown to $17,365.  The land would only be worth about 48% of the stocks.

What will the next 20 or 40 years bring.  With the high value base of farmland and the lower base of common stocks, it may be hard for farmland to outdo stocks, but it may be more rewarding to own the land than a piece of paper.

For the article, click here.

Verasun Bankruptcy - Check Your Preference Payments

Sep 07, 2010

Whenever a farmer sells a crop to a purchaser of their product, they always need to be aware of what happens if that purchaser goes bankrupt.  Any payments that the farmer receives within 90 days of bankruptcy can be considered preference payments and the farmer may have to pay some or all of these payments back to the bankruptcy court.

However, there are usually three key defenses that the farmer has:

  • A contemporaneous exchange for new value - This is a legal term that means the crop was sold for cash by the farmer and not for a promise of a payment in the future.  Essentially, the payment was directly related to the delivery of the crop, i.e., a cash sale.


  • Ordinary course of business - To establish an ordinary course of business defense,  a farmer will have to show that the debt was incurred in the ordinary course of business or financial affairs between the farmer and the buyer.  The bankruptcy court will require documentation showing the transactions that support this contention.  For example, if the farmer was delivering corn on a weekly basis for cash payment and has the invoices to prove it, then they should win on this basis.


  • Subsequent new value - Essentially this means that the farmer received a payment from the supplier and then delivered the corn after receiving the payment.


With the announcement that the Verasun bankruptcy trustee is in the process of attempting to get back 80% of these payments made to farmers within 90 days of its bankruptcy, you need to review your records and do something now.  If you think this will go away, you are wrong.  I have been involved in a couple of bankruptcies where the trustee attempted to get preference payments from the company I was involved in and  we probably would have failed all of the three tests shown above.  However, we ended up succeeding since the bankruptcy court had signed off on an agreement between our company and the company involved.

The Center for Agricultural Law and Taxation has a very good article on the Verasun bankruptcyand I have seen several other good articles.  If you sold corn to Verasun and have gotten a notice, take action.  It may save you large amounts of money.

This is not a legal opinion.  You must review this with an attorney and make sure you follow all of the steps.  If you do, then you stand a good chance of not paying back these payments.  If you do not, then this will cost you.

New Game Plan for Potash

Sep 06, 2010

Potash Corp. of Saskatchewan is one of three Canadian potash producers who own and control Canpotex.  Canpotex handles all of their sales outside North America.  Two other similar organizations are Belarusian Potash and International Potash.  These three entities control nearly 70% of the world's potash production.

By cooperating with each other, they are able to mitigate any decreases in prices and as we saw in 2008, increase pricing far above what most farmers felt it should have been (anybody remember $1,000 ton potash prices).

Even if the bid by BHP fails, Canpotex faces long-term pressure.  Such smei-monopoly organizations work best with the following situations:

  • There are limited number of producers,
  • There are barriers to entries by other competitors, and
  • There is homogeneity in the product.


While the barriers to entry in potash are high, they may not be high enough.  BHP is already developing Canada's huge Jansen field and big miners like BHP and Vale strive to keep production running full steam.  If they can bring on the 13.5 million metric tons of supply that they target over the next few years, then the big three's combined share of capacity will drop to 55% from 70%.

If BHP is successful in obtaining Potash, then the market would be changed dramatically.  Assuming all proposed new projects materialize, BHP would control 24% of global capacity by the end of this decade versus about 38% for Canpotex and its two sisters.

By running flat out, BHP would cause prices to drop, however, as high cost producers drop out of production, prices may start to increase.

For more information, please see this article by the Wall Street Journal (you may need to be a subscriber to read all of the article).

How Fast Can I Depreciate an Irrigation System

Sep 03, 2010

We had a reader give us the following question yesterday:



* Question
Last year , 2009 , I purchased 2 new irrigation systems in Nov. and they were delivered in Dec. The total price was $93,800. When I did my tax the CPA said I had to dep. them for 15 yrs. I will be 75 and am retired - making me 90? before they are dep. out . I`d like to take them for 9 yrs. but he says it can`t be changed . What do you think ? They used to do DDB . Is that possible ? With the way things are going with the Govt. I`d like to pay the least tax possible.

This question actually has several answers that are as follows:

  1. We are uncertain as to whether the irrigation system is primarily above ground such as a circle or wheel lines or below ground for mainline.  When I see "purchased 2 new irrigation systems", I would assume above ground which for 2009 which would have been treated as farm personal property depreciated over 5 years, not 15 years.  However, if the irrigation systems were mostly in the ground, then 15 years is correct.
  2. Normally, you can not elect to depreciate an asset over 9 years.  The Code does allow you to elect a longer period, but these years are locked in by the code and you can not pick and choose the years you want.
  3. The reader was asking if "DDB" was available.  This refers to "double declining balance" and it is a depreciation method that allows the farmer to take twice the deduction in the first year than using the straight-line method.  Now each year thereafter, the deduction will "decline" until straight-line is larger.  This method does result in extra depreciation over the life of the asset, just more in the first few years.  Several years back, farmers were only allowed to use 150% declining balance instead of 200% (or double) declining balance.
  4. Another item that is unknown from the question is whether Section 179 expense deduction could have been used to totally deduct the irrigation systems.  For 2009, you could deduct up to $250,000 under this option, but there are certain situations  that might have reduced or eliminated this option for this farmer.  This would be especially true if the farmer was not actively farming and land and just renting the land out or if the overall farm income was too little.
  5. Last, if the irrigation systems were brand new, then the purchase would have qualified for the 50% immediate deduction with the remainder depreciated over either 5 or 15 years.


If the assets were in fact depreciated incorrectly, a farmer has three years to file an amended tax return and correct the method and receive a refund.  For 2009 tax returns, you would normally have until either April 15, 2013 or October 15, 2013 if you filed an extension.



Russia Extends Its Wheat-Export Ban

Sep 03, 2010

The Wall Street Journal had a fairly extensive article in today's paper on the extension of the ban of wheat exports by Russia from December of this year until after next year's crop.  However, as most traders and farmers know, you will believe what Russia says at your own risk.  What we do know from the article is as follows:

  • Wheat stockpiles are still much higher than in 2008, however, the original news of the Russia ban led to a 5% rally in food prices last month.  Wheat rallied substantially, along with corn and sugar.
  • Russia last year accounted for 14% of all wheat exports and if the ban continues to next year's crop, then this will drop to zero.  The Ukraine and Kazakhstan will also have sharply reduced exports this year.  During the the current 2009-2010 crop year, Russia exported about 650 million bushels up from 40 million bushels in 2000-01.
  • A possibly bigger concern is that the winter wheat crop will not get planted if the drought continues.  Normally, 44 million acres get planted to winter wheat and Russia right now assumes the worst case scenario for this year is closer to 2/3 of that number and that may be too high.  If that is the case, even if the drought is lifted for next spring's crop, spring wheat normally produces less than winter wheat.
  • Also, drought is hitting Argentina and Australia, and Germany had a wet season and the quality of their crop is way down.  They have had to import wheat from the US which rarely happens.
  • Egypt, which historically has not bought much wheat from the US, just struck deals to import about 8 million bushels at prices 5% higher than last month.

This is the second day in a row that the Wall Street Journal had an article on wheat exports  and I think we will see several more over the next few months.

Wheat Basis Increases by up to 44%

Sep 01, 2010

Kansas State University provides a very good map of basis for most of the major crops over most of a five state region comprising all of Kansas, Nebraska, Oklahoma and parts of Texas and Colorado.  These maps on a weekly basis show what the current basis is and how it compares to the three year average.

During 2010, the basis maps for Soybeans show that the average basis has both increased in some areas and decreased in others, but overall  has not moved to much.

The basis maps for corn show that the basis is narrowing in some areas.  At the first part of the year, in some areas the local cash price was 40 cents higher than futures.  That has decreased to about 27 cents while the lowest basis areas remains steady at 84 cents cash price under futures.

Now, wheat basis has shown a dramatic change since the first of the year.  On January 6, cash prices ranged from 29 cents under futures all the way up to $1.14 under futures.  As of August 25, this spread has widened to 35 cents under futures to almost $1.65 under futures.  This represents a 44% increase in basis for the worst areas of these states.

So even though futures may be rallying, this does not always mean the local farmer is getting the benefit of these prices.

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