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August 2012 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.

Have a Good Labor Day Weekend

Aug 31, 2012

For all of those farmers out there that are harvesting their crops, have a good Labor Day Weekend and as a farm kid, I thank you for all of your effort to feed this country and the world.  Some of my favorite memories is working with my father on the farm (even as young as 3 I can remember sleeping on the floor of the combine while my dad operated it).

All of your efforts are appreciated and even with the drought, you will keep the good work going.

Again, thank you.

I am headed over to Roche Harbor for my oldest son's best friend from college wedding and expect to be stuck in line waiting for a ferry for three hours this afternoon.

I will have a new post on Tuesday and have a good Labor Day Weekend.

Net Farm Income at a Record Even with the Drought

Aug 29, 2012

In a report from the USDA issued today, they project that net cash income from farming will increase by 3.4 percent from 2011 to a new record of $122.2 billion.  Net value added is expected to increase by $5.9 billion to $172.6 billion.

Due to the market effects of the drought and the expected large crop insurance payments, these increases are expected to be much greater than any resulting increases in input costs or livestock losses.

Gross farm income is expected to hit a new record of about $450 billion.  This number was as low as $300 billion just five years ago.

Total production expenses are expected to increase by $18.6 billion or about 6 percent over 2011.  It is interesting how fertilizer prices always seems to increase with grain prices.

Unlike 1988 when little revenue protection crop insurance was available, this year more farmers will benefit for these and other crop insurance policies which will keep net farm income high.

USDA Predicts Large Livestock losses

Aug 29, 2012

As we discussed the estimated 2012 net farm income from the USDA report yesterday, the grain farmers are looking at a very good year at the expense of the livestock operators.

USDA is predicting that dairy revenues will fall from about $40 billion to $33 billion and in connection with much higher feed prices, this will lead to much larger dairy losses.

Total cattle sales are expected to be higher, however, is primarily due to extra liquidation of the herd rather than higher prices.  Total hog and broiler revenue is expected to remain about the same, however, high feed prices again will lead to large losses.

Total revenues from livestock for 2012 are as follows:

  • Cattle and calves - $65 billion
  • Dairy - $35 billion
  • Poultry - $23 billion
  • Hogs - $21 billion
  • Total livestock sales of about $144 billion

 

One last observation is that total farm expenses have now surpassed the 1979 inflation adjusted peak (using 2005 dollars) at about $325 billion of total expenses.  1979 peaked out at about $280 billion.

Mid-West Crop Tour Recap

Aug 26, 2012

My part of the Midwest Crop Tour started in Columbus, Ohio early Monday morning and finished up at the Iowa/Minnesota far eastern border around noon on Thursday.  We traveled through Ohio, Indiana, Illinois, Iowa and into Minnesota.

The samples that our team took each day on route seemed to be a little bit better than samples taken by other scout teams.  We never took a sample that had a zero, but almost every other team did.  Our lowest sample was on the last day with 11 bushels per acre and our highest sample was about 220.

Soybean pod counts were down about 20% or more compared to last year in every state.  Also, it appears that most of the beans are much further ahead of other years and even in rains show up, I am not sure how much extra yield the rains will produce in the beans.

Pro Farmer ended up with an estimated corn yield of about 120 bushels per acre (I told numerous people Thursday night I was predicting 119.77, so I was not too far off) and a bean yield of about 35 bushels per acre.  Both of these numbers are below the USDA but our tour is about two-three weeks after their samples and they will be updating theirs soon.

All-in-all, I saw about what I expected.  There will be no surprise on the upside for either corn or beans and I think the downside is about where it is now.  I know we are looking at a tropical storm that will hit parts of the country and am not sure how this will affect the market, but I would expect volatility will be in place for several months to come.

The International Flavor of the Crop Tour

Aug 22, 2012

 Today we left Bloomington, Illinois headed north for about 50 miles and then went due west to Iowa City, Iowa. We picked up a group of about 8 people who followed us on the route today. We had two people from Brazil, one from Germany and one from England.

When the crop tour started it was comprised mainly of farmers, however they are now in the minority on the tour.  The international trading and farming community travels on the tour to get a better idea of how our crop will affect their marketing activities.

The corn and beans in Illinois was much better than I expected, however, the yields are down from historical averages, but there is still very god grain out there if they got rain at the right time.

However, when we crossed into Iowa we did see several miles of absolutely dead corn and then at the end of this area, we of course had our best yield of the day.

Tomorrow is the last day of the tour and I look forward to the final numbers.

 

Again, Corn Has Been More Consistent than I Expected

Aug 21, 2012

We left Fishers, Ind., this morning and headed northwest to the Illinois border and then turned due south to Paris, Ill. (I told my wife I always wanted to go to Paris, but did not realize it was going to be Paris, Ill.). 

Indiana numbers on our route were consistently in the 120-140 range, but we had a 200-bu. field too. The bean pod counts seemed to be down from yesterday. 

We then entered Illinois and found slightly worse yields, but the worst was still 97 bu. per acre. We stopped and talked with two farmers who had already started harvest in Douglas and Moultrie counties south of Champaign.

Actual yields for them had been in the 110-140 range, and the combining is fast. Harvest had started at least two to three weeks early.

Again, my first two days have been a time of fairly consistent yields. We had some low ones, but not what others have seen on their route.

 

Crop Tour so far more Consistent than I Thought it would be

Aug 20, 2012

 We left Columbus early this morning and headed north and west. Our very first field was a whopping 44 bushels but the next was 146. I envisioned the whole day like that but after the first four samples we settled down into a trend right around 130 bushels. We had two in the 170 range and 2 about 110 but the other 8 were right at 130. 

There has been some rain in the area but we saw several very dry areas. 

The beans seem to be lower than last year but we saw many good fields. Only saw one area of silage being cut and hauled. Other than that most of all corn we saw was still standing  

Tomorrow we head to Bloomington, Illinois and I think there will be more variability tomorrow 

 

Off to the Crop Tour

Aug 17, 2012

I will off to the Midwest Crop Tour beginning tomorrow morning very early (even for me, out of bed at 3:15 to get to my flight in time). I am meeting up with Chris Barron (who write's the Ask the Margin Expert column for Agweb) at the Cedar Rapids airport. We drive to Champaign, IL, spend the night and then arrive in Columbus, OH Sunday afternoon for the orientation meeting that night.

I will be doing multiple posts and many tweets throughout the trip and I look forward to seeing how the crop looks this year. I will keep you posted.

Expectations for Farm Income Dropping Rapidly

Aug 16, 2012

For those states comprising the Kansas City Fed District (Nebraska, Mountain States, Kansas, Missouri and Oklahoma), the expectations for farm income have dropped dramatically due to the drought.  In a just released report on the second quarter agricultural credit conditions, several financial nuggets can be found.

Due to timely rains, the wheat crop in Oklahoma and Kansas was much better than expected.  With increased prices, wheat farm income is substantially higher than last year.  However, the drought has dropped the expected index of farm income from levels around 120-130 to a current reading of about 90.

The report presented a chart of actual income versus expected income by quarter from 2004 to now.  It is interesting how the expectations on the high side are never as good as actual farm income and the spike downwards in expectations is more than the actual decline in farm income, at least from a chart standpoint.  This just shows that bankers are human too (we knew that) and like farmers expect the bad times to be worse than they usually are and are surprised when the good times are better than expected.

This district has substantial livestock operations so the high cost of feed is more negatively impacting farm income than perhaps other reporting districts.

Farmland prices have increased dramatically from a year ago.  Nebraska leads the pack with a 36.5% increase in non-irrigated land, with some of the other states are not too far behind.  However, expectations going forward is for flat farmland values for the next year or so due to the drought.  Also, there is probably some "fatigue" setting in from the rapid appreciation in values.

Financial Stress Remains Muted

Aug 15, 2012

The Kansas City Federal Reserve issues a monthly report on their index of the US Financial Stress.  The most recent one issued on August 8, 2012 had an index level of -.13 essentially unchanged from the June level of -.11.  Negative levels indicate that there is less stress than a normal level of 0 and a positive number would indicate more stress.

For example, during the "Great Recession" of 2008-09, the level peaked out at about 6 (which is 6 Standard Deviations, not six times)  Other than this time period, the index toggled between +1 and -1 from 1990-2007 and from 2010 to now.  The least amount of stress occurred during 1991 to 1998 and from 2004-2006.

11 components make up the index.  8 of them are based upon yield spreads and 3 are based upon behavior of asset prices.  The changes of each component for the month of July ranged from -.06 to .07.

Although not directly to farming, these indexes provide guidance on where the financial markets are headed which will affect lending and interest rates.

Does Ridge Till Net You More

Aug 13, 2012

I was browsing the soybean net income statistics reported by the University of Minnesota for the 2011 crop year. There were 1,372 farms reporting soybean statistics for 2011 and 680 used some type of chisel or reduced tillage (635 gave no answer on tillage practice). These farmers reported an average of $147 return over direct expenses per acre. However, the 11 farmers reporting using ridge till increased their gross return by about $60 per acre and their net return by $30 (even with cash rents averaging almost $40 higher).

Although the sample size is too small to be totally meaningful and with higher cash rents suggesting better ground, it is still productive to review these reports each year and determine the trend. If you get a rolling five years of history and one method of farming consistently out-yields the standards in your area (or your farm), it may be wise to consider trying the method on a couple of test plots. These tests may give you the knowledge to make an educated change and join the farmers in the top tier.

Drive/Run/Operate the Combine

Aug 10, 2012

Just a personal note to let everyone know that I am headed down to the Walla Walla area to drive/run/operate my cousins combine for a couple of days.   If they are nice to me, they will even let me run the new Case IH machine that they are renting this summer.

I will try to remember to take some photos of it and post it to the site to prove my ability (or lack thereof) of operating the combine.  So far, I think their yields have been in the 120-140 range.

What if RP had been around since 1977

Aug 08, 2012

I was browsing the FarmDoc website maintained by the University of Illinois and came across a series of slides put out as part of the 2010 Illinois Farm Economics Summit. One of the slides was a projection of Revenue Protection payments per acre from 1977 to 2011 assuming the coverage had been available. I am not sure on the APH, but here are some of the interesting findings:

  • As expected, the largest payments would have incurred in the 1980's. In 1983, the expected payment would be about $85 per acre and in 1988 (the last major drought year), the payment would have exceeded $145 per acre.
  • The only other years with payments between $20 and $40 per acre were 1977, 1991, and 1998.
  • Of the total 34 years of the study, 19 years would have shown "negative" payments, i.e. farm revenue exceeded insurance coverage, however, none of the negatives were greater than about $15.
  • The cumulative payout during these years would have been about $425 and the total negative payouts would be around $100 or a return of 4 to 1. However, I am not sure if insurance premiums are reflected in these numbers.

 

The management of crop insurance strategies can be as important as picking the right seed or fertilizer application. It only takes a few years like 2012 or 2008 to make the difference between earning a profit or perhaps borrowing more from the bank than you planned.

Additional Thoughts on the KC Fed AG Symposium

Aug 06, 2012

Continuing our post from yesterday:

  • During the last 10 years, the world has planted an extra 184 million acres to the 10 ten major row crops.  The Black Sea area has added 48, South America 42 and China 31 million acres.  The US has only added 8 million acres.
  • Total acres in production has increased from 1.959 million to 2.143 million acres.
  • The demand for US ethanol has used increased from 6.6 million acres to 24.4 million or an increase of about 18 million acres.
  • However, China's demand for corn and beans has increased from the equivalent of 18.4 million to 52.7 million acres or an overall increase of 34 million acres.  This increase is almost twice the ethanol increase.
  • Brazil sugarcane has increased from about 13.3 to 22.6 million acres, almost on par with US ethanol acres.

 

Most of the growth in the future will continue from South America and the Black Sea area, although at some point, Africa will start to dramatically increase their acres (if they can solve their infrastructure and other issues).

When total corn ethanol acres is about 1% of total world crop acreage and Brazil sugarcane is about the same, I find it interesting to think that grain prices will drop dramatically simply if we eliminate the ethanol acreage.  The total increase over the 10 year period is about the increase in world production for less than 6 months.

Thoughts from the KC Fed Ag Symposium

Aug 05, 2012

The Kansas City Federal Reserve held a Ag Sympoisum on July 16, 2012.  The presentations are available on their website, but I thought I would recap some of the interesting things I found in reviewing the presentations.

William Hudson of the ProExporter Network had a presentation entitled "What Lies Beyond the Horizon for Farm Income?  There is a lot of detail in his report, but here are a few things I found interesting:

  • In the 2003/04 crop year, the US planted a total of 228.6 million acres to the top 10 major row crops.  During the current crop year, the acreage had increase to 236.9 or about 8 million more acres.
  • Corn acreage has increased from 70.9 to the current 89.1 or about 18 million acres of total increase.
  • This increase was primarily contributed to a decrease in barley of 2, sorghum of 3, wheat of 4 and cotton of 2.  The oilseeds had increased their acreage by about 2 million acres.  The remaining 10 million acres would most likely come out of CRP and probably hay and other crop acres.
  • World acreage for these same crops has gone from 1.959 billion acres to 2.143 billion or an increase of 184 million acres.
  • Corn has increased by about 80 million acres, but wheat is up 33, oilseeds are up 69 (most likely South America) and rice is up 26.  Barley has decreased by 18, sorghum by 9 and peanuts by 3.
  • The 2002/03 corn crop had production of about 9 billion with 1 billion going to Ethanol.  Last year's crop was 12.4 billion bushels with about 5 billion for ethanol.  Net other use in 2002 was 8 billion and for last year it was 7.4 billion. 

 

It seems looking at these numbers, that although ethanol production has greatly increased, corn production has kept up with the demand without taking too much other crop production acres away.  Even if you totally remove ethanol out of the equation, the net amount of corn being used for ethanol, net of DDG for feed is most likely the equivalent of about 20 million acres (which is about equal to the net increase in corn acres) and since total world acres planted to corn is about 431 million acres, this represents about 5% of the overall land planted to corn (granted our yields are higher, but it would still only be a percent or two).

Based on this, it appears you can completely eliminate ethanol demand for corn acres and the underlying price of corn should not change that much.  I am not economist, but this is what I find looking at his numbers.

I will do a few more posts on this and other information from the symposium.

FFSC - Day 2 Session 5

Aug 01, 2012

The last session of the day was presented by Ben Romine, an accountant from Northern Indiana on Using the Standards in an Accounting Practice.

Using Enterprise accounting is very valuable but you must determine what the standards are and how much detail. If you have not started this yet, start simple and then go to more detail if you have the time, staff, and will get the records from the production.  But remember this only has value if you use it as a farming tool.

This use creates valid cost of production that can used in yourbudgeting and marketing. Most farmers are still using their CPA/accountant as their "controller". This continues to accelerate as more lenders require compiled financial statements.

The use of a double column balance sheet (cost and market) allows you to more easily determine values for buy/sells and expansion or contraction as appropriate.

FFSC - Day 2 Session 4

Aug 01, 2012

The 4th session was presented by Todd Doehring of Centrec Consulting Group on Using the standards with producers and lenders to analyze  operations.

The top 5% of farmers are now producing about 75% of total crop production or about 120 thousand farmers.

The last three years we have been able to insure a profit for our farms. Before that period we were unable to insure a profit.

Working capital as a percent of revenues has become more important than the current ratio.

The DuPont Financial Analysis Model is comprised of return on assets which is has been updated for return on equity.  By understanding how all of the ratios going into this analysis interacts is important for a farmer to understand how leverage and returns affect their operation.  If your return on assets is less than your cost of borrowing you should not be doing more leverage.

The more your return on assets exceeds your cost of liabilities the more leverage you can afford (not necessarily want).

Need to make sure to account for owner's compensation on an actual equivalent to what the operation would have paid for those services not necessarily what was withdrawn.

 

FFSC - Day 2 Session 3

Aug 01, 2012

The first session in the afternoon was a panel discussion of three professors from the University of Illinois on using cash versus accrual income.

There is a myth that cash versus accrual "averages out over time".   With surgery of about 1,000 farms from 2001 to 2006, they found:

1.  Cash versus accrual was about 50% different in each year and about the same percentage difference for a three and five year totals sit this study indicated it does not average out.

2. Crop inventory changes and differences in depreciation was usually the largest difference.

3. Current ratios have increased from an average of about 2 to 3.  Debt to asset ratios have dropped from about 30% to less than 20%. Debt levels have gone up but values have gone up faster.   Returns on assets have jumped around due to the volatility of crop and land prices.

4.  Income per acre has increased from an average of about $100 to over $300 in 2011.

 

FFSC - Day 2 Session 2

Aug 01, 2012

Our second  session was presented by Ron Homann with 1st Farm Credit Services on how to use the ratios and standards.

A first level loan may not require a balance sheet or income statements. If the "score" is high enough then a loan of up to $250k or $500k operating loan may be granted. Their history  is good with these types of loans, but much of that is due to the current good Ag economy.

The next level of loan is scored plus balance sheet analysis. Looking for minimum 65% equity and 1:25 to 1 current ratio.  These loans can be about twice the size of the first level.

Investor loan approval go through different analysis.  These loans would be scored based upon income and up to $1 million level may have less analysis than amounts above that amount.

They use three primary ratios:

  • Owner's Equity
  • Working Capital to Adjusted Gross Income
  • Net Capital Debt Repayment Capacity %

These ratios includes adjustments for estimated equipment replacements and any working capital deficits. The capital debt repayment capacity is on non-land payments.

Probability of default is based on three weightings for solvency, liquidity and capacity with the highest weighting on capacity.

FFSC - Day 2 Session 1

Aug 01, 2012

Our first session today was presented by Economics Professor Kevin Waspi of the University of Illinois.  He presented a discussion on the Economic and Financial Outlook and some highlights are:

  • Our economic policy is based on the the policy we used in the late 1990's to help get Japan out of their lost decade.  Everybody knows how that worked out since Japan is now in the lost decades.
  • The Baby Boomer bulge is causing a weakness in our demographic base. Instead of almost 16 workers for every social security recipient. It is now less than 2 workers.
  • Europe's demographics are even worse.
  • Most European countries are running more than 100% of gross government debt to annual GDP.
  • Some European countries unemployment for people 25 years or younger is approaching 50%.
  • Now may not be the time to buy 30 year treasury bond at a 2.5% rate
  • Do not believe in soft landings (especially China right now)
  • Investigate other production options
  • Expect higher taxes
  • There is now a greater fear of your return of your money instead of a return on your money. That is why German Government Tbills are generating negative yields.

Farm Financial Standards Council Annual Conference - Day 1

Aug 01, 2012

On Monday, I had a meeting in Milwaukee and then headed down to Bloomington, IL by car.  I stopped off in Leland, IL to meet with a client and he took me on a tour of a couple of his fields.  Normally, his corn yields would near or exceed 200 bushels per acre.  From the road, the corn appeared to look OK, however, when you went into the field, you saw multiple skips, tip backs on the ears, and the corn was already denting and the kernels looked like popcorn, not regular field corn.  He is hoping to hit 120-130, but would not be surprised to be closer to 100.

We counted a bean field that did not look too bad from the road, however, when you started to count pods, instead of the normal 30-40, you counted 10-15.

After visiting with him and his wife, I headed to Bloomington to spend the night. 

On Tuesday afternoon, I attended the technical committee session of the Farm Financial Standards Council.  This organization is comprised of 8 primary groups related to farm financial accounting (CPA, bankers, producers, academics, etc.).  The goal of the group is to promote "practical" standards for farmers to adopt that will make it much easier for users to know what the standards are and to utilize them properly.  The group has been around for about the last 20 years and about 60 people are expected to attend the three day conference.

The technical committee discussed accounting for hedges.  I know from practical experience that hedges are accounted for in several ways by our farmers and I think our group is well on the well to implementing a little better, more practical accounting than what many of our farmers use now.

On Wednesday, the main session of the conference and I will give you an update on what I have learned then.

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