Farmers are enjoying fairly low short-term and long-term rates right now (that is assuming you can borrow the money).  With the government continuing to pump large amounts of liquidity and stimulus into the economy, it is very difficult to predict that these lower rates will continue to last much longer.

Much like, fertilizer, fuel and seed, interest costs is another input cost that you can hedge or lock in.  I believe that these lower rates will continue for awhile longer, however, I would not be comfortable going out too far into the future with this projection.  I would certainly be looking at converting variable rates to fixed rates, paying down your most current debt with highest rates as soon as possible.  You also may be able to hedge on the futures markets by selling short long-term bonds, etc. to lock in lower rates.

Bob Utterback of the Farm Journal in their November issue had a very good article on this subject.  I would take a look at it and try to implement these strategies into your operation where it might make sense.

I just got back from spending about three days in Kansas City.  During my time there, I was able to get in about 6 hours of driving a John Deere 9660 combine.  It took until about noon for the soybeans to dry up enough to be able to harvest them.

I know when I was growing up that I thought of Kansas being perfectly flat.  However, the area around the Missouri river in the Kansas City area has many hills and the farm that I was harvesting on Monday was one of these hilly areas.  We kept the combine in first gear most of the afternoon and there were a couple of times where we had to kick  in the rear wheel assist to get the combine up the hill.

The beans looked very good for this field.  In normal years, the yield would probably be 30 bushels or less, but this year, the yield looked closer to 40 – 45 bushels per the yield monitor.

I also spent some time at the local cafe for breakfast and most of the farmers were looking forward to good yields for corn and beans this year, however, most of them joked that they would be combining corn after Christmas.  The weather report called for sunshine on Monday and Tuesday and of course, we woke up to a thunderstorm on Tuesday and no combining.

I think the current weather rally in beans, corn and wheat is a very good time to lock in some good prices for this year and next year’s crop. 

All in all, it was great to get to drive the combine, but also nice to get home.

About two months ago, I messed up with paying a bill for another business that I am involved in.  I sent a check for $6,500 made payable to one vendor to a different vendor for a $45 bill.  Of course, they cashed the check and my other vendor wondered why they did not get paid.

I took care of the vendor that did not get paid right away, but then tried to get my $6,500 back.  This company is an international telecommunications business.   I started the process by calling the 800 # on the bill.  After pushing about 5 different numbers to get the “right department”, I ended up with somebody from India who could not help me.  She then transferred me to another department that should be able to help.

On this transfer, I then had to re-input the account number on the phone and go through another five layers of help menus to talk to a human being (also in India).  I then had to repeat the account number since the phone system does not seem to keep track of that number for customer service.  We then found out she was not the right person to help and started a transfer to another department.

This process went on for many days.  They assured me that a check was being mailed and I should receive it shortly (their definition of shortly was three weeks).  In the mean time, I reconciled my bank account for the month and determined they had actually wired the funds into my account on the day after my first call.  Nobody was able to tell me this and I must of spent at least five hours on the phone getting very frustrated.  In almost every case of talking to somebody, there was at least one to five apologies offered by each person.  These people are trained to offer apologies when solutions are not available. 

In all cases, every person I talked to was very empathic with my case, but nobody was able to offer me a solution.  What is most important in these type of situation is to provide a solution.  I would rather deal with somebody who is gruff and can get my problem resolved, than somebody who smiles and says I am so sorry.  That does not solve anything.

This does not relate too much to the business of farming, but remember, there’s empathy, and there’s empathy.  The harm is not using too much empathy, but doing it by rote, sloppily or without the proper intent.

I hope if you ever need to contact me for advice that I can give you a solution and never say I am sorry.

Several of my farm clients have called me and asked whether receiving a crop insurance payment this year is taxable in 2009 or 2010.  I commonly tell them the answer is yes.  It may be taxable in 2009 or 2010 depending on what type of crop insurance it is and other matters.

In general, if you receive any crop insurance, the proceeds are taxable in the year that you receive them.  However, you can postpone reporting the proceeds to the following year if you meet all of the following conditions:

a.  You use the cash method of accounting for your farm.

b.  You receive the crop insurance proceeds in the same year the crops are damaged.

c.  You can show that under normal business practice you would have included income from the damaged crops in any tax year for the year the damaged occurred.

In brief, if you are a cash basis farmer and you usually sell all or most of your crops in the year after harvest, you should be able to defer the crop insurance proceeds into the next year.  However, if your history is to sell the crops at harvest time or by the end of the year of harvest, then you will not be able to defer the proceeds. 

In order to defer the proceeds, you must actually incur destruction of or damage to the crops.  Agreements with insurance companies that provide for payments based upon a minimum revenue per acre without regards to actual crop losses do not qualify for the deferral.

Some farmers received payments under the Crop Revenue Coverage (CRC) purchased from federal Crop Insurance Corporation.  These payments are based upon price as well as quantity and quality of the crop.  Only the payment for destruction or damage (yield loss) is eligible for deferral.  A farmer receiving these payments would need to calculate the portion related to the crop damage and this would be eligible for deferral.  The remaining part of the payment would need to be reported in the year of receipt.

The University of Minnesota has a very good article regarding how to calculate this and other matters related to the taxation of crop insurance proceeds.  Their article is located here.

We had a good weather rally back in the spring when it was apparent that the come would be planted lack due to the rain in Illinois and other areas.  It appears that we might be having a weather rally due to the frost coming this weekend.

I would highly suggest that you review your marketing plans for this crop and the 2010 crop to see if you need to lock in some good prices that are coming now.  If the current prices compared to production costs provide a profit, do not be shy about locking 20-40% of them in.

Too many farmers get emotional when they see a rally start, think it is going higher and wind up with missing the whole rally.  Do not let this one go by with the same problem.

I am headed back to my farm in Missouri next weekend and plan on driving a John Deere combine very similar to the one shown in the picture.  I am hoping it does not rain and I get to cut some 60 bushel beans or 200 bu corn.  This is always my vacation this time and year and for a farm boy like me, there is nothing better.

The Agricultural Statistics Board of the United States Department of Agriculture publishes many reports during the year.  I find it interesting to review these on a periodic basis (my wife does not seem to think this is much fun).  Some of the fun facts that I recently spotted were:

Texas is about four times larger in size than Iowa, but Iowa has the largest amount of acreage committed to the principal crops grown in the US.  There is about 320 million acres of cropland committed to the principal crops grown in the US.  These crops comprise:

• Corn, wheat, soybeans, sorghum, barley, oats, rice, peanuts, cotton, potatoes, sunflowers, canola, millet, sugar beets, and dry edible beans.

  The top five state based upon acres is:

1.  Iowa – 25.1 million acres

2.  Illinois – 23.0 million acres

3.  Kansas – 22.7 million acres

4.  Texas – 21.9 million acres

5.  North Dakota – 21.6 million acres

The top five states farm about 114 million acres, which is about 36% of the total acres for the US.

The top corn state is Iowa at 13.4 million acres with Illinois right behind at 12.1 million acres and Nebraska coming in third at 9.2 million acres.

The top wheat state is Kansas at 8.8 million acres with North Dakota not too far behind at 8.5 million acres and Montana third at 5.2 million acres.

The top hay state is Texas at 4.5 million acres.  Missouri is second at 3.6 million acres and Oklahoma comes in third at 2.7 million acres.

Iowa has the most soybean acres at 9.8 million, Illinois is second at 9.0 million and Minnesota is third at 7.1 million acres.

Texas grows more than three times the acres of cotton than the next closest state of Arizona.  Texas has 3.3 million acres, while Arizona only has 615 thousand acres.  Actually Texas has abour 43% of the total acres grown to cotton in the US.

Top Producer Magazine / Website is a great resource for farmers that are trying to be the “Top Producer”.  I recently came across a short article from their editor, Greg Vincent, about expanding a farm.  He interviewed former Farm Credit Services of America (FCSA) financial officer turned financial consultant, Roger Schlitter.  I thought it had a lot of good insights and will outline the four key points:

Step 1 - Working Capital

He suggested that a good rule of thumb is that any farmer should have at least $200 in working capital for each acre of land.  Therefore, if you plan on acquiring a new quarter-section of land, you should have at least $32,000 of net working capital available.  Working capital is the net operating items on the top of your balance sheet such as cash, crop inventories, crop receivables less accounts payables, operating lines of credit, etc.

“Operations with more than the minimum amount of working capital are the ones driving the market right now”

Step 2 – Secure the Cash

With the current banking environment, assets on hand are not worth as much as cash in the bank.  If you have a lot of crop on hand, convert it to cash and pay down the debt.

Step 3 – Lock in Margins

Locking in input prices is just as important as locking in sales prices, especially with the volatility in fertilizer prices.  But it is also about managing your land payments and making sure they are at a manageable level.

In 2008, when land prices were on the uptrend, Schlitter financed several farms with three different notes (1) a one year note, (2) a five year note, and (3) a 20 year note.  When corn got to $4.50, the farmers sold it and used the proceeds to pay off the one and/or five year notes.  Too many farmers wanted to get $7 corn, but remember this was about the first time for $4.50 corn.  When you get a good profit, lock it in.

Step 4 – Balance Machinery Costs

As discussed in this blog many times, farmers are sometimes too concerned with reducing their tax costs by buying machinery, when they should be concerned about managing machinery costs and improving working capital.

“That’s a dead-end proposition.  You cannot own $1,000,000 in machinery and farm the same number of acres as a guy who is doing it with $500,000.  The other guy is going to have more money available as working capital than you do.  That $500,000 more in equipment had to come out of your working capital.  You have to balance your capital spending.”

All of these ideas have great merit.  This is even true you are not expanding.  All of these ideas will apply to all ”TOP” farm operations.

The University of Minnesota has a Center for Farm Financial Management that performs an survey of farms in Minnesota.  In August, they issued their report for 2008.  Some of the key findings are as follows:

• Median net farm income was $90,039 which was down from $105,489 in 2007.  This represents an approximate 14.6% decrease. 
• Median net income per operator was slightly lower at $81,250.
• Return on assets (ROA) decreased from 13.9% to 10.5% or a 24% decrease.
• The median farm income for crop farms only decreased by about 2% to $132,748.
• Dairy farm profits were down sharply.  Even though average milk prices increased by about 82 cents per hundredweight, the cost of production increased by $2.47 per hundredweight.  2009 numbers will be even worse.
• Hog farmers that did not have crop farms saw their income almost drop to zero.
• The average farm’s net worth did increase by about $106,000 while keeping their debt to asset ration constant at 47%.
• Profits were down in all regions.  the Southwestern region still has the highest profits per farm.  Farms in the central region saw profits decrease by 40% after doubling in 2007.
• Yields for corn farmers increased by about 10%, however, net income was down.
• 2.,457 farms participated in the survey.

I think these state specific farm surveys are very valuable in determining what your budgets and break-evens for the year should be.  Make sure that you lock in your profits when you can into today’s environment.

I remember working on our wheat and pea farm for my parents when I was in high school.  During spring, I would help plant the peas.  During harvest, I drove the combine for about 3 to 4 weeks depending on the yields, weather and how much custom cutting we did.  In the fall, I would help plant the winter wheat.

During all of these years, my mother, who did the taxes made sure that my brother and I were paid at least enough wages to make sure that they had the best tax deduction at year-end.

In 2009, self-employed family farms can pay all of their minor children up to $5,700 and not have the child pay a dime of tax on the earnings for federal purposes.  The other good thing about this is that these wages are deductible from the self-employment income of the farm and allowed as an income tax deduction.

For example, if the farmer has three children that perform enough services to make $5,700, the farmer will get a $17,100 farm deduction.  If they are subject to the maximum self-employment rate of 15.3% plus being in a 25% income tax bracket, then the savings are about 40% or $6,800.

Remember, the key items are:

1.  Child must be a minor child,

2.  Child must be compensated based upon a reasonable wage rate.  If the normal wage is about $10-$15 per hour, pay that rate.  Do not try to pay $25-$50 per hour.

3.  Make sure to issue a w-2.

4.  You can take the earnings for the child and contribute it to an IRA for the child.

5.  These wages are exempt from FICA, Medicare, and federal unemployment taxes.