Bruce Babcock, an economist at Iowa State University, recently prepared an extensive report on competition in the crop insurance industry.  With all of this year’s crop delays in getting corn and beans harvested this fall, you may get to know your crop insurance agent better in the next couple of months.  You are probably hoping that the crop insurance company can pay any claim that you may have for harvest losses.

It appears that competition is disappearing in this industry with the continuing purchases of insurance companies by other crop insurance companies.  Bruce wanted to find out if they were making money.  Since 2000, the Risk Management Agency of the USDA calculated that these companies earned an average return on equity of 19%.  The RMA concluded that a more reasonable number should have been about 11%.  Of course the industry does not agree with these conclusions.

Based upon the RMA analysis, their conclusion is that the US taxpayers have paid excessive compensation to the industry totaling at least $1.165 billion for 2008.  This indicates that the premiums paid by farmers could be reduced by at least a billion dollars and the industry would still be in good shape.  Congress could reduce these premiums by an average of about $400 per year and save the taxpayers about $500 annually.  However, these agents also pay taxes and vote, so the chance of this happening may be very low per Bruce.

What might be more helpful to review is the average amount of compensation that an agent receives for selling a crop policy.  This amount has increased from about $400 in 2000 to almost $1,500 last year which almost a four fold increase.  A profitable crop insurance company has found a good way to increase business is to compete for a crop insurance agent’s book of business by offering higher premiums.  You can see the result in average premium paid during this period.

In summary, although crop insurance agents and companies will be doing a lot more work this fall, they will get paid for it.

The ROTH IRA has been around for many years.  For many farmers and others that have income over $100,000 annually, they have either been unable to contribute to a ROTH IRA or convert a regular IRA to a ROTH IRA.

Starting in 2010, these rules are changing for ROTH IRA’s.  Here are 6 things that you should know about 2010 ROTH IRA conversions:

1.  It is for adjusted gross incomes over $100,000 – Whether you are filing as an individual or married filing joint, the adjusted gross income limitation of $100,000 will become nonexistent for the Roth IRA conversions of 2010.  For higher income earners, this is a prime opportunity to convert money into the Roth IRA to allow your money to grow tax-free for retirement or to pass onto your heirs.

2.  You don’t have to wait until 2010 – For people who earn less than $100,000 they can do the conversion this year.  With the market being down, this may be a great time to convert (in hind site, doing it in March would have been the best time).  If you convert too soon, you can always reconvert back to a regular IRA by October 15 of the year you convert.

3.  2010 is the year, but not the year the tax is due – While 2010 is the actual year that you will be able to convert, the income to be claimed can be deferred until 2011 and 2012.  Their is a special provision for 2010 allowing you to report 50% of the conversion in 2011 and 50% in 2012.   This normally a great thing to do, but if income tax rates increase substantially in 2011 versus 2010, you may want to elect to pay in full next year.  This special conversion option is only available for conversions in 2010.  After that date, you will owe the tax on the conversion in the year after conversion.

4.  You can save taxes now – Knowing that the event is coming up soon, you should start saving for paying the taxes now.  Add some money to your emergency fund to handle the extra taxes due in 2011 and 2012.

5.  Convert but can’t contribute – Just because the conversion income limit of $100,000 has been eliminated, this doesn’t mean that the income restrictions for a normal ROTH contribution have been changed.  If you are over the phase out limits of the ROTH IRA, you will not be able to contribute new money to a ROTH.  You may be able to contribute to a non-deductible IRA and then convert to a ROTH in 2010.

6.  Convert traditional IRAs and old 401ks  -  The 2010 conversion is not limited to just your traditional IRA.  If you have old 401k, profit sharing or other types of pension money, you can also convert these to a ROTH.

As with any retirement and tax planning, make sure to review this with your income tax advisor and financial planner to make sure you make the right election.  Make your plans for 2010 now.

 The Senate appears to be moving closer to passing a bill to extend and expand the homeowners credit to purchase a home.  This credit was designed to help stimulate the housing market and I know in our area (which tends to have moderate to lower priced homes) that this credit is probably responsible for most of the home sales that have occurred in the last few months.

Homebuyer Credit Provisions- The extension would make the credit good for purchase of sales that have a binding contract by May 1, 2010 and close by July 1, 2010.  The credit is equal to 10% of the house cost or $8,000, whichever is less.  The credit starts to phase out for those taxpayers earning $225,000 and is completely phased out at $245,000 (for married couples).  Those who bought in 2008 are required to pay the credit back over time, while purchases made in 2009 and 2010 and for the taxpayer to keep as long as they keep the home for three years or more.  If the taxpayers buy a house costing more than $800,000, the credit is not allowed.

The Senate has also decided that the American public who already own a home should get in on the fun also.  If you are a long-time homeowner (five of the last five years). then you are now eligible for the credit, however, it is reduced to $6,500.

These provisions are estimated to cost the rest of us that do not purchase a new home about $10 billion in 2010.

Net Operating Loss Carrybacks- The Senate bill is also expanding the extended carryback periods for business with net operating losses that was allowed for 2008 into 2009.  This means that if you have a business with sales less than $15,000,000, then you can elect to carryback a loss for up to five years instead of the old two year rule.  This provision will also cost about $10 billion.

Nasty S corporation and partnership penalty provision  – As a way to make up for part of this tax rebate, the Senate wants to more than double the penalty for filing late a partnership or S corporation income tax return.  The current penalty is less than $100 per partner or shareholder per month.  They want to increase this to about $200 per month instead.

With the recent change in partnership extensions being September 15 instead of October 15, they may catch a lot of farmers in the pocketbook next year.  I have already written multiple letters asking for abatement of penalties this year due to this change.

My friend Alex Tiller recently had a great post on how a farmer must be a good CFO in order to be a successful farmer in today’s complex financial world.  As I quote him “Most ag producers are their own chief financial officer”.

Most farmers are doing this job right now, but many of them do not have the training to perform this function.  As a CPA I have many years of this type of training and production, but you as a farmer, may not have any of this background.

For those of you in that situation, the Center for Farm Management , which is part of the University of Minnesota, has a new website to help you get that training.  They have created a new online workshop series to help farmers understand how to read and use their financial statements to make you a more successful farmer.

This site will help you interprete your 4 major financial statements and 21 key financial measurements.  It is a series of online videos that producuers can do at their own pace.  There are several actual farms with data that you can use to benchmark and the service is free.

I would strongly recommend all farmers take a look at this site and take advantage of it.  You can never learn too much and I even learn a little bit when i went through the courses.

Growing up on our wheat farm in Walla Walla County in Washington state, we had a small railroad trestle that went over Dry Creek behind our house.  The local train would come by in the morning headed to Dayton to pick up freight and then would head back to Walla Walla in the afternoon.  Most of the time there would be the engine, about five cars and the caboose.  The largest train I ever remember had about 17 cars.

This was a local branch of the Northern Pacific railroad which merged with two other railroads in the early 70′s to form Burlington Northern railroad.  I became a great fan of railroads at that time and the very first common stock whose price I followed each day was the Burlington Northern.

Today, November 3, 2009, Warren Buffett announced that his company, Berkshire Hathaway, would be acquiring Burlington Northern.  I think, as farmers, this may be a good deal since Warren’s company has financial horsepower to make any capital investments needed to keep the railroad in good operating shape.  A lot of grain in this country is moved by railroads and I believe that well capitalized railroads are very good for farming.  For example, almost all of the wheat grown in Montana is shipped by rail to the west coast to be exported.  Without well run railroads, the cost of shipping this grain would increase dramatically.

Farm Credit Services of America indicated that setbacks in the swine, dairy and ethanol industries will trim this year’s financial results below the record 2008 results, however, they indicate that 2009 will still be a ‘respectable year’.

This means that patronage dividends will be less than the record $60 million in 2008, but possibly more than the $52 million paid in 2007, Chairman Richard Hall said at its annual meeting in Omaha on Thursday, October 29, 2009 in Omaha.

Farm Credit Services of America serves farmers in the Iowa, Nebraska, South Dakota and Wyoming region.

Preliminary figures show net income of $134 down from the record $173 million in the same period last year.  They indicated that the fourth quarter would not be profitable enough to equal last year’s full amount of $243 million which was a record.

Lower prices for pork, dairy products and ethanol hurt some farmer’s profits in their region.  As a result, Farm Credit’s allowance for possible loan losses total $94 million so far this year, up from $55 million in 2008.

Loans with payment problems increased from $144 million at the end of 2008 to over $265 million as of September 30, 2009.

But CEO Doug Stark indicated that 2009 will still be a good year overall because Farm Credit was able to keep all its loan products, including long-term, fixed-rate loans for farmland, despite turmoil in the nation’s financial markets and the worldwide recession.

Farm Credit issued $3 billion in new loans during the nine-month period and has nearly twice the required capital to back up its loans.

Investors continue to purchase bonds that the national Farm Credit System uses to raise money for loans, so the Omaha based cooperative didn’t have to turn away any loan applicants due to a lack of funds.

Several of the farm equipment manufacturers that are publicly traded have recently posted their third quarter earnings.  In most cases, these earnings were down from last year’s third quarter and in some cases, the amount was down substantially.

Agco’s net income was down about 90 percent.  The company blamed their earnings short fall on two main items:

1.  Lower commodity prices, and

2. Tight credit

The company indicated softening demand in North America and Europe, weakness in Russia and Eastern Europe and stabilizing demand in South America.  Agco makes equipment under the Massey Ferguson, Challenger, Fendt and Vaitra brand names.  Sales were down almost 33 percent, therefore a reduction in net income of about 90% was actually better than most analysts expected.

More numbers are available here.

Lindsay, the maker of irrigation systems indicated that their profit for the quarter dropped 81 percent on a 50 percent drop in sales.  Both earnings and sales were substantially less than what the analysts expected.  Rick Parod, the company’s CEO said farmers continued to remain cautious about making investments in capital goods.

Further information can be found here.

I will try to update more of these publicly traded companies each quarter as their earnings comes out.  You can obtain good trend information from reading their quarterly reports or analysis.