Most farmers are of an independent nature, however, in one area they may want to consider partnering up on is grain storage.  The decision to build on-farm grain storage can be very complex.  Farms that are mid-size or smaller usually find it cheaper to continue to bring their grain to an elevator versus storing it on their farm.

However, if their are several compatible farm operations in a central location, the idea of Condo Storage may make a lot of sense.  The benefits are that instead of each farmer having to spend the same amount on certain items related to the storage facility that cost the same whether they build 5,000 bushels or 500,000 bushels, they may be able to pool their money together and only spend it once. 

Most of these condo storage operations have employed a farmer-owned LLC.  The farmer buys shares in the limited liability company and receive rights to store grain in proportion to the amount of shares owned in the LLC.  The storage structures and equipment are owned by the LLC, not the farmers.  This provides liability protection for the farmer investors.  If somebody were to get injured (or even die) working in the storage facility, the only asset at risk are the assets of the LLC, not the farmers assets.

The LLC then depreciates the structure and equipment and passes the depreciation back to the owners based upon their ownership percentage.  Also, the Condo LLC may charge each farmer a per bushel fee to store the grain and then the net income or loss is allocated to the farmer owners.   If a fee is charged, this allows the LLC to offer its storage to other farmers that are not owners of the LLC.  This can either help it make a profit or reduce the overall cost to the owners.  There is typically a board of directors elected to govern the LLC and make decisions regarding the assets it holds.

If the farmers do not want to manage the storage facility themselves, they can contract with a local grain cooperative to manage and run the facility for them.  Long-term lease options are also available under this structure.  To entice a local cooperative to get involved, several hundred thousand bushels of storage will probably need to be committed to the condo program.

I believe that many mid-size farmers should look into this opportunity especially with long waits and long travel times to get to grain elevators these days.

This type of condo project probably has returned a much higher rate of return than buying a Florida condo in the last few years.

Crop insurance has been available to farmers for many years.  Until recent years most of this insurance was based upon Actual Production History (APH).  Insurance products based upon Crop Revenue Insurance (CRI) have been introduced to enhance and/or replace APH.

Marcia Taylor of DTN/Progressive farmer had a good blog on how one farmer in Ohio is utilizing Crop Revenue Insurance as part of his risk management strategy.   One interesting paragraph stated that on a nationwide basis, CRI is now insuring about $33 billion of potential corn losses versus $4.3 billion for APH.   If total corn production is 12 billion bushels at an average of $3.50 per bushel, approximately 89% of the total US corn production is covered by crop insurance.

There are many reasons for this.  I think the primary reason is that CRI allows the farmer to lock in a guaranteed revenue level per acre on a much more consistent and predicable basis than APH.  The Iowa State University has several Ag Decision Maker articles on how all of these programs work.

I think that all farmers should carefully review these available crop insurance options and work with your financial advisor, banker and insurance agent to determine which is best for you.  At a minimum , you should make sure to lock in your input costs .  Also, most bankers are going to require this to obtain an operating loan or renew one.

The most recent AgLetter from the Federal Reserve Bank of Chicago indicated that good farm land in Iowa decreased about 7 percent from the third quarter of 2008.  The average decrease for the five state region was 4%.  The good news that the price of good farm land increased by 2% over the second quarter of 2009.

The forecast for the fourth quarter prices were an additional decrease in values, but not at a great rate.  Pockets of strength seem to exist in areas where farmers have built up financial capital over the last few good years.  These farmers are either expanding their farm operation or trying to reduce their exposure to hikes in cash rents.

On the financial side, loan repayment rates for non-real-estate loans fell to their lowest ranking since 2006.  The index had peaked in 2008 at 150 and fell to 89 in the third quarter which is about a 40% decrease in loan repayments.  Both real estate and operating loan rates were at very favorable being in the low 6% range for the quarter.

Bankers also did not see conditions improving into the fourth quarter and beyond.

Chuck Schwartau of the University of Minnesota Extension Service has a great post of how the trend in milk prices has changed over the last several months.  It is no secret that dairy farmers having been hurting for close to a year now and a common statement was “If milk was at $15,00 per hundredweight, we’d be in good shape”.  During this past year, it seemed $10 was much closer than $15.

Well, the trend has changed.  In past few weeks, there have been several opportunities to contract for Class III milk at the $15 range for January and February delivery.  Chuck indicates that milk has only been over the $15 level about 10% of the time, so make sure to take advantage of these prices now.

One option is to use a Put as insurance.  This locks in a floor price, with the price you pay for the put being your insurance premium.  These contracts can be costly, but if you have premium milk, it may be worth locking in the floor price.

A dairy farmer can also use contracting services if they belong to a cooperative.  It appears that profitable dairy farming is here and you need to take advantage of it while you can.

MERRY CHRISTMAS and a HAPPY NEW YEAR!

I can not believe that Christmas will be here tomorrow.  Between having two boys in high school, one in college and one that just graduated, it seems like I can still remember being bigger than they were.  That is no longer true. 

We started this blog less than a year ago, and we wish to give thanks to all of our readers for an interesting trip so far.  As we make the journey through life, it is good to stop and say thanks (I should more often than I do) and we say THANKS!!!!!!!

We have appreciated all of your ideas, feedback and suggestions for future themes and topics.  We are looking forward to 2010 and want to give everybody a great Christmas and we hope that the New Year is better for everyone (it may be hard to be worse).

MERRY CHRISTMAS and a HAPPY NEW YEAR!

 I have read several articles about the Department of Justice possibly looking into anti-trust concerns regarding the concentration of seed genetic traits by Monsanto.  Many experts believe that Monsanto uses their supplier contracts with other seed companies to unlawfully constrain competition in the seed industry.

Over the last 12 years, Monsanto has gone from having almost no seed business to a dominant position primarily due to their Roundup© Ready gene traits that they have licensed to hundreds of seed companies to use in marketing their seed.  These traits allow farmers to apply Roundup© directly without worrying about it killing their crop.  This can save substantial costs over having to spray on other chemicals at a later date or using less effective chemicals.

The Capital Press recently had an article on these practices.  I am not sure if I totally agree with the slant of the article especially when they talk about the price of seed corn going up by 25% last year.  Seed pricing has a very direct relationship to the overall price of corn since if you do not pay a market price, your grower will not grow seed corn, they will grow regular corn.  Therefore, since the average price of corn in 2008 was substantially higher than 2007, so seed corn should be much higher.

Also, I am not sure where you draw the line on letting a company enjoy the fruits of its patent versus being a monopoly.  The current patent system promotes the exclusive right to market and use your patent for a certain term of years.  This allows companies the ability to spend large amounts of money since they know that they will be able to recoup this money if they receive a patent.  Thus, they should be able to maximize this value during the limited years of the patent.  Monsanto will lose the patent in next 10 years or so and the market will be open to anybody that can make a generic and the price will drop at that time.

There is an overall limit as to how much Monsanto can charge since at some point it would become cheaper not use their seed if the price got too high.

I would be very interested to have feedback from our farmer clients as to whether you believe that Monsanto has an unfair competative advantage or if you are happy using these seeds and would not change.  Let us know!

Thanks to Senate gridlock, taxpayers who are trying to do effective estate tax planning are in for a case of estate tax whiplash over the next few months.  The federal estate tax is due to disappear for one year starting in about two weeks, however, it may reappear unexpectedly and retroactively.

When the Senate refused to act this week, it opened the door for the estate tax to disappear in two weeks, although nobody knows for how long.  Under current law, the estate tax disappears on January 1, 2010 for the whole year and then reappears on January 1, 2011 at the old 2001 rates.  Also, the gift tax maximum rate will fall to 35% and for some assets inherited in 2010, the step up in basis will disappear (with the step up in basis, the capital gains tax is based upon the difference in value between what you sell it for and what it was worth at the time of death.  With the new law, you use “carry over basis” which means you need to go back and find out what the heir originally paid for it and use that basis.  This could end up being an accounting mess).  All this happens because the 2001 tax act phased out the estate tax over a 10 year period, repealing it entirely in 2010.  But the estate tax returns in 2011 under 2001 rules – a $ 1 million exemption and a 55-percent top rate.

The House had passed a law a couple of weeks ago making the current top rate of 45% and exemption amount of $3.5 million permanent.  Senate republicans wanted the rate lowered to 35% and the exemption at $5 million.  But lacking any unity in the Senate, Democrats failed to even get the Senate to vote on the issue.

The whiplash mess is that we are not sure if Congress will get their act together in early 2010 and pass a new estate tax law and whether it will be retroactive to January 1, 2010.  Senate Finance Committee Chair Max Baucus (D-Montana) has promised to revive the issue next month and make it retroactive to January 1, 2010, but that may not happen. 

In the meantime, I would not be making any large gifts assuming the new law will be in place.  You will want to watch and see what happens and when the dust settles, make your plans then.

One of the deductions available to farmers that I see missed on tax returns (and I must admit I have missed it until I review the return) is the deduction for Domestic Production Activities.  This can be one of the most complicated tax deductions of all times for larger businesses, but for farmers who follow the simplified method, it is not too hard to calculate.

In brief, you take your total farm income (excluding certain items such as interest income, etc.) and you subtract your farm expenses.  This net income from domestic farm activities is then multiplied by a certain percentage.  For 2009, this percentage is 6% and for 2010 and thereafter, it will be 9%.

There is an overall limit on the deduction which is the amount of W-2 wages that you paid during the year times 50%.  I will give you an example here:

• Let’s assume your gross farm income is $750,000, your gross farm expenses are $475,000 and your W-2 wages are $75,000.  This means that the Domestic Production deduction would be equal to ($750,000-$475,000) times 6% or $16,500.  If your W-2 wages were less than $33,000, the deduction would be limited to 50% of your W-2 wages.

This deduction does not reduce your self-employment income.

For those farmers who are sole proprietorship’s, you may not qualify for the deduction if you do not have any employees or minimal employee expense.  This is another good reason to pay reasonable wages to your children if they work on the farm.  I have a couple posts on why this makes sense, but if you can maximize your Domestic Production Activities deduction by paying them wages, this is another reason to do it.

The USDA just recently produced their Crop Production report for 2009.  Being a stats nut, I always like to look through the report.  This time, I thought I would share with you the total amount of food that the US produces in metric tons.  Lots of food items are counted in bushels, bales, tons, etc. but the USDA summarizes the major food catagories by metric tons.

The top ton food items by metric tons for 2009 are:

1. Corn                328 million
2. Hay                 139 million
3. Sileage corn    101 million (2008 numbers)
4. Soybeans          90 million
5. Wheat               60 million
6. Sugarbeets        27 million
7. Sugarcane        26 million
8. Potatos             20 million
9. Rice                  10 miilion
10. Sorghum           9 million

Total grain and hay production was about 655 million metric tons.  Total oilseed production was about 98 million metric tons.  Cotton, sugar products and potatos and related ended up at about 79 million totals.

Fruit products are much smaller than most of the grains, but here are the 5 largest fruit crops (in metric tons):

1. Oranges            8 million
2. Grapes              6 million
3. Apples               5 million
4. Grapefruit        1 million
5. Peaches            1 million

Total fruit production was about 24 million metric tons.

Overall food production for all products ended up at about 856 million metric tons.  If there are about 300 million people in the US, this equals production of about 3 metric tons or almost 7,000 pounds per person in the US.  We can see that a large portion of your production is exported.

The House on December 3, 2009 passed the Permanent Estate Tax Relief for Families, Farmers and Small Businesses Bill of 2009.  The Act would permanently extend the current exemption of estates of up to $3.5 million for a single taxpayer and $7.0 million for married couples.  For estates larger than there amounts, they would be taxed at the current 45% top rate.

As the title suggests, the House is trying to provide relief to Families, Farmers and Small Businesses.  Additionally, the bill repeals the enactment of carryover basis that was to start in 2011.  This means that people inheriting assets will still be able to use the date of death values (like you can now), instead of using what the basis was for the person that died.  This would probably led to an accounting nightmare.  This bill simply continues the present 2009 law for rates and exemptions.

The negative is that the Bill does not increase the lifetime exemption amount for gifts.  This is still limited to $1 million during life.  It is unclear if the Senate will review this before year-end, so this Bill may not get passed until early 2010 and there may be some changes, but at least it has passed the house.

You should be reviewing your estate plan right now to make sure it is up to date, but with the current law and the proposed changes.