One of the shows that I have taped on my DVR each day is AgDay.  It comes on in the morning at 6 am and when I get home from work, that is usually the first thing that I watch on TV.  The parent of AgDay, Farm Journal Media has launched a new monthly TV show in conjunction with Pioneer Seeds called Legacy by Design.  It is hosted by my friend Kevin Spafford and the first inaugural show is on AgDay today. 

I look forward to watching the show and see how it evolves over time.  The Legacy by Design site is dedicated to helping farmers transition their farm operation from the current generation to the next or the ones after that.  As our farmers are aging, many of the children that used to hang around and farm are no longer doing that.  It is nice to see the ones that are.

Keep up the good work Kevin and staff and let’s see how the show grows.

Does the recent announced closing of the hog plant located in Sioux City, Iowa mean that hog prices will increase during 2010.  First, the closing will directly impact 1,500 workers and their families in the area.  Some of them may find work at other plants located in the area, but many will need to find new jobs which is tough in this still weak economy.

The Iowa Farm Outlook published a post on the expected impact in the area due to the closure.  The Sioux City plant processed approximately 4 million hogs each year and this is almost equal to the expected decline in hog production from 2008 to 2010.  Since this should more closely match hog processing capacity to production, this should result in an increase to hog prices in 2010.  Prices have already increased substantially from their early 2009 lows, but have much farther to go to get back to their highs.

I have posted before that hog farmers were probably losing at least $20 per hog grown in 2008 and 2009 due to high feed costs and low prices (part of it due to the Swine flu scare).  I believe that hog farmer profits in 2010 will be positive and if feed prices decline, they may make very good profits.

Although one plant is closing in the area, there are another 7 plants within 100 miles that process over 28 million head per year.  This is certainly an area with more hogs than people.

I am a firm proponent of using hedges to lock in your cost of production when you can.  However, you must not just look at what your commodity price is trading at on the relevant exchange.  You need to determine what your basis is and how it compares to the historical trends.

Basis is the difference between what your local elevator, ethanol plant or other buyer is willing to buy your crop for and what the price is on the exchange.  For example, assume you can sell your corn locally for $3.85 per bushel and on the exchange it is selling for $4.25.  Your basis is in this case a negative 40 cents. 

For growers that are far away from the end user of the product, their basis is normally quite negative compared to other growers.  This is due to the cost of shipping the product to market.  A grower with several ethanol plants competing for product will normally create the best basis for corn growers (in many cases you will have substantial positive basis, while a wheat grower in Montana that has to ship his product by rail to Seattle to ship it overseas will have a very negative basis).

After determining what your basis is, you need to review how the current basis compares to the trends over the last several years.  This comparison of the deviation from the normal trend will give you data as to whether you expect it to narrow toward or away from the exchange price.  This can effect whether you want to put on a hedge or use some type of forward contract.

The Kansas State University has a great Crop Basis and Deviation service that they provide on an almost weekly basis.  They provide a map for several mid-west states showing the current basis and the deviation from a three year average.  If you are in one of those states, bookmark this site and watch how your basis changes over time.   

As you become familiar with your basis, you will make more informed decision when and how to sell your crop.

Sort of like the photo of my motorcycle at the left, broadband Internet services are much faster than dial up (or in my case a Harley).  Historically, the utilization of broadband Internet services in the rural sector has been much lower than urban areas.

In an article in the September, 2009 Amber Waves , several observations about these issues were made.  By 2007, about 82% of the homes that had Internet service were using a broadband connection.  However, only 70% of rural areas had broadband which is about 15% behind urban utilization.  Clusters of very low service are located in the Dakotas, eastern Montana and Oregon and northern Minnesota.

An interesting conclusion was that rural counties that had broadband service on a quicker basis than other rural counties ended up with better job and economic growth than those without starting in  2000.  This difference in growth rates ranged up to 2% more in 2005 and 2006 and income levels were almost 3% higher in certain years.  Broadband service allows rural America to compete with urban areas since communicating at broadband electronic speeds shrinks the miles to almost nothing from a business standpoint.

Urban areas with low income levels still had broadband coverage of about 75% while rural areas with the same income only had about 50% penetration.  The gap for higher income levels in rural versus urban areas were much lower.

I am firm believer that countries such as Korea (with some of the fastest broadband service in the world), China, Brazil etc. that are deploying fast broadband service will catch up and possibly pass us much faster than if they did not have broadband.  This world is getting much flatter and the rural parts of America are catching up, but still have a ways to go.

Many dairy and other farmers will need to make a decision this year that they may not have had to make for several years.  I would say almost all dairy farmers for 2009 will have a tax operating loss and it may be substantial.  With a net operating loss, the tax laws allow you in most years to  either carry it back for two years or carry it forward for up to 20 years.

However, for farmers they can carry back their net operating losses for up to five years and if they have losses from other businesses for 2008 or 2009, they can carry those losses back for up to five years.

You need to review your actual income tax paid for the last five years.  You will need to determine the amount of tax actually paid and the overall tax bracket that you were in for each year and in total for the appropriate years.

• You need to estimate what your income tax bracket will be over the next few years.  In general, if the prior years overall tax bracket is 15% or less and you expect to be in the 25% or higher bracket going forward, it makes more sense to carry it forward.
• You need to review whether you took advantage of farm income averaging in those years and whether you will take advantage of it going forward. 
• If the loss is very large and you need the cash, carry back the loss and what is left over can still be carried forward to 2010 and beyond.
• You can elect to carry the non-farming loss back three, four or five years or the normal two.

If you make no election, then the loss is automatically carried back two or five  years.  To carry it forward, you must make an election with the tax filing.

Here is a link to the IRS website dealing with the net operating loss rules for farmers and other related farm tax publications and links.

All in all, farm debt levels have increased, however, farmers have done a very good job of not letting these levels get out of control.

The United States Department of Agriculture has a very good print and online magazine called Amber Waves.  Each issue generally has several good articles related to farming and I would highly recommend reading it each month.

In the December issue, the an article on how farm debt has increased and shifted in the last few years was highly informative.  Here are the highlights of the article:

• Farm debt levels have risen sharply in recent years, but the growth in farm asset values has outpaced the growth in debt. 
• Fewer farms end the year with debt outstanding than in the past; debt is more concentrated in larger farms
• Debt repayment capacity is expected to decrease this year, but remains well above levels seen in the later 1970s and early 1980s

US farm sector debt was estimated at $240 billion at the end of 2008, however it is expected to decrease by about $6 billion to $234 billion at the end of 2009.  Total farm assets are estimated at about $1.8 trillion for a debt to asset ratio of only 13%.  This ratio is about 2.7 times better than the low reached in the mid-1980s farm crisis.

In 1986, nearly 60% of farms reported having outstanding debt at the end of the year; by 2007, this figure had dropped to 31%.  Larger farms are more likely to use debt than smaller farms.  The majority of small farms indicated they have sufficient liquidity to finance their operations.  Livestock operations tend to have higher levels of debt than crop operations.

At the end of 2007, 65% of farmers reported having no outstanding on their business balance sheet, however, these farms only average about 258 acres in size.  14% of farms reporting between $1 and $5 million in sales also reported having no debt outstanding at year-end.

Farms that reported having multiple loans with multiple lenders only represented 6% of farms, however, they had more than 31% of total farm debt outstanding.

Farm debt has increased more slowly than income.  As a result, the ratio of debt to income has trended down from a ratio of five times annual farm income to less than three times annual income in 2007.

Debt repayment capacity utilization (DRCU) measures debt obligations in relation to maximum debt repayment capabilities.  The lower the DRCU number the better.  This measure has decreased from 27% in 2007 to about 18% in 2008.

Agriculture Online has a good quick article on whether farmers will reduce their production levels in 2010 due to the large crop that was grown in 2009.  Corn has rallied about a $1 since early September and soybeans have gone up about $2. 

However, the government report on Tuesday led to limit down price moves in corn.  Surprisingly to the author, farmers seem to be upbeat this time of year compared to previous years.  It seems that the fundamentals of the world grain market may have changed to promote high levels of production since the demand is now starting to keep up with these levels of production.

I think you need to make sure not to rely on this, but rather, make sure you have marketed enough of your 2010 production to cover your input costs.  At these price levels, you should be able to still get good pricing to cover them.

As a tax preparer, I  normally file all of my client tax returns electronically.  However, for this tax season, for all of my clients that are claiming the homeowner credit, we will need to send in a paper return to the IRS.  Many farmers may qualify, either for the first time credit of $8,000 or the long-time ownership credit of $6,500.

To claim the credit, you will need to fill out form 5405.  For the first time credit, you will need to attach either of the following to the tax return:

• A copy of your closing statement from the home purchase, or
• If purchasing a mobile home, a copy of the retail sales contract, or
• If building a house, the certificate of occupancy and most likely the bills from the contractor to back up the cost claimed on the form.

If you are claiming the long-time credit (which means you lived in the same house for five consecutive years), you will most likely need to provide five consecutive years of either:

• Home mortgage interest statements,
• Real estate tax records, or
• Homeowners insurance.

The IRS has indicated they will not start processing any of these returns until mid-February and the soonest that any refund checks will be mailed will be around late March.

Remember, if you are claiming the homeowner credit, file your return by mail.

Most of the farmers that I deal with from an income tax filing standpoint try to file and pay their income taxes by March 1 of each year.  This is primarily due to no estimated taxes needing to be paid during the tax year if the farmer files and pays by March 1.  If they do not file by this date, than a penalty for not paying estimated taxes can be due.

Normally, a farmer will pay this estimated tax payment on January 15 for the previous year.   For example, for calendar year 2009, the estimated tax payment for a farmer is due on January 15, 2010.  This estimated tax payment can either be the tax paid in the previous year or 90% of the tax owed for this year.

Let suppose that for 2008, the farmer owed total income taxes of $5,000 and for 2009, they expect to owe $10,000.  They are required to pay in on January 15, 2010 $5,000.  Now if they only expect to pay $2,000 for 2009, then they only need to pay in $1,800.

Since farmers and other taxpayers get used to doing the same thing every year, if they are used to filing on March 1, they file on March 1.  If they are used to paying estimates on January 15 and filing on April 15, that is what they do.

What they should do each year toward year-end is determine what works best for that year.  If they owed very little tax for the previous year, it would probably make a lot more sense to make an estimated tax payment based upon the previous year’s tax and then just pay the tax on April 15.  This will save both interest cost on the money owed and give the farmer and extra 45 days or so to get their tax return done.

Please make sure to check this out each year and determine what works best for you.

The Kansas State University Department of Agricultural Economics periodically produces a recap of the high 1/3, mid 1/3 and low 1/3 of various farms in their state.  They just released the latest analysis for corn, sorghum, wheat, soybeans and alfalfa for the three years 2006-2008.  The total number of crop farms reporting for all three years during this analysis was 629 farms.  There are several pages of producer returns, but I thought I would try to recap the major trends that I spotted.  These trends are based upon the differences between the top 1/3 and the bottom 1/3.

CORN

• The yield per acre difference was about 16 bushels for non-irrigated corn or about 18% while the price difference was only 13 cents or 3.6%.  The total average revenue difference was $61 per acre.
• Major costs variances were in fertilizer and machinery with these costs being about $49 lower for the top 1/3.
• The overall net return to management in the top third was $150 more than the bottom third.

SOYBEANS

• Yields for good producers was about 6 bushels higher or about 20%.  The net selling price was about 55 cents higher or about 7%.
• Total revenue was $72 higher or about 31%
• Again, machinery costs were materially lower for good producers at about $30 per acre lower.
• Good producers returned $130 more per acre than the low producers.

WHEAT

• Yield was about 6 bushels higher or about 19% better for the top 1/3.
• Prices were only about 4% higher than the bottom third or 23 cents overall.
• Again, machinery and fertilizer costs were about $46 lower for the better producers.
• Overall, the best producers gained $120 per acre over the bottom producers.

Other trends are:

• In all cases, the lower 1/3 of farms reporting had negative net income for this three year period, with wheat and corn growers being the worst off compared to the other crops.
• For non-irrigated crops, soybeans appeared to be the best return per acre compared to the other crops, however, the difference between returns for each 1/3 was only about $25 plus or minus per acre.
• As we have discussed in other posts, it appears that the best way to increase your return per acre is to minimize your equipment cost per acre.  This is by far the most consistent cost that is almost always higher for the lower third than the top third.

How does your operation stack up.