I ran across another thought provoking article in Cornhusker Economics.  In the article, they performed an analysis of farmers in Nebraska based upon their ages.

In 1982, 13,436 farmers in Nebraska were under age 35.  In the most recent census in 2007, this number had dropped to 3,353 or a 75 percent decrease.

The number of operators aged 65 or over increased from 8,777 to 13,062 in 2007 or about a 49 percent increase.

Based on these numbers, over the next several years, there will be about 13,000 Nebraska farmers pondering these three options regarding their operations:

1. Will they sell the land, machinery and livestock to the highest bidder, or
2. Will they rent the land, machinery and livestock to the highest bidder, or
3. Will they transfer it to a successor to farm

For many operators, option 1 or 2 will most likely be the best option.  For others, option #3 will allow them to see their life’s work continue on.  The rest of the article discussed the University setting up the “Nebraska Network for Beginning Farmers”.

I would be curious to find out which of the three options our readers are pondering.  If I get enough response, I will post the results in a later post.  If interested, send me a quick e-mail with the following information regarding you and your operation:

• Your age
• Your home state
• The size of your operation in acres or head
• The type of operation
• Major crops grown
• Which option you are leaning toward
• Whether you have identified who either the higher bidder will be or your successor
• Are they related to you
• Other information you think is pertinent

Again, if I get enough responses, I will post the data.

I will be traveling on the business the next two days, so I wanted to make sure to wish Happy Thanksgiving to all of our readers.

This holiday was my favorite as a child growing up since we went to my grandparents for Thanksgiving and some years we would have over 45 relatives there. 

Again, Happy Thanksgiving!

One of the recent issues of Cornhusker Economics put out by the University of Nebraska Department of Agricultural Economics showed how the farmland turnover for the current year is about half of the long-term trend.

The market for farmland has historically been a “thin” market in that very little is marketed and changes in ownership at any point in time are few and far between.

From an economics viewpoint, most people would predict that as prices rise, more and more product will be released into the market.  Farmland actually has the opposite happening right now.  As the price rises, farmers and investors are holding onto their farmland.

Since good farmland may remain in the same hands for decades, the window–of-opportunity is very limited to make a buy.

Over many decades, a rule-of-thumb has been anywhere from 3% to 5% annual turnover of ownership.  It is likely that the long-term trend is on the lower end, therefore, a particular piece of farmland will only be on the market once every 33 years.

The economics department reviewed all real estate transfer documents for Nebraska and eliminated any parcels less than 40 acres.  They then calculated a three year average for transactions in the 2006-2008 period.   These numbers were then divided by the total acres for each county to find out the turnover rate for each county in Nebraska.

They found that the average turnover for this period was 1.55% or an about 65 years between a particular piece of farmland coming up for sale.  Some counties were substantially under 1%.

Although this information relates to Nebraska only, I would surmise that most other states are seeing the same trends.

We had a reader ask the following questions:

“We had a combine fire this fall, and my question is concerning “betterment” deducted from the claim. The combine was a 2010 model, with only 400 hours on it. The damage exceeded $41,000, and the insurance company deducted $4,100 (10%) for “betterment”. I assume that I can deduct the amount I paid over and above the insurance payment. Is this deduction common. Maybe it’s more of a legal question. Any help is appreciated.”

Even though I am not an attorney, I will give my answer on this from my research.  Betterment refers to the insurance company replacing parts on equipment with newer parts than was in the equipment originally.  For example, you may have a combine that is 10 years old that has a fire and when the insurance company replaces the parts on the combine it purchases brand new parts that have a much greater value than the 10 year old parts on the combine.  This is called betterment and the insurance company will adjust the payout to reflect the extra cost or value of the new parts versus the old parts destroyed.

In this case with a 2010 model with only 400 hours, the insurance company may have stretched the definition here, but like driving a car off the lot that loses some value once the odometer no longer reads “new”, I suppose there could be some betterment to be charged.

With regards to the extra paid to get the combine back in working condition, that is normally considered a repair expense and 100% deductible.  Also, with Section 179 being $500,000 for 2010, even if you “added” something new to the combine as part of the repair process (for example, you may have added a precision ag monitor that was not there before, this would not be a repair but an addition), you should be able to deduct this as part of your Section 179 deduction.  But if you are only getting the combine back to what it was before the fire, that will 100% deductible as a repair expense.

With the expected large increase in gift and estate tax rates for 2011, December 31, 2010 is the key date to make any large taxable gifts.

Currently, the maximum gift tax rate is 35% and it will rise on January 1, 2011 to 55%.  There is no estate tax for 2010, but in 2011, the maximum rate will also be 55%.  In other words, December 31, 2010, ironically, is the “drop-dead date” for taking advantage of the 35% rate.  Basically, gift taxes are on sale for 2010 only.

If the farmer dies in 2010 after making a taxable gift, then paying the sales price – the 35% gift tax – will have backfired since there are no estate taxes owed for 2010.  That is why any farmer will want to wait until December 31, 2010 to consider making these gifts.

Another potential draw back to the gift in 2010 is that if the farmer dies within 3 years of making the gift, it is basically undone and the gift and gift tax paid is included in the farmer’s estate and taxed at whatever rates are in effect at that time.  The farmer would not be any worse or better off from dying within this 3 year period, but the benefit of making the gift in 2010 would be nullified.

For example, let’s assume we have a farmer worth $10 million and elects to make a gift on December 31, 2010 of $4 million.  They will pay a gift tax of about $1.4 million.  After paying this tax, they have reduced their estate from $10 million to $4.6 million.  Assuming the farmer lives for at least 3 years, the estate will only pay tax on the $4.6 million at 55% or about $2.5 million of total estate tax.  This tax plus the $1.4 million gift tax equals total taxes of about $3.9 million.  They were able to pass on to theirs heirs $6.1 million.

Now let’s assume the farmer does not live three years or does not make the gift.  They will be taxed on the full $10 million at 55% or $5.5 million of total estate tax.  Their heirs only recieve $4.5 million instead of $6.1 million.  By making the gift on December 31, 2010, the family saved $1.6 million of estate taxes or about 30%.

This strategy is primarily focused on the farmer who has a net worth greater than $5 million, the liquidity to pay the gift tax and is probably in their 70′s or 80′s.

A major caveat is that Congress may make changes to the 2011 estate law before December 31, 2010, however, it makes sense to at least plan for reviewing this strategy with your tax advisor if Congress does not act in time.

I got a call from one of my clients yesterday saying that he got a surprise in the bank account.  His ACRE payment had shown up and it was a substantial amount.  We wrote many posts on this about a year ago before the final sign up for the 2009 crop indicating that ACRE might be a good idea with prices going down.

G.A. “Art” Barnaby Jr of Kansas State University posted an update recently projecting the estimated ACRE payout for each crop by state for the 2009 crop year.  The primary payouts were for wheat.

For corn, the only corn belt state that qualified for an ACRE payment was Illinois at about $25 per acre.  None of the other corn belt states received any payment, however, some other states received a fairly large payment:

• Connecticut, Massachusetts, Rhode Island all received close to $150 per acre
• Texas – $73 per acre
• Oklahoma – $49 for dry land and $100 for irrigated

Only two states qualified for a soybean payment – Texas got $15 per acre and South Carolina received about 54 cents per acre.

Sorghum payments ranged from about $11 to 47 per acre and were primarily in the Southern states.

Almost every state received a Wheat ACRE payout for the 2009 crop.  The maximum payment of $133 was earned by Nevada, while Arizona, Delaware and Idaho all received more than $100 per acre.  Most of the other states earned from $50 to $100 on average.

However, North Dakota, the largest wheat producing state earned zero for the year (due to their increased yield) and Kansas only earned $7.56 per acre.

If you have one of these crops and are in these states, check your bank account to see if the USDA made a deposit you were not expecting.

With a lot of recent discussion and articles on whether farmland prices are entering a “bubble” phase, I thought some analysis to see how a potential rise in interest rates might effect farmland prices would look like.

Farmland prices (as are most financial assets) is normally a function of the income generated by the farmland and the expected rate of return that an investor requires to make the investment.  Currently, farm income is historically high and interest rates are historically low.  With these two bullish patterns, farmland prices have enjoyed a large run up in price over the last ten years or so.

What if farm income stays high, but interest rates and the expected rate of return that an investor requires increases, how might this affect the price?

Let’s assume that we have an investor who owns 160 acres of very good farmland in Iowa that is currently worth $8,000 per acre and the cash rent on this property is $300 per acre.  This implies that the investor is willing to earn an approximate 3.75% rate of return.  Now let’s assume that the interest rates rise and the investor requires a 5% rate of return.  This would reduce the value of the property from $8,000 per acre to about $6,000 or a 25% drop in price.  If the required rate of return was 6%, then the price would be $5,000 or about a 37.50% drop in price.

This analysis assumes that cash rents would remain the same and other expectations would also remain constant.  However, normally, when interest rates rise, expectations change and the effect on prices could even be more dramatic than what is shown here.

If you are anticipating making an investment in additional farmland, make sure that you have done this analysis to determine the effect on your farming operation if rates and expected returns do rise.  Now is probably not the time to be making farmland purchases with much leverage.

I have seen several articles lately on the battle between high fructose corn syrup and regular sugar from sugar cane or sugar beets.  There is a perception by the public that cane and beet sugar is better for you than sugar from corn. 

Most nutritionists believe that the all of these sugars are equal from a nutritional standpoint, that is, they all think we should consume much less of them than we are now.

Even Heinz Ketchup has gotten in the middle of it.  A few months ago, they started marketing ketchup made with regular sugar instead of high fructose corn syrup that they called Simply Heinz.  They kept the regular ketchup with the same recipe, but marketed Simply Heinz as an alternative to their regular brand.

The feedback has been, to say the least, very interesting.  The Pittsburgh Post-Gazette has an article on how the feedback has ranged from people wanting to have products with regular sugar, but hating the taste of it, to people wanting to keep things the same.  Other companies like Pepsi have come out with soda’s with regular sugar as a throwback item.  I, myself, am a Mountain Dew fan and I must admit that I much prefer the taste of current Mountain Dew with high fructose corn syrup than the taste with “real” sugar.

The corn industry is trying to get a ruling that they can legally change the name of high fructose corn syrup to corn sugar.  It will be interesting to see how this all plays out.

Prices for sugar hit a 30-year high on Thursday at 33.39 cents per pound, however, by the end of the day, prices had dropped about 9.6% closing at 29.66 cents a pound and dropped another 11.6% on Friday to close the week at 26.21 cents per pound.

The drop in prices was sparked by the announcement that India appears to have a sugar surplus of about 3.5 million metric tons which should offset the impact of the drought-stricken harvest in Brazil, the world’s largest producer.

India’s announcement was about 3 times higher than what the market expected.  The final total, which determines how much sugar can be exported can be higher.  This decision will most likely be made sometime later this month.

China’s expected raise in interest rates also appears to be spooking the market for soft agricultural goods such as sugar, cocoa, coffee and cotton which all fell by at least 3 percent on Friday.

The Federal Reserve Bank of Kansas City (representing Kansas, Missouri, Nebraska, Oklahoma, and the Mountain States) just reported that non-irrigated farmland prices for the year-over-year ended September 30, 2010 rose more than 6%.  Irrigated cropland was up an even more robust 9.6%. 

After dipping slightly in the third quarter of 2009, prices have risen each of the last four quarters.  Kansas saw their prices rise more than 12% during the year, while Missouri, Oklahoma and the Mountain States only saw modest gains.

Cash rental rates were up about 5% for cropland and 2% for range land.

Rising farmland values were driven by strong demand from both farmers and investors.  Bankers reported that investors expect an average rate of return of between 5% and 6% on farmland investments.

There has been a two-year decline in the number of farms available for sale and bankers believe that with the possible rise in capital gains rates in 2011 that more farms may become available.