I have spent most of the time since Saturday in Kansas City, Minneapolis and Fargo. I have seen a lot of water, both in overflowing rivers and standing in the fields.

Our 200+ acres of corn north of Kansas City looks great but my farm partner will most likely lose 400 or mores acres due to the Missouri River overflowing the levee.

Driving through Southern Minnesota reminds me of the saying “knee high corn by the Fourth of July”. In Southern Minnesota his year there will be a lot of ankle high or no corn by the Fourth.

It will be interesting to see how markets react to the June 30 stocks report tomorrow. Stay tuned.

Effective July 1, 2011, the allowed mileage deduction and reimbursement rate is increased from 51 cents per mile to 55.5 cents. Don’t ask me why the IRS uses half cents for these rates, but they do.

This means you can use 51 cents for your miles incurred by June 30 and the new rate after that date. Most farmers take actual costs incurred and depreciate the pick-up, etc., but you may want to use the mileage rate for the incidental use of a spouse’s car for making bank runs and other minor farm uses during the year.

This is also the rate you can use to reimburse employees for the use of their auto or pick-up

Todd Becker, CEO of Omaha-based ethanol producer Green Plains, says ethanol “is still a great fuel” according to an article in the Omaha World-Herald.

Ethanol allows for a reduction in demand for foreign oil and is a cleaner burning fuel.  At current production rates, ethanol provides more motor fuel for the United States than it imports from Saudia Arabia, the equivalent of about 1 million barrels a day.

Also, the ethanol industry is more mature than when the tax credit subsidy was originally placed into service and ethanol now actually costs about 30 cents cheaper than gas.  This difference would be reduce by eliminating the 45 cent per gallon credit, but it would not have a dramatic effect on the industry.

This is especially true due to the mandate to blend 12.6 billion gallons of ethanol into gasoline this year.  As long as that mandate remains, ethanol should remain a vibrant industry and the Obama industry stands behind it so far.

The states of Iowa and Nebraska rank #1 and 2 in ethanol production with 42 and 25 plants in those states, respectively, with thousands of jobs tied to the production, transportation and marketing of the fuel.

The ethanol industry would like to see the elimination of the tax credit (since it really goes to the oil industry, not the ethanol industry) and have the savings put into infrastructure to deliver an 85/15 blend to consumers. 

Major changes to the tax structure of the ethanol industry will most likely happen this year.  It will be interesting to see what the final change will be.

We had a reader ask the following question:

“On taxing options, you state that hedges apply to crops that you raise or feed. However, you say if you raise wheat but have no livestock an option would not be a hedge. I am confused. “

The tax definition of hedging is when a farmer has made a transaction to minimize or eliminate the risk of price action going against them.  For example, a wheat farmer may purchase a contract on the futures market to sell short their wheat at $7 per bushel.  This contract has locked in the price that the farmer will receive (subject to basis adjustments).  By entering into this contract, if the price of wheat goes up a $1 at the elevator, the farmer will get cash of $8 per bushel but lose $1 on the futures contract for a net of $7.  This is what the IRS calls a hedge.

Conversely, if a farmer only raises livestock and purchases a long contract to buy corn at $5 per bushel, they have hedged their feed costs by locking in corn at $5 per bushel (again subject to basis adjustments).

However, if a wheat farmer with no livestock operation, buys a long contract or a call option to purchase wheat at $7 per bushel, the IRS views this as not being a hedge, but rather speculation on where the price of wheat is headed.  In this case, the gain or loss on the sale of this contract is considered 60% long-term and 40% short-term.  If the farmer has a gain, this may work in their favor since 60% of the gain is taxed at a maximum 15% federal rate, however, if the farmer has a loss and no other capital gains, this loss is limited to $3,000 per year until it is fully used up.

This is why it is extremely important for a farmer to know what is a hedge and what is not for tax purposes and how it can affect them.

The Wall Street Journal had an article yesterday on how Chinese companies are continuing to invest in South America especially in buying up farm land to feed their people.  Through the twelve month period ended May 31, 2011, the China’s investment in Latin America had hit $15.6 billion.

During the last three years, more than 70% of their investments had been in energy and minerals, but farming is attracting more attention. 

This month, China’s largest farming company, Heilongjian Beidahuan Nongken Group signed a joint venture with Argentina’s Creud SA to buy land and farm soybeans.  Creud SA already controls more than 2.5 million acres of land in Argentina.  Heilongjian had already indicated back in March their intentions to purchase 500 thousand acres of land overseas during this year and Latin America is their primary target area.

They are also spending $1.5 billion to develop about 750 thousand acres of land in Rio Negro Province over a ten year period.  These developments will not be a direct purchase of land, but they will be in control of the production.

With the backing of the Chinese government, we will continue to see this type of investment going forward.

I noticed a post on the Iowa Farm Union that indicated 47% of the farm land in Iowa is owned by women.  I think this trend will continue and there may be a good chance that this percentage may be in excess of 50% at some point in the near future.  Women appear to express a desire for strong conservation in their stewardship of the land, but sometimes are not sure how to most effectively carry this out.  The Iowa Farm Union and other state organizations have several seminars devoted to this effort.

As a tenant farmer are you taking advantage of the differences between what is most important to men or women who own farm land.  What is most important to male land owners may not be most important to female land owners.  By knowing and understanding these differences, you can become a more effective farmer.

Just a reminder that you can now follow me on Twitter.  I had set up my account last year, but with all of the changes with my accounting firm, I had not had a chance to take advantage of using Twitter for quick posts through out the day.  I will be using Twitter to update on any quick ideas, thoughts, etc. that I think are applicable to farmers and ag as they happen in real time.  There are many times when I have a thought that is not quite perfect for a post, but should be communicated and I will use Twitter for this.

Let me know how you like it and any changes that you think would work.

The new owner of the Whittemore Golf Course in Algona, Iowa has plowed it under to put in a corn crop for this year.  This nine hole course was originally built in 1969.  The new buyer decided that it would make more money as a farm than as a golf course.

This has caused some rift in the community since they now have lost their local course.  Here is an article on the change over.

I have a feeling that we might start to see more of this happen in smaller corn belt cities if corn and bean prices stay high and the golf participation continues to decrease.

The Supreme Court has decided to hear a case involving a dispute between the Ninth Circuit on one side and the Eighth and Tenth Circuit on the other side concerning the issue of who owes the tax on the capital gains arising from a Chapter 12 farm bankruptcy.

In most normal bankruptcies, the capital gain from selling the estate’s assets is generally treated like an unsecured claim and if there are assets available, they are used to pay the income taxes in the same pro-rata basis as all other unsecured claims.  So, in most cases, the IRS will only get pennies on the dollar from the sale of these assets.

However, the rules concerning family farm bankruptcies under Chapter 12 of the bankruptcy Code are a little more unsettled and the Ninth Court feels that these income taxes should be treated as an administrative expense and thus have priority over almost all other claims.  This means that if there is not enough assets in the estate, the claim will usually pass through to the farmer after bankruptcy.  This results in an extra liability to the farmer that they are not expecting.

Therefore, since these three Courts disagree, the Supreme Court has decided to hear this case and make a ruling.  I would expect this ruling in the next few months.  I would expect the ruling to go in the favor of the farmers, but who really knows.

We had a reader ask the following question:

“I am looking at options to put floor prices in for my corn and soybeans. I have a few questions on the accounting for income taxes. Is the cost of options an expense for income tax the year you buy them? If you sell the option the following year, are the proceeds from the option taxable in the year sold?”

The tax treatment of options on futures such as corn, soybeans, wheat, cattle contracts are treated in a unique manner compared to other investments.  The taxation of these types of contracts is spelled out in Sections 1092 and 1256 of the Tax Code.  This section was put into place to prevent taxpayers from entering into two futures positions that completely offset the risk.  The taxpayer would sell the one with loss at the end of the year and then sell the other one the following year.  Congress felt this was being abused.

Under this section, all futures contracts including options on futures (except those treated as hedges)  are reported at the end of the year as if they were sold for fair market value.  So to answer our reader’s question, the cost of the option is not recognized when purchased, but the value of the option at year-end is compared to the cost of the option and the difference is considered to be gain or loss.

For example, assume the farmer purchased a call option of 5,000 bushels of corn for $5,000.  At the end of the year, the option is worth $10,000.  The farmer has a $5,000 gain that will be recognized that year.  If next year, when the farmer sells the option for $7,500, the farmer recognizes a $2,500 loss in that year.  The total gain was $2,500, but $5,000 was reported the first year and loss of $2,500 was reported the second year.

If this is not a hedging transaction, the gain is automatically treated as 60% long-term and 40% short-term.  The above rules don’t apply if the farmer uses this as a hedge . Because of the offsetting positions, Section 1092 applies. Section 1092 delays the reporting of a loss until the year in which gain is recognized on offsetting positions.

Remember, even if you are a farmer and you think all of your futures transactions are hedges, this only applies to crops that you raise or feed.  For example, if you grow corn and beans, an option contract for these two crops would be a hedge, but if you purchase or sell an option on wheat or cotton, these are speculative investments and the 60/40 long-term/short-term gain or loss rule applies. Likewise, if you raise wheat (and have no livestock), an option to purchase wheat would not be a hedge.