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 have listened to several marketing experts on ways to accomplish this and I think several of them have merit.  Therefore, make sure to review your budgets for these years and at least consider locking in both revenue and costs numbers for 50% or more of your corn and bean and wheat crop.  We do not get opportunities like this too often, so make sure to take advantage of this.

I would welcome comment on what steps our farmers have taken to lock in input prices.

1. Kansas State University has a site called ag manager info and there is always some interesting tidbits that they have on the site.  They recently posted an article on the world wheat market supply and demand trends.  I thought I would recap the article with what I found interesting.

For the current year, total acres planted to wheat is estimated at about 557 million acres or over 870 thousand square miles.  This acreage is about the size of Greenland. Since the study started in 1987-88, the average acres in production has decreased by about 1 million acres annually.

The 10  largest wheat production areas produced on average about 80% of the world’s total wheat production.  The top 5 areas (in acreage terms) were:

1. Russia – 71 million acres (slightly smaller than Arizona)
2. India – 69 million acres (about the size of Colorado)
3. European Union – 63 million acres (about the size of Oregon)
4. China – 59 million acres (slightly larger than Idaho)
5. United States – 49 million acres (about the size of Minnesota)

I always thought that Canada was a large producer, however, the country of Kazakhstan has almost twice the acreage in wheat production as does Canada.

The highest average yields per acre are:

1. European Union (76.9 bu/acre), increasing about 1 bu per year,
2. China (65.0 bu/acre), increasing by 2.2 bu per year.

United States yield is about 41.6 bu/ac with it increasing by about 1 bu per year.

Total wheat production by the top 5 countries are as follows:

1. European Union – 5.1 billion bushels
2. China – 4.2 billion bushels
3. India – 3.0 billion bushels
4. Russia – 2.3 billion bushels
5. United States – 2.2 billion bushels

Even though the United States is the 5 largest producer of wheat, it is the largest exporter of wheat and the top 5 exporters are as follows:

1. United States – 1.1 billion bushels (50% of production)
2. European Union – 705 million bushels (14% of production)
3. Russia – 600 million bushels (26% of production)
4. Australia – 450 million bushels (55% of production)

Canada exports about 67% of its production.

The top importer of Wheat is North Africa at about 610 million bushels, with the Middle East, South America, Sub-Saharan Africa, Southeast Asia and East Asia next.

Another interesting fact is that China has by far the largest ending wheat stocks at about 1.8 billion bushels.  The United States is the next largest at about 635 million bushels.  China is at about 47% of total ending stocks, while their historical trend is about 30%.

I always find this information interesting and I hope you find something of interest in the data.

I have noticed that the USDA reports show the corn crop carryover going down which has caused a decent rally in corn prices.  On a seasonal basis, corn and beans do tend to top over the next month or so.  You need to make sure that you have updated your budgets for this year to determine if the current prices are covering all of your input costs.  If so, consider start locking in some of these decent prices.

I strongly urge all readers to have a good marketing plan in place since this can be (and usually is) the difference between showing a profit and showing a loss.

I was planning on taking my motorcycle back here, however, with the rain, I left my bike home.  Next week, I go to California and plan on taking my bike then.  I hope planting season is going good for everybody.

For those people living in rural areas, the smells associated with hogs, cows, etc. can be a nuisance.  Usually most people grin and bear it, however, there are many times when they try to do something about it.

The High Plains Midwest Ag Journal recently reported on a civil trial filed in Kansas City regarding the hog odors from a large commercial hog operation about 80 miles north of Kansas City.  This operation usually contains about 80,000 head of hogs and encompasses over 2,000 acres.  Fourteen rural neighbors had already received $100,000 apiece from a 1999 lawsuit, however, they have taken Premium Standard Farms back to court arguing that these payments are not enough to compensate them for the continuing odors.

The company argues that they are not suffering “substantial impairment” from the odors.  They agree that hogs stink, but it does not meet the qualifications of a nuisance under the law.

Kansas City attorney Charlie Speer has won over $10 million from Premium Standard and its affiliates since 1999 on these types of cases.  In 2009, he indicated a lawsuit that was settled for $1.2 million will “set the bar” for future cases.

PSF attorneys contend these lawsuits are driven only by money and are causing damage to the local ag economy.

I believe that both sides have some merit to their cases.  These smells can be overpowering when you have that many animals in a small area, however, most people living in farm country usually know this when they move there.  I think, however, that these large operators sometimes believe it is cheaper to just settle the lawsuits than to try to fix the problem which can cost substantially more.

There are many issues surrounding these investments in third word farming enterprises.  Although it may provide jobs for these people, it also is disturbing the economic and social structure of these societies.  It appears that with Africa being more than three times larger than the US and with lots of good farmland that has never been aggressively farmed, that this may be last land available to be developed on a large scale basis.

In the first half of 2009, more than $2 billion was raised to invest in farmland, according to Agcapita, a Calgary based ag fund.  A lot of this money will be invested into Kenya, Sudan, Tanzania and Ethiopia.  In June, 2009, the first annual Global AgInvesting was held which brought together these fund managers and investors looking to invest in farmland.

Although $2 billion sounds like a lot of money, it would only purchase about 400,000 acres of land in Iowa at $5,000 per acre.  This would be equal a county with about 625 square miles.

I personally think that we will see more of these investments over the next several years as we continue to add world population.  We have been the most technologically advanced farming country in the world, but these technologies change quickly and Africa can catch up.  However, it may take several decades.

Please read the article and let me know what you think of the issues raised.

In the last few days, it has become apparent that I was not setting up the comments section for my postings.  In most cases, this probably means that you were either unable to make a comment or could not find where to comment or it was just too confusing to post a comment.

I believe that I have fixed this since I am now getting some comments.  I want to stress that I really like getting your comments since they help me decide what you as my readers feels is important or worthwhile to this site.

Please leave as many as you can or want.