Several of the farm equipment manufacturers that are publicly traded have recently posted their third quarter earnings.  In most cases, these earnings were down from last year’s third quarter and in some cases, the amount was down substantially.

Agco’s net income was down about 90 percent.  The company blamed their earnings short fall on two main items:

1.  Lower commodity prices, and

2. Tight credit

The company indicated softening demand in North America and Europe, weakness in Russia and Eastern Europe and stabilizing demand in South America.  Agco makes equipment under the Massey Ferguson, Challenger, Fendt and Vaitra brand names.  Sales were down almost 33 percent, therefore a reduction in net income of about 90% was actually better than most analysts expected.

More numbers are available here.

Lindsay, the maker of irrigation systems indicated that their profit for the quarter dropped 81 percent on a 50 percent drop in sales.  Both earnings and sales were substantially less than what the analysts expected.  Rick Parod, the company’s CEO said farmers continued to remain cautious about making investments in capital goods.

Further information can be found here.

I will try to update more of these publicly traded companies each quarter as their earnings comes out.  You can obtain good trend information from reading their quarterly reports or analysis.

As a tax advisor, I would normally tell my farm clients to always do a like-kind exchange on their farm equipment.  This would normally result in trading-in an older piece of equipment for a newer one of higher value to defer the tax on the old farm equipment.

However, for 2009, there are many cases where this may not be a good idea.  The recent tax law extended the Section 179 deduction for equipment to $125,000 for 2009.  Therefore, if your total equipment purchases for 2009 will be less than $125,000, I would suggest making sure that non of your equipment that you want to trade in qualifies for the like-kind exchange rules and thus, they will be taxable sales.

Most farmers are probably asking why would we ever want to report a gain-on-sale by selling equipment.  The reason is that the gain on sale from selling equipment is not subject to self-employment taxes and the Section 179 deduction on your farm equipment will reduce your self-employment taxes.  Thus, reporting gain on sale of equipment can result in a tax savings of about 15% on the sale of your equipment.

As an example, say you have an old combine worth $50,000 that you have depreciated to zero.  You want to buy a newer combine for $125,000.  If you traded in this combine, you would be able to take section 179 on the net difference of $75,000.  This would reduce your taxable and self-employment income by $75,000.  However, if you sell the combine for $50,000, you would report a gain of $50,000 which is not subject to self-employment tax and you would be able to deduct the entire combine purchase price of $125,000 which would reduce your self-employment income.  The net result is a potential tax savings of about $11,000 under this scenario.  This assumes you are not over the taxable wage base.

If you have equipment needs this year, please review them with your tax advisor to make sure you take advantage of these rules if they apply to you.

With the ever increasing cost of new and used farm machinery, it may pay for farmers to enter into joint ownership of certain farm machinery.  Probably the best type of machinery to have in joint ownership would be combines, sprayers and drills.  This type of equipment is usually only used at certain times of the year unlike tractors and trucks which can be used year round and would be more difficult to own and operate jointly.

The Iowa State University Extension Department has a very good article on how to structure these joint operations.  Even if the ownership percentages are different from the acres that are farmed, the accounting for these differences can be done effeciently and timely.

For example, in the case of combine joint ownership, I believe that you should perform an analysis of the total number of hours that a combine should operate each year to get the best rate of fixed cost amortization.  If you determine that this number is about 300 hours and you can average 10 acres per hour, this would result in the optimum acres of 3,000.  You would try to find another partner or partners to get a total of 3,000 acres.  This would allow you to minimize your fixed costs in operating a combine. 

If you farmed 1,000 acres of beans and corn and owned a combine costing $150,000 for five years and then sold it for $50,000 after the five years, you cost of ownership of this machine is $20,000 per year.  If you can find another farmer that has 2,000 acres, you would reduce your annual ownership cost from $20,000 by 2/3 to $6,667 or a savings over five years of about $67,000.  Also, the other farmer may be able to provide additional services such as repair experience, trucks, dump out wagons, etc. that you do not have now.

Other factors need to be reviewed such as how close and compatible your farm partner(s) are.  The age of the machinery, the amount of other equipment to support the jointly-owned machinery and who would operate and maintain the equipment.

(Warning – this post does not have anything on farming)

My wife and I attended the World SuperBike races in Tooele, Utah this weekend.  I currently ride a BMW K 1200 S similar to the photo posted here.  I grew up riding small dirt bikes and had not been on a sports bike for about 25 years.  About three years ago some of my friends rented Harleys for a four day trip to the Canadian Rockies and I was hooked.

I was able to attend the bike races as a guest of the local BMW motorcycle dealership and what a great time we had.  My bike has about 1,200 cc and almost 165 hp.  The racing bikes are about 1,000 cc and well over 200 hp.  Our view point was right on the final turn before they hit the straight away.  We would see them take a full S curve at about 100 mph and then hit a top speed of almost 195 mph on the straight away.  Since we were at about 5,000′ of elevation, the top speed was close to 20 mph slower than at sea level.

There were about 8 crashes in the three races and most of them happened in the corners at about 100 mph.  It is impressive to see these bikers crash, slid and then walk away with no injuries.  A rider from Texas won both of the SuperBike races (there were only 2 american bikers out of about 45 totals racers).  The Europeans and Asians really dominate these events normally.

Altough this is not about farming, this is one of my favorite pastimes and wanted to share it with you.  I would highly recommend attending this event if you ever can.

On a recent episode of Agday, there was a small feature on a product from Reichhardt called a minibatt.  This is a very small hand-held portable combine that allows the farmer to harvest a small amount of grain and get a very quick reading on moisture levels of the crop.  

I know growing on our farm, it was a royal pain to get a sample and take it to the elevator to get a moisture reading.  If you have farms spread out all over the county or counties, then you could pay for this machine in a very short time.  Getting your combine into the right field at the right time will is one of the fastest ways to improve the bottom line.

Remember the bottom line is more important than the top line.