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.

 Our CPA firm deals with many newly formed businesses each year.  When two or more people get together to form a business, it is almost like a boyfriend and girlfriend getting together for the first time.  They are usually fairly giddy with excitement over the new venture and look forward to the business being there forever.  However, like many human relationships, many of these unions will end in divorce and it can be painful.

I like to remind my clients that they need to be extremely diligent in building in a rip cord in case the business does not work out.  Just as in parachuting for the first time, the rip cord is designed to get you to the ground safely when things do not always work out.

In your business agreement, you need to make sure to document what will happen in the following situations:

• What happens if one of the partners becomes disabled or dies?  Will you use life insurance to take care of these situations?
• What happens if one or more of the partners goes bankrupt?
• What happens if one of the partners decides to leave the business?  Are the remaining partners required to purchase the interest?  If so, what is the price and terms and how is it determined?  What if the parties can not agree on the price, how is that resolved?
• What type of restrictions are built in to the transfer of interests?  If not handled correctly, you may end up new partner that you did not know about or want.

These are just some of  the issues that need to be built into the “rip cord” wording to make sure that it works.  Remember, in these situations it is almost always better to design the rip cord up front than to try to come up with the right one when it is too late.

Marcia Taylor with DTN/The Progressive Farmer had a great post recently on the elimination of crop insurance under the Group Risk Income Protection (GRIP) and Group Risk Program (GRP) in over 1,000 counties across the US.  The primary reason for eliminating these counties were due to not reporting at least 30 yield reports or 25% of the acres for the county.  The USDA requires at least this amount of data in order to provide the insurance coverage.

Also, of the 1,062 counties that lost these insurance programs, only 310 counties were actually buying these types of insurance policies.  It appears that most of the counties affected were located in the South, Great Plains and Eastern part of the US.  Most the Mid West corn belt was not affected.  The decision eliminates this coverage for corn, soybean, grain sorghum, cotton and peanut producers.

Farmers in Lawrence County, Alabama say their maximum insurance yield reduced from 135 bushels per acre to only 60.  This insurance can be expensive.  GRIP with a harvest-price option cost $90 per acre as mentioned in the article, however, the return has been as high as $415 in 2007 and $222 in 2008 per acre for this particular county.  Payouts were as high as $614 per acre in Baca County, Colorado in 2008 largely due to the steep decline in corn prices.

However, these farmers need to realize they need to report their yields and if they do a good job of this, then the coverage will be available again.  The trends over time have shown that this coverage returns about $1.78 for every $1.00 of premium. 

GRIP has offered some of these growers superior coverage levels.  This coverage is no longer available and it may cost the farmers substantial losses to their bottom line.

Mike Walsten from the “Your Precious Land” has posted recently that farmland sold at auctions are still enjoying high prices.

Mike also was interviewed on Ag Day last week and one of his interesting comments related to the trend of farmers in the metro Chicago area.  When pricing for development land was very high during the mid 2000’s, these farmers were able to sell their farm land for upwards of $15,000 an acre and then reinvest it tax-deferred under Section 1031 of the Internal Revenue Code.  They mostly reinvested in three or four times the land located in more rural areas.

Now, with the drying up of development potential, many of these farmers are now going back to the people they sold their land to for maybe $20,000 an acre and re-purchasing it for $5,000 to $7,500.  I think you will see this trend continue for a couple of more years.  Then, when the development trend starts again (and based upon a growing population, it will start again sometime), these same farmers might be able to sell the land for $20,000 an acre or more again.

It seems like some of the best investors over the last decade have been our farmers.  It has been a long-time since we could say that.

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.

Crop insurance has been available to farmers for many years.  Until recent years most of this insurance was based upon Actual Production History (APH).  Insurance products based upon Crop Revenue Insurance (CRI) have been introduced to enhance and/or replace APH.

Marcia Taylor of DTN/Progressive farmer had a good blog on how one farmer in Ohio is utilizing Crop Revenue Insurance as part of his risk management strategy.   One interesting paragraph stated that on a nationwide basis, CRI is now insuring about $33 billion of potential corn losses versus $4.3 billion for APH.   If total corn production is 12 billion bushels at an average of $3.50 per bushel, approximately 89% of the total US corn production is covered by crop insurance.

There are many reasons for this.  I think the primary reason is that CRI allows the farmer to lock in a guaranteed revenue level per acre on a much more consistent and predicable basis than APH.  The Iowa State University has several Ag Decision Maker articles on how all of these programs work.

I think that all farmers should carefully review these available crop insurance options and work with your financial advisor, banker and insurance agent to determine which is best for you.  At a minimum , you should make sure to lock in your input costs .  Also, most bankers are going to require this to obtain an operating loan or renew one.

Many farmers do a good job of benchmarking their operations to other operations in the same state of region.  By doing this benchmarking, they are able to see where they are either behind or ahead of other farmers.  Some get discouraged trying to get out of the middle range into the top 20%.  Most think that it is too hard to get there.

What I would like farmers to key in on is what I call the 5 + 5 + 5 = Home Run concept.  This is obtained by doing the following:

• Increasing yields by 5%,
• Increasing the price received for your crop by 5%, and
• Decreasing total costs by 5%.

Lets see how these objectives would apply on a typical farm. 

Lets assume that the average corn yield is 150 bushels with average price of $3.50 per bushel and the farmer has total costs of $2.50 per bushel.  His current net income is equal to 150 bushels times his net margin of $1 equals $150 per acre.

If we increase the yield by 5% to 157.50 bushels, the price to $3.675 per bushel and decrease costs from $375 per acre to $356.25 per acre his total return per acre will equal 157.50 times 3.675 or $578.81 per acre of revenue less $356.25 equals net return of $222.56.  By doing these 5 + 5 + 5 adjustments, the return goes from $150 per acre to $223 per acre or an increase of $73.  This equates to an almost 50% increase in profits.

As you can see, it does not take a large change in the three major production centers to yield a large increase in net income.  I suggest you review your numbers and set these 5% targets and even if you only hit 2 of them, you will be many dollars ahead.  Good luck.

Bruce Babcock, an economist at Iowa State University, recently prepared an extensive report on competition in the crop insurance industry.  With all of this year’s crop delays in getting corn and beans harvested this fall, you may get to know your crop insurance agent better in the next couple of months.  You are probably hoping that the crop insurance company can pay any claim that you may have for harvest losses.

It appears that competition is disappearing in this industry with the continuing purchases of insurance companies by other crop insurance companies.  Bruce wanted to find out if they were making money.  Since 2000, the Risk Management Agency of the USDA calculated that these companies earned an average return on equity of 19%.  The RMA concluded that a more reasonable number should have been about 11%.  Of course the industry does not agree with these conclusions.

Based upon the RMA analysis, their conclusion is that the US taxpayers have paid excessive compensation to the industry totaling at least $1.165 billion for 2008.  This indicates that the premiums paid by farmers could be reduced by at least a billion dollars and the industry would still be in good shape.  Congress could reduce these premiums by an average of about $400 per year and save the taxpayers about $500 annually.  However, these agents also pay taxes and vote, so the chance of this happening may be very low per Bruce.

What might be more helpful to review is the average amount of compensation that an agent receives for selling a crop policy.  This amount has increased from about $400 in 2000 to almost $1,500 last year which almost a four fold increase.  A profitable crop insurance company has found a good way to increase business is to compete for a crop insurance agent’s book of business by offering higher premiums.  You can see the result in average premium paid during this period.

In summary, although crop insurance agents and companies will be doing a lot more work this fall, they will get paid for it.

Farmers are enjoying fairly low short-term and long-term rates right now (that is assuming you can borrow the money).  With the government continuing to pump large amounts of liquidity and stimulus into the economy, it is very difficult to predict that these lower rates will continue to last much longer.

Much like, fertilizer, fuel and seed, interest costs is another input cost that you can hedge or lock in.  I believe that these lower rates will continue for awhile longer, however, I would not be comfortable going out too far into the future with this projection.  I would certainly be looking at converting variable rates to fixed rates, paying down your most current debt with highest rates as soon as possible.  You also may be able to hedge on the futures markets by selling short long-term bonds, etc. to lock in lower rates.

Bob Utterback of the Farm Journal in their November issue had a very good article on this subject.  I would take a look at it and try to implement these strategies into your operation where it might make sense.

Several of my farm clients have called me and asked whether receiving a crop insurance payment this year is taxable in 2009 or 2010.  I commonly tell them the answer is yes.  It may be taxable in 2009 or 2010 depending on what type of crop insurance it is and other matters.

In general, if you receive any crop insurance, the proceeds are taxable in the year that you receive them.  However, you can postpone reporting the proceeds to the following year if you meet all of the following conditions:

a.  You use the cash method of accounting for your farm.

b.  You receive the crop insurance proceeds in the same year the crops are damaged.

c.  You can show that under normal business practice you would have included income from the damaged crops in any tax year for the year the damaged occurred.

In brief, if you are a cash basis farmer and you usually sell all or most of your crops in the year after harvest, you should be able to defer the crop insurance proceeds into the next year.  However, if your history is to sell the crops at harvest time or by the end of the year of harvest, then you will not be able to defer the proceeds. 

In order to defer the proceeds, you must actually incur destruction of or damage to the crops.  Agreements with insurance companies that provide for payments based upon a minimum revenue per acre without regards to actual crop losses do not qualify for the deferral.

Some farmers received payments under the Crop Revenue Coverage (CRC) purchased from federal Crop Insurance Corporation.  These payments are based upon price as well as quantity and quality of the crop.  Only the payment for destruction or damage (yield loss) is eligible for deferral.  A farmer receiving these payments would need to calculate the portion related to the crop damage and this would be eligible for deferral.  The remaining part of the payment would need to be reported in the year of receipt.

The University of Minnesota has a very good article regarding how to calculate this and other matters related to the taxation of crop insurance proceeds.  Their article is located here.