I was talking with a new farm client the other day about his estate plan and what struck me the most was not how much farm land value he had accumulated but rather the amount he had tucked away into his retirement plans. This amount was over 6 figures and he had only been contributing for a little more than a decade.

His annual contributions were in the $50,000 range and with a little bit of compounding a tidy sum can result. One of the benefits that arises is the flexibility in your estate planning. This can be a good vehicle to fund charitable intents at death or can be used to help equalize values between farm and non-farm heirs. One drawback is that these funds are subject to income tax when the heirs withdraw them.

We see too many farmers that are land rich and cash poor and with some some care these pension contributions can  save you income taxes and make you more liquid.

Paul Neiffer, CPA

My friend Chris Barron and I were discussing how delayed planting of corn this spring may affect farmer’s net profit margins.  A reduction in yield and/or price can have a dramatic affect on overall profit margins since most of a farmer’s costs are what we call fixed.  Cash rent, the seed that is in ground, the fertilizer that has been applied, etc. although normally viewed as a variable cost, once you plant the crop, these costs are now “fixed”.

During very good years such as 2011 and most likely 2012 assuming adequate crop insurance, farmers obtain the benefits of these fixed costs.  Unlike variable costs that increase with revenues, these costs remain fairly constant, with each resulting dollar increase in revenues due to higher prices or yields drops mostly to the bottom line.

However, this year may be a completely different situation.  We are facing much lower prices this year than last, although if you locked in spring prices with 85% crop insurance levels, you most likely guaranteed yourself a minimum of $5 per bushel for corn and about $10.50 for beans.  However, the last few years with high prices have also resulted in what I call inverse basis for many farmers.  Unlike normal years when the farmer may receive 50 cents less than futures prices, the last couple of years many farmers have received higher than futures price.  This year if the carryover ends up closer to 2 million bushels than the current carryover, we will probably see basis levels return to more normal levels.  In that case, your guaranteed corn price of $5 may be closer to $4.5 or lower.

As the planting date gets delayed beyond May 15, yield loss may be in excess of 1% per DAY.  On 200 bushel corn, this is 2 bushels a day per acre or at least $10 per acre per day.  A week costs you $70 and two weeks might cost your $140 per acre.

Let’s assume a corn farmer with 180 bushel yields projects revenues of $1,000 and costs of $800 for 2013.  This assumes that the farmer will receive a net $5.50 per bushel.  Instead of planting at the end of April, he does not get his corn into the ground until May 25.  This results in a 12% reduction in yields to 158 bushels and instead of getting an $5,50 average for his corn, basis goes against him and he ends up netting $4.75.  This results in total revenues of $750 with an average loss of $50 per acre.  Whereas in 2012, this same farmer may have ended up netting close to $300 or more per acre, this year, he may face a loss of $50 or more.

Have you run an analysis on your operation to see how a delayed planting may affect your margins. 

Paul Neiffer, CPA

We get this question from farmers approaching retirement age a lot:

“I have had very low income for most of my career and should I try to maximize my income as I approach retirement to increase my social security benefits”

Chris Hesse, who is one of my partners at CliftonLarsonAllen, LLP had provided me with an Excel spreadsheet that can calculate this answer fairly quickly.  It is based on the method that Social Security uses to determine your retirement benefits and the key issue for our farmer is what your average indexed monthly income has been during your career.

Social security benefits are calculated based upon the average of your highest 35 years of earnings indexed for inflation.  For example, the maximum wage that you could use for 2012 was $110,100.  In 1975 the maximum wage was $14,100, however the inflation index for that year was 4.98 so the equivalent 2012 number is about $70,200.  Therefore, you input all of your wages during your career and the computer then indexes them based on inflation.  It then takes the top 35 years and divides by 420 (35 years times 12).  This results in a very important number known as the Average Monthly Indexed Earnings (AMIE). 

The AMIE is then divided into three tiers.  The first tier (currently about $800) is valued at 90%.  The next tier (the next approximately $4,000) is valued at 32% and the remaining tier is valued at 15%.  Each of these tiers is then multiplied by these percentages and the cumulative result is your estimated monthly retirement benefit when you retire. 

Assuming a farmer has paid in the maximum amount for at least 35 years, the estimated monthly social security benefit at full retirement is slightly more than $2,500 per month.  However, the interesting part is how these tiers break down.

Tier 1 has a value of $712, Tier 2 $1,273 and Tier 3 is $565.  Tier 3 monthly earnings amount is calculated at about $3,800 which is almost 5 times higher than Tier 1, but the value of Tier 3 is about 20% lower than Tier 1.

The first step for our farmer is to maximize their Tier 1 AMIE amount.   If your average annual earnings have been less than about $10,000 indexed for inflation, then reporting greater farm earnings will dramatically increase your social secuity benefits.  For example. if a farmer during his career reported an average of $5,000 per year (in 2013 numbers), his current expected Social Security benefit is about $374 per month.  If over the next couple of years, he reports an extra $157,000 or so of earnings (does not need to be in one year), his monthly benefit will jump to about $712.  The extra social security cost will be about $24,000, but in return he will receive a lifetime annuity indexed for inflation paying $338 per month.  A simple calculation shows that he would fully recover his investment in about 6 years.

In our example, we are only trying to get up to the Tier 1 amount of about $800 per month.  As you go over Tier 1 into Tier 2, your return on investment drops dramatically.  Tier 1 has a 90% value, whereas Tier 2 only has a 32% value, therefore, as you enter Tier 2, instead of a 6 year payback, it becomes a 18 year payback.  Tier 3 amounts are even worse.  At that point, your payback period is in excess of 30 years.

In conclusion, if your earnings are still in Tier 1, it would definitely pay to pay in extra FICA tax to maximize your social security earnings.

Paul Neiffer, CPA

The Employee FICA tax rate for 2011 and 2012 had been cut from the normal 6.2% to 4.2%.  This provision was set to expire at the end of this year and then revert back to the normal rate beginning January 1, 2013.

Allowing this cut to expire in 2013 seemed like a reasonable position several months ago, however, the tepid economy has Congress discussing extending the cut or coming up with an alternative.

This cut costs about $115 billion in revenue each year to the government, however, if it is not extended, it drains this amount out of worker’s pockets and some economists predict that this will reduce economic growth by about .6% next year.

House Republican leaders are opposed to extending the cut and coming up with an effective alternative such as a credit has not shown any progress.  A credit sounds good in theory, however, it prevents giving a immediate shot to the consumer since they would have to wait to file their tax return to receive the credit.

Others want to use this cut as a bridge to income tax reform, however, in my experience Congress does not build very good bridges, whether for tax reform or roads.

Paul Neiffer, CPA

While perusing the Admission Document (similar to our initial public offering document and yes; CPAs do like to read these documents for fun) for Continental Farmers Group, PLC, I noticed that the company farms about 52,000 acres (20,840 hectares) in Western Ukraine.  These 52,000 acres are covered by almost 17,000 individual leases (about 3 acres per lease).  In order to keep track of and document these leases requires 5 full time employees.

The yields for the company compared very favorably to yields in the US.  For example, their wheat yields were as high as 80 bushels per acre in the Ukraine in 2008 and an impressive 120 plus bushels per acre on their Poland holdings in 2008.  The lowest yield they had in the last three years in Poland (for 2008 to 2010) was still almost 100 bushels per acre.

Potatoes in the Ukraine averaged about 15 tons per acre and sugar beet yields were in the 20-25 ton per acre range.  Some of the best “black earth” is in the Ukraine and about 95% of the country is considered flat.

Revenues grew from about $10 million in 2008 to over $30 million  in 2010 with profits of almost $5 million in 2010.

I know of some farmers who have upwards of 25 landlords but the idea of having almost 1,000 times that amounts would be a very daunting task in the US.  I think we will continue to see more companies like Continental Farmers Group going into Ukraine and other countries to bring more up to date farming practices to bear.  The efficiencies may have a dramatic effect on overall yields in these countries.  The world is getting flatter and they will continue to catch up to the US farmer.

The Federal Reserve Bank of Kansas City just published their National Trends in Farm Lending for the second quarter of this year.

Due to the increase in input costs, operating loan levels have increased dramatically from the second quarter of 2010, up nearly 36%.  The number of livestock loans dropped slightly from the year before, however, the average loan amount almost doubled, pushing the volume of livestock loans more than 25% higher.

Capital spending on the farm for machinery and equipment seems to have cooled during this quarter.  Loan volumes for farm machinery and equipment plunged from a first quarter spike and were 36% below the year-ago levels.  I have a feeling that the 50%/100% bonus depreciation enacted late last year has soaked up a lot of the demand for new equipment and these types of sales may remain low until year-end.

The average borrowing rate on operating loans fell from 5.3% to 4.7%, however, the rate for equipment loans did incur a slight uptick to almost 5.4%.

With the late harvest in Ohio and other areas affected by all of the heavy rain and bad planting weather, many farmers face crucial decisions on what crops to plant.  Should they take a risk on planting corn, switch to soybeans or collect insurance on prevented-planting acreage.

You can check out these tools to help you in that decision.  Ohio State University has a spreadsheet to help you with your decision and the Iowa State University has an article comparing likely receipts from late-planted crops versus cash from receiving prevented-planting insurance.

Since the June crop report came out, wheat has rallied over a $1 per bushel, corn is up about 50 cents and soybeans have rallied also.  Now, it appears that the world wheat supply is looking at drought issues around the world (except for our hemisphere it seems) and this is continuing to help wheat prices rally.

Although I am not a marketing expert, as a CPA, it is always good to review your farm budget for the year and I believe that for most of our farmers, especially wheat farmers, your estimated crop price is less than what the market it now.  Therefore, you should review with your marketing expert what options you have right now such as taking advantage of forward hedging, buying a call, etc.

I remember when I was in my teens and wheat prices had rallied about a $1,50 and I was talking with my uncle.  He had not sold any of his crop yet and the market price was very near a round number such as $6.00 a bushel.  He told me he was going to sell when it hit that number.  As you can guess, it never got to that number and he rode the price decrease all the way down to the very low of the market when he sold.

Make sure this does not happen to you this year.

The large health care act passed earlier this year had an up to 35% credit available to farmers who paid for health insurance for their employees.  The credit is based upon the percentage amount of health insurance that a farmer pays times 35%.  As long as you pay at least 50% of the premiums for your employees, then the credit is based upon the amount paid times 35%.

However, there is a cap on how much premium that you can use.  This cap is based upon the average premium for small group markets for each state.  The IRS just published revenue ruling 2010-13 that outlines what this cap amount is for each state.   The cap is based either on employee-only coverage or family coverage.  I will give you an example of how this cap might work for you as a farmer:

Suppose you have two employees.  One is single and one is married with kids.  Assume that you pay 80% of the medical insurance for each employee.  Also, assume you are a farmer in Iowa.

Lets calculate the maximum amount of the credit by assumimg that the cost of this premium is $500 per month for the employee and $950 per month for the family.  The credit that you could take is 80% of the premium times 35% for the year.  This would equal $500*12*.8*.35 or $1,680 for the single employee and $950*12*.8*.35  or $3,192 for the family employee or a total credit of $4,872.

Now, we need to determine how much of this credit is allowed by comparing it to the small group market tables from the IRS.  For the single employee, the maximum credit allowed for Iowa for a year is $4,652.  Since the farmer only paid 80% of the premium, this would equal a total allowed amount of $3,721.60 times 35% equals $1,302.56 maximum credit allowed for a single employee.  For the family employee, the state of Iowa maximum annual amount is $10,503 times 80% times 35% equals $2,940.84.  These two amounts added to together results in a maximum credit allowed of $4,243.40. 

Our original calculation resulted in a credit of $4,872.  The IRS only allows $4,243.40 based upon the small group market tables, so the actual credit you would use on your tax return is the $4,243.40.

A quick way of determining whether you need to worry about this is to look at your premium on a monthly basis and compare it to the table amount (after dividing by 12 to make a monthly comparison).  If your premium is less than the table amount, you can ignore it on the tax return, however, if your premium is greater than the table amount, you will need to limit your credit based on this calculation.

Of the 2,401 Minnesota farms included in the “FINBIN” survey for 2009, the median farm saw a 63% decrease in net income from $91,242 to $33,417.  Each year, the Center for Farm Financial Management performs a survey of Minnesota farmers.  Their response for 2009 represented about 3% of overall farms and about 10% of the farms with total sales over $100,000.

A summary of the results for 2009 show the following:

• Median farm income peaked in 2007 at about $105 thousand and have declined in two years to about $33 thousand.   The 2009 numbers are also the worst net income for any year in this decade other than 2001 when the median net income was about $24 thousand.
• Incomes were down substantially for virtually every type and size of farm.
• Livestock farms of all types, on average, did not provide enough income to support family living expenses.
• While crop farms were more profitable than livestock farms, the median earnings of crop farms dropped 55% to about $60 thousand.
• Dairy farm profits were down substantially falling to an average of about $5 thousand per farm.  The average price for milk dropped from about $19 to $13 in one year.
• Hog farms eked out a small profit as their income dropped about 87%.
• The average return on assets dropped from 10.5% in 2008 to 3.1% in 2009
• The average farm’s net worth increased by about $60,000, however, almost all of this increase was due to increasing land prices and not earned net worth growth.
• The average farm spent $52,000 on living expenses and needed to generate $72,000 from farm and non-farm income to cover family living, income taxes and other ongoing non-farm expenses.