I have been in Omaha all week on business and have not had much time to write a post or two.  Most of the corn is planted here and for all week it has been raining on and off.  This will help get the corn up, but may delay the bean planting.

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.

I received two excellent comments on my post from Monday of this week regarding the cost to some farm families of not having an estate tax for this year.  The comments had additional information which is all applicable for this year.  The main intent of my post was to let farm families know that without proper planning, an estate in 2010 can cost your farm operation a large amount of current or future taxes.

Also, the key problem with the 2010 estate law is that effective January 1, 2011, it reverts back to the law in effect in 2001.  This means that all estates larger than $1,000,000 will be subject to federal estate taxes.  A quarter section of good farmland can exceed this amount alone.  Congress needs to take action and soon to correct this, or thousands of farm families will be much worse off on January 1, 2011 than they were on January 1, 2009 or 2010.

I will keep you posted and keep sending me the comments.

The Federal Reserve Bank of Kansas City puts out a quarterly review of credit conditions in their region.  This region covers Kansas, Missouri, Nebraska, Oklahoma and most of the Mountain States.  I try to give you a recap when it comes out since the information is both timely and interesting.

The most recent report for the fourth quarter of 2009 showed that average farm values in the region were up about 3% over the same time in 2008.  Kansas, Missouri and Oklahoma showed more than a 3% increase, while Nebraska was only marginally higher and the Mountain States actually showed a price decrease.  This decrease was primarily due to the larger concentration of livestock operations in these states which have not fared well over the last few years.

The bank indicated the strength was due to two primary reasons:

• Rising farm income due to both stronger prices at year-end and higher yields, and
• Small supply of farmland available for sale

For the farmland that did sell, more of this went to other farmers rather than investors.  Residential development is almost at a standstill right now and the recession has put a crimp on people being able to buy farmland for recreational purposes.  Also, the bankers noted that more farmland was purchased for cash during the quarter.

Many of the bankers expect farmers to purchase more capital equipment during 2010 than in 2009.  Livestock prices did move higher during the quarter, but they remain slightly under break even levels.

With the price decreases in January, 2010, it will be interesting to see what the next report brings.

Agriculture Online has a good quick article on whether farmers will reduce their production levels in 2010 due to the large crop that was grown in 2009.  Corn has rallied about a $1 since early September and soybeans have gone up about $2. 

However, the government report on Tuesday led to limit down price moves in corn.  Surprisingly to the author, farmers seem to be upbeat this time of year compared to previous years.  It seems that the fundamentals of the world grain market may have changed to promote high levels of production since the demand is now starting to keep up with these levels of production.

I think you need to make sure not to rely on this, but rather, make sure you have marketed enough of your 2010 production to cover your input costs.  At these price levels, you should be able to still get good pricing to cover them.

 The idea for this blog was a glimmer in my mind at the end of 2008.  While surfing on the web, I found the Golden Practices web-site that listed different industry specific blogs.  This spurred me to action and with their help, we had a fully up and running blog site in the first quarter of this year.  Some of the experiences and reflections that I have for 2009 are:

• 1.  Our readers are a very geographically diverse group.  I expected to have most of my readers from the corn belt of the US, while this is true, we seem to have many readers from India, Australia, Canada, Europe and all over the globe.  I assume most of them read English and I hope they have learned a lot about US farming.

2.  Altough I am a CPA by trade, I grew up on a farm and farmers are business people first, and taxes and finance and accounting is just part of the equation.  I have tried to balance my posts with operations, marketing, accounting, taxes and trends. 

3.  I believe that the mega trends are and will continue to support farming as a great business going forward.  All of the world has to eat and this requires farm.  Horse and carriage was replaced by cars which may be replaced by some other form of transportation a 100 years from now, but we will still be farming at that time.  China and India other growing countries will demand better food with more protein as they mature.  Our American farmers will be there to provide a lot of this food.

4.  I have set an ambitious goal for myself to get some type of online “Farmers Tax Guide” up and running by the end of 2010.  I have several parts of it done, but to be fully operational and run the way I want it to may require programming skills that I do not currently have.  Also, with tax season for me rapidly approaching, not much will get done between now and April 15.

5.  The best thing about this blog are the wonderful people that I have met or communicated with that are doing similar blogs.   A couple that you should check out at “The Exuberant Accountant“, “The Roth & Company Tax Update Blog“, and “Legacy by Design“.  You can not go wrong by checking these sites out.

6.  I thought I would get more comments on the postings and for several months, I did not get any at all.  Recently, I have started to get more comments and e-mails and I really appreciate the feedback.

7.  I also enjoyed trying to work up “White Papers” or “Tax Bulletins” on subjects that my readers have questions on.  I have already done several of these and I am planning on putting them in a little better format and posting them to the site early in 2010.

Last, but not least, we want to wish everybody a prosperous New Year in 2010 and we look forward to seeing what the year brings.

Most of the wind turbines located in the United States are probably located on farm land or near farm land.  DTN – The Progressive Farmer just posted a recent article on “living in the shadow of wind generators”. 

This posting had several points regarding putting wind turbines on your land.  Some of the key thoughts were:

• It may be a good idea to have legal advice, especially if the attorney has experience in this area.  Many of these leases last for over 20 or 30 years and if you do not address both the near-term and far-term issues in the lease, it may be impossible to fix after the lease is signed.  Remember that a good lease will spell out both the good things, such as the rent income to be paid to the farmer, and the bad things, such as how is land maintained during and after construction.
• Make sure to address how construction will be handled.  Most of the roads that are put in for construction are 40′ wide and after construction, they are reduced to about 15′.  How the contractor takes care of that extra 25′ will determine how good the farmland becomes again.  Remember, if there is massive compaction or the roads are not terraced property, this may negatively effect your farm for many years.
• Wind energy does not appear to be a fad.  It is already producing enough power for over 7 million homes.  Most of the issue with wind energy is the total variability of when the wind blows which effects how well the energy is moved through the electric grid.  However, with the low price of natural gas, many wind farms are now combining wind farms with natural gas generators that will kick in when the wind dies.  This can make the wind farms even more efficient.
• If you lease the farm land, you maintain your rights versus giving an easement to the wind farm.  Know your rights on this subject.
• The rent income can in many cases far exceed the income that you can generate off of the farm.  For example, in the article, each wind turbine generates $5,400 of rental income per year with a 1% inflation increase.  If a wind machine takes up 10 acres, that is net rental income of about $540 per acre.  Believe me, most farms in the mid-west would love to net $540 per acre on any crop.  Also, some companies will pay both a fixed annual rental plus a percentage of the energy produced.  Make sure to determine what the correct market rate is for your area.
• Wind companies want to be good neighbors since they know that good public relations and working relationships will allow them to keep operating.
• Wind turbines need maintenance.  If you think once the machine is up and running, you will never see a maintenance worker again, you are wrong.  Most wind farms have some number of full-time employees that manage and maintain the wind turbines and towers.  They will be using these roads on a daily basis.  They will become your neighbors.   Make sure the are good neighbors, not bad ones.

In the US Tax Court decision - Paul D. Garnett and Alicia Garnett v. Commissioner – rendered in June of this year, the court ruled that farmers who hold business interests in limited liability companies (LLC) and limited liability partnerships (LLP) are not passive investors.  This is a great victory for many farmers and entrepreneurs that own various farm and business interests.

Background

The popularity of the LLC and LLP have increased greatly in recent years.  For almost all of our farm clients, we recommend that the ownership of the land be held in a LLC or LLP.  These entities give you the legal protection of a corporation without the double tax of a C corporation or the extra potential liquidation tax of a S corporation.

This means that if the LLC is sued for business debts, the risk is to the assets of the LLC, not the home or other assets held by the members of the LLC.

The IRS has argued that the passive activity limitations automatically apply to these types of investments.  If the business activity is classified as passive, then you can only offset passive losses against other passive income.  Any excess is carried forward and can not be used to offset wage or business income.

The IRS has various tests to determine if your operation is passive or not.  Most rental real estate and limited partnership interests are presumed to be passive.

Facts of the new case:

A farm couple located in Nebraska owned either directly or indirectly seven limited liability partnerships, two limited liability companies and two tenancies in common.  These entities were involved in the production of poultry, eggs and hogs and it appears the farm was located in Iowa.  Under the LLC agreements, all partners were treated as active participants in the farm operations, however, the LLC agreement limited these responsibilities to a general manager.  All of the LLP and LLC were registered and operated under Iowa state law.

The couple claimed over $300,000 of losses from these operations.  The IRS disallowed the losses by claiming they were passive losses since the members were considered to be limited partners.

However, the Tax Court overruled the IRS.  The court stated that the limited partners in a limited partnership are considered to be passive investors since they are not allowed to materially participate in a business.  With respect to LLC and LLP members and partners, the Court ruled that under state law, the members are allowed to materially participate in the management of the company.  This would allow the members to deduct their losses.

Farmer’s Impact:

This means that if you are currently treating farm operations held in LLC interest as being passive, you may want to consider amending your income tax returns and deducting these losses as regular losses.  This would allow you to offset these losses against any other income that you have.  You can amend any 2006, 2007 and 2008 tax returns and you may be able to amend 2005 tax returns if you had filed for an extension.

Also, for any new investments that you make in farm operations with other farmers or investors, using a LLC or LLP will generally make these a material investment unless your fact pattern reflects otherwise.

Remember that this court case referenced operating LLC and LLP.  They did not involve only the rental of farm land which could still be considered passive.

In any case, make sure to discuss this with your tax advisor to see if this court case applies to you.

 For many farmers, the new Average Crop Revenue Election (ACRE) program is about as easy to understand as learning a new language for the first time.  I have read several articles and listened to a couple of slide shows on the program.

You have until mid-August to make up you mind regarding the election for this year which will lock you in until 2012.

 At the FarmDoc site, they have a very good slide show that lasts about 20 to 30 minutes that gives a good synopsis of how the program will work.  Based upon their analysis, over the last 31 years, farmers growing corn would have had ACRE payments in about 10 of the 31 years.  This average payment would have been about $53 per acre.  Electing ACRE would cost you about $5 per year, so getting a $53 payment every three years might be a good deal.

For growing soybeans, the ACRE program would have resulted in an average payment of $37 per acre for only 5 out of 31 years.  For soybeans, the benefit of the ACRE program appears to be much less than corn. 

Also, with the higher corn and soybean prices for 2007 and 2008, these numbers may be actually higher since there is a 10% cap on the increase or decease in the revenue targets.

I think for many farmers this may be a very good put insurance on your crop.  There is no excuse for not understanding if it will work best for your farm.  You can elect this coverage on a farm by farm basis.