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Tuesday, January 19, 2016

Southwestern Minnesota Farmland Values Decline 8 Percent in 2015

By David Bau, Extension Educator

At the end of each year for the last twenty-one years, a survey has been conducted of farm land sales in fourteen southwestern Minnesota counties. Land values had been on a steadily increasing until 2014.  The survey reports bare farm land sales to non-related parties for the first six months of each year.  After reaching record high prices in 2013, the upward trend was broken as prices declined in 2014.  This trend continued in 2015.  Data collected in this survey is available at the county extension offices in Chippewa, Cottonwood, Jackson, Lac qui Parle, Lincoln, Lyon, Martin, Murray, Nobles, Pipestone, Redwood, Rock, Watonwan and Yellow Medicine Counties.  This year the decline across the fourteen counties averaged 8.3%.  Average land values had not declined since 1996 when the average SW Minnesota land prices were $1,175 per acre in 1995 to a high in 2013 to $8,466 then declined in 2014 and again to $6,929 in 2015.

Data from these counties indicate prices decreased from an average of $7,556 in 2014 to $6,929 in 2015 or a decrease of 8.3%.  This is only the second percent decrease as far back as this data has been collect since 1995.  In 2013 was the largest year to year increase of 35.6%.  Farmland prices decreased in ten counties and while increased in four counties including Chippewa, Lac qui Parle, Nobles and Rock from 2014 to 2015.  There was a lot of variability in the numbers from 2014 to 2015.  The largest increase was in Rock County with an increase of 19.2% while Cottonwood experienced the largest decrease of 27.2% for the sales that met the bare farmland to non-related party transaction.

Farm Resource Guide Available

By David Bau, Extension Educator

The Farm Resource Guide for 2016 is now available upon request at many University of Minnesota Extension County offices across the state.  It includes a variety of very useful farm business management information.  The front of the Guide has the most frequently requested information on Custom Rates, Rental Rates for various ag commodity, forages, bins and buildings, Farmland Sales and Rents and Pasture Rental rates.  There are lease forms for Cash Rent and Share Rent arrangements.  There is flexible rental arrangement information.  Marketing information including the cash price probabilities for cash corn and soybeans for Worthington, Minnesota, since 1974. Information from the Southwest Farm Business Management Association includes trends in costs, family living and net worth changes.  At the end of the Guide is a section on Feedlot Rule Highlights and information on Manure Agreement and Easements, including examples of Manure Spreading Lease and Land Application Agreement forms.

Included are the average cash prices for corn and soybeans to use as a benchmark along with statewide listing by county of the last five year average yields for corn and soybeans.  Statewide cropland rental information is available for counties with significant farm numbers in Adult Farm Management. Farmland sales information is available for all counties across Minnesota.  A second study lists bare farmland sales from 14 counties in southwest Minnesota.  There are many pages of information and forms which would be of benefit to the entire state including: custom rates; lease forms; commodity price probabilities for corn, soybeans, alfalfa hay, straw, grass hay, hogs and cattle.

This Resource Guide is available for a $25 fee plus postage and sales tax if you would like to have your own copy.  I can provide you the information in your preferred format: (e-mail cost $25 plus sales tax, CD cost $28.50 or hard copy cost $30.00).  The small $25 fee will help fund continued Extension efforts in Agricultural Business Management and will allow me to continue with the project and update the Resource Guide for 2017.  

If you would like your own copy of the Farm Resource Guide, please e-mail me at bauxx003@umn.edu or give me a call at 507-372-3900 ext. 3906 and let me know what form you would like to receive the Farm Resource Guide in.  I will send out the materials and an invoice as soon as possible.  I hope you find the Resource Guide useful and would welcome your feedback on what you would like to see included in next year’s Guide.

Wednesday, January 6, 2016

Women in Agriculture Conference


By: Pauline Van Nurden, Extension Educator


University of Minnesota Extension is hosting a Women in Agriculture Conference on February 18, 2016 at the Kelly Inn, St. Cloud.  This inaugural event  will be a day of learning and networking for women involved in agriculture in the region.  Registration begins at 9 am, with the conference convening from 9:30 am to 3:00 pm.

Keynote Speaker for the day is Dr. Robert Milligan, Cornell Professor Emeritus and Senior Consultant with Dairy Strategies, LLC.  Milligan is a popular and frequent ag leadership speaker.  His message for the day will challenge participants to proactively and aggressively address the future of their farm business. 

Monday, January 4, 2016

Where should 2016 Farmland Rental Rates be?

By David Bau, Extension Educator

The answer to the question depends upon who is answering.  Landlord property taxes continue to increase while farmer’s profit margins have turned negative.  The agribusiness management team just completed a state tour completing 47 workshops on what is a fair farmland rental agreement.  It seems this year determining what is fair, is a very challenging process.

There were a lot of frustrated people in the workshop audiences, with a composition of two-thirds landlords and one-third farmers.  Neither party is happy with the current situation and with the economics in farming.   What the farmer can afford to pay for rent and what landlords want to receive for rent.

Good times occurring in the recent past are still on many landlord’s minds, while the current low prices offered for 2016 are on the farmer’s mind.  Through the first nine months of 2015 the average cash price in Worthington for corn was $3.52 and soybeans $9.32 continuing the change to lower prices as is indicated on Table 1 below.

Table 1. Cash Prices for Corn and Soybeans, Worthington Minnesota by calendar year.



The fourth column is the average rent paid by farmers in southern Minnesota in adult farm management Programs as part of the FINBIN data base.

The last column is the average property tax paid on owned land in Minnesota in FINBIN data base each year.

As the table indicates, the high prices for corn, when above $6.00 cash, occurred in 2011, 2012 and 2013. While for soybeans high prices, above $12.00, occurred in 2011, 2012, 2013 and 2014.  Prices did start going lower in 2014 from 2013 and rents started falling slightly.  Now in 2015 prices continue lower, dropping by about one-third as compared to the higher prices. The 2015 average prices are comparable to 2010 when farmland rents averaged $168.25.

The last column shows the average real estate tax paid per acre on owned land again in the FINBIN data base for Minnesota.  You can see that property taxes have more than doubled from 2006 through 2014.  This is one reason landlords continue to seek an increase in rental rates. Another variable in rent negotiations is the farmer’s profit.  This increased from 2006 to 2008, then declined from 2008 to 2009 and then grew to each year to a record for income in 2012 and has been falling since.

There is some delayed reaction to increasing and decreasing prices which account for the challenge in determining what is a fair rental rate, as rents and land values adjust to current grain prices.  I stated at the workshops, rents could be staying the same, increasing or decreasing depending on the individual circumstances.  They could have had a long term lease that has yet to benefit from the recent high prices.  The fall in price and the basic economics of the 2016 crop outlook would encourage lower rental rates; if rents are lowered maybe a flexible component could be added to account for potential increased prices. Many landlords will want them to stay the same, but at current prices this will cause many farmers to lose money.

If 2016 grain prices were to improve, the frustrations for both landlord and farmers would decline.

Wednesday, December 30, 2015

Ag Tax Update Available

By Gary Hachfeld, Extension Educator

“Ag Tax Update for Farm Families” is now available on the University of Minnesota Agricultural Business Management website at www.extension.umn.edu/agriculture/business under Farm Tax and Legal Issues in the center of the web page.

The document includes descriptions of several ag tax issues of importance to farm families. Of particular note are the tax laws that were signed into law by President Obama on Friday, December 18, 2015. Most notable of those are the changes in depreciation which extends numerous provisions. The tax act permanently sets Code Section 179 depreciation expensing limit at $500,000 with a $2 million dollar overall investment limit before phase out. Both amounts will be indexed for inflation beginning in 2016. The amounts apply to the 2015 tax year. In addition, bonus depreciation for new or first use equipment has been reinstated under a phase down schedule. This first year depreciation schedule is 50% for 2015 through 2017, 40% in 2018 and 30% in 2019. 

Key to the depreciation deduction is that Minnesota does not fully allow the same deduction as the federal law. Minnesota tax payers will be affected by this for the next four years. If producers do not have enough income on the Minnesota return to offset the depreciation rolling to the current year return, the prior year depreciation will be lost. Check with your tax preparer on this issue.

Other important issues included in the tax update relate to the complicated tangible property repair rules and regulations, new guidelines for the 1099 and associated penalties, gross sales reported on the 1099-PATR, changes to the federal and Minnesota estate and gift tax exclusions and information about the affordable care act.

The last five pages of the update make up the appendix with several tables and charts listing 2014, 2015 and 2016 tax data. Items included are the 2015 and 2016 federal and state tax tables, 1040 individual tax standard deductions, alternative minimum tax exemption amounts, social security data and much more.

The tax update is free to the public simply by going to the U of M Ag Business Management website as described above. In addition to the ag tax update, the website includes information on land economics and land rent, legal issues, farm transition and estate planning, business planning, commodity marketing, farm financial and risk management, human resource management and more.

Monday, December 21, 2015

Thoughts and Updates on Year-End Tax Planning

Written by Rob Holcomb, EA
Extension Educator, Ag. Business Management
University of Minnesota Extension

There is a great deal of late-breaking tax information for 2015.  This post addresses the following topics:

Avoiding a Net Operating Loss (NOL)
Carry-over Section 179 and bonus depreciation on the State of Minnesota Return
Deferred Tax Liability
Passage of Extender’s Bill
Changes to the Repair Regulations
Prepaid expenses

NOTE: This information piece offers educational information only and is not intended to be tax, legal or financial advice. For questions specific to your farm business or individual situation, please consult with your tax professional.

Tax planning for farmers in 2015 is going to be a bit of a challenge.  Commodity prices combined with the current cost structure is going to raise the potential for the producer having a net operating loss (NOL) for 2015.  On the other side of the coin, some producers may have a great deal of deferred income rolling into 2015 from the previous year. Producers want to make sure that they examine where they are at from a tax planning standpoint. The author strongly recommends that farmers meet with their tax professionals prior to year end.

Avoiding a Net Operating Loss (NOL)

A net operating loss is something that producers really want to avoid. While having a net operating loss usually results in a zero tax liability, there are a number of hidden costs involved. When you have a net operating loss, you lose your standard deduction and all or your exemptions…….and you never get them back. Once you have a net operating loss the taxpayer must pay self-employment tax on all the money that is required pay off the net operating loss.  A sound tax management strategy is to avoid a net operating loss if at all possible. Avoiding a net operating loss oftentimes can be done by either accelerating sales or postponing expenses.

Carry-over Section 179 and bonus depreciation on the State of Minnesota Return

One very important point to make for 2015 tax planning is the carryover of section 179 and bonus depreciation for the state of Minnesota tax return.  In previous years (and currently), the state of Minnesota only recognizes section 179 expenses up to $25,000. Any Federal Section 179 expense exceeding $25,000 was spread out over a five year time period. Additionally, ALL bonus depreciation (also known as additional first-year depreciation) was also spread over a five-year period of time. The technical term Minnesota Department of Revenue uses for this practice is, “The 80% Add Back Rule.” This 80% Add Back Rule for the state of Minnesota, in effect, pushes accelerated depreciation into future years (only on the State tax return).  Producers that have taken accelerated depreciation in prior years will have a certain amount of depreciation coming in as a current year depreciation expense for the 2015 Minnesota tax return (this amount will not show on the Federal return).  If the producer does not have enough income on the Minnesota return to off-set the depreciation rolling to the current-year return, the prior-year depreciation will be lost.  Under current State law, taxpayers cannot carry this expense forward to future years.
This is another reason why you do not want to have a net operating loss.  Producers in this situation should consider accelerating some sales so that you can use the additional depreciation expense on the Minnesota return.

Deferred Tax Liability

One additional topic to consider is deferred tax liabilities. A deferred tax liability can simply be defined as the amount of tax that the producer would owe if you were to have a farm liquidation today. As I look back over balance sheet information as reported in the University of Minnesota FINBIN database; in 2000, the average deferred tax liability for Minnesota farmers reporting in FINBIN was $87,000. In 2014 that deferred tax liability had swelled to over $283,000.  This growth is a result of a number of factors including; increased land prices, increased levels of prepaid expenses and deferred commodity sales.

Due to 2015 commodity prices, many producers may be looking at lower incomes. As a result of this situation, producers should consider planning to either accelerate sales or postpone expenses in order to fill up the lowest income tax brackets on the tax return. If you don’t have enough income to use up your standard deduction and exemptions, those deductions are lost forever.

Passage of Extender’s Bill

On Friday, December 18, 2015 the President signed into law the “Protecting Americans from Tax Hikes (PATH) Act” which extends numerous tax provisions. Some important tax provisions have been made permanent, while others were extended through 2016 or 2019. The bill, in final version was over 2,000 pages.  The most notable provisions for agricultural producers include modifications to Section 179 and Bonus (additional first year) depreciation.

Pre-act, the dollar limit for code section 179 expensing for 2015 had reverted to $25,000 with an investment limit of $200,000. The act permanently sets the code section 179 expensing limit at $500,000 with a $2 million overall investment limit before phase out (both amounts indexed for inflation beginning in 2016).

The act also extends bonus depreciation (additional first-year depreciation) under a phase down schedule through 2019:
at 50% for 2015 through 2017;
at 40% in 2018; and
at 30% in 2019.

Changes to the Repair Regulations

On November 24, 2015 The Internal Revenue Service announced a simplification of the paperwork and record-keeping requirements for small businesses by raising the safe harbor threshold for deducting certain capital items from $500 to $2,500. The change affects businesses that do not maintain an applicable financial statement (audited financial statement). It applies to amounts spent to acquire, produce or improve tangible property that would normally qualify as a capital item.

The change affects businesses that do not maintain an applicable financial statement (audited financial statement). It applies to amounts spent to acquire, produce or improve tangible property that would normally qualify as a capital item.  The new $2,500 threshold applies to any such item substantiated by an invoice. As a result, small businesses will be able to immediately deduct many expenditures that would otherwise need to be spread over a period of years through annual depreciation deductions.  The new $2,500 threshold takes effect starting with tax year 2016. In addition, the IRS will provide audit protection to eligible businesses by not challenging use of the new $2,500 threshold in tax years prior to 2016. For taxpayers with an applicable financial statement, the de minimis or small-dollar threshold remains $5,000 [www.irs.gov].

Prepaid expenses

If your tax management plan includes increasing expenses, one of the more common techniques is to prepaid expenses.  Cash basis tax filers are able to pre-pay expenses for the following year. Prepayments normally consist of fertilizer, chemicals and seed.  Prepayments need to actually be purchased. Going to the co-op and putting money on account does not qualify as a prepaid expense.  There also needs to be a business reason for doing the prepaid expense. The typical reasons for prepaid expenses are to either lock in price or lock-in supply. Cash basis farmers are able to prepay up to 50% of the total schedule F expenses including depreciation.


NOTE: this information pieces offers educational information only and is not intended to be, tax, legal or financial advice. For questions specific to your farm business or individual situation, consult with your tax professional.

Resources:

Internal Revenue Service.  www.irs.gov

National Association of Tax Professionals.  www.natptax.com

Wolters Kluwer.  CCH Tax Briefing.  www.cchgroup.com/news-and-insights/federal-tax-legislation

2015 National Income Tax Workbook.  Land Grant University Tax Education Foundation. Inc.

Tuesday, December 15, 2015

Intensive Marketing Workshop Scheduled for Grain Producers

By Gary Hachfeld, Extension Educator

The Minnesota Master Marketer Program, six days of intensive marketing training for grain producers, is returning to Mankato in January, February and March of 2016.

The years 2007-2014 were an extended period of prosperity for many grain and soybean producers. This golden era has passed and with prices below production costs, the time is right for an educational program that gets back to the fundamentals of price risk management. The Master Marketer Program focuses on the basics of marketing plan development and profitable pricing decisions.

Sponsored by MN Soybean, the program is spread over three, two-day segments; January 13 & 14, February 10 & 11, and March 9 & 10, 2016. Sessions will be held at Country Inn & Suites Hotel & Conference Center, 1900 Premier Drive, Mankato, MN. Registered producers who cannot attend all six days can send a family member or business partner in their place.

An outstanding line-up of guest presenters promise to make this a valuable program. They include:
  • Edward Usset, Grain Marketing Economist , University of Minnesota
  • Dr. Elwynn Taylor, Professor & Iowa State University Extension Climatologist
  • Dr. Chad Hart, Professor & Crop Market Extension Economist, Iowa State University
  • Alan Brugler, President, Brugler Marketing & Management
  • Dr. Mark Seeley, Professor, University of Minnesota
  • Scott Cordes, President, CHS Hedging
  • Dr. Lee Schulz, Professor and Livestock Economist, Iowa State University
  • Bob Craven, Extension Economist, University of Minnesota
To view the Minnesota Master Marketer Program agenda or to register on-line, go to the registration page at http://www.cffm.umn.edu/events/MasterMarketer.aspx . Pre-registration is required to attend the program and producers can register by mail or online. The cost by mail is $395 or producers can save $10 by registering on-line. If you have any questions about the Master Marketer Program please direct them to Edward Usset at (612) 625-7014.
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