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Friday, December 2, 2016

Ag Tax Publication Available for Farm Families

By Gary Hachfeld, Extension Educator

With farm profit margins very slim in agriculture today, financial planning is crucial to the survival of a farm operation. That planning includes tax planning for the end of the year. A tax planning publication is now available for farm families which includes many of the new ag tax rules and related information. This information will aid farm families as they prepare for the tax season.

With the passage of the Protecting Americans from Tax Hikes (PATH) Act of 2015, there were substantial changes in depreciation rules. Section 179 depreciation has been permanently established at $500,000 with a $2 million dollar overall investment limit before phase out takes place. Qualified Section 179 property includes breeding livestock, machinery, single-purpose agricultural structures and drainage tile. The qualified property can be new or used. The legislation makes permanent the rule allowing a taxpayer the ability to revoke I.R.C. Section 179 elections and any specification of property to be expensed without IRS consent. The PATH Act also reinstated bonus depreciation under a phase down schedule through 2020.

Federal and state estate exclusion rules are also outlined. The federal estate tax exclusion, indexed for inflation, will be $5,490,000 per person for 2017. The Minnesota estate tax exclusion increases by $200,000 to $1,800,000 for 2017 and the qualified farm property exclusion will be $3,200,000 for 2017. The annual federal and state gift exclusion for 2017 remains at $14,000 to any number of donees.

The publication also includes information on alternative minimum tax, disaster payments and insurance indemnity payments, repair regulations, business sale or liquidation, earned income credit plus a number of tables with applicable tax rates and related thresholds. “This information is not intended to be legal and financial advice but can give the farm family some valuable background information from which to begin” says Gary Hachfeld, University of Minnesota Extension educator. Always seek advice from a qualified professional on details specific to your situation.


The publication is available at no cost through Extension. For those who have Internet access, simply go to www.extension.umn.edu/agriculrute/business and click on “Farm Tax & Legal Issues” on the center of the page. Click on the document titled “Ag Income Tax Update for Farm Families”. For those without Internet access, contact your local county Extension office or the Farm Information Line at 1-800-232-9077 for a copy.

Wednesday, November 23, 2016

Where Can Farmers Lower Cost?

By David Bau, Extension Educator

Average 2017 corn and soybean budgets for cash rented farmland look unprofitable at projected input costs and current market prices available.  In 2007, prices were similar to what is available in 2017 for corn and soybeans. The table below compares actual figures for 2007 and 2015 from the FINBIN database for southern Minnesota and compares them to trends for 2017.

Corn and Soybean Input Costs Comparison between 2007, 2015 and 2017


The figures for 2017 indicate losses on both corn and soybeans. Even with crop insurance and government payments and corn lost money in 2015. Examine the fourth line from the bottom: Total direct expense per bushel you will see that in 2007 Southern Minnesota farmers needed $2.37 per bushel of corn to cover the direct costs and $5.12 per bushel for soybeans. Comparing these to the trend figures for 2017 of $3.43 for corn and $8.16 for soybeans, this represent a 45% increase for corn costs and 59% increase for soybean costs while prices are the same or flat.  Farmers setting up marketing plans are interested in the last row where corn is projected at $4.16 per bushel after government and insurance payments and $10.18 for soybeans.

With current 2017 prices well below these levels, farmers are forced to look for ways to make $3.25 corn and $9.00 soybean prices work.   Also listed on the table are the major input costs.  Rents are the top input cost accounting for 41% soybeans and 27% for corn in the trend 2017 columns at $194 per acre.  There should be pressure on rental rates to decrease in 2017, but there will need to be some tough negotiations.  Landlords with increasing property taxes have been behind the curve increasing rental rates during the record prices and now are trying to play catch up at a time when budgets do not support current rental rates and other input costs.

For corn the next major input cost is fertilizer.  Fertilizer prices have declined significantly in 2017. There is a very direct relationship between potential yield and fertilizer, so not a good area for farmers to cut on amount.  Seed cost is the next highest and there may be a small decrease in seed costs for 2017 from dealers, but again it will be hard to lower these costs further without affecting yields.  The 2015 are the most recent actual numbers available but farmers should use their 2016 costs when looking for areas to cut costs.

Depreciation is one item that can be trimmed, but does not quickly change as a farmer’s equipment size usually matches their farm size. I am sure farmers will be looking at all costs and trying to lower them somehow.

Farmers will need crunch the numbers to see where the costs will be and then what prices are needed to cover these costs and start a marketing plan.  It would be nice if farmers could generate the positive incomes of 2007 compared to projected losses in 2017.

Wednesday, November 2, 2016

Women in Ag Network Announces December Event!

Women in Agriculture Network (WAGN) is excited to announce its quarterly seminar, being held in December: "Taking Charge of YOUR Finances- How to Survive and Thrive".  

The event will be December 6, 2016 at the Farmington Regional Extension office (located at the Dakota County Extension and Conservation Center, 4100 220th St. West, Farmington, MN 55024).  Registration is at 8:30 AM with the program running from 9:00 AM-3:30 PM.  The fee is $20, which covers the cost of lunch.  Payment can be made the day of event.

"Financial management is the key to a successful farming operation," Pauline Van Nurden, Extension Educator, shared.  "Having an understanding of farm finances impacts all management decisions.  Attending our 'Survive & Thrive' workshops will give producers a base understanding of the major financial statements and how to put them into action in their operation."  This program will use an interactive approach to learning about financial management.  Participants will form lending teams to make decisions on a case study loan request.

The Women in Ag Network offers more information about the program, including registration details at: z.umn.edu/decflyer.

To learn more about Women in Ag Network, please visit: http://www.extension.umn.edu/agriculture/business/women-in-ag/.  
Please contact Betty Berning or Pauline Van Nurden with questions.  We hope to see you in December!

Monday, October 24, 2016

USDA Average County Rents Published in September

By David Bau, Extension Educator

The National Agricultural Statistic Service with the USDA released the county farmland rental rate estimates for 2016.  After increasing continuously since 2007, statewide average rents went down for the second year in a row. The state average cropland rental rates declined from $185 in 2014 to $180 in 2015 to $170 in 2016 as indicated in Chart 1 below. This represented a 5.5% decrease from 2015 to 2016 and 2.7% decrease from 2014 to 2015.  Previously rental rates had a 4.5% increase from 2013 to 2014, 18% from 2012 to 2013 and 11.1% from 2011 to 2012. Statewide Irrigated rental rates declined from $210 in 2015 to $185 in 2016 almost a 12% drop. Pasture rent average increased from $26 per acre in 2014 to $28 per acre in 2015 to $30 in 2016 or an increase of 7.1%.
Table 1 below lists the actual farmland rental rates by county from Adult Farm Management Records. Since farmers and landlords are starting to negotiate 2017 farmland rental rates and the last actual numbers available are for 2015, I have listed estimated rental figures for 2016 and 2017.  For 2016 I heard many times, that rents were down $20 to $25 per acre, although some rents went up and some remained the same.  In Table 1 below, I estimated a 10% decline in 2016 from 2015. What direction should 2017 farmland rental rates go? In the table is an estimated 7% decline in rental rates from 2016 to 2017 due the continued decline in corn prices.

The column third from the right in bold is the latest 2016 USDA county estimate.  Property taxes continue to increase while profits are being squeezed by low commodity prices. It will be a very challenging year for both the landlord and farmer to determine where the 2017 farmland rental rate should be? Up? Down? or Constant?




What is a Fair Farm Rental Agreement?

By David Bau, Extension Educator

Landlords, Farmers, Agri-Business Professionals should make plans to attend one of the informative meetings being held across Central and Southern Minnesota. These free meetings are being provided by the University of Minnesota Extension.  Farm land rental rates have never been higher and determining a fair profitable farm rental agreement is a challenge in today’s economy with recent record corn and soybean prices and record farm land values and current significantly lower price for 2014, 2015, 2016 and 2017.

Negotiating a fair rental agreement that satisfies the land owner and the farmer is a challenge.  David Bau, Extension Educator in Ag Business Management, will provide several ways; by examples, factsheets and worksheets to determine a fair farm land rental rate for both parties.

Topics covered at the meetings will include local historic and projected farmland rental rate trends, current farm land values and sales, a worksheet that will help determine a fair rental agreement. Input costs for 2017 will be presented along with current 2017 corn and soybean prices. Worksheets will examine 2017 costs and what is affordable rent that a farmer will be able to pay in 2017, the rate of return to the landlord at current market values and examine flexible rental agreements.

Make plans to attend one of these meetings now.  Attendees will receive several informative worksheets and factsheets that will help to determine what is a fair 2017 farm land rental rate is.

The meetings will be held in Ada, Albert Lea, Alexandria, Albert Lea, Benson, Blue Earth,   Buffalo, Caledonia, Chaska, Cologne, Elko New Market, Faribault, Farmington, Foley, Gaylord, Hutchinson, Jordan, Le Center, Litchfield, Little Falls, Long Prairie, Madison, Mankato, Melrose, Moorhead, Morris, Newfolden, Olivia, Owatonna, Park Rapids, Pipestone, Preston, Red Lake Falls, Rochester, St. Charles, St. Peter, Slayton, Sleepy Eye, Waseca, Wheaton, Willmar, and Worthington starting in Slayton on November 7, 2016 and ending in St. Peter on December 14, 2016.  Check out the Agricultural Business Management calendar on web at: www.extension.umn.edu/agriculture/business/ for specific times and locations.

What is a Fair Farm Rental Agreement? (SW Minnesota)

by David Bau, Extension Educator

Landlords, Farmers, Agri-Business Professionals should make plans to attend one of the informative meetings being held across Central and Southern Minnesota.  These free meetings are being provided by the University of Minnesota Extension.  Farm land rental rates have never been higher and determining a fair farm rental agreement is a challenge in today’s economy with recent record corn and soybean prices and record farm land values and significantly lower prices since 2014.

Negotiating a fair rental agreement that satisfies the land owner and the farmer is a challenge.  David Bau, Extension Educator in Agricultural Business Management, will provide several ways; by examples, factsheets and worksheets to determine a fair farm land rental rate for both parties.

Topics covered at the meetings will include local historic and projected farmland rental rate trends, current farm land values and sales, a worksheet that will help determine a fair and profitable rental agreement.  Input costs for 2017 will be presented along with current 2017 corn and soybean prices.  Worksheets will examine 2017 costs and what is affordable rent that a farmer will be able to pay in 2017, the rate of return to the landlord at current market values and examine flexible rental agreements.

Make plans to attend one of these meetings now.  Attendees will receive several informative worksheets and factsheets that will help to determine what is a fair 2017 farm land rental rate is.

The meetings held in Southwest Minnesota include:

November 7, 2016 at 9:00 am 
Murray County Fairgrounds 4-H Building, 3048 S. Broadway Ave., Slayton, MN 56172

December 2, 2016 at 9:30 am
Emergency Service Building, 811 5th St., Pipestone, MN 56164

December 7, 2016 at 9:30 am
Extension Regional Office, 1527 Prairie Drive, Worthington, MN  56187

Make plans to attend a farmland rental workshop this fall for current numbers.  Check out the Agricultural Business Management calendar for schedule of the all 45 rental workshops at across the state at: www.extension.umn.edu/agriculture/business/ for specific times and locations.

Monday, October 17, 2016

Cash Flow Statement- Watch Where the Money Goes

By Betty Berning, Extension Educator        


This is it- the last of the financial statement articles.  I promised I would write three:  one for each of the commonly used financial statements on farms.  I am sure some of you are breathing a sigh of relief!
If you recall, I’ve written about balance sheets- first article- and income statements- second article.  A balance sheet tracks your assets (cash, land, machinery) and liabilities (loans, mortgages, accounts payable).  An income statement looks at your profitability over time.  For example, your Schedule F from your tax return is an informal income statement because it lists where you received and spent money. 
This article will focus on cash flow statement (CFS), the third financial statement.  CFS is precisely that:  a statement that explains the flow of cash in your business.  In other words, how did money move in and out of your business?  Where did your income come from?  What kind of expenses did you have?
                Imagine that you looked at your 2015 and 2016 balance sheets. (See Figure 1)   You notice there are changes.  Your assets have increased by $107,000 and your liabilities have increased by $54,900.  What happened?  With a little analysis, you can piece some of it together.  Long-term assets and long-term liabilities increased, so it would appear that land was purchased and a portion was financed.  You can see the basics, but don’t get the in-depth view. 
What about the current assets?  There was a change of $4,000 from 2015 to 2016.  What happened there?  That’s not as obvious by just looking at the balance sheet.  That is where CFS comes in.  CFS helps tie the balance sheet and income statement together. 

Figure 1:   2015 and 2016 Balance Sheets

                There are three components to CFS:  cash from operations, cash from investing activities, and cash from financing activities.  (Figure 2) Let’s define these terms a bit further.  Cash from operations is the gross cash income and total cash expense.  These items can be found by looking at your tax statement, which lists out your income and expenses.  Cash from investing activities consists of purchases and sales of equipment, machinery, or land.  Think about what you may have purchased in the last year or may have sold.  Cash from financing activities are loan payments and withdrawals.   It also includes your nonfarm income and family living expenses.  CFS is completed for a specified time period (usually annually at the end of the year).  It will help you understand where money was spent. 

Figure 2:  Cash Flow Statement
Beginning cash balance
$3,800
Cash from operations
+113,423
Cash from investing activities
-17,023
Cash from financing activities
-83,700
Ending cash balance
$16,500

                How do you know if you have a strong CFS?  You’ll have positive cash from operations.  This means you have money for investing and financing activities.  Your money from operations can be used to buy a new piece of machinery or cover family living expenses.  Another good sign is if your ending cash balance is greater than your beginning cash balance.  This shows that you were profitable during the time period.
                Your lender will probably look at your term debt coverage ratio.  This helps determine your capacity to repay you debts.  It is calculated using the following equation:


                  Term Debt Coverage Ratio = Net Farm Income
                                                                 Debt payments

A ratio of greater than 1 indicates your operation is generating enough income to cover your debt payments.  A ratio of less than 1 indicates that there is not enough income to service debt.  Lenders like to see a term debt coverage ratio of 1.25 or greater.  In others words, for every $1.25 of income you generate, you can pay for a $1 of debt.  Don’t panic- many farms have less than desirable term debt coverage ratios right now.  If that’s you and you haven’t talked to your lender, you need to do so.  You need to develop a plan.  That could be selling an asset, generating additional income, or restructuring debt. 
                If you are feeling confused after reading all of this, that’s okay.  Re-read it and try to work through an example.  Review the cash flow statement your banker or financial software have produced for you.  What do you see happening in your business? 
                CFS is the most difficult statement to understand, but it is very important.  This is where you can identify if you have enough money to pay your bills.  Additionally, it is one of the first places where financial distress appears.  Learn how to utilize this statement and it will allow you to be a proactive financial manager.
                Times are tough right now.  Keep engaging with your lender and farm business manager instructor.  Have conversations early and know your options.  Understand your business and its finances.  If you are interested in learning more about financial statements, please consider using “Interpreting your Financial Statements and Measures”, http://ifsam.cffm.umn.edu/.  This is an on-line workshop series that will help you understand your financial statements to more effectively manage your farm.  It will go into greater depth than these articles and help you on your financial journey!
               



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