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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.

Thursday, December 10, 2015

Making the Difficult Rent Decisions

By: Pauline Van Nurden, Extension Educator

Farmers have begun pushing the pencil on profitability expectations for the upcoming year. And the outlook is challenging – especially on rented acres. Expenses look to be the same and revenue is down considerably (26% or more for corn, soybeans, and wheat). There will be no easy answer when planning for the 2016 crop year.

As producers make crop input decisions and work on land rent negotiations for the coming year, many options may come to mind to help their bottom line. A natural goal is to decrease expenses. But, these expense cuts cannot jeopardize the yield potential of the crop. Therefore, it is likely difficult to trim much off of seed, fertilizer, or chemical expenses.

The other major crop expense is land rent. According to the FINBIN Database, land rent has been increasing at an average rate of 9% per year over the last 10 years on both corn and soybean acres across all of Minnesota. This may be an area where expenses can be reduced. Producers will need to have a frank discussion with their landlord about the current farm economy. This open conversation may help negotiate a lower rent cost for the coming year. But remember, landlords have also experienced rapidly increasing costs. Real estate taxes, one of their major costs, have risen at an average of 10% per year over the last 10 years as well.

What if no solution is available and a farmer is facing a large loss on rented acres for the 2016 year? Farmer’s may wonder if it is time to walk away from rented acres. This is truly a difficult decision. As this decision is contemplated a few items to consider include:

Thursday, October 29, 2015

Where Can Farmers Lower Cost?

By David Bau, Extension Educator

Average 2016 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 2016 for corn and soybeans. The table below compares actual figures for 2007 and 2014 from the FINBIN database for southern Minnesota and compares them to trends for 2016.

Corn and Soybean Input costs comparison between 2007, 2014 and 2016 



The figures for 2014 and 2016 indicate losses on both corn and soybeans even with crop insurance and government payments.  As you examine the fourth line from the bottom: Total direct expense per bushel you will see that in 2007 Southern Minnesota 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 2016 of $3.91 for corn and $9.23 for soybeans, this represent a 65% increase for corn costs and 80% 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 $4.20 per bushel after government and insurance payments and $10.30 for soybeans.

With current 2016 prices well below these levels, farmers are forced to look for ways to make $3.50 corn and $8.50 soybean prices work.   Also listed on the table are the major input costs.  Rents are the top input cost accounting for over 41% soybeans and 26% for corn in the trend 2016 columns at $210 per acre.  There should be pressure on rental rates to decrease in 2016, 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 and there is a very direct relationship between potential yield and fertilizer, so not a good area for farmers to cut.  Seed cost is the next highest and there is a small decrease in seed costs for 2016 from dealers, but again it will be hard to lower these costs further without affecting yields.  The 2014 are the most recent actual numbers available but farmers should use their 2015 costs when looking for areas to cut costs.

Depreciation is one item that can be trimmed, but does 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 2016. 

Friday, October 9, 2015

Disappearing Profits in 2015 and 2016

By David Bau, Extension Educator

Average 2016 corn and soybean budgets for cash rented farmland look unprofitable at projected input costs and current market prices available.  National net farm income was estimated at $124 billion in 2013, $91.1 billion in 2014 and current forecast is $58.3 billion in 2015 down 36 percent from 2014.  In Southern Minnesota, corn and soybean are the main crops and the average cash prices in Worthington for 2013 were $6.04 for corn and $13.99 for soybeans. For 2014 the average cash corn price was $3.85 and $12.25 for soybeans.  In 2015 through September, the average cash corn price is $3.52 for corn and $9.32 for soybeans.

This declining trend in corn and bean prices and increasing input cost have put the farmers in a tight situation. Using an average rent of $210 per acre in the 2015 budgets, input costs would total $849 for corn and $516 for soybeans.  Even with good yields averaging 200 bushels per acre for corn at current cash price of $3.50, including a farm bill payment of $60 per acre, farmers would have an $89 loss per acre. Using an average yield of 55 bushels per acre for soybeans at price of $8.50, and a $35 farm bill payment, farmers would have a loss of $13.50 per acre.

These figures do not include a crop insurance payment due to the good yields predicted in Minnesota, or any labor charge for the farmer. Current 2016 forward contract cash prices are $3.63 for corn and $8.30 for soybeans in Worthington. If input costs and commodity prices remain the same in 2016, similar losses will occur.  So you can see it is not poor yield or high input cost that is causing the disappearance of profits, but the decline that has occurred in prices.

Selling 180 bushels of corn, receiving the average price each year, would have generated $1,087.20 in revenue in 2013, $693 in 2014 and $633.60 in 2015, a decline of over $453 in revenue per corn acre in two years.  Selling 50 bushels of soybeans per acre at the average prices would have generated $699.50 in revenue in 2013, $612.50 in 2014 and $466 in 2015, a decline of over $233 in revenue per soybean acre in two years.

Rents are the major input cost for soybeans and corn accounting for 44½ percent and 28½ percent respectively. There should be pressure on rental rates to decrease in 2016, 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.

A Flexible rental agreement may be the best option for 2016 where both landlord and farmer share the price risk, if prices improve so does the rental payment, choose a base payment at current prices and then share 50-50, 40-60, or 1/3-2/3, whatever is the extra revenue gained at prices above the starting point prices.  You can also have a yield component if yields are better than average in 2016.

Farmers need to determine their 2016 crop budgets and 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.  Farmers must be prepared to market their crops if the opportunity becomes available to sell the crops when target prices are achieved in the coming year.

Wednesday, September 23, 2015

Crunching Corn and Soybean Budgets 2016

By David Bau, Extension Educator

The 2016 corn and soybean budgets look unprofitable at projected input costs and current market prices available.  For the past 10 years corn input costs have been increasing at rate of 9.8% per year while soybean input costs have been increasing at 8.5%.  From 2013 to 2014 input costs actually declined slightly from $755.44 in 2013 to $732.92 in 2014 for corn.  While soybeans increased from $451.38 in 2014 to $456.18 in 2014.  If you take 2014 figures and apply the 10 year trend of 9.8% increase for corn the 2014 numbers would increase to $804.75 in 2015 and $883.61 in 2016.   For soybeans applying 8.5% it would imply $494.95 in direct cost in 2015 and $537.03 in 2016.  Using 180 bushels corn and 50 bushels for soybeans, the price necessary to cover direct cost would be $4.91 for corn and $10.74 for soybeans.

Forward contract bids for 2016 corn and soybeans are under $3.60 and $8.80 respectively.  Farmer breakeven prices necessary to cover input costs and living expenses are in the $4.50 to $5.00 range for corn and $11.50 to $12.50 range for soybeans for 2016, which means if prices do not improve, many will have losses on 2016 crops.  This where the budget crunch comes, unless farmers are able to lower input costs or commodity prices improve dramatically to $5.00 for corn and $11.00 for soybeans.  In the 2013 and 2014 crops crop insurance provided an additional revenue source.  Crop insurance in 2015 might not pay anything if the harvest prices average close to spring prices of $4.15 for corn and $9.73 for soybeans with average to above average yields in Minnesota expected.

So what can a farmer do to try to lower their input costs?  The top input cost on both corn and soybean budget is land rents.  In 2014 FINBIN data land rent accounted for 33% of the direct input costs for corn and 52% of the direct input costs for soybeans.  In 2007 farmers in the FINBIN data base sold their corn for $3.68 and soybeans for $9.52 while land rent averaged $125.44 compared to 2014 average rent of $241.36, and the average price received were $3.93 for corn and $10.15 for soybeans.  For 2010, 2011, 2012 and 2013 average prices received were $4.68, $5.66, $6.50 and $4.45 for corn and $10.87, $11.40, $13.77 and $12.63 for soybeans.  Using price only rents should have been the highest in 2012 and have fallen since.  There is always a lag time or reaction time that takes place and that is why rents continued to in 2013 and fell only slightly in 2014.  This trend for declining rent should continue in 2015 and 2016, but will not decline as rapidly to reach the comparable prices of 2007 when average rents were $125.44.  Rental negotiations will be a struggle this year and will be a major deciding factor if a farmer will be able to coming close to breakeven in 2016.

Flexible rental agreement may be one options where both landlord and farmer share the price risk, if prices improve so does the rental payment, maybe you start with the 2007 rental rate as a base and current prices and then share 50-50 the extra revenue gained at prices above the starting point prices.  You can also have a yield component if yields are better than average in 2016.

The next highest input cost for corn in 2014 was fertilizer accounting for 22% of the costs.  If a farmer cuts this input they are also cutting yield and 60% of the yield is determined by fertility.  For Soybeans the second highest input cost is seed which accounted for 13% of the total input costs.  Seed was the third highest for corn and again cutting seed costs and seed treatment costs again will have a direct impact on yields.

Farmers need to determine their 2016 crop budgets and 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 to price the crops when the target prices are achieved.

Tuesday, September 22, 2015

Sequestration and the Effect on Farm Program Payments

Sequestration will likely affect farm program payments that are to be received by producers this fall. At this time, an ARC-CO payment, on corn base acres, will be $50 or more across Minnesota counties, for eligible producers. ARC-CO payments on soybean base acres are much more variable. Payments on these base acres will range from $0 to approximately $45, depending on the Minnesota County where a producer farms. But, all of these payments will likely be reduced due to sequestration.

Many producers are currently asking what sequestration is. Sequestration is a piece of 2011 legislation passed by Congress that is aimed at reducing the Federal budget deficit. Most Federal programs are affected by this reduction and USDA farm programs are no different. (Federal Crop Insurance and Conservation Reserve Payments are both exempt from sequestration though.)

The Federal Office of Management and Budget (OMB) administers sequestration and determines the annual level of reduction. It is expected that OMB will require USDA to reduce 2014 farm program payments between 6.8 and 7.3 percent. Officials believe 2014 and 2015 farm program payments will likely be reduced by 7.2 or 7.3 percent. This expected reduction will equate to approximately $4 or $5 per MN corn base acre enrolled in ARC-CO. Soybean ARC-CO payment reductions due to sequestration will be much more variable, and will range from $0 to approximately $3.50 per base acre. Producers eligible for a farm program payment of $50,000, will see this reduced to approximately $46,400, if a 7.2% sequestration is enacted.

FSA is waiting to hear from the White House and OMB as to what the actual farm program payment reduction level will be. Producers will then be informed as to the final sequestration level. At this time though, producers need to visit their county FSA office to finalize enrollment in the farm program they selected for 2014 and 2015. This paperwork needs to be completed with FSA by Sept. 30 to be eligible for any FSA related payments this fall.

Monday, September 14, 2015

Farm Program Enrollment - One Last Step

Many commodity producers thought they were done with their Farm Program signup tasks this past spring. At that time, farm operators elected either ARC or PLC for their farm commodity program on eligible farm acres. This program election process selected which program farmland was placed in for the entire 5 years of current Farm Bill.

There is one more important step that needs to be completed though by producers! Producers must enroll farmland acres in the originally elected program by September 30, 2015. This enrollment is for both the 2014 and 2015 crop years. This final step includes signing the ARC/PLC contract form, which is CCC-861 or CCC-862 at the FSA office. If this last step is not completed, then farm program payments for both of these years will not be made on affected acres – even if program payments have been earned. (Each crop year going forward, the same election process will need to be completed.)

At this time it is very important for producers to contact their local FSA office and schedule an appointment to complete the ARC/PLC enrollment. Again, this needs to be done prior to September 30th. Program payments are very likely for producers this year – especially those that have elected ARC-CO. Producers don’t want miss this important final step of the process with FSA and risk forgoing the program payment dollars on their farm.

Wednesday, September 2, 2015

Set your strategy for 2016 Margin Protection Program


by Betty Berning, Extension Educator
It's that time of year. State Fair? Well, yes, but not what I was thinking. Haying? Again, yes, but not what I was thinking! It is time to enroll in the Margin Protection Program (MPP) for 2016. The enrollment period for the 2016 MPP began on July 1, 2015 and will end on September 30, 2015. If you recall when you enrolled in MPP at the end of 2014, you signed up to participate in MPP until 2018 and need to pay a $100 administrative fee each year. You're not just paying a fee, though; this also nets you the "catastrophic" coverage of a $4.00/cwt margin. Producers who have previously enrolled will receive a 2.61% "bump" on their production history. If you haven't enrolled previously, now is an excellent time to consider if this program is a good risk management tool for your operation.
What, exactly, is MPP? MPP was part of the 2014 Farm Bill and is an "insurance-like" program. The intent of MPP is to provide farmers with margin protection during times of financial distress. MPP takes the difference between milk price and feed cost to calculate a margin. This calculation is made by USDA and is based on the All-Milk price; NASS prices for alfalfa and corn; and AMS prices for soybean meal. These prices may be different than the milk price you receive or your actual feed costs.
Producers enrolling in MPP select a margin level to insure between $4.00 and $8.00/cwt (coverage is available in $0.50 increments). They also opt to enroll a percentage of their milk, which can range from 25% to 90%. The premiums for MPP vary depending on the margin level selected and production history. Premiums are subsidized heavily to $6.50/cwt margin and climb rapidly after that. Premiums for covered production history of less than 4 million pounds are less than premiums for covered production history of greater than 4 million pounds. At $4.00/cwt coverage, there are no premiums for either group. See Table 1.

Table 1. Premium rates for MPP

Premiums
Margin level protected ($/cwt)Covered production history of 4M lbsCovered production history of 4M lbs
$4.00NoneNone
$4.50$0.010$0.020
$5.00$0.025$0.040
$5.50$0.040$0.100
$6.00$0.055$0.155
$6.50$0.090$0.290
$7.00$0.217$0.830
$7.50$0.300$1.060
$8.00$0.475$1.360
Source: Farm Service Agency.
Now that you've had your MPP refresher, you may be wondering what coverage level you should select for this year. To help you make this decision, you can use the on-line tool found at the USDA Farm Service Agency. Click on "Dairy Margin Protection Program web tool". This tool allows you to enter your farm's production history and estimate your payments based on today's futures markets. An added feature to the tool this year is the ability to enter in your own assumptions for 2016 prices. The tool will help you determine the cost of each strategy along with payment, given today's future markets or your forecast.
I suggest looking at three options to evaluate your decision:
Option 1 is catastrophic coverage, i.e. enrolling at $4.00/cwt and paying the $100 administrative fee. While there is no cost to enroll at this level, this is "catastrophic" coverage. You will only get paid if margins are near historical lows. As I review margin data from the past 8 years, there are only a couple of times that this strategy made a payment (see Figure 1). One of those times was in 2009, which was a very difficult year financially for dairymen. This strategy is basic coverage at a very low cost.
Option 2 is a risk management strategy of enrolling at $6.50/cwt. This provides more coverage than Option 1 and it avoids the large premium increase at coverages over $7.00/cwt. Again, as I review the margin data in Figure 1, I can see MPP margins since 2007 have been $8.00 or less almost half the time. Most of the time, these margins have been in the $4.50 to $8.00/cwt range. In other words, historically Option 2 would have paid more frequently than Option 1.
Option 3 is to maximize your predicted net return. In this scenario, the on-line tool is used to predict which coverage level will provide the greatest returns. The tool will analyze both expected margin and the cost of premiums to determine your net return at varying coverage levels. You choose the greatest return. It is important to note that the tool is estimating margins based on futures markets, which are subject to change. This strategy requires more analysis than the others.
As you think about your options, talk with your banker or other trusted financial adviser about what fits best with your operations.

Figure 1. MPP margins 2007 - Present.
One last consideration, as I wrote in the beginning, MPP is intended to be an "insurance-like" program. It is there for the bad times. Just like car insurance, I may pay my premium, but I hope I don't have to use it! If MPP is not paying, it's an indication that margins are strong and dairy farmers are experiencing a time of prosperity. MPP is there to help producers navigate through the tougher times.
Don't forget to get your FSA office to make you 2016 elections by September 30, 2015!

Friday, August 28, 2015

Liquidity is Strength when Profits are Scarce, How Should it be Measured?

by Don Nitchie, Extension Educator

Liquidity has certainly become a hot topic that many people are monitoring in Agriculture with more than two years of significantly lower grain prices.  While livestock operations enjoyed strong returns in 2014 many crop only farms experienced negative returns.  Lower prices also impact the value of grain inventories held as current assets on balance sheets.  In some cases, current liabilities may have also increased as operating loans expanded after decreasing over past years of higher grain prices.

In this changing environment, we know that liquidity, or the ability of the farm business to meet its current financial obligations in the coming year is very important.  Strong liquidity also provides a business the ability to withstand short-term shocks and the flexibility to capitalize on opportunities.  But, what is the best measure of liquidity?  Frequently, the current ratio; current assets divided by current liabilities may have been used in the past to measure your liquidity.  Current assets are typically grain and marketable livestock inventories as well as some cash and prepaid inputs.  Current liabilities are typically annual operating loans and annual payments due on machinery, buildings and land loans. A ratio of 2:1 or above is good and 1.3:1 or below is considered weak.

However, while the current ratio is accurate in telling you the relationship on your balance sheet of your current assets to your current liabilities, it does not relate to your income statement and your size of business.  Many financial experts including the Farm Financial Standards Council now argue that the Working Capital to Gross Revenue measure is a much better measure of liquidity.  Working capital is equal to current assets minus current liabilities.  If Working Capital is 30% or more of Annual Gross Revenues, liquidity is considered strong.  If working capital is 10% or less of gross revenues it is considered weak.

As an example, consider a farm where the current assets are $200,000 and Current Liabilities or debt is $100,000.  This would make the current ratio 2:1, fairly strong by conventional wisdom.  The working capital of this farm is $200,000 -  $100,000 = $100,000.   If the annual gross revenue were $300,000, this means that working capital was 33% of gross revenue-strong according to guidelines.  But, if gross revenues were $1,000,000 annually the working capital would only be 10% of gross revenues and the liquidity situation would not be good.  It would be a struggle to meet current obligations.  So relating your liquidity to the size of your operation is important and should be monitored continuously.  Maintaining strong liquidity will help a farming business survive and thrive in challenging times.

Tuesday, August 4, 2015

Relationship between Corn and Bean Prices verses Land Values and Rents

By David Bau, Extension Educator

I receive many questions daily about land rents and land values and what direction they are going in the near future and long term.  Corn and soybean prices have fallen from record highs in recent years to a level that presents a challenge for farmers to generate a profit. I thought I would try to put together a chart that correlates the relationship between these three items.

I put together a list of average farmland values in Southwestern Minnesota from 1994 thru 2014 average Southern Minnesota cropland cash rental rates and average prices received by farmers for corn and soybeans sold each year.  Next I took the percentage yearly change for each and compared the results to each other in Table 1 below. The average change in land values is indicated by diamonds, the average change in Farmland Rental Rates is indicated by squares and the average change in corn and soybean prices is indicated by triangles.

Table 1.






















From 1994 to 1995 all three had increases in values with corn & soybean prices increasing by an average of 32.9%, while farmland sales prices increased by 8.4% and farmland rental rates by 5.3 %.  In 1996 farmland sales prices declined by 1.3% while corn and soybean prices increased by 4.1% and rents by 7.9%.

In the last 20 years, there were seven years where corn and soybean prices were negative, while farmland sale prices and farmland rental rates were in negative territory three years.  Is there anything to learn from the chart? There is a trend between all three with corn and soybean prices the most volatile, followed by farmland values and with farmland rents more stable.  There is definitely a year or two lag in the reaction of farmland sales and rental rates following the direction in corn and soybean prices.

From 2013 to 2014 farmland sales declined by 10.7% and farmland rents declined by .9% while corn and soybean prices declined by 15.7%.  With corn and soybean prices in negative territory, this should indicate lower farmland sale prices and lower farmland rental rates unless prices go up dramatically in the near future.

Friday, July 31, 2015

Farmland Sales Decline Slightly in Minnesota in 2014

By David Bau, Extension Educator

Minnesota farmland sales for 2014 are available at Land Economics website thanks to University of Minnesota Professor Steve Taff who updated the information before his recent retirement.   Minnesota average sale price was $5,109 in 2014 down 1 percent from an average sale price of $5,165 in 2013.  The average sales price was $4,222 in 2012.  The Minnesota average for prior years was: $3,667 in 2011, $3,517 in 2010 and $3,420 in 2009.  The upward trend was broken slightly in 2014 the first decline in recent years.

Record corn and soybean prices and corresponding profits in recent years can explain the rapid rise in farmland sale prices.  Now much lower corn and soybean prices can explain the falling farmland sale prices as farmer profits have declined.  Since the June 30th crop report corn and soybean prices have moved higher but are still below the level for many farmers to reach their breakeven prices.

If you want to see what farmland sales took place in the county and township where your land located,  you can go to the Land Economics website.  Here you will find information by county or township from 1990 through 2014 at:  http://www.landeconomics.umn.edu then choosing Farmland Sales and selecting your counties you are interested in.

At this website you can find the assessors’ estimated market value data from last spring.  This lists the 2015 estimated values.  The data is provided by the Minnesota Department of Revenue staff.  Keep in mind that this represents estimates by the county assessors, not actual sales.  It can be found under the “Land Values” tab on the website.

The data can be broken down by township or by whole county and provides information on class 2a agricultural land values per acre, class 2b rural land value per acre, class 2a tillable value per acre, class 2b timber value per acre, class 2c timber value per acre, class 2a ag preserve value per acre, class 2b ag preserve value per acre, green acres market value per acre and green acres taxable value per acre.  This information is not available in each category for every county and township, but lists them when available.

I complete a survey of bare farmland sales in 14 Southwestern counties and the average sale price declined to $7,556 in 2014 from $8,466 in 2013.  This was the first average decline since 1999.

Recent reports from assessor indicate assessed values will go down in 2016.  But the assessed values and farmland sale prices are both dependent on what direction the corn and soybean prices take and if farmers are able to generate profits at the prices offered.

Friday, July 10, 2015

Repeal of Country of Origin Labeling – it’s messy

By Betty Berning, Extension Educator

In May, the World Trade Organization (WTO) found the United States’ County of Origin Labeling, or COOL, discriminated against imported animal products from Canada and Mexico. Canada and Mexico have received permission from the WTO to impose retaliatory tariffs on U.S. products. Industries impacted include meat, wine, chocolate, furniture, and jewelry, along with others. The total amount of tariffs varies, but has been estimated as high as $3.7 billion.
For those not familiar with COOL, it is a United States program that requires all fresh beef, pork, chicken, goat, and lamb to be labeled with its country of origin. It sounds simple, but it gets messy.
Processed and foodservice meat are exempt from COOL. COOL was part of the 2002 Farm Bill and modifications were made in 2008 and 2013. So, for example, if a steer was born in Mexico, finished in the U.S., and processed in the U.S., COOL requires that it is labeled as being a product of Mexico and the U.S. This is where it gets messy – extra labeling, tracking, segregation, etc.
The WTO has been hearing about COOL for several years in a back and forth matter between the United States, Canada, and Mexico. It’s been a messy journey.
Starting in 2008, Canada and Mexico filed complaints with the WTO about COOL. In 2011, a WTO panel found that this was an unfair trade practice. The U.S. appealed this decision and the practice was again found to be unfair.
Modifications to COOL were made in 2013, in the hopes of complying with the WTO’s ruling and maintaining this program. Canada and Mexico requested that a WTO panel investigate if the modifications were truly in compliance with the original ruling. In 2014, the compliance panel found that the updated COOL policy continued to create an unfair trade advantage for the United States.
The U.S. appealed this decision. The WTO issued its final ruling in May 2015 which upheld the compliance panel’s findings.
In June, the House of Representatives voted to repeal COOL. By doing so, the U.S. may avoid the $3.7 billion in retaliatory tariffs from Canada and Mexico. The Senate will vote on this next; at press time, no date was set for this vote. Many are saying COOL must be repealed because the proposed tariffs are too costly and could lead to a trade war.
The issue is messy when one examines the arguments for and against COOL. Consumer and producer groups have been COOL’s main advocates. A Consumer Reports article from June urged Congress not to repeal COOL as consumers have the right to know where their food is coming from. Farmers and ranchers have echoed these sentiments.
The logic is that clothing is labeled as “Made in China,” so why should food be different? At a time when eating locally is on-trend, it would seem as though COOL is necessary for consumers to make informed decisions. These advocates argue that consumers should be able to “buy American” if they choose.
Furthermore, due to diseases like bovine spongiform encephalopathy (BSE), proponents of COOL contend that it is a food safety measure.
On the flip-side of this, the tariffs that are being sought are huge and that is concerning to many parties. $3.7 billion is not a small number. Sources state that the tariffs could be 100 percent of a product’s value and the targeted industries will come from states whose lawmakers’ backed COOL regulations. The WTO has already agreed that Canada and Mexico may take these measures, but has not agreed to the dollar amount of these tariffs.
Critics of COOL say that the program has not had the desired impacts of food safety or consumer value. It has been a marketing measure, more than a food safety measure. For packers and processors, it’s created additional recordkeeping and labeling.
USDA estimated the costs to retailers, packers, and producers at $2.6 billion per year and added that COOL provided little measurable benefit to the consumers.
Additionally, producers in Canada and Mexico believe that fewer of their animals have been imported to the U.S. for growing and/or processing because of the increased paperwork and segregation COOL requires. Canada estimated that COOL cost its hog and beef industries $1 billion per year.
Tyson Foods has publicly shared that the program created additional costs in its supply chain due to the need to segregate meat and, as a result, it would discontinue accepting Canadian beef cattle shipped directly to its U.S. facilities. The food conglomerate also reiterated that the program had little value to its consumers.
The issue is messy with two very strong sides. Some in the middle have suggested that labeling be made optional, rather than mandatory. In this way, consumers still have the opportunity to understand the source of their food. In addition, many companies already have practices in place to support this type of labeling, so it wouldn’t require a change.
Another proposed option is modifying the current COOL policy to satisfy the WTO, Canada, and Mexico. Opponents of this are concerned that this could lead to another lengthy WTO review and during the interim the tariffs described above could be imposed.
Although there is not a clear cut answer, an answer about repealing COOL may come quickly if the Senate votes before its recess. As a beef producer, decide where you stand on the issue and understand both the costs and benefits. Be able to articulate your point by citing facts and let your representatives know your thoughts!

This article appeared in the June 24, 2015 issue of Minnesota Farm Guide.  Please reach out to Betty Berning at bberning@umn.edu or 320-203-6104 for more information.

Wednesday, July 8, 2015

Challenging Times & the Need for Financial Planning

By: Pauline Van Nurden, Extension Educator

Minnesota poultry producers are currently experiencing the impacts of the most devastating outbreak of avian influenza on record. To date, millions of turkeys and chickens across the state of Minnesota have been lost to the disease. Producers are dealing with many challenges at the current time – euthanizing birds; cleaning and disinfecting their premises; and all the other physical and emotional challenges related to starting production again on their farm.

It is easy to get wrapped up in the daily management of all of these tasks. And, it is difficult to begin considering the financial planning implications of this disease on the farming operation. Yet, it is important for producers to assess their current financial position, look at scenarios for the future, and assess the best path for the future success of their operation.

Wednesday, June 24, 2015

Outlook for 2015 and Beyond

By David Bau, Extension Educator

Good early season planting enabled much of the crop to get in the ground early across Minnesota. The weather scare of a possible drought has been relieved by spring rains so at this point the yield potential is good for the 2015 crop.  Ending stocks for the 2014 crops are larger for both corn and soybeans than the previous year and the potential for these to grow at the end of 2015 is possible with the right growing conditions.

Iowa State publishes balance sheet projections for both corn and soybeans and will update these again after the June 30th crop report is released. Current projections for corn with national yield of 165 bushels would have ending carryover declining from 1,835 million bushels at end of 2014-15 crop year to 1,540 million bushels with 89.2 million acres of planted corn. This projects a $4.20 national weighted average price and $4.15 December futures price at harvest, with at 50 cents basis this would translate to $3.65 cash corn at harvest. If national yields are 159 bushels per acre, projections are for $4.85 December futures at harvest or $4.35 cash and if yields are 170 bushels, December Futures would average $3.85 or $3.35 cash. With a 165 bushel national yield ending carryover would be at 5.8 weeks compared to 7.0 weeks for 2014-15 crop year and at low of 3.8 weeks for the 2012-13 crop year.

For soybeans with an average national yield of 44 bushels per acre, on 84.6 million planted acres, the national weighted average price is projected at $8.50. With November futures at harvest of $8.50 with a local 60 cent basis this would be $7.90 cash price. With a national yield of 41 bushels per acre, November futures would be $10.70 or $10.10 cash and if yield is 46 bushels per acre November futures would be $8.25 or $7.65.  Carryover at 44 bushels is projected at 5.1 week supply, with 41 bushels 2.3 weeks and with 46 bushels 7.2 weeks.  These compare to a low of 1.4 weeks for the 2013-14 crop year.  These balance sheets can be found at:
http://www.extension.iastate.edu/agdm/crops/outlook/cornbalancesheet.pdf for corn and at http://www.extension.iastate.edu/agdm/crops/outlook/soybeanbalancesheet.pdf for soybeans.

With these projected prices, it is hard for farmers to put marketing plans together at target prices that will cover their cost of production, which range between $4.50 to $5.00 for corn and $11.00 to $12.00 for soybeans.  Forward contract bids for 2015 corn and soybeans are under $3.50 and $9.00 respectively.  If prices do not improve, many farmers will experience losses in 2015. The price outlook for 2016 is not much better.  October 2015 cash prices are $3.41 for corn and $8.60 for soybeans, while October 2016 cash prices are $3.55 for corn and $8.67 for soybeans.

Lower yields might raise national prices, but will also lower the gross income per acre.  The current lower prices could create stronger demand and if the dollar weakens, this could increase export demand, the other option is a weather scare and the drought area has shrunk.  With the current outlook farmers will need to look for ways to lower their cost of production for 2016 if current prices continue.

Tuesday, June 23, 2015

Update: Frequently Asked Questions about Avian Influenza

By: Pauline Van Nurden, Extension Educator                                               Updated:  6/22/2015
Avian Influenza is affecting poultry
producers and the rural economy of Minnesota.


Highly pathogenic avian influenza (HPAI) has devastated not only the Minnesota poultry industry, but also farms throughout the Midwest and across the country. The following are current answers to frequently asked questions regarding this disease and the impacts of it. Fortunately, there have been no new infections of HPAI in Minnesota since June 5, 2015. Therefore, the information included here is an update from the original May 2015 publication.

Wednesday, June 10, 2015

Managing Farm Profit Margins Small Improvements Add Up

By Don Nitchie, Extension Educator

At today’s much lower grain prices, some producers may rightly ask, “What Profit Margins”? Regardless, there are always opportunities to improve profit margins or in the worst case, minimize losses.  This is true for a given year or across several years. The record high prices of the past several years has probably masked some less than best management practices of the past becoming a habit in some cases.

The Southwest Minnesota Farm Business Management Association and the Center for Farm Financial Management, both University of Minnesota Extension programs have examined the difference that small margin management decisions can make.  Don Nitchie, UMN Extension Educator in Ag. & Business Management indicates that they looked at the impact on the average association farm, that a 5% increase in gross income or revenue, through improved selling prices, yields or both-combined with a 5% decrease in costs.  This decrease in costs could be from negotiating lower purchase prices for inputs, more effective use of inputs applied or a combination of both.

It was found that if the average association farm could improve gross revenues by 5% and lowers operating costs by 5% over 2014 for 2015, these small changes result in Net Farm Income almost doubling, Return on Assets more than doubles from 2% in 2014 to 5% in 2015 and Net Worth grows by 9%.  Debt Repayment Capacity also almost doubles.  This is a significant improvement across several key financial measures.  Small changes have a big impact on your bottom line.

Is it possible to achieve a 5% improvement in gross revenue?  Probably.  Doing a little better than average on selling prices, yields or a little of both.  Is it possible to lower costs by 5%?  Probably.  Here is where it is true that successful managers do a lot of little things just a little better rather than doing one thing really well.  Being more effective with expenditures on inputs is the key.  Get the most revenue possible for each dollar spent on herbicides, pesticides, seed, fertilizer, rent, equipment investments and feed etc.  Sharpen your production management skills.  Know where your costs are relative to competitors.  It pays off when profits are scarce!

Wednesday, May 20, 2015

Frequently Asked Questions about Avian Influenza



By: Pauline Van Nurden, Extension Educator


Highly pathogenic avian influenza (HPAI) has devastated not only the Minnesota poultry industry, but also farms throughout the Midwest and across the country. The following are current answers to frequently asked questions regarding this disease and the impacts of it. Unfortunately, in recent days, the virus has continued to spread and impact additional producers. Therefore, the information included within is a current estimate only.

Thursday, May 14, 2015

Financial Planning Resources Available to MN Poultry Producers

by:  Pauline Van Nurden, Extension Educator

As Minnesota responds to the devastating Highly Pathogenic Avian Influenza outbreak, poultry producers have financial planning resources available for their needs. A team of experienced financial planners is offering assistance to poultry producers during this difficult time, as they begin to navigate their path to recovery. This team will aid producers as they work through the next steps of the business planning for their operation, including cash flow projection development; capital planning needs; and long range planning and goal setting. This team includes farm financial planners with University of Minnesota Extension; Adult Farm Business Management program of Minnesota State Colleges and Universities (MnSCU), and Minnesota Department of Agriculture’s Farmer Assistance Network (MFAN). Access to contact and more detailed information can be found here.

Monday, April 20, 2015

Flexible Farmland Rental Agreements Shares Risk between Landlord and Farmer

by David Bau, Extension Educator

The vast majority of farmland rental agreements are cash rental agreements where landlord receives a cash amount in spring or half payment in spring and fall or payment in fall.  With cash rental agreements, the landlord knows how much income they will receive and the farmer has the risk to grow a crop sufficient to generate enough income to cover input costs, the rental payment and hopefully have some left for profit. Current 2015 forward contract prices available are $3.50 for corn and $9.00 for soybeans, and that poses a problem for farmers with breakeven prices about $4.50 per bushel for corn and $9.00 for soybeans to cover the cost of production.  With a cash rental agreement, the farmer bears all the risk of prices not reaching the breakeven prices during the year, this is when a flexible rental agreement would work better.

With a flexible agreement landlords can still have a minimum rental payment in spring and then have an additional payment in the fall if criteria of the lease agreement are met.  I completed over 46 talks this fall and winter on rents and outlook for 2015 and used $3.50 corn price and $10.00 soybean price and average input costs to determine farmer profits and farmland rental rates.  I used yields of 180 bushels per acre and 50 bushels for soybeans. I used a cash rental rate of $250 per acre and the farmer would receive $60 per acre for their labor. Using these prices, farmers would lose $304 per acre for corn and $101 per acre on soybeans before government payments.  There will probably be some farm payments on the 2015 crops, using 460 per acre on corn and $30 per acre for soybeans the loss would still be $244 for corn and $71 per acre for soybeans. These numbers would suggest the base rent should be less than $250 based on current 2015 commodity prices.

Most Flexible Rental Agreements have a base rent component that assures the landlord this income and will allow the tenants to cover expenses even after a bad year with good crop insurance coverage.  Base rents vary by area but for Southern Minnesota the range for base rents could be from $100 to $200.  Then a flexible component is added, either based on price, yields, gross revenue or some combination of these components.  There are many ways to set up a flexible land rental agreement.  The farmer and landlord should determine what both are looking for.  The higher the base rent the more risk the farmer has, the lower the base rent the landlord is increasing their share of the risk with no crop insurance to protect their revenue.

Here are some short definitions of different types of flexible rental agreements:

  • Flexible Rents based on gross revenue: Rental payments are based on gross revenue of the farmland. It can include a base payment in the crop year and a final payment after the actual yield and price are determined.   Prices can be set once a year, twice, three, four or more times and then averaged.
  • Base rents plus a bonus: A base rent is paid and then a bonus may or may not be paid determined if yields exceed a base goal.  Then these additional bushels would be shared between landlord and tenant.  The bonus can also be determined by yield and price together or price alone.
  • Flexible rent based on yield only: The landlord receives a set base number of bushels with additional bushels if yields are higher than was determined for the base payment.  This can also be done with a cash payment based on yield and then price at an elevator or averaging multiple pricing dates. 
  • Flexible rent based on price only: The rental payment is based on crop prices.  Often it is an average price of the previous twelve months or a quarterly price which is multiplied times the bushels agreed to.  Rental payments can be made at the quarterly price setting times or half and half or after harvest.
  • Profit sharing flexible rent agreements: The landlord and the tenant share the profit from the farmland.  This agreement is similar to a 50-50 crop share lease where they share crop yields 50% to landlord and 50% to the tenant and some of the expenses are paid by each party.

Flexible rental agreements can be a good way to share yield and price risks between the landlord and the farmer.  If prices and yields are low, the landlord receives only the base payment, but if yields and or prices improve the landlord will receive a higher payment in fall sharing the extra income with the farmer.

Wednesday, April 15, 2015

Profitability of Dairy Farms in Minnesota

A recent analysis of the profitability and viability of dairy farms in Minnesota indicates that total family income on these operations is greater than US median Income.  FinBin data, supported by the Center for Farm Financial Management, was utilized in this analysis. 

Monday, April 13, 2015

2014 FINBIN Report on Minnesota Farm Finances



Crop farms and livestock farms had very different years in 2014 based on analysis of the 2183 farms that participated in Minnesota farm business management programs.  The median income for all farms was $43,129, up 3% over 2013.  But this small change hides major differences in the earnings of the diverse sectors of Minnesota’s farm economy.   

Crop farmers, for the second consecutive  year,   suffered  a  steep decline in earnings, while many livestock producers had one of their best years ever.  The 2014 FINBIN Report on Minnesota Farm Finances provides a full summary of 2014 results.  Data is provided by MnSCU Minnesota Farm Business Management and the Southwest Minnesota Farm Business Management Association.

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