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Extension > Agricultural Business Management News > 2016

Tuesday, December 27, 2016

Southwestern Minnesota Farmland Values Decline 2.6 percent in 2016

By David Bau, Extension Educator

At the end of each year for the last twenty-two 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. The trend continued in 2015 and 2016.  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 2.6%. 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, 2015 and again to $6,751 in 2016.

Data from these counties indicate prices decreased from an average of $6,929 in 2015 to $6,751 in 2016 or a decrease of 2.63%.  This is only the third 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 eight counties and while increased in seven counties including Cottonwood, Lyon, Martin, Murray, Nobles and Watonwan from 2015 to 2016.  There was a lot of variability in the numbers from 2015 to 2016. The largest increase was in Pipestone County with an increase of 21.2% while Lincoln experienced the largest decrease of 30.3% for the sales that met the bare farmland to non-related party transaction.

Thursday, December 22, 2016

What Are the Keys to Successful Farm Business Management?

By:  Pauline Van Nurden, Extension Educator

The new year is right around the corner and with that comes a blank page to create your financial plan for the coming year. As a farmer, do you ever struggle with what needs to be included in your financial management plan? Are you looking to boost your farm financial management skills? As you look to start the new year off on the right foot, make sure you have a handle on your business;s finances. 

  • Balance Sheet – Do you sit down at the beginning of the year to create a balance sheet? This gives a snapshot of what you own and what’s owed against it. You’ll then determine your net worth. Creating a balance sheet at least annually is important to assess your profitability and business gains. 
  • Income Statement – Do you look at the profitability of your farm over the last year by creating an income statement? The income statement measures profitability by determining the net income of your farm. This is calculated by subtracting the farm expenses from the farm revenue for the year. The best approach is to calculate the accrual adjusted income because this factors in changes in inventory and depreciation during the year. By doing this, you learn the true profitability of the operation. 
  • Cash Flow Projection – Do you create a plan each year for your money? A cash flow projection can help you do just that. The statement of cash flows looks at where cash is utilized in the operation – either for operating, investing, or financing activities. Remaining funds build your cash balance. Planning how every dollar will be best used is important and will get your business off to the right start in the new year. 
These financial statements are created using your farm records and aid you in making important financial decisions for your operation. The MN Soybean Research and Promotion Council knows the importance of sound farm financial management as well. They are generously sponsoring two workshop sessions aimed directly at these skills. “Taking Charge of YOUR Finances: How to Survive & Thrive” workshop will help farmers put these tools into action to gain financial management skills. To learn more go to z.umn.edu/thriveworkshop. To register go to z.umn.edu/thrive2017. For more information, contact Pauline Van Nurden at: pvannurd@umn.edu or 320-235-0726, ext 2008.

Monday, December 12, 2016

Look Back to Look Ahead

by Betty Berning
Extension Educator

The end of the year is rapidly approaching.  It is a special time of family, friends, and reflection.  As 2016 comes to an end, look at the year past and the year ahead.  I’d like to suggest that you ask yourself four questions:
  1. What went well?
  2.  What didn’t go well?
  3.  What do I want to do differently?
  4. Where do I want to go from here?
Being positive is important.    Start off by identifying areas where things went as planned.  It was a tough year.  You survived.  What did you do well?  What are you grateful for?  Maybe your family worked well together.  Perhaps the cows had great production.  In spite of the slow harvest, did you have record yields?  Look at your victories.  Spend some time analyzing them and asking “why did this happen?  What was my role in it?”  This will help you understand what behaviors or actions made a difference and what to continue in the future.  It is really important to focus on the positive during challenging times.

Moving on, think about what didn’t go well.  Was it milk price?  Completing harvest?  There were a lot of challenges this year.  Be honest with yourself about what didn’t go well and stick to the facts.  There is no need to throw a pity party.  Pick a few key issues.  Determine what you had control over and what you didn’t have control over. 

There are many things that fall in a gray area; we can’t completely control them, but we have some control.   For example, we don’t control milk price, but we can take advantage of opportunities to forward contract milk.  Another example is weather.  We don’t control the weather.  However, you can think about how to prioritize field work on good weather days and who might be able to pitch in so that you can get more done on those days. 

Look ahead, what do you want to do differently?  It might be as simple as avoiding some of the issues identifies in question #2.  It could also be that you are looking to make some changes to your farm in the form of expansion, adding a child as a business partner, hiring additional labor, etc.  These are opportunities for you to improve.

Last question:  Where do I want to go from here?  If you answer this questions after you’ve answered the previous three, this should be the easiest to answer.  This is where you can start to think about your farm’s vision and strategic plans.  Think about what your goals are for 2017 and even beyond (5 year goals?  10 year goals?)  What is it that you want to accomplish?   What changes need to occur?  If you’re thinking about expansion, do you have a plan in place?  Are you following that plan?  Where might your plan need to changed?  If you haven’t written these things out, write them out now.  Then you can revisit them on a regular basis.      

Not everyone likes to write out goals.  Some people like to stay in the present moment.  Generally speaking, that’s a good way to live on a daily basis; however, on occasion a business (any business, including a farm) must look at its past and learn.  It must also look forward to identify where it might like to go.  Without an idea of where you may be headed, it is difficult to know what steps are needed next.  In other words, without a roadmap, it’s hard to find your destination.    

2016 is almost over.  2017 will be a new year that is completely different.  There will be new challenges and opportunities.  Take time to reflect.  Think of it as strategic business planning.  Talk to your business partners and families about your answers to the above questions.  Discuss their answers to the questions.  Together you can create a great plan and vision for your business moving forward. 

Although 2016 hasn’t been easy, be sure to be positive and focus on what you can control.  Keep after your goals and adjust them where you need to.  Finally, be patient.  Lots of small steps add up over time.  Life if journey made up of many steps.  We don’t arrive at our destination immediately.  Keep stepping forward toward your destination.  With time and hard work, your many small steps will bring you to your goal.  Best wishes to you!

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, go to the "Farm Tax & Legal Issues” 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!
               



Thursday, October 6, 2016

MN Livestock Investment Grants Available

Funds for On-Farm Livestock Improvements 



Recently the MN Department of Agriculture (MDA) announced there are $2 million in grants available for improvement projects on MN livestock farms. These funds are available through the Agricultural Growth, Research, and Innovation (AGRI) Program.

Successful applicants are reimbursed 10 percent of the initial $500,000 of their investment. The maximum available per year for a producer is $25,000.

Applications are due by Dec. 16, 2016. Funded projects will need to be completed between Jan. 1, 2017 and June 30, 2018. Complete details of this program, including application documents, can be found on the MDA website.

Financial Help Available For Farmers Impacted By Floods


Updated Disaster Loan Program Available


The Minnesota Rural Finance Authority (RFA) has just released updated information regarding their Disaster Loan Program. Farmers who experienced losses as a result of recent flood conditions can qualify for a zero-interest loan through the RFA. This RFA loan is a participation (or essentially shared) loan with the producer's current lender. The RFA portion of the loan is limited to 45 percent of the principal balance, up to a maximum amount of $200,000. This loan can be used to "replace or repair items lost or damaged due to flooding and not covered by insurance" according to the MN Department of Agriculture News Release.

For more information, farmers should contact their local lender or the MN RFA at 651-201-6004.

Friday, September 30, 2016

Skills for Negotiating; Land Rents, Contracts, Purchases and Other Business Agreements

by Don Nitchie, Extension Educator

Over time, you can fall into a mind-set, especially with long-time landlords, lenders and other suppliers or vendors you may work with—that all they care about is the “bottom line”. This maybe true for some but, not necessarily for all. Now with the pressure caused by tight or negative profit margins, to reduce costs—good negotiating skills and practices can be a significant business advantage. This can be the case even with your long-term business relationships and certainly with new ones you are considering. As a decision-maker you have lots of good data at your disposal-from FINBIN and many other sources. While this data is very useful in business negotiations, “people skills” are required beyond just the use of or knowledge of data, to be successful in negotiating. The following are negotiation techniques highlighted in Katie Shonk’s Guidelines for “Getting to Yes” blog post, with examples that have been customized for specific farm business situations:

1. Separate the people from the problem or the deal. When negotiating, it’s easy to forget that our counterparts have feelings, opinions, values, and unique backgrounds that contribute to what they do and say during talks. When misunderstandings and conflict arise in negotiation, we need to deal with the “people problem” directly rather than trying to gloss over it with concessions. Strive to imagine the situation from your counterpart’s viewpoint. If someone is refusing to back down from a hardline position, ask them how they think things are going. Exploring each side’s perceptions openly and avoiding the tendency to blame are key negotiation skills.

2. Focus on interests, not positions. We tend to begin our negotiation by stating our positions. A farm tenant may start out by stating, “This rent is too high”. When we stake out firm positions, we set ourselves up for impasse. In our goal of getting to yes, we need to draw out the interests underlying our counterpart’s positions by asking questions, such as; “how do you feel the weed control is looking on your land—or the drainage, or erosion control’? By identifying what interests are motivating the other party, and sharing your own interests, you can open up opportunities to explore tradeoffs across issues and increase your odds of getting to yes.

3. Learn to manage emotions. Be sure that you and your counterpart have ample opportunities to express and discuss any strong emotions related to your negotiation. Allowing one another to speak your mind will benefit both sides. When you know that you will have your turn to express how you’re feeling, it will be easier for you to listen when your counterpart has his turn. A landlord may have strong feelings about the care and upkeep of their farm, the economy or their financial situation-for instance.

4. Express appreciation. Expressing appreciation can be a means of breaking through impasse. “No one likes to feel unappreciated, and this is particularly true in a negotiation,” Express appreciation by working to understand the other’s perspective, seeking merit in that perspective, and communicating understanding through words and actions—all critical negotiation skills.

5. Escape the cycle of action and reaction. “If the other side announces a firm position, you may be tempted to criticize and reject it. If they criticize your proposal, you may be tempted to defend it and dig yourself in . . . if they push you hard, you will tend to push back.” To head off this vicious cycle, avoid escalation by refusing to react. Instead, channel your resistance into more productive negotiation strategies, such as “exploring interests, inventing options for mutual gain, and searching for independent standards.”

Incorporating these methods into your negotiation tool kit could prove very helpful in your negotiations during these tight economic times in agriculture. They may not bear fruit in every case but, if they help in just a few situations it could add up across multiple landlords, suppliers and markets you sell to. Experiment and give some of these techniques a try.

Source: Harvard Law School Daily Blog, Six Guidelines for “Getting to Yes”, Katie Shonk, Oct. 2015

Skills for Negotiating; Land Rents, Contracts, Purchases and Other Business Agreements

by Don Nitchie, Extension Educator

Over time, you can fall into a mind-set, especially with long-time landlords, lenders and other suppliers or vendors you may work with—that all they care about is the “bottom line”. This maybe true for some but, not necessarily for all. Now with the pressure caused by tight or negative profit margins, to reduce costs—good negotiating skills and practices can be a significant business advantage. This can be the case even with your long-term business relationships and certainly with new ones you are considering. As a decision-maker you have lots of good data at your disposal-from FINBIN and many other sources. While this data is very useful in business negotiations, “people skills” are required beyond just the use of or knowledge of data, to be successful in negotiating. The following are negotiation techniques highlighted in Katie Shonk’s Guidelines for “Getting to Yes” blog post, with examples that have been customized for specific farm business situations:

1. Separate the people from the problem or the deal. When negotiating, it’s easy to forget that our counterparts have feelings, opinions, values, and unique backgrounds that contribute to what they do and say during talks. When misunderstandings and conflict arise in negotiation, we need to deal with the “people problem” directly rather than trying to gloss over it with concessions. Strive to imagine the situation from your counterpart’s viewpoint. If someone is refusing to back down from a hardline position, ask them how they think things are going. Exploring each side’s perceptions openly and avoiding the tendency to blame are key negotiation skills.

2. Focus on interests, not positions. We tend to begin our negotiation by stating our positions. A farm tenant may start out by stating, “This rent is too high”. When we stake out firm positions, we set ourselves up for impasse. In our goal of getting to yes, we need to draw out the interests underlying our counterpart’s positions by asking questions, such as; “how do you feel the weed control is looking on your land—or the drainage, or erosion control’? By identifying what interests are motivating the other party, and sharing your own interests, you can open up opportunities to explore tradeoffs across issues and increase your odds of getting to yes.

3. Learn to manage emotions. Be sure that you and your counterpart have ample opportunities to express and discuss any strong emotions related to your negotiation. Allowing one another to speak your mind will benefit both sides. When you know that you will have your turn to express how you’re feeling, it will be easier for you to listen when your counterpart has his turn. A landlord may have strong feelings about the care and upkeep of their farm, the economy or their financial situation-for instance.

4. Express appreciation. Expressing appreciation can be a means of breaking through impasse. “No one likes to feel unappreciated, and this is particularly true in a negotiation,” Express appreciation by working to understand the other’s perspective, seeking merit in that perspective, and communicating understanding through words and actions—all critical negotiation skills.

5. Escape the cycle of action and reaction. “If the other side announces a firm position, you may be tempted to criticize and reject it. If they criticize your proposal, you may be tempted to defend it and dig yourself in . . . if they push you hard, you will tend to push back.” To head off this vicious cycle, avoid escalation by refusing to react. Instead, channel your resistance into more productive negotiation strategies, such as “exploring interests, inventing options for mutual gain, and searching for independent standards.”

Incorporating these methods into your negotiation tool kit could prove very helpful in your negotiations during these tight economic times in agriculture. They may not bear fruit in every case but, if they help in just a few situations it could add up across multiple landlords, suppliers and markets you sell to. Experiment and give some of these techniques a try.

Source: Harvard Law School Daily Blog, Six Guidelines for “Getting to Yes”, Katie Shonk, Oct. 2015

Monday, September 12, 2016

What Direction will 2017 Farmlands Rents Go? Stay the Same? Up? or Down?

by David Bau, Extension Educator

Each year I put together tables listing actual farmland rental rates by county from Adult Farm Management Records.  Unfortunately farmers and landlords are starting to negotiate 2017 farmland rental rates and the last actual numbers available are for 2015 so I am forced to estimate figures for 2016 and 2017.  When I did this last year I used an estimate of a 5% decline and the actual figure came in at 5.3% decline statewide.  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.

But what direction should 2017 farmland rental rates go?  How do I determine an estimate for 2017 farmland rental rates?

Should they stay the same? 
Landlord property taxes continue to increase, while schools pass referendums that also increase taxes. If rents stay the same, a landlord’s income will go down if taxes increase and if taxes are not increasing the revenue to the landlord will remain constant, when they have grown accustomed to significant increases since 2007.

Should they go up?
Landlord expenses increase as property taxes increase and they want to pass this cost increase onto the farmer and increase the rental rate. Another example might be where there has been a long term lease in place where the rental rate has not changed for many years and this rate might be considered low today and due for an increase.

Should they go down?
Farmers have experienced decreasing corn and soybean prices since record high prices in 2012 for corn and 2013 for soybeans and current prices offered for 2017 corn and beans are below what farmers sold their grain for in 2007, when rents were $125 per acre. Average production budgets for 2017 indicate losses for farmers if rents are above $100 per acre. With the average rents in Table 1 in 2015 averaging $217 per acre, to go down to $100 per acre would be over 50% reduction in average rents.

So you could make an argument for all three scenarios, but looking at the economics for corn and soybean production in 2017 using 180 bushels per acre, yield and $3.25 price per bushel, for corn and 50 bushel yield and $9.00 price for soybeans, income would be $585 for corn per acre and $450 for soybeans. With average cost projected to be $555 for corn and $290 for soybeans before rent and labor, this would leave $30 per acre for corn and $160 per acre for soybeans to be shared between the landlord as rent and the farmer and income. This would be an average of $90 per acre to be shared.

So I projected a 7% decline in rental rates from 2016 to 2017 for figures listed in Table 1.

But from earlier examples 2017 farmland rates could go down by over 50% or increase from 2016 rates depending on the individual situations.  It will be a very challenging year for both the landlord and farmer to determine where the 2017 farmland rental rate should be.

Table 1. Average County Farmland Rental Rates from 2007 to 2017



What Direction will 2017 Farmlands Rents Go? Stay the Same? Up? or Down?

by David Bau, Extension Educator

Each year I put together tables listing actual farmland rental rates by county from Adult Farm Management Records.  Unfortunately farmers and landlords are starting to negotiate 2017 farmland rental rates and the last actual numbers available are for 2015 so I am forced to estimate figures for 2016 and 2017.  When I did this last year I used an estimate of a 5% decline and the actual figure came in at 5.3% decline statewide.  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.

But what direction should 2017 farmland rental rates go?  How do I determine an estimate for 2017 farmland rental rates?

Should they stay the same? 
Landlord property taxes continue to increase, while schools pass referendums that also increase taxes. If rents stay the same, a landlord’s income will go down if taxes increase and if taxes are not increasing the revenue to the landlord will remain constant, when they have grown accustomed to significant increases since 2007.

Should they go up?
Landlord expenses increase as property taxes increase and they want to pass this cost increase onto the farmer and increase the rental rate. Another example might be where there has been a long term lease in place where the rental rate has not changed for many years and this rate might be considered low today and due for an increase.

Should they go down?
Farmers have experienced decreasing corn and soybean prices since record high prices in 2012 for corn and 2013 for soybeans and current prices offered for 2017 corn and beans are below what farmers sold their grain for in 2007, when rents were $125 per acre. Average production budgets for 2017 indicate losses for farmers if rents are above $100 per acre. With the average rents in Table 1 in 2015 averaging $217 per acre, to go down to $100 per acre would be over 50% reduction in average rents.

So you could make an argument for all three scenarios, but looking at the economics for corn and soybean production in 2017 using 180 bushels per acre, yield and $3.25 price per bushel, for corn and 50 bushel yield and $9.00 price for soybeans, income would be $585 for corn per acre and $450 for soybeans. With average cost projected to be $555 for corn and $290 for soybeans before rent and labor, this would leave $30 per acre for corn and $160 per acre for soybeans to be shared between the landlord as rent and the farmer and income. This would be an average of $90 per acre to be shared.

So I projected a 7% decline in rental rates from 2016 to 2017 for figures listed in Table 1.

But from earlier examples 2017 farmland rates could go down by over 50% or increase from 2016 rates depending on the individual situations.  It will be a very challenging year for both the landlord and farmer to determine where the 2017 farmland rental rate should be.

Table 1. Average County Farmland Rental Rates from 2007 to 2017



Use Your Income Statement to Understand Your Farm's Finances


by Betty Berning, Extension Educator

I’ve written a couple articles this year and all have been related to farm finances.  I am passionate about finance and economics, but I understand that finance isn’t the most glamorous topic for most people.  Would you believe that I’ve tried very hard to make these articles as exciting as possible?!  I know, I know, they’re not very exciting! 

Having said that, finances are very important.  They are critical to a farm’s success.  Without strong finances and a solid understanding of them, one’s operation will have a difficult time surviving.  Anyone can become better at understanding finances, it just takes time and practice (repetition).

I’ve written about understanding revenue and expenses and balance sheet.  If you recall, the balance sheet is one of four financial statements.  The other three are 1.  Income statement, 2.  Statement of cash flows, and 3.  Statement of retained earnings.  For this post, I’ll focus on what an income statement is and what it tells you.

An income statement measures profitability over time.  For example, your Schedule F from your tax return is an income statement of sorts.  Your Schedule F measures your income and expenses over the past year (a period of time) and calculates what is leftover (profit).  This is considered a cash-based income statement.  Table 1 below illustrates an accrual-based income statement.  You can see the types of items that are included as income and expenses and the net farm income for the year.  The table includes accrual adjustments which give you a better picture of how much money your farm actually earned.

Table 1  Accrual Based Income Statement
Income

Crop sales
$403,588
Crop inventory change
$50,626
Livestock sales
$680,442
Livestock inventory change
-$97,475
Government payments
$48,418
Other cash farm income
$141,966
Change in accounts receivable
-$65,576
Gain or loss on hedging accounts
$4,367
Change in other assets
$1,690
Gain or loss on breeding lvst
-$923
Gross farm income
$1,167,124


Expenses

Cash operating expenses
$1,072,018
Change in prepaids and supplies
$2,815
Change in growing crops
$91
Change in accounts payable
-$9,747
Depreciation
$77,130
Interest paid
$35,471
Change in accrued interest
$2,197
Total operating expense
$1,179,975


Net farm income from operations
-$12,851
Gain or loss on capital sales
-$759
Net farm income
-$13,610
Source:  Center for Farm Financial Management, FinBin

By looking at your income statement, you can see where you are making and spending money.  Take some time to really analyze your statement.  Identify the areas where you spend the most money and the least money.  Ask yourself, where am I making the most money?  The least?  Are you surprised by your answers?  

I’d also suggest comparing your current income statement to a past income statement.  An easy way to do this is to compare your 2014 tax return to your 2015 tax return.  Or you could compare one month’s income statement to another.  For example, compare your June 2016 income statement to your May 2016 income statement.  Analyze what you see.  Notice where there are differences.  Did you spend more money on one particular expense?  Did you make more money in one time period than another?  Make sure you understand and can explain any variability you see in your income statements.

Remember the balance sheet that I wrote about last time?  Find that when you’re doing your analysis.  There are a few simple ratios you can calculate using your income statement and balance sheet.  These ratios will help you understand how efficiently your operation is running.


1.        Return on Assets (ROA):  This helps you understand how efficiently you are using your assets create profits.  Generally speaking, anything over 8% is very good.  Less than 4% indicates an opportunity to improve.  You can calculate ROA using this formula-

2.        Return on farm equity (ROE):  This ratio illustrates how much money you are making for each dollar of equity.  A ROE of over 10% is excellent; ROE of less than 3% suggests more work is needed.
The analysis described in the previous paragraphs might seem a little confusing and daunting.  I strongly encourage you to spend some time trying to do this analysis.  Dig into the numbers.  Sit with your banker or farm business management instructor.  Try to understand your numbers.

By doing this, you can begin to see where you might have opportunities to increase your revenue or decrease your expenses.  Additionally, you may be able to spot potential problem areas before they become problems and take steps to avoid them all together!  One of the keys to financial success is being proactive when opportunities and threats arise.  Finally, careful analysis of your income statement can help you budget for the future.  You can utilize your monthly or yearly income statement to estimate your revenues and expenses for the next month or year.  Again, this will allow you to be proactive in your finances.

I’ll go back to what I said at the beginning- finance isn’t the most glamorous topic, but it is critical to the success of a farm.  If you aren’t spending much time digging into your farm’s finances, start now.  Over time it will get easier and hopefully it will provide you with tools for even greater success.  
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