A key to success in any field is being a life-long learner. Individuals who are life-long learners are always seeking ways to learn, grow, and improve their lives. One of the great things about the internet is the amount of resources that are available to help you on your quest for learning. In this post, I would like to share three great resources from the University of Minnesota that are free of charge and available online.

·         Ag Plan website– www.agplan.umn.edu. I believe that every farming operation and agbusiness should have a business plan. A business plan serves as a roadmap for your business, and allows you to put your goals and objectives on paper. Often the words “business plan” intimidates people. They think of it as a tedious process, and some do not even know where to start. The Ag Plan site makes it easy for you to develop a business plan. First, you will need to set up a password and user id. Once that is completed, you are ready to roll. The website contains tips and resources on what to include in your plan. If you are a visual learner, you can view sample plans for ideas. In addition, you can add reviewers to your plan (like me) that can go online and add comments or suggestions. It is an easy way to start a business plan and get feedback from others. Your information will be completely confidential, and available only to you and the individuals you add as reviewers.

·         Ag Transitions website  - https://www.agtransitions.umn.edu/. AgTransitions helps farmers & ranchers develop a plan to transition their business to the next generation. The website contains tips and resources on what you need to include in your plan, and ways to stimulate multi-generational discussions. You can share your plan with family members and your transition team. It gives you the opportunity to interact with reviewers – your business advisors, educators, or consultants – for feedback and assistance.

·         Interpreting Financial Statements and Measures website – www.ifsam.cffm.umn.edu. This website helps you learn to use your financial statements effectively. Additionally, it will help you to understand how to interpret common financial statements, acquire an enhanced skill set to aid in managing your farm business, and build self confidence in the area of finance.

The websites are set up to be very user friendly. Each website has training videos available to watch at your convenience. Think of it as a 24-hour classroom designed to help you in your farming operation.

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This spring, we have had a flood, followed by a tornado, followed by another flood. It’s definitely been the kind of year that makes me ask my husband, “Have you ever thought about another occupation?” Of course, I’m just kidding him (kind of). But most importantly, no one was hurt in any of these events. While reflecting on being thankful, I thought about our insurance coverage and the peace of mind it has brought us.

Insurance is an important component of any small business. Not only does it manage your risk, but also protects you from financial disaster. The main types of insurance all producers need to carry include liability insurance,  property (including crop) and casualty insurance, health, life,  and disability insurance. Most producers have property and crop insurance policies, but forget about the importance of other types of insurance.

According to Forbes magazine, farming is ranked number five in the list of America’s 10 Deadliest Jobs. Producers are more likely to become disabled than killed in a farming accident. A family’s financial status can be devastated by a severe injury or illness. A disability policy, in addition to health and life insurance, is an excellent risk management tool.

The potential legal liability from agricultural activities and land ownership is large. The liability can be potentially devastating. Possible farm liabilities include misuse of chemicals, injury to farm visitors, liability for farm employees, escaping animals, and motor vehicle accidents. A liability policy can protect a producer from claims or lawsuits from individuals who have allegedly been injured by the producer’s negligence. The most common liability policy being written for producers is called the Farmers Comprehensive Personal Liability policy. It is typically part of an umbrella policy that includes property, homeowners, and casualty. Be sure to check with your insurance agents to determine if you have sufficient insurance coverage.

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The deadline for ACRE sign-up is just around the corner. ACRE, added under the Food, Conservation, and Energy Act of 2008 (Farm Bill), is an alternative revenue-based safety net to the price based safety net provided by the counter-cyclical payment for crop years 2009-2012. Signing up for ACRE is completely optional, and producers may elect the ACRE alternative on a farm-by-farm basis. A decision to enroll in ACRE may be made in any of the crop years 2009-2012. If you chose not to enroll in 2009, you can still enroll this year. However, once you enroll in ACRE you are in it until the end of this Farm Bill. A farm enrolled in ACRE will remain in it even if the farm is sold or rented by someone else.  All individuals (owner, tenant, etc.) on the farm, must agree in writing to participate in the ACRE program. While there is a potential for big payments, producers who elect and enroll a farm in ACRE must agree to: (1) forgo counter-cyclical payments, (2) a 20% reduction in direct payments, and (3) a 30% reduction in the marketing assistance loan rates for all commodities produced on the farm.

The sign-up deadline for the Average Crop Revenue Election (ACRE) Program is June 1, 2010. There are several decision tools available to help you analyze the ACRE program. The two that I use the most are from the University of Missouri Food and Agricultural Policy Research Institute (FAPRI) and Iowa State’s Ag Decision Maker.  Both tools are multi-state Excel spreadsheets that can help you evaluate the decision to enroll in the new ACRE program or to stay with the current Direct and Counter-Cyclical (DCP) program. The decision tools are available for download on the following websites:

 www.fapri.missouri.edu

http://www.extension.iastate.edu/agdm/info/farmbill.html

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Title IX (Renewable Energy Provisions) of the 2008 Farm Bill contains the REAP program. The Rural Energy for America (REAP) program provides loan guarantees and grants to agricultural producers and rural small businesses to purchase and install renewable energy systems and make energy-efficiency improvements. Renewable energy systems include those that generate energy from wind, the sun, biomass, geothermal sources, or that produce hydrogen from biomass or water using renewable energy, and ocean and hydroelectric source technologies.

Energy-efficiency projects typically involve installing or upgrading equipment to significantly reduce energy use. For example, replacing grain dryers, installing perforated floors and fans for air drying, or converting an existing grain bin into a grain drying bin by installing grain drying equipment. Energy audits and feasibility studies are also eligible for assistance. Eligible applicants for energy audits include State, tribe, or local governments; land-grant colleges and universities; rural electric cooperatives; and public power entities. Eligible applicants for feasibility studies include rural small businesses and agricultural producers. For all projects, the system must be located in a rural area (population less than 50,000), must be technically feasible, and must be owned by the applicant. For more information about this program, visit http://www.rurdev.usda.gov/rbs/farmbill or call your local USDA Rural Development Office.

This program offers a great opportunity to update your grain drying system on your farm and become more energy efficient. These projects require a written grant, and involve a lot of paperwork. However, don’t let that hinder you from investigating this program!

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This time of year, people start thinking about resolutions and planning for next year.  Here is a list of farm management issues to plan for in 2010.           
(1) Planning for 2010 – I know that several of you have already planned for 2010 as far as crop acres, livestock numbers, etc. If you haven’t, you need to think about it now. Look at the whole picture and not just 1 or 2. Land values have been increasing, but don’t expect them to continue to go up. Be sure to exercise caution as you plan for the new year.
(2) Think about your marketing plan – Marketing is a critical part of making a profit in farming, and it is extremely important to your operation. Past history shows that from now until June is the best time to forward price a portion of your crop. Keeping track of the markets can put several dollars in your pocket that you won’t have to find later. Extension (and others) has many marketing resources to assist you in this regard. Get a plan together and use it!
(3) Deciding on insurance coverage – this may seem rather simple. You can decide between hail versus multi-peril or even decide to have no coverage at all. Crop insurance has several options to look at (crop revenue coverage, etc.) if you go that route. This year livestock producers have insurance coverage that they may want to consider as well. You must determine if it will work economically in your situation. Another issue with insurance to think about is if you lease out your land for hunting (for a fee). Your normal farm insurance may not cover that so additional coverage may be necessary. The same could be true for value-added enterprises such as selling meat products or food products off of your farm.
(4) Reviewing leases & contracts – It’s a good idea to review any farm leases and other legal contracts on an annual basis. It is a good business practice to have something in writing. A written lease is better than an oral agreement in so many different aspects.
(5) Analyzing major purchases beforehand – Major purchases are a part of the capital intensive business of Agriculture. It is always a good idea to analyze purchases of equipment, breeding livestock and land as far ahead of when they occur as you possibly can. There are a number of considerations to think about such as:
– can I repay a loan to purchase this?
- will it make my operation more efficient?
- will it still look like a good investment if
           prices fall substantially?
- what are the income tax implications?
(6) Staying straight on “legal” concerns – farmers and landlords face many issues today with potential legal consequences. It is critical that you know what those laws are and how they affect you and your farm. These can range from a boundary fence concern to oral land leases. Studying this beforehand could save you afterward.
(7) Review your financial progress – this may not be the time of year to do this but it is something that you should do. A yearly review of your balance sheet and how you’ve progressed can tell you a lot. The same is true for your profit and loss (tax returns at the least) statement. Trends over a 3 or 5 year period (looked at the same relative timeframe each year) can show you if you’re moving in the right direction or if modifications might be needed.

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Farm estate and business planning is one of the most important activities that you and your family will ever be involved in.  Even though no one wants to think about their own mortality, death is one of the few certainties we have in our life.  Therefore, why not be prepared for that day instead of allowing your family to be burdened with events that might not correspond with what you had intentionally planned?  Here is a list of reasons why you should plan your estate:

1. To provide (financially and otherwise) for your spouse or significant other
2. To be certain that your wishes are followed out when you’re gone
3. Lay out a plan for the distribution of your assets after your death
4. Guide the continuation of your farm or other business
5. Specify for the care of any minor children or any special needs dependents

The success of an estate plan depends upon the care and consideration that is put in the estate planning process.  To begin the process, you’ll need to start collecting certain pieces of information.  Take stock of your present situation by doing an inventory of your present family and financial situation.  Do an analysis of your farm/business operation in order to determine overall profitability, including cash flows, profit and loss statements, etc.  Have an updated balance sheet or current financial statement.  Gather together and determine which assets you have (bank accounts, insurance policies, etc.) that have a title and which ones that do not.  Start listing clear goals and objectives regarding what you wish to achieve with your estate during life and how you would like it dispersed after your death.

Second, you need to make a realistic appraisal of your family situation and the people problems that may arise.   Do your children get along well, or are there rivalries that must be taken into account?  Do the potential heirs have the ability to manage money or property?  Could they take over the farm/business and make it go?  Does your spouse have the time or interest to manage the farm/business?  What would be the fair treatment of heirs if the farm/business was continued or terminated?  Do the heirs really want to farm or farm together?  How will you equitably treat those heirs who do not receive farm property?  These questions are asked to assist in the planning process and ascertain that no hardships are placed on any parties involved in the transition.

Third, be sure to ask plenty of questions and familiarize yourself with planning tools that can be of assistance.  Knowing the basics of estate planning can help make decisions easier.  Retain competent legal and financial advisors to assist you with your estate plan.  Once your decision is made and plans are set, be sure to share these goals and plans with your family.  Your family will be affected by the plan you choose and family discussions now will minimize or eradicate disagreements later down the road.  In addition, your family may raise some questions or issues that you hadn’t thought of previously.  One can never go wrong by planning ahead and involving as many resources as possible.

Finally, remember to evaluate your estate plan annually to determine if it still satisfies your goals and objectives.  If it doesn’t, check with your advisors and find out what new alternatives should be considered.  In addition, changes in tax laws and legal requirements necessitate periodic reviews and revision of the plan.

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American Recovery and Reinvestment Act of 2009 – Extends Two Big Electable Deductions:

The American Recovery and Reinvestment Act of 2009 (The 2009 Act) contains several substantial tax provisions which may make 2009 a buying opportunity year for “big items”. We need to clarify that purchases should never be based solely on tax benefits. However, if a business is positioned for expansion, now may be a great time to be taking advantage of buying opportunities.

For 2009, Section 179 capital asset expensing will be maintained at the $250,000 maximum deduction level. You may recall Section 179 was increased to the $250,000 level last year as part of a 2008 stimulus package. The 2009 Act extended this increased deduction for another year. The dollar-for-dollar phase-out beings for investments over $800,000. Qualifying assets for Section 179 can be new or used.

For 2010, the maximum Section 179 deduction will be $134,000. The investment limit before the dollar-for-dollar phase-out will be $530,000.

For tax years after 2010, the Section 179 deduction limitation is scheduled to decrease to $25,000, and the investment limit (before phase-out) is scheduled to decrease to $200,000. Neither of these two amounts will be indexed for inflation.

Another big electable deduction, the 50% “first year” bonus depreciation on the purchase of new qualifying assets, is also extended through December 31, 2009. Bonus depreciation was implemented as part of last year’s 2008 stimulus package. Qualified assets for bonus depreciation are assets that meet the following tests:

·       MACRS eligible property with a recovery period of 20 years or less (this includes general purpose farm buildings);

·       Acquired by the taxpayer before 12/31/09;and

·       Original use must commence with the taxpayer (i.e., new property).

Five Year Depreciation Recovery – New Farm Machinery & Equipment Purchased in 2009:

The “Tax Extenders and Alternate Minimum Tax Relief Act of 2008” mandates a 5 year MACRS recovery period for new farm machinery and equipment if the assets meet the following three requirements:

1.     Original use starts with the taxpayer after 12/31/08

2.     Placed in service prior to 1/1/10

3.     It is not a grain bin, fence, or other land improvement, or cotton-ginning asset.

The 5-year recovery period substitutes for the traditional 7-year recovery period. While taxpayers can opt for the Section 179 expensing, additional first-year bonus depreciation, or elect to utilize a 10-year ADS recovery period using straight-line depreciation – taxpayers are not able to opt for the traditional 7-year MACRS depreciation.

The 7-year depreciation recovery period remains available for grain bins, fences, and some other land improvements.

After harvest is over, schedule a time to visit with your tax preparer about these tax provisions. 

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Storing grain is an important marketing tool. Large crops may create a storage crunch. “What should a grain bin rent for?” The answer depends upon condition of the bin, handling or unloading equipment, drying or aeration capability, and bin location.

The bin owner would like to recover all costs and earn a return on investment. This is often referred to as the DIRTI-5 (Depreciation, Interest, Repairs, Taxes, and Insurance). Dividing the sum of the DIRTI-5 by the capacity of the grain bin would equal the amount per bushel rent that provides the owner’s desired return. This could be a starting point for lease negotiation.

Example: Assume the bin value is $10,000 and holds $10,000 bushels. Equipment (grain spreader, bin sweep auger, aeration fan and motor, unloading auger and motor, etc.) value is $3000. Total value of bin + equipment = $13,000. Interest = 9%.

So in this example, you would charge $0.15/bushel for storage.

Most grain bins rent for something less than commercial storage charges. Commercial storage is usually higher because grain handling and management services are provided. The elevator also assumes some of the risk associated with storage. Depending upon competition and storage availability, typical historical commercial storage rates have been 3 to 4 cents per bushel per month for actual bushels weighed in. In comparison, grain bin rents are often 1 or 2 cents per bushel per month and are usually calculated on bin capacity rather than measured bushels stored.

Grain bins are usually rented for several months or a year at a time. One or two months rent wouldn’t recover much of the bin owner’s cost or investment, so owners prefer that the tenant guarantee a minimum return. Rental rates of 11 to 15 cents per bushel per year (calculated by bin capacity) are common. This compares with most minimum commercial storage charges, but the tenant would have the use of the storage for a much longer period of time without additional monthly storage charges.

Bin rents get more complicated if grain handling and drying equipment are included. Repair and maintenance costs are higher and less predictable for the additional equipment. Allowance in the rent should be made for whoever pays these costs. Normally it works better if the tenant can pay for electricity and dryer fuel since these will depend upon the number of bushels and how wet the grain is. However, this isn’t always possible. For example, the dryer may be connected to the same electric meter that the owner’s house and other buildings are connected to. This would require an estimate of electricity use that both parties agree on or an allowance in the owner’s rent to cover the electrical charges.

Location and convenience are important. Bins that are in good condition, with unloaders that work and are located so that semi trailers can be loaded under nearly all weather conditions, offer the tenant several advantages that may be worth a higher rent. With commercial storage, (while not required) producers often feel obligated to sell the grain wherever it is stored. Grain in a bin can be unloaded and sold anywhere. Storing grain offers marketing flexibility and can return profits. If they can be found, renting a bin can be an alternative to commercial storage.

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Before harvest starts, farm landlords and tenants wanting to make changes in their lease agreements need to be reviewing the terms of their current rental agreements. Hopefully you have written leases to review. This is a particularly important time of the year because there is typically a lease termination time notification period listed in the terms of a lease. An additional point is many landlords and tenants are unaware that when terminating or changing verbal leases, they must give the other party written notice prior to the end of the lease agreement anniversary. 

An advantage of a written lease is it will state the date the lease agreement was made. If you have a verbal lease that has been in existence for several years, it may be difficult to determine the anniversary date. Was your lease agreement entered into on January 1, March 1, or some other date? If you want to terminate a verbal lease, put your intentions in writing and deliver the notice to the other party. Each state has different guidelines regarding a verbal lease. Be sure to contact your local Extension office to see what the guidelines are in your state.

Again, this is where a written lease would be valuable because it would eliminate the potential debate over the anniversary date of the lease agreement. Remember that farming is a business. Putting a lease in writing is just a good business practice that protects both parties. So if you currently have an oral lease, even if you do not plan to change the terms of the lease, there is no better time than now to put it in writing.

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Phase 3: Developing a Transition Plan

Once you have decided on a long-range plan, your next step involves deciding “how to get there from here.”  Usually no one can jump right in and make all necessary changes at once. Therefore, you need to ask yourself what can be done now, and what is the most important.  Transition planning involves making production and financial projections for use in deciding the best way to achieve your long-range plan.  These projections help the owner/manager to think through production and financial details of a new undertaking.

Phase 4:  Finalizing your Plan

Before finalizing your plan, be sure to check with your lender and other resource providers.  Major changes usually require additional capital, so it is important that your lender agrees with your plan. Changes in a farming operation may also include tax and legal implications.  Check with your tax advisor or attorney, in addition to your lender.  Once again, be sure to include your family and business partners in the planning process.

Phase 5:  Implement your Plan

The last thing to do before implementing your plan is to go through a checklist. If you are making substantial changes, work with your lender on securing funding.  Be sure to define the roles that family members and/or business partners will be playing.  Look at existing contracts such as leasing land, machinery, and buildings.  Do your existing contracts need to be revised or should you enter new ones?  Determine if your present business organization fits into the new long-range plan, or whether you should consider a different form of business organization such as a partnership, corporation, or LLC.  Evaluate your current accounting and record-keeping system.  Review current insurance coverage to determine if there is adequate protection for your business and family.  Lastly, develop or update your estate plan.

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