Category: Farm Management

While the cost of many inputs have retreated from historic highs made earlier in 2022, fertilizer and farm diesel fuel remain elevated continuing to push total costs of production in 2023. Despite the fact that commodity prices remain relatively strong, margins will be stretched thin for many crops this year.  

Enterprise budgets can be a good farm management planning tool for growers to use when evaluating crop selection and budgeting returns (net or total specified with overhead) to land. In the 2023 enterprise budgets released by the LSU AgCenter, fertilizer prices for nitrogen, phosphate, and potash are estimated at $0.78, $0.90, and $0.67 per pound of active ingredient. This represents an increase of $0.02, $0.25, and $0.09 per pound of active ingredient, respectively from 2022. Another energy-related farm input, diesel fuel, is projected at $4.00 per gallon, an increase of $1.60 per gallon from the 2022 enterprice budget. 

The magnitude of the fertilizer cost impact will have on a grower’s bottom line will vary with crop selection, variety, and soil nutrient profile. Soil testing is crucial in times of elevated input prices. Knowing the nutrient profile can be a cost-saving measure for the grower. For fuel cost, the extent of field preparation activities and irrigation will significantly impact a grower’s fuel expenditure.

Over the past three years, the cost of production for corn, cotton, rice, and soybeans in Louisiana have increased in conjunction with the increase in fertilizer and fuel costs. Figure 1 illustrates the cost of production (C.O.P.) per unit using representative farm yields for the 2021 to 2023 crop years. 

 Figure 1. Breakeven cost of production estimates for selected Louisiana crops. 

Especially in times of dramatic price and cost changes, it is critical to have a handle your cost of production.  Estimating your own production costs is an important management exercise that helps with both understanding and controlling cost, as well as establishing price targets and marketing plans.  A pre-season breakeven price is calculated by estimating the total cost of production related to a specific crop and dividing it by the expected yield of that crop. Or simply put: how much money do you expect it will take to produce each bushel or pound of production?   Similarly, a breakeven yield is that same total cost of production divided by the expected price.     

In today’s agricultural production environment, given the volatility in both input and commodity prices, breakeven analysis can help farmers make better short-term operational decisions. Enterprise budgets can be a useful tool in performing breakeven analysis utilizing both their individualized farm’s crop yields and expectations regarding market prices for a given commodity that is uniquely tailored for their agricultural production space.

Crop enterprise budgeting resources are available for download for Southern states by clicking on the links below.

Alabama: https://www.aces.edu/blog/topics/farm-management/enterprise-budgets-for-row-crops/

Arkansas:  https://www.uaex.uada.edu/farm-ranch/economics-marketing/farm-planning/budgets/crop-budgets.aspx

Florida: https://fred.ifas.ufl.edu/extension/commodityenterprise-budgets/

Georgia: https://agecon.uga.edu/extension/budgets.html

Kentucky: https://agecon.ca.uky.edu/budgets

Louisiana: https://www.lsuagcenter.com/portals/our_offices/departments/ag-economics-agribusiness/extension_outreach/budgets

Mississippi: https://www.agecon.msstate.edu/whatwedo/budgets.php

North Carolina: https://cals.ncsu.edu/are-extension/business-planning-and-operations/enterprise-budgets/

Oklahoma: http://www.agecon.okstate.edu/budgets/

South Carolina: https://www.clemson.edu/extension/agribusiness/resources/request-budget.html

Texas: https://agecoext.tamu.edu/resources/crop-livestock-budgets/

Tennessee: https://arec.tennessee.edu/extension/budgets/

---

Delilberto, Michael. “Projecting Your Cost of Production and Combating Higher Costs in 2023.” Southern Ag Today 3(11.3). March 15, 2023. Permalink

The short answer is: It depends. The slightly longer answer is that it is determined by the classification of your timber holding, the way to sell the timber, and your modified adjusted gross income (MAGI) for the year. 

What is the Net Investment Income tax?

NIIT, also known as the Medicare surtax, is an additional tax applicable to high-income individuals, estates, and trusts with significant investment income. More specifically, it is a 3.8% tax on the lesser of: (1) net investment income or (2) the excess of MAGI over a threshold ($250,000 for married filing jointly and $200,000 for single taxpayers). The tax went into effect in 2013. 

Generally, net investment income includes: (1) interest, dividends, capital gains, annuities, royalties, and rents not derived in a trade or business; and (2) income from businesses that are passive activities to the taxpayer. Wages, unemployment compensation, operating income from a nonpassive business, Social Security benefits, tax-exempt interest, and self-employment income are not subject to the NIIT. 

Timber income and the NIIT

For federal income tax purposes, your timber activity generally can be classified into one of three categories: 1) for investment; 2) material participation in a trade or business; and 3) passive activity where your participation in a trade or business does not rise to the level of material participation. Due to the level of involvement, most non-industrial private forest landowners fall in the investor category. Farmers with occasional timber sales may treat their timber as property held for sale or use in a business. An example of passive activity is the limited partner in a partnership.  

For investors, income on the sale of standing timber is a capital gain. Depending on the holding period, it can be long-term or short-term, but it is usually included in the net investment income for NIIT. 

If the standing timber is held in a trade or business for more than one year and sold in a lump-sum or under a pay-as-cut contract, the income generally qualifies for the long-term capital gains tax treatment. Income from the sale of cut timber normally is ordinary unless a 631(a) election is in effect. Under the special election, the income from holding the standing timber is treated as a long-term capital gain, while the portion of the income from selling the cut timber is ordinary income. 

If you materially participate in a trade or business, your timber income from the business is not subject to the NIIT, even if it is treated as a long-term capital gain. However, it is subject to the NIIT if your timber activity in a trade or business is passive and your MAGI is over the threshold.

Strategies to manage the NIIT for timber owners

If you can substantiate your timber activity as material participation in your timber business, you can enjoy the long-term capital gains tax treatment of your timber income and won’t have to worry about owing the NIIT on it. However, your timber income may push your MAGI over the threshold and trigger the NIIT on non-timber investment income. Therefore, you may want to manage the timing of your other investment income when you expect to have a significant timber income. 

For more information about timber taxation, please see https://www.timbertax.org/publications/fs/taxtips/TaxTip2022.pdf

This publication is for informational and educational purposes, but is not intended as financial, tax, or legal advice.Please consult with your tax advisor concerning your particular tax situation.

---

Li, Yanshu. “Do I need to pay the Net Investment Income Tax on my timber income?” Southern Ag Today 3(10.3). March 8, 2023. Permalink

In 2023, the adverse effect wage rate (AEWR), which is the reference minimum hiring rate for H-2A workers, increased by 2.66 to 15.47 percent in all U.S. states (except Alaska). Florida registered the highest annual increase, with incremental rates in six other states exceeding 10 percent (Table 1).  

There are two possible explanations for these 2023 AEWR growth differentials across states. First, sharp spikes in 2023 AEWRs may be associated with lower historical AEWR growth trends. From 2019 to 2022, AEWRs in states with the ten highest 2023 AEWR increases grew annually by only about 3 percent, while states with the ten smallest 2023 AEWR change registered an average growth of almost 6 percent. Figure 1 shows that these two trends are negatively correlated, thus supporting the contention that larger 2023 AEWR increases may have been designed to make up for lower annual AEWR growth rates from 2019 to 2022.

The other explanation revolves around gaps between AEWRs and livable wage levels in 2022. Livable wage, calculated by the World Population Review, measures the amount of income that can adequately cover basic family needs.  In this analysis, a gap exists when AEWR is less than the livable wage per hour (LWH), indicating that AEWR could not adequately satisfy all basic needs; a surplus exists when AEWR exceeds LWH.   Based on the summary in Table 1, all Top 10 states have AEWR-LWH gaps in 2022 as their ratios are below 100%.  In contrast, five of the bottom ten states registered AEWR-LWH surpluses in 2022.  Figure 2 plots the relationship between these two trends, where a no-gap demarcation line is drawn at the 100% level to distinguish surplus (above 100%) and gap (below 100%) situations. 

From a business standpoint, stark increases in 2023 AEWRs may cause potentially harmful economic effects on labor-intensive, H-2A-dependent segments of each state’s agricultural industry. These are serious concerns, especially for states where H-2A workers account for a larger proportion of their annual hired farm labor complement. Last year, H-2A workers in Georgia and Florida comprised 62.88 and 55.31 percent of their hired farm labor force.     Notably, Florida and Georgia had the two highest annual AEWR increases in 2023. 

From a social standpoint, there will always be pressure to correct gaps between actual and livable wages.  At the same time, it is important to understand the broader impacts of such corrective measures.  One-time (abrupt) sharp increases in AEWRs may fix one problem but create a challenge elsewhere.  Alternatively, corrective adjustments implemented in tranches, or gradually over time, could avoid the development of large living wage gaps while allowing farm businesses to make gradual strategic adjustments in preparation for additional costs.

Table 1. Relating 2023 AEWR Increases to Annual AEWR Growth and Livable Wage-AEWR Gaps Among States with Ten Highest and Ten lowest 2023 AEWR Growth Rates

STATE (RANK of 2023 AEWR Increase)	2022-2023 INCREASE	AEWR ANNUAL CHANGE (2019-2022)	LIVABLE WAGE GAP (AEWR/LWH)	2022 AEWR-LWH GAP RANK Worst (#1) to Best (#49)
Florida (1)	15.47%	3.36%	70.35%	6
Georgia (2)	14.01%	2.53%	68.63%	4
South Carolina (2)	14.01%	2.53%	54.52%	1
Alabama  (2)	14.01%	2.53%	54.80%	2
Minnesota (5)	12.82%	4.33%	89.15%	25
Wisconsin (5)	12.82%	4.33%	79.23%	13
Michigan (5)	12.82%	4.33%	69.90%	5
Louisiana (8)	9.80%	3.21%	78.25%	12
Mississippi (8)	9.80%	3.21%	60.53%	3
Arkansas (8)	9.80%	3.21%	77.09%	9
South Dakota  (40)	5.22%	4.63%	101.42%	43
Nevada (41)	4.88%	5.89%	95.64%	37
Utah (41)	4.88%	5.89%	93.86%	34
Colorado (41)	4.88%	5.89%	102.16%	44
Hawaii (44)	4.29%	3.96%	102.22%	45
Washington (45)	3.22%	5.03%	110.26%	48
Oregon (45)	3.22%	5.03%	106.29%	47
West Virginia (47)	2.66%	6.10%	93.54%	33
Tennessee (47)	2.66%	6.10%	90.37%	28
Kentucky (47)	2.66%	6.10%	88.98%	24

Figure 1.  2023 AEWR Increases and Average Annual AEWR Growth (2019-2022), All U.S. States

Figure 2.  2023 AEWR Increases and 2022 AEWR-Livable Wage Ratio, All U.S. States

---

Escalante, Cesar L. “Social and Business Implications of the 2023 Increase in Adverse Effect Wage Rates.” Southern Ag Today 3(9.3). March 1, 2023. Permalink

There are two primary outcomes of Chapter 12 bankruptcy filings, discharge and dismissal.  The most common objective is the discharge of eligible debts.  After completing all the payments required under the Chapter 12 plan, the debtor will certify that all obligations have been paid.  At that time, the debtor can receive a discharge of eligible debt.  The discharge can release the debtor from all debts, with some exceptions.  Several debts will not be discharged, including child support and alimony payments.  Other debts that would not be allowed to be discharged are those that have been secured or restructured.  With restructured debts, the plan may allow for payments past discharge based on the type of asset and quality of the asset.  For example, claims secured by livestock may be allowed to be restructured over 5 to 10 years.

At the same time, a debtor may qualify for a hardship discharge.  A hardship discharge is allowed when the debtor fails to meet the plan payments through circumstances beyond the debtor’s control.  For example, if the debtor became seriously ill and unable to work during the plan, this potentially could lead to a hardship discharge.

An alternative to discharge of debt may occur when the court grants a dismissal order.  

Dismissals occur for a variety of reasons, including the failure to pay the filing fee, failure to file all required documents, or failure to make plan payments.  Additionally, debtors sometimes will request a dismissal when financial situations change, or negotiations result in the ability to pay back debt without further protection from the courts.

Figure 1 shows the breakdown of the most common outcomes in the southern U.S. bankruptcy cases that we have looked at in this four-part Southern Ag Today series. From October 1^st, 2012 to September 30^th, 2022, there was an equal percentage of discharged filings and dismissals.  Only 1% of the discharged cases were in the hardship category, with the other 99% resulting in some form of debt relief.  

Approximately 19% of the dismissed cases were for failure to make a plan payment.  This may occur when the bankruptcy repayment plan does not provide sufficient relief, or additional financial issues develop.  The remaining 81% of dismissed cases fall into the multiple dismissed categories previously discussed, although the data provided do not allow for identification between those groups.  However, it should be noted that some of those dismissed cases are voluntary, which can be viewed as an optimal decision by the debtor to exit the court process.  

What is apparent from these data is that filing bankruptcy does not provide automatic relief from dischargeable debt.  There is still a need to negotiate with the court and the creditors throughout the process.  The court protection can hold off other legal action and foreclosures, but this can also be achieved by early communication with creditors when financial problems become apparent.  If necessary, U.S. bankruptcy law does provide farmers with a unique court protection option.

---

This work is supported by the Agriculture and Food Research Initiative (AFRI) program, grant no. 2022-67023-36112/project accession no. 1028056, from the U.S. Department of Agriculture, National Institute of Food and Agriculture.

Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and should not be construed to represent any official USDA or U.S. Government determination or policy.

---

Rabinowitz, Adam, Paul Goeringer, and William Secor. “Outcomes of Chapter 12 Bankruptcy Filings.” Southern Ag Today 3(8.3). February 22, 2023. Permalink

At the start of the Chapter 12 bankruptcy filing process, a filer (the individual or business entity unable to pay back their debts) submits several pieces of information to officially file for bankruptcy. Included in this information is data on their assets and liabilities. The Federal Judicial Center collects and compiles selected data into a database for each case as of September 30^th of each year. Figure 1 below uses data from October 1^st, 2012 to September 30^th, 2022.

When analyzing these data, there are two important things to keep in mind. First, a filer is not always the whole farm. A farm may have multiple partners, and several legal entities (e.g., a sole proprietor and an LLC) involved. Therefore, the statistics presented here are strictly per filing, not per farm. Second, the data are compiled at the time of the filing with updates if the initial data has been appended. Throughout the bankruptcy process, new assets may be obtained, or new liabilities may be taken on. These data may not fully incorporate these changes.

Assets and liabilities listed on the debtor’s filing are placed into categories. Assets may be real property or personal property. Real property includes land, buildings, homes, and other such property. Personal property includes assets such as cash, vehicles, equipment, and tools.  Farm related inventory such as crops, animals, chemicals, feed, and machinery are included in personal property.

Liabilities or debt are categorized as secured, priority unsecured, and nonpriority unsecured. Secured liabilities are those debts with an asset used as collateral, such as a loan with farmland as the collateral. Priority unsecured debt is debt that has no collateral but has special treatment and may not simply be discharged like other unsecured debt. This type of debt includes any legal judgments or unpaid taxes. Lastly, nonpriority unsecured debt is debt that has no collateral securing it and requires no special treatment. This type of debt includes credit card and medical debt that may be eligible for discharge during bankruptcy proceedings.

Figure 1 shows the trend in average debtor assets and liabilities disclosed at filing over the last ten years. Following broader trends across the agricultural sector, assets and liabilities have increased, especially since 2016. Assets have had a smooth upward trend, likely following higher farmland and equipment values. Note that in all years, average liabilities exceed average assets. This is expected because debtors filing for bankruptcy are often insolvent.

On average, real property accounted for approximately 60 percent of a debtor’s total asset value. This suggests that land is an important asset that may be shielded during the bankruptcy process. On the liabilities side, secured liabilities, on average, accounted for over 75 percent of a debtor’s total liabilities. Additionally, nonpriority unsecured debt made up about 20 percent of this total, on average. This suggests that the Chapter 12 bankruptcy process is beneficial in two ways. First, secured debt may be restructured (e.g., lower interest rates or longer payment terms) or crammed down (e.g., reduction in total liability to current market value), making the debt more workable for the debtor while the debtor is able to retain ownership of the collateral (e.g., land). Second, a significant portion of total debt in the form of nonpriority unsecured liabilities may be discharged at the successful completion of the bankruptcy process.

This work is supported by the Agriculture and Food Research Initiative (AFRI) program, grant no. 2022-67023-36112/project accession no. 1028056, from the U.S. Department of Agriculture, National Institute of Food and Agriculture.

Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and should not be construed to represent any official USDA or U.S. Government determination or policy.

---

Secor, William, Adam Rabinowitz, and Paul Goeringer. “Financial State of Chapter 12 Bankruptcy Filings.” Southern Ag Today 3(7.3). February 15, 2023. Permalink