Category: Farm Management

Rising input and labor costs have already created significant concerns for agricultural producers today. One of the major causes of rising costs is the high inflation rate which now stands at the highest level in the last four decades.

Among some of the options available for the Federal Reserve System (the Fed) for lowering the inflation rate, adjusting the federal funds rate tends to be one of the first options to consider. Indeed, the Federal Open Market Committee (FOMC), a committee within the Fed, raised the federal funds rate multiple times this year. These federal funds rate hikes already had a significant impact on consumer loan rates, including agricultural loan rates. How does this work, and what should we expect for the rest of 2022 and 2023?

First, the federal funds rate is the interest rate at which depository institutions trade federal funds (balances held at the Fed) overnight. The federal funds rate is important because it is the central interest rate in the U.S. financial market. It influences short- and long-term interest rates such as mortgages, loans, and savings. While it is certainly possible that these consumer loan rates may not react to the changes in the federal funds rate, they tend to move in the same direction. This means that when there is a federal funds rate hike, consumer loan interests are likely to increase.

At the beginning of 2022, the effective federal funds rate was at 0.08%, which was significantly lower than the 10-year average of 0.72%. The Fed has maintained a low level of the federal funds rate since the COVID-19 pandemic to ensure enough financial capital is circulating in the economy. Yet, prolonged low federal funds rate and interest rates contributed to the rapid increase in the inflation rate, and the Fed is now rapidly increasing the federal funds rate. From 0.08% in January, the effective federal funds rate now stands at 3.83%.

How have farm loan interest rates reacted to the federal funds rate hikes? USDA’s Farm Service Agency (FSA) provides farm loan interest rates which are updated monthly, and we can observe how farm loan interest rates have changed in the past few months. Operating loan interest rates, ownership loan interest rates, and emergency loan interest rates have all spiked in the past twelve months. One year ago, interest rates for operating, ownership, and emergency loans were at 1.75%, 2.875%, and 2.75%, respectively. Interest rates have more than doubled since then, reaching 4.5%, 4.375%, and 3.75% on November 2022. While the magnitudes have varied, we can see that the farm loan interest rates have moved in the same direction as the federal funds rate. Farm loan interest rates issued from commercial banks are not available on a monthly basis, but these rates also tend to move in the same direction.  

What should we expect for farm loan interest rates for the rest of the year and 2023? The consensus is that the Fed will increase the federal funds rate significantly for the rest of 2022 and 2023. The current forecast is that the FOMC will increase the federal funds rate to 4.4% by the end of this year and to 4.6% by the end of 2023. This will inevitably result in continued increases in farm loan interest rates as well. This means that cost of financing will increase for the next few quarters, especially for new loans and existing floating-rate loans that do not have fixed terms. We expect the federal funds rate to lower to 3.9% and 2.9% for 2024 and 2025, making it doubtful that we will return to the favorable loan terms from 2020 or 2021. 

Author: Kevin Kim

Assistant Professor

kevin.kim@msstate.edu

Most farmers right now are not thinking about taxes, let alone tax management. Many are still harvesting crops and beginning to think about the next season, but it is also time to start the office work and meet with your tax professional.  A November or early December appointment with your tax professional will give you more tax management options before year-end.

Update your accounting of transactions for the year, and arrive prepared with the necessary reports that detail the following: 

1. All revenue and sources of income.
2. All expenses with descriptions.
3. All capital asset sales and purchases (with details).
   • If an asset was traded, bring complete invoices and sales documents including information on the trade, the trade-in value, etc. 
   • Related inventory of breeding, milking, or draft livestock.
4. Bank loan payments detailing principal and interest portions.
5. An estimate of additional revenue expected, along with what might be deferred if necessary.
6. An estimate of upcoming expenses, and an idea of what expenses might be shifted (deferred or prepaid) across tax years.
7. Any health insurance premiums paid out of pocket, may be eligible for a self-employer credit/deduction.
8. All draws that have been taken.

Preparing the above reports will help your tax professional determine an approximate tax liability for this year and allow for a discussion of different tax management strategies. Remember that tax management is not about how to get out of paying taxes but should be about how to move as much income through the tax system as possible at the least expensive tax rate possible. 

Common tax management may include multiple tools or provisions. Work with your tax professional and ask about some of the following basic strategies:

1. Putting money into a retirement account with tax-preferred treatment such as a Traditional IRA or some 401k accounts.
2. Putting money into a Health Savings Account.
3. Making a commodity donation to a house of worship or other charitable organization may provide a greater tax benefit than a cash donation.
4. Utilizing prepays is a common way to lower the farm’s taxable income but check with your tax preparer about specific restrictions and requirements. 
5. Paying the accrued interest of any debt at the end of the year.
6. Utilizing any remaining Net Operating Loss (NOL) that can be carried over. It is important to remember that the NOL can only offset up to 80% of the taxable income for the farm.
7. Use depreciation strategies with caution. Section 179 and Bonus Depreciation allow a farm to rapidly depreciate an asset in a shorter period, up to a single year.  However, there are several limitations to these methods and subsequent tax consequences when the asset is sold.
8. Income Averaging is a method only available for farms and commercial fishing. It may help you avoid higher income tax brackets in one year if you have previous years with “unused” lower income tax brackets. 

Keeping up with accounting and production records throughout the year will make the end-of-year office work easier and less stressful. Having a tax professional that you can trust and is willing to work with you will help a farm meet their goals and reduce tax liability over the long term. Visit ruraltax.org for additional information and publications about taxes, including a 2022 Farm Tax Estimator tool and other information for farms, timberland owners, and landowners.

Dr. Adam J. Kantrovich,

Extension Specialist of Agribusiness and

Director of Clemson Tax School

akantro@clemson.edu

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Kantrovich, Adam. “Year-End Tax Preparation and Management“. Southern Ag Today 2(45.3). November 2, 2022. Permalink

After decades of litigation and settlements of lawsuits alleging discriminatory lending decisions, lenders have learned valuable lessons to increasingly “objectify” their loan decision-making procedures.  The resulting “more objective” loan evaluation models consider borrowers’ business profitability, liquidity, solvency, and repayment capability – in addition to credit histories and collateral arrangements, among other considerations.   

One may ask if these “objective, more transparent” decision models have increased minority farmers’ access to credit.  The reality is that farm businesses operated by certain ethnic groups are typically smaller, less profitable, and with liquidity concerns – thus not always faring well in those lenders’ models.

Even if certain minority farmers get their loan applications approved, they must still negotiate another hurdle – the packaging of their loan terms.  Table 1 presents a compilation of information on the approved loans for beginning farmer clients of the Farm Service Agency (FSA) from 2004 to 2014.

The most favorable loan package for any borrower should combine a relatively lower interest rate and longer loan maturity, which would result in lower periodic loan amortization amounts.  The trends in Table 1 indicate that Hispanic and Black farmers received higher interest rates than the rest of the approved borrowers.  The average loan term for Hispanic borrowers, however, was longer (and comparable to White borrowers’ terms), hence could have tempered the unfavorable high interest rate effect.  In contrast, Black farmers were prescribed the shortest average repayment term, which may pose a potential liquidity concern when combined with higher interest rates.

From the lenders’ perspective, loan terms are additional tools for credit risk management.  Specifically, borrowers’ credit risks are factored into loan packaging decisions, so lenders are inclined to prescribe higher interest rates and shorter loan maturities to borrowers with higher credit risk profiles.  When this rationale is factored into the interpretation of lending statistics and trends, then it becomes clearer that the more urgent priority in addressing minority farming issues is to implement effective reforms geared towards helping smaller minority farms overcome persistent hurdles that threaten their economic and financial viability.    Only then will these farmers gain better credit access and command the most favorable lending terms when their loan applications are approved.

Table 1.  Comparative Lending Terms Packaged for Approved FSA Loans of Beginning Farm Borrowers from different racial/ethnic groups

FSA lending terms	White	Black or African American	American Indian	Asian	Hispanic or Latino
Obligated loan ($’000)	104.57	52.00	97.36	69.71	76.00
Interest rate (%)	2.92	3.27	3.07	2.78	3.91
Loan maturity (year)	17.48	14.92	19.35	12.90	18.64

Source: Ghimire, J., C.L. Escalante, R. Ghimire, and C. Dodson. “Do Farm Service Agency Borrowers’ Double Minority Labels Lead to More Unfavorable Loan Packaging Terms?”  Agricultural Finance Review.  80,5 (2020): 633-646.

Escalante, Cesar L.. “Loan Packaging Terms for Beginning Minority Farmers Under More Objective Lenders’ Loan Evaluation Models“. Southern Ag Today 2(44.3). October 26, 2022. Permalink

As spring-born calves across the country reach the end of their stay at their farm or ranch of origin, it is important to consider management options like implanting, weaning, castrating bull calves, and dehorning that add value on sale day. Each choice requires an investment of time, facilities, and some education, but when used appropriately, each option tends to yield a positive return on investment, ROI. 

Whether you have weaned or are in the post-weaning phase, implanting calves has one of, if not the highest ROI of any production tool in the business. Implants contain growth stimulants that increase muscle growth and result in higher weaning weights and sale weights. Consider a popular implant priced at $40.78 for 24 doses or $1.70 per dose. The product is marketed to increase weaning weight by 20-35 lbs. That means each additional pound costs roughly $0.06 to produce, and today those additional pounds are worth anywhere from $1.70 to $2.15/lb. Some producers will reach out to us and suggest they are missing the premium for NHTC calves if they implant; if you are not in a verified, likely audited program that produces calves bound for either the EU or Whole Foods, those calves are unlikely to see any premiums at sale, and they are implanted the minute they set foot in the feed lot. Remember, even if you’ve already weaned calves, implants can be utilized post-weaning.

On that note, weaning is another management choice that adds significant value to calves at sale. However, the investment in weaning is certainly greater than that required when implanting. The table below reports sale values for weaned steer calves and their un-weaned peers in different weight ranges. With only one exception, the value of weaned calves exceeds that of un-weaned calves. In one case, the premium for weaned calves was 20 cents per pound or roughly $94 per head. The average difference in weaned and un-weaned calf prices varies by weight class but averages $8.33 per hundredweight across the report. This sample suggests that weaning increases the value of each calf by roughly 4.6%. 

Medium & Large #1 and #2 Steer Values for the week of 10/3/2022 – 10/7/2022 ($/CWT)

Dehorning and castrating bull calves both add value as well. Data on each management decision is reported less frequently through AMS, but expect both management choices to yield a positive ROI. A few data points from Texas collected over the last month suggest a $0.19 per pound discount for bulls compared to steers and a $0.03 per pound discount for horned calves. 

Consider the aggregate difference in a few management decisions presented here. Last week at the Oklahoma National Stockyards, a weaned steer calf that was implanted and sold at a weight of 450 lbs. brought roughly $787.50. A similar quality un-weaned bull calf that was un-implanted and therefore weighed only 420 lbs. may have brought only $627.80; a total discount of $159 per head compared to the calf from the producer that applied some management tools. 

We want to keep animal welfare at the forefront of our decision-making, even before financial gains, so always read and follow the product label. It is also true that the misapplication of these tools can result in a financial loss. If implanting calves, castrating bulls, dehorning, or weaning is new to your business, be sure to reach out to your county Extension agent, Extension Animal Science Specialists, or at least experienced producers you trust. The experience and knowledge these groups will bring to your operation will help prevent a financial misstep and will help you maintain the well-being of your cattle. 

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Benavidez, Justin. “Adding Value to Feeder Calves“. Southern Ag Today 2(43.3). October 19, 2022. Permalink

A farm manager wears many hats and deals with a lot of different businesses and tasks in running a farm. Business planning and succession is its own topic (and an important one), but sometimes there are short-term scenarios when farm managers or key personnel are away from the farm because of personal matters, sickness, vacation, or even unexpectedly passing away. These are stressful events, even more so when business and farm obligations start to pile up. Having a comprehensive plan in one place provides a critical resource to anyone needing to step in and temporarily continue these tasks. 

We have listed several resources below that are available for use. Consider them prompts and outlines to think through what is needed. Your family, local Extension agent, and other trusted confidants are good resources to help you develop your plan. Once it is complete, make copies and clearly communicate where those are located. A good short-term contingency plan should detail accounts, contacts, obligations, and critical information a farm manager deals with. Some examples of the information detailed would be: (1) tracts of land with corresponding surveys or maps of the property (2) livestock feed/availability, veterinarians, and grazing plans for cattle (3) the location of keys, business documents, and contact information for advisors or partners to the farm.

Several points to consider:

Information related to the farm can frequently change and in a short period of time the information could be out of date. Plans should be reviewed after significant changes on the farm, or at a minimum, reviewed annually.  Tax filing time, when you are already reviewing business information, may be a good opportunity to schedule a contingency plan review. Having bad or outdated information could be as detrimental as having no information at all.

Some information can be highly sensitive such as bank accounts, passwords, and other confidential data.  This information can be critical to communicate because a family member trying to figure out passwords, or resetting accounts could be a long, frustrating process. There are safe & secure options to digitally store sensitive information or physical lists may be kept in a secure location.

Having multiple copies of the plan is advised and distributing those to any relevant personnel.  In addition, one central copy could help ensure availability. Depending on your relationship with each, consider informing your banker, lawyer, neighbor, etc. of your operation’s contingency plans. 

Short-term planning is part of a larger discussion of operational risk and transition planning. Having a strategy to transfer relationships and responsibilities according to an owner’s wishes should not be ignored. Succession planning resources are often available through your local Extension office. We encourage you to reach out to a trusted advisor. Adequate short and long-term planning can help farms sustain their operation into the future.

Resources:

1. Short-Term Operating Plan for farms and ranches https://extension.missouri.edu/media/wysiwyg/Extensiondata/Pub/pdf/manuals/m00202.pdf. Primarily hand-written worksheet used to document important aspects of the business
2. AgPlan https://agplan.umn.edu Business planning website run through the Center for Farm Financial Management. It is free to use AgPlan, and once logged in you would select ‘Short-Term Operating Plan.’ 
3. Code Red “Contingency Planning for Your Family and Farm Operation” https://ag.purdue.edu/department/agecon/fambiz/_docs/leadership-succession-planning/code-red.pdf Microsoft Excel workbook can be printed, shared virtually, or distributed through thumb-drives.

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Burkett, Kevin, and Scott Mickey. “Short-Term Contingency Plans for Southern Producers“. Southern Ag Today 2(42.3). October 12, 2022. Permalink