Category: Farm Management

One of the biggest challenges to farmers and landowners is negotiation of farmland leases in a manner that leaves both parties satisfied. Too often, fixed cash leases are negotiated and within a short period of time one person or the other is getting less than they think they should. One solution to this is to re-negotiate fixed cash leases on a regular basis and recognize that they will need to be changed to reflect the variability in the market and/or production conditions. Another solution is a flex lease.

Flex leases are designed with a base cash rent amount (negotiated at the beginning of the season) and a flexible “bonus” amount that depends on either market prices, yields, or both. The idea is to guarantee the landowner a certain amount of rent and have both parties share in the good times as well as the bad times. When set up correctly, they will adjust for changing revenue conditions.

The base rent needs to be calculated at the beginning of the season and is often tied to a published or well-documented measure.   A couple of options might be: a negotiated premium/discount from the county-average rent from USDA or a percentage of historical gross revenues from the leased farm (for example 15-20%). The flex component (determined at the end of the season) can be calculated as a percentage of actual gross revenue or a measure of gross margin (gross revenue less variable costs of production). For example, you might make the flex component of the payment 20-30% of gross margin.  Another flex component could be a discount in the base rent if total costs are not covered so the landowner shares in the downside risk.

A few things to remember, as you negotiate a flex lease:

1) WRITE IT DOWN, don’t rely on a verbal agreement,

2) Keep the calculations simple and transparent to avoid misunderstandings, and

3) Be willing to renegotiate if things get out of line, which can happen with big swings in farm profitability.

Flex leases should encourage communication between landowner and tenant, which will help in overall lease negotiation.

Taylor, Mykel R. . “Flex Leases for Crop Producers“. Southern Ag Today 2(12.3). March 16, 2022. Permalink

Determining what to pay or charge for custom rates is a challenge in normal years. There is very little publicly available data on custom rates, and though many universities publish surveys of custom operation rates, they usually aren’t updated every year. 

This year, rapidly rising input costs will likely compound the already challenging process of agreeing on what to pay for custom operations. However, we can estimate approximately how much we expect custom rates to increase based on the change in costs for two critical inputs: fuel and labor. Combined, these two inputs represent approximately 25% of the cost of field operations during an average year, with overhead (repairs, maintenance, depreciation, transportation, etc.) representing the other 75%. 

Restructuring the economy post-COVID-19, supply chain disruptions, and mass movement of workers around the country all led to rapidly rising wages in 2021. The Bureau of Labor Statistics (BLS) reports that the cost of employment rose approximately 4.5% across the board and approximately 4.3% for farming occupations in 2021. Surveys of private firms suggest they are planning for wages to rise 3% to 5% in 2022; a nominal increase that does not keep up with the current rate of inflation, meaning that real wages would be down. On its own, a 5% increase in wages would represent a 1% change in the cost of custom operations to maintain profit margins, on average. 

As recently as December 2021, the Energy Information Administration (EIA) forecast a modest increase in the average annual cost of WTI Crude from $68/barrel in 2021 to $73/barrel in 2022. However, cash WTI Crude is currently trading at $115/barrel. The recent war in Ukraine and Russia’s role in the global energy market led to a two-week spike in the price of WTI Crude, up from $90/barrel to $115/barrel. If prices remain at approximately $115/barrel, (many economists assume it will get more expensive before it gets less expensive) it will represent a 70% increase in the cost of crude over the 2021 average price. On its own, a 70% increase in the cost of fuel represents a roughly 10% increase in the cost of custom operations on average. 

The table below shows the expected change in the cost of custom operations as a function of different WTI Crude values. The February EIA Short Term Outlook (which was published prior to the Russian invasion of Ukraine) placed the 95% confidence bounds on 2022 forecasted average price of WTI Crude at $40/barrel and $60/barrel. The cost of fuel and labor account for a different percentage of each custom operation’s cost, so the change in the cost of fuel impacts each category differently. If the cost of fuel remains at $115/barrel and wages do increase 5% year over year, we can expect all custom operations to cost 10% more than in 2021, with the cost of grain harvest up 10%, the cost of tillage up 12%, the cost of planting up 8%, the cost of chemical and fertilizer application up 6%, the cost of forage harvest up 19%, and the cost of hay baling up 12%. If you don’t utilize custom operators, you may also view these figures as the expected increase in cost to conduct these operations yourself. 

Change in Cost of Custom Operations, 2021-2022, based on Different WTI Crude Prices and 5% Wage Increase 

Benavidez, Justin. “How much will the cost of custom operations go up this year?“. Southern Ag Today 2(11.3). March 9, 2022. Permalink

From planting trees to conducting timber sales, there are many things for landowners to consider when owning a timber property. Many forest landowners think about taxes only after they had a timber sale. However, there could be tax implications for each timber activity. It is important to conduct tax planning carefully. 

Here are a few tax tips for forest landowners to consider.

1.         Know the classification of your timber holding

Your timber holding classification is the first step in figuring out the federal income tax consequences of your timber activities. The classification determines which tax rules are applicable. Timber holding generally could be classified as one of the following three types: 1) property for personal use or as a hobby (not-for-profit); 2) property held as an investment; or 3) property held in a trade or business. Generally, you will get the best tax advantages if you materially participate in a timber business.  

2.         Understand timber sale income and capital gains tax

When you have a timber sale, you are taxed on the net income, rather than the gross proceeds. You are allowed to subtract selling expenses, timber depletion allowance, and yield tax from the revenue to get the net taxable gain. In most cases, the income from a standing timber sale is taxed at favorable long-term capital gains tax rate (0%, 15%, or 20% depending on the taxable income) if the timber has been owned for more than one year. If your timber is inherited, the gain is considered long-term in nature regardless of how long you have owned the timber. 

3.         Take advantage of the reforestation tax incentives

Eligible forest landowners may deduct up to $10,000 (married filing jointly) in qualifying reforestation expenditures per year per qualified timber property and amortize the rest over 8 tax years. You make the deduction against taxable income from all sources. 

4.         Recover operating expenses and carrying charges

If you materially participate in the timber business, you can fully deduct ordinary and necessary expenses associated with carrying on the business. For 2018 through 2025, forest landowners who hold timber as an investment are not allowed to deduct eligible operating expenses as itemized deductions. You may consider capitalizing (adding to basis) certain forest management expenses and carrying charges with proper tax elections. Timberland property taxes can still be fully deducted if you itemize. 

5.         Keep track of timber basis

Timber basis is generally the amount of capital investment in the timber. If the forestland was purchased, the original timber basis is the amount of the total acquisition costs allocated to the timber. If the property was inherited, the timber basis generally is its fair market value on the decedent’s date of death. If the property was received as a gift, the basis is generally the donor’s basis plus the gift tax. 

6.         Claim timber casualty loss deduction when a natural disaster hits

Timber loss caused by a casualty event (e.g., hurricane, storm, fire) may be tax-deductible. A forest landowner may deduct the lesser of the basis or the decrease in the fair market value of the affected timber block caused by the casualty.

7.         Consider excluding cost-sharing payments

Some conservation-oriented cost-sharing payments from qualified government programs qualify for partial or full income exclusion.  

8.         Take advantage of the Qualified Business Income (QBI) deduction if applicable

If your timber business has received ordinary income from selling cut timber products, pine straw, live trees, or other products, you may consider taking the QBI deduction. It is available for tax years 2018 through 2025. 

9.         Smooth out timber income over years

You may consider using an installment sale approach (lump-sum contract) or a pay-as-cut contract to smooth out your timber income over several years if such an arrangement can minimize total taxes. 

For more details on these tax tips as well as others, please see the publication: https://www.timbertax.org/publications/fs/taxtips/TaxTip2021.pdf.

Disclaimer

The material herein is for general informational and educational purposes only and is not intended as financial, tax, or legal advice. Please consult with your tax advisor for advice concerning your particular tax situation. 

Li, Yanshu. “Tax Tips for Forest Landowners“. Southern Ag Today 2(10.3). March 2, 2022. Permalink

According to the latest national agricultural census (2017), minority farmers account for 9% of the country’s population of beginning farmers.  Asian and Hispanic Americans register the two largest shares of beginning farmers at 40.23 and 36.33 percent, respectively, of their group’s population.  Compared to other minority farmers and their White peers, farmers of Asian and Hispanic origins are usually 5 years younger than the average 60-year old American farmer and operate significantly much larger and more profitable businesses.   

The need for more new entrepreneurial activities in farming is well known, as the sector confronts an aging farmer population and business succession issues.  External financing is crucial to beginning operations, and access to credit has been a perennial concern among budding entrepreneurs unable to compete well with established firms in their loan applications.  After all, regular lenders’ loan approval decisions are not primarily based on business potentials but instead rely more heavily on concrete historical indicators, such as business and credit track records that start-up firms naturally do not have.

Beginning minority farmers can find financial support from USDA’s Farm Service Agency (FSA) through its loan programs designed to cater to their situations – one targeted towards the socially disadvantaged and another for beginning farmers. Consistent with its overriding mission to be the “lender of first opportunity”, FSA’s credit risk assessment policies deviate from commercial/private lending industry norms and may resolve the start-up borrowers’ otherwise limited access to credit.  Notably, FSA’s lending policy explicitly excludes the following in ascertaining “unacceptable credit history:” (1) any foreclosure, judgment, bankruptcy, or delinquent payment caused by temporary circumstances and beyond borrower’s control; (2) isolated instances of late payments that do not indicate an overall delinquency pattern; and (3) lack or absence of a history of credit transactions. Thus, as FSA opens its doors with such provisions, farms operated by beginning minorities can have a greater chance at overcoming start-up hurdles and building flourishing businesses.

Selected Revenue and Income Statistics, By Farmers’ Ethnic/Racial Group

Escalante, Cesar L. . “Alternate FSA’s Lending Programs for Beginning Minority Farmers“. Southern Ag Today 2(9.3). February 23, 2022. Permalink

According to USDA-NASS, the southern region accounts for over 75% of the broiler production in the United States.  This provides an excellent opportunity for row crop producers to utilize broiler litter as an alternative to commercial fertilizer.  With commercial fertilizers reaching record prices and broiler litter abundantly available, understanding the economic value of broiler litter going into the 2022 growing season is critical for making nutrient management decisions.  The value of broiler litter will vary greatly depending on management practices (when applied, how it is applied, and to what crop), nutrient content of the litter, soil test data, and commercial fertilizer prices. 

Spring application right before a light rain or incorporating after application maximizes plant-available nutrients resulting in the maximum economic value of broiler litter.  However, buyers who do not measure litter for nutrient content before an application can face economic and environmental risks.  Unlike commercial fertilizer, broiler litter will vary in nutrient content depending on the timing and length between cleanout, type of cleanout (de-crusting or full), in-house litter management, bedding material, and feed mix differences between broiler companies.  Over 700 broiler litter samples submitted for analysis were evaluated to look at the range of nutrient content.  Like soil samples, broiler litter samples are sent to labs for nutrient analysis and, in this case, the University of Kentucky Regulatory Services for analysis.  Table 1 provides the statistics for the broiler litter samples that were assessed.   The average nutrient content of broiler litter was 50 lbs of nitrogen (N), 56 lbs of phosphorous (P₂O₅), and 47 lbs of potassium (K₂O) per ton of broiler litter.  For spring application of broiler litter, 50% N, 80% P₂O₅, and 100% K₂O of the nutrients are plant available.  Therefore, the nutrients available to the crop from an average ton of broiler litter would be 20 lbs of N, 45 lbs of P₂O₅, and 47 lbs of K₂O.  

With current fertilizer prices of $899/ton for Urea ($0.98/lb N), $834/ton for DAP ($0.52/lb P₂O₅), and $800/ton for potash ($0.67/lb K₂O), the average expected value of broiler litter is $80/ton.  Therefore, if you can buy broiler litter and have it delivered and spread for less than $80/ton this Spring, broiler litter is a better economic option than commercial fertilizer.  Last year, with lower fertilizer prices, the nutrient value of an average ton of broiler litter was $48/ton.  But remember, broiler litter nutrient content will vary (see max and min values in Table 1).  Figure 1 applies current fertilizer prices to each broiler litter sample submitted for analysis to illustrate the range and frequency in the value of a ton of broiler litter.  Given the wide range in value, make sure you measure broiler litter for nutrient content to understand what you are receiving and avoid the risk of overpaying for broiler litter. 

Table 1. Sample statistics for the nutrient content of broiler litter samples (n=740)

	N (lbs/ton of litter)	P2O5 (lbs/ton of litter)	K2O (lbs/ton litter)
Average	50	56	47
Minimum	7	4	2
Maximum	186	124	109

Figure 1. Variation in value of broiler litter samples given current commercial fertilizer prices and 50% N, 80%P2O5, and 100% K2O plant available nutrients (n=740)

Shockley, Jordan. “What is the Current Nutrient Value of Broiler Litter?“. Southern Ag Today 2(8.3). February 16, 2022. Permalink