After scrutinizing year-end statements, lenders may tighten credit lines on some farmers. Some may suggest farmers renegotiate rents for 2015, or even let some land go, to limit risk exposure.
Here’s help to evaluate your rent paying capacity.
Kansas State University has a spread sheet designed to help farmers and land owners arrive at equitable rental agreements. The spreadsheet will evaluate crop share and cash rent situations. We first featured this spreadsheet in our December/Extra 2008 issue.
The more leg work you invest getting good projected values for inputs and their prices, plus yields and their prices, the more reliable your decision-making guide will be.
Return to land is what’s left over from revenue after all other cash inputs have been paid for. Expenses that get paid first include withdrawals for living expense. Getting paid last makes land the residual claimant. It becomes subject to down pressure, when revenue slips or expenses rise.
We're featuring the spreadsheet as our Farm Futures Financial Tool-of-the-month. You can download it by clicking on the download link below.
Do you have a financial tool that's made a difference on your operation that you'd be willing to share with other readers? Drop us a line at [email protected] with a description of the spreadsheet. We'll pay $100 if we feature your farmer-written noncommercial program as our Financial Tool of the Month.
We're celebrating 10 years of service to our readers by opening up our archives. If you'd like to see past spreadsheets we've featured on this page, just direct your web browser to FarmFutures.com/spreadsheetarchive. Enjoy!
Dumb tax moves
CPA Paul Neiffer shared a story with us about the pitfalls of poor tax planning:
"I met with a new farm client to prepare their income tax return. He had been very aggressive in buying equipment to keep his income tax burden very low. He had bought well in excess of $1 million of new farm equipment over the last three years and had financed it with no money down and payments over 5 years.
"Due to low prices, the bank had required him to sell some extra corn and not do as much prepaid farm expenses at year-end. Additionally, he had to report an extra $250,000 of cash sales to pay his loan payments.
"Since he had no depreciation to offset the $250,000 of loan payments, he owed tax on $250,000 plus the extra $500,000 of accelerated grain income and lower prepaid farm expenses. This resulted in taxes owed of over $300,000.
"I find that farmers pay more income taxes in lower price years than they sometimes pay in good price years.
"It is very important to match up your income with your mid-term debt obligations. If not, you may owe a lot more tax and not have the income to cover it."
What is a residual claimant?
Three attractive coeds went into an ice cream parlor. Three college lads were there: a handsome football player, a star basketball player and a fat, pimple-faced economics student. The blond hooked up with the football player. The red head connected with the basketball player. The brunet was the residual claimant. She got what was left over.
In farming, the residual claimant gets what’s left over after all other resources have been paid. In crop production land is the residual claimant. Seed, fuel and equipment, fertilizer, labor and interest all get paid first. What’s left of revenue after they’re paid is return to land. When times are good, the residual claimant gets paid handsomely. When revenues tumble or costs surge, the residual claimant gets less. That’s the force pressuring land values and cash rents.
In pork production spot-market feeder pig producers are the residual claimant. They suffered in 2012 when corn prices sky rocketed and cheap hogs pressed spot market iso-wean pigs to $10 per head. They raked in the dough in early 2014 when surging hog prices, baby pig death losses due to porcine epidemic diarrhea virus and faltering feed costs launched iso-weans to $90 per head.
If you are the residual claimant in your sector, you need to stash cash, equity or both when times are good because you will bear the brunt of the drubbing when times are tough.