& Policy Update Graphic owner: UKZN SAEES: school website
November 23, 2016 Volume 16, Issue 11 Edited by Will Snell & Phyllis Mattox
Families are More Dangerous than Death Taxes - Steve Isaacs Grain Storage in Kentucky - Jordan Shockley Changes to FFSC Farm Accounting Guidelines - Jonathan Shepherd A Local Foods Vitality Index - Tim Woods - Jarius Rossi - Alison Davis
Families are More Dangerous than Death Taxes Alert: it’s not death taxes that destroy family farms, it’s families. While they sound dangerous and everyone (especially politicians) hates them, inheritance taxes are really not a threat to most family farms. Since the American Taxpayer Relief Act of 2012 set a permanent federal estate tax exemption of $5 million per spouse, the “death tax” has ceased to be a threat to 99% of American farm families. In fact, that exemption was indexed to inflation, and any unused portion can be transferred to a surviving spouse (that’s called “portability” in the tax code). So for 2016 the total exemption is $10.9 million. That protects almost all farm families. A 2015 ERS report indicated that 97.9% of farm operator estates would not even have to file an estate tax return, another 2.2% would need to file the return, but would owe no estate taxes. Only 0.8% would owe taxes. A cautionary note: for those in the 0.8% with large estates, the tax implications can be quite significant, and those owners should plan well ahead to shield their successors from a large tax bill that could damage, but not likely destroy the farm. The death tax issue has motivated many farm families to attend transition and succession planning workshops. That, along with the aging of principle farm operators are two major factors that have driven the interest succession planning. The average age of farmers has increased by one year in each five-year ag census cycle since 1977 and stands at 58.3 in the 2012 census. While it’s true that the certainty of death and taxes are threats to family farms, simple observation suggests that families are a much bigger threat. When family businesses work, they’re beautiful; when they don’t, they’re ugly. Every farm family has either experienced or knows someone who has experienced the death of a family business caused by family disputes. Families, not taxes, destroy family farms. So, if families are such a danger, what can be done about them. It’s usually too late to pick your relatives so efforts must be made within the family to avert disaster. While many factors can contribute to turmoil, most of them boil down to a failure to communicate. Communication should start with the older generations. Succession planning is a difficult conversation for children to initiate without seeming intrusive or greedy. And, too often the older generation finds it a difficult conversation as well. “Don’t worry, I’ll take care of you” may be well intentioned but often means “don’t ask me about it again.” Open and frequent conversations ensure that everyone is on the same page…or at least making an effort to find the right page.
You are Not Alone on the Range - Jonathan Shepherd
Steve Isaacs, sisaacs@uky.edu
PAGE 2 Educational programs of Kentucky Cooperative Extension serve all people regardless of race, color, age, sex, religion, disability, or national origin. UNIVERSITY OF KENTUCKY, KENTUCKY STATE UNIVERSITY, U.S. DEPARTMENT OF AGRICULTURE, & KENTUCKY COUNTIES COOPERATING.
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Grain Storage in Kentucky . Kentucky has over 280 million bushels of grain storage capacity across the state (USDA-NASS). Of that, on-farm storage accounts for 73% or 205 million bushels. While overall storage capacity in Kentucky is lower than the neighboring states of Indiana and Illinois, the percent of on-fam storage is significantly higher (64% in Indiana and 51% in Illinois). With the abundance of on-farm storage across the state, it is typically underutilized. On average, only 46% of on-farm capacity is used for storage. This presents an opportunity for producers with on-farm storage to rent out storage space that is not being utilized to increase farm revenue during times of low commodity prices. If renting out on-farm storage space is an option, the following link can help you determine a fair rental value (http://www.extension.iastate.edu/agdm/wholefarm/html/c2-24.html). The North Central Farm Management Extension Committee (which includes Kentucky) conducts a Farm Building Rental Rate Survey which includes grain storage rates. The most recent survey in 2014 had an average rental rate of $0.027/bushel/month. Kentucky producers utilize grain storage to market their crops throughout the year. Figure 1 illustrates the average percent of grain marketed off-farm by month in Kentucky for both corn and soybeans. Most grain in Kentucky is held until January with the intention of capturing higher prices or carry in the market and for accounting (tax) purposes.
Figure 1. Average percent of grain marketed off-farm by month in Kentucky (USDA-NASS)
As mentioned earlier, grain is stored to capture higher prices or carry in the market. Figure 2 illustrates historical carry in the market and the cash price received by month as a percent of the October harvest price for both corn and soybeans in Kentucky. Averaging the past five years, a Kentucky corn producer received a 16% increase in cash price over the October price if corn was held in storage until June.
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Figure 2. Kentucky monthly cash price as a percent of October price (USDA NASS: 2010-2015).
While capturing carry in the market presents a great opportunity for grain producers, understanding the costs (both ownership and operating costs) of storing and drying grain are essential in deciding if and how long to store. Decision tools that outline the cost of owning and operating a storage system in Kentucky will be available soon on the following website: http://www.uky.edu/Ag/AgEcon/shockley_jordan.php
Jordan M. Shockley, Jordan.shockley@uky.edu
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Changes to FFSC Farm Accounting Guidelines The Farm Financial Standards Council (FFSC) is a non-profit organization that was born out of the farm financial crisis of the 1980’s. It was commissioned to develop a universal loan application and accounting standards for farm businesses. The FFSC publishes guidelines annually and are relied on by those in the agricultural financing and consulting sectors. In the 2017 edition of the Farm Financial Standards Council Financial Guidelines, there are several important changes to be noted. These changes reflect the latest evolution of the guidelines to be more user-friendly and guided by the continual goal of being as consistent as possible between Generally Accepted Accounting Principles (GAAP) and the distinct challenges inherent in agricultural production businesses. The goal of obtaining a more stream-lined, visually appealing, and more concise set of guidelines was largely achieved by reducing verbosity and minor format changes. Beyond these, the most impactful change affects the Income Statement and subsequent financial analysis ratios calculations and other computations that are derived in part or whole from the income statement. While these calculations have changed, the interpretation of the results have not been affected. It must be noted that the Income Statement format has changed. Interest expense has been moved out of operating expenses resulting in the subtotal, Income from Operations, which is prior to consideration of interest expense. The prior Income Statement format contained the subtotal Net Farm Income from Operations and was a subtotal that included all operating expenses and only differed on from Net Farm Income by the exclusion of gains/losses on capital assets. This term has been removed from the guidelines. In the current Income Statement format, Net Farm Income differs from Income from Operations by the exclusion of consideration of interest expense and losses/gains associated with the sale of capital assets. Please refer to the following list concerning the specified effects: Income Statement format: Interest expense removed from operating expenses and is listed below Income from Operations subtotal (Formerly Net Farm Income from Operations) as a line item prior to gain/losses on sale of capital assets. Rate of Return on Farm Assets and Operating Profit Margin Ratio computations: In the calculation of these ratios the numerators, Net farm income from operations + Interest expense, are replaced with the single expression Income from Operations. The interpretation of these ratios remain unchanged. Rate of Return on Farm Equity computation: In the calculation of this ratio the numerator, Net farm income from operations, is replaced with Income from Operations – Interest expense. The interpretation of this ratio remains unchanged. Earnings Before Interest, Taxes, Depreciation, Amortization (EBITDA) computation: Net farm income from operations + interest expense replaced with the single expression Income from operations. Intermediate subtotal EBIT removed from the calculation to arrive at EBITDA computation. Capital Debt Repayment Capacity computation: Net farm income from operations replaced by Income from Operations. In this calculation, the addition of interest expense on term debt has been replaced with the subtraction of interest expense on current debt to arrive at Capital debt repayment capacity. Income from Operations Ratio computation: In this calculation since Net farm income from operations have been removed from the guidelines, Income from operations less Farm interest expense is used as the numerator. The interpretation of this measure remains unchanged. To learn more about the FFSC, become a member, or order your copy of the guidelines, please visit http://www.ffsc.org/ Jonathan Shepherd, jdshepherd@uky.edu
FFSC Board of Directors, Academia & Cooperative Extension
A Local Foods Vitality Index There are many aspects to a local food economy. Local foods are distributed through various market channels and community food activities, as well as supported through an assortment of branding and promotional activities. Recent surveys of consumers in Lexington, KY were conducted parallel to a national survey on perceived performance of various aspects of local food systems (LFS). The following table provides a measure of perceived performance for each LFS component. The index provides a measure of Lexington benchmarked against other consumers from small cities (50-250K).
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Overall, Lexington has been scored higher than its peer cities. LFS components where Lexington scored the highest in absolute terms include local brewery promotion, farmers markets, and CSAs. Lower performance scores were associated with local food and low income communities, food banks, farm to school, and in ethnic markets. Benchmarking reminds us that consumers generally see local food performance measures vary across all components. The indexing allows us to see how a city like Lexington may compare to how consumers score each aspect in like communities across the country. Local food system development has been an important focus of many agencies in the Lexington community. An index like this will hopefully be available periodically to help both establish priorities and measure progress. An index like this will also be helpful understanding how LFS performance measures vary by urban vs rural communities as well as between types of consumers. This survey was funded in part by the UK Food Connection, the Kentucky Horticulture Council, the UK Food Systems Innovation Center, and a UK CAFE Research Activity Award. Further survey work and analysis continues and additional information may be obtained from the authors.
Components CSAs Food Truck Coop Grocery Restaurants Farmers Market Retail Farm to School Ethnic Markets Food Festivals Food Education Community Gardens On-farm Events Low Income Comm. Food Banks Breweries Promote LFS Local Food Label Govt. Support of LFS Private Investment in LFS Local Product Diversity Price Competitive Overall Vitality
Lexington Versus All Other Small Cities Small Cities Mean Std. Dev. Mean Market Channel Performance 3.40 1.04 4.01 3.33 0.99 3.62 3.46 1.03 3.73 3.35 1.05 3.62 4.09 0.84 4.25 3.38 1.05 3.02 2.95 1.14 2.64 3.28 1.11 2.85 Community Measures Performance 3.34 1.19 3.54 2.96 1.07 3.14 2.99 1.19 3.00 3.38 1.18 3.16 2.68 1.12 2.36 3.19 1.08 2.79 Local Food Promotion Performance 3.52 1.05 4.29 3.14 1.05 3.72 3.03 1.15 3.38 3.11 1.09 3.37 3.38 1.07 3.53 3.33 0.96 3.24 3.21
Lexington Std. Dev.
3.65
Index
0.87 0.92 0.95 0.86 0.85 0.95 1.21 1.09
118 109 108 108 104 89 89 87
1.02 1.00 1.05 1.02 0.94 1.05
106 106 100 93 88 87
0.71 0.94 0.93 0.98 0.90 0.92
122 119 111 108 104 97 114
Notes: performance scores were measured on a 1 = “extremely poor”, 2 = “poor”, 3 = ”average”, 4 = good” and 5 = “excellent”. A “Don’t know” option was provided and omitted here for purposes of the index measure. Each index is measured as the LEX score/Small Cities score x 100. A total of 80 surveys were completed for Lexington and 260 for other small cities in the U.S., although the corresponding N for each index varies based on the frequency of omitted “don’t know” responses. This data is preliminary as additional data is in the process of being collected.
Tim Woods, tim.woods@uky.edu Jairus Rossi, jairusrossi@uky.edu Alison Davis, Alison.davis@uky.edu
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You Are Not Alone on the Range As farmers continue to wind down harvest it is time to tally the results and determine how this year’s performance will affect plans for next year. Throughout Kentucky, preliminary indications suggest that grain yields are variable depending on where and when the rains hit. You may have been rewarded with higher than average yields while others are closer to average. Relatively higher yields are providing some temporary easing of financial tensions. However, commodity prices are still near break-even assuming a modest cost structure. What remains to be a reality, is that cash-flows are still extremely tight and are expected to be tight for the foreseeable future. This holds true for most agricultural enterprises in Kentucky. While the relatively higher bean price and potentially better yields may have improved financial performance for 2016, it is not time to let the pencil dull. We will be entering into 2017 with flat price projections and cash-flows being strained. The turn of events in the agricultural sector of the past couple of years have also led to several changes in terms of lending and farm managers’ potential access to capital. Many lenders are in the same process of taking the advice they give to clients and are taking a hard look at their loan portfolios and assessing the risks. In this evaluation process, lenders are requiring more timely financial documentation reporting. Even the terms of some operating agreements are being changed. Previously, it was not uncommon for lenders to offer three year operating notes. Some financial institutions are eliminating this as an option for farmers and are returning to a one year operating note agreement. Understandably, farmers who have been informed they will be moved to a one-year note are generally anxious about what this change really means about the overall financial health of their operation and the commitment of their lender. Some managers see this change as direct indication of the financial health of their operation as opposed to an industry wide trend of risk management. You are not alone. Almost all farmers, especially those who are primarily dependent on farm income not only for farm operations but for serving personal expenses and debt as well, are being subjected to a more strenuous financial review process. Here it is important to point out that the only benefit of having a longer term operating note really boils down to submission of financial documentations by your lender to their underwriters. When longer operating note agreements were the norm, your lender had to submit financials to the underwriter every three years (for a three year-note). Now, your lender will be submitting financial documents to the underwriter yearly assuming you have been switched to a one-year operating note. It would be remiss to not point out that most all lenders still require farm managers to submit yearly financial documents even with a three-year operating note. Further, a three year operating note is not a guarantee of operating fund availability. Even with a multi-year operating note, operating funds draws can be stopped if financial performance deteriorates. So while some of these agreements have changed, truly, the outcome should be the same. The only potential change is that some farm managers will have to be more disciplined and timely in submitting the required financial documentation in order to keep access to their operating notes. The goal here is not to give you false hope. Lending decisions are very much dependent on individual operations business plans and financial performance. However, it is not just your operation that is being singled out. This is an opportunity to more timely manage your business’s finances and have another set of eyes provide feedback on your operation’s performance. Liquidity issues can turn into solvency issues quickly if the underlying cause of the liquidity problem is not addressed. More timely reviews of your operation only increases the chances that any of these potential problems can be addressed. If you would like input about your operation from the Kentucky Farm Business Management Program, please contact your local farm management specialist. http://www.uky.edu/Ag/KFBM/
Jonathan Shepherd, jd.shepherd@uky.edu
Kentucky Farm Business Management
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College of Agriculture, Food and Environment Department of Agricultural Economics
315 Charles E. Barnhart Bldg. Lexington, KY 40546-0276 Phone: 859-257-7288 Fax: 859-257-7290 http://www.uky.edu/Ag/AgEcon/extbluesheet.php
Economic & Policy Update View all issues online at http://www.uky.edu/Ag/AgEcon/extbluesheet.php
Educational programs of Kentucky Cooperative Extension serve all people regardless of race, color, age, sex, religion, disability, or national origin. UNIVERSITY OF KENTUCKY, KENTUCKY STATE UNIVERSITY, U.S. DEPARTMENT OF AGRICULTURE, & KENTJCKY COUNTIES, COOPERATING.