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70% of North American farms will change hands by 2025. This is not just ownership, but who farms the land. This provides plenty of opportunities for American farmers. We need to get over the concept that farming is a lifestyle that deserves special provisions protections and romanticism. It is apparent that it is a business to the non farm sector, and unless the operators of farms act like business men and women, they will be consumed by those who do. Direct payments and counter cyclicals will be under attack and likely crop insurance will be offered up to replace the guarantee payments. The kitchen table  and the board room table are two different places for a reason.

Farming has 3 golden times in the last 100 years (1) during the 1910's (when the US fed Europe as Europe shot each other into the stone ages), (2) during World War II (when every body wanted to be like Europe and shot everything back into the stone ages)  and the period thereafter and (3) during the mid 1970's (again when our competitors abroad couldn't meet the demand).  Drive through the country and look at when houses were built. Lots of 1915 builds still dot the country side, with plenty of post World War II expansions and 1970's ranch style houses. Coincidence, I think not.
Perhaps another set of good times happened from 2008-2012  Number crunchers indicate that for the period 2002-2012 years indicate that farmers have had the best overall profitability over the those three years

Good times are defined by the lack of good times that follow. If we are in a good time, it is important for agriculture business operators to take advantage and prepare for the bad that follows.
So how does a farmer operator behave like a business operator? Acknowledge the elements you need to be successful, assemble those elements and place them into action.
     
Acknowledge that you must consider   management of revenues, farm input costs and   your interest rate management. These will need to be balanced. Obsessing over one will hurt the other two. Getting a handle on costs of production will help you make sales decisions that are rationally based, not emotionally based on who has the best bragging rights at the Co-op.
Another item to watch is your repayment capacity.  This is calculated by taking your net farm income adding non-farm income plus depreciation and interest expense on long-term debt and capital leases.  From this total, subtract long-term debt and capital lease payments, net cash incurred for equipment purchases required annually and family living expenses.   This math formula this tells you how liquid you are for this year and the upcoming year.  If this ratio is less than 1, you will have liquidity problems.  It should be greater than 1.5 to 1 to be comfortable and above 2 will give the liquidity to expand, etc. Knowing this will take a lot of drama out of going to see the banker.

Time and time again I here business clients who are concerned about protecting their rights to collect against a customer by being concerned that “it might offend them.”  Liens are a perfect example of this.

Under recent Iowa Law, contractors who work on residential structures need to file a notice of commencement of work with the Secretary of State. This notice puts the lender, the home owner and anybody else working on the project that work has begun. This is important as failure to file this notice will prevent a contractor from placing a lien against the finished product.  While very few people would be offended by a bank telling them they  need a lien (which is what a mortgage is) against your property  to make sure you pay as promised, contractors are concerned that those same property owners will have their dander up about a potential lien filing by a contractor. 

It isn’t limited to just contractors. If a farm operator custom feeds for a third party owner, that feeder has a right to file a lien to ensure payment. The lien must be filed with in so many days of the livestock arriving at the property or the lien is not enforceable. Again, the producer sometimes shy’s away from protecting its rights to be paid by the owner of the animals for fear of offending. Feed suppliers can also file a lien to make sure that the feed provided to the livestock is paid back to the party delivering the feed on credit. Failure to protect yourself as a contract feeder or a feed supplier for fear of offending the customer may result in the t  rather offensive outcome of being “out of the money” when the customer files for bankruptcy or other wise doesn’t  have enough money to pay all the creditors.

Tax Planning.

Pay Now and Play Later and The Wimpy Doctrine.

In most years, a  tax estimate prepared prior to the end of the year is a valuable tool to allow operators to make decisions on end of year purchases to manage what income tax bracket the operator falls into .

This year, with the looming expiration of decades long tax rates and a return of higher rates, the estimate may take on extra significance, as deciding to trigger income in 2012 may net savings in a lower tax rate than taking the income in 2013. As the law stands today, tax brackets are going to be compressed (meaning more people pay higher rates) and the higher rates are higher than current rates. Additionally, capital gains rates move upward, dividend rates expire, and married tax payers will once again, be penalized in the form of a lower standard deduction than if the tax payers where single and the child tax credit is slashed in half. And finally, section 179, which allowed accelerated expensing of machinery and sheds over the last  years, looks to be limited in the future.

Pay Now and Play Later:

Many farm operators spend money at the end of the year on prepaid expenses as a way to adjust income. Interest cannot be prepaid past what is due and rent prepayments are limited to 12 months.  In order to pass the smell test regarding expenses from the IRS, farm operators would do well to remember the following guide posts:

1.       Terms. Price, quantity and grade without refund or sale back options must be included in the purchase. No throwing money “on the books” to be applied to whatever expenses come up in the future.

2.       Valid, non tax reason, for purchase. Farm operators should document the incentive to prepay (like better price or  concerns regarding specific quantities not being available at a later date (think seed numbers)).

3.       No giant swing in income.  Purchasing a limestone quarry and then attempting to expense it all off as fertilizer expense is distorting. Purchasing a pile of lime to apply with in the next 12 months is likely not.

4.       Only Half. Prepaid expenses should only be about 50%  of non prepaid expense. Operators can look at the last three years in total to show the 50% test is met.

5.       Proof and Payment. Keeping the written offer regarding prepay discounts are a great idea. Additionally, payment by credit card is fine, but offering a check to the supplier and asking them to hold it upon receipt or postdating a check is not acceptable. Likewise, offering a check on an overdrawn account (unless backed by a line of credit) is not a legitimate prepay. Borrowed funds are also okay, as long as the seller is not providing direct financing.  Be ware of wholly owned subsidiaries of the input supplier offering financing as it may knock  the operator out of the benefit they are seeking to maximize.

 

Do you have that in Writing

In each of these cases reviewed below, having it in writing was central to the case. Sometimes a writing is good enough and some times it isn't worth the paper it is printed on. Stopping to think about whether or not a "handshake" will hold up in a dispute is worth the time and effort it takes.

Collect the data or don't collect the reward

Using grid soil sampling and yield monitoring is the industry standard for modern farming. Consider all the ways you can establish your yield. Monitors, weigh wagons, grain warehouse receipts, scale tickets. A farmer filed suit against a Cooperative for impaired crop due to lack of proper spraying. The farmer had no yield records to support his claim. This farmer apparently had no records to support his yield claim and yet demanded compensation. It is a true stretch in those cases to get anywhere. The farmer learned that the hard way. The lesson is to invest in your operation and ensure you have accurate data, especially if you think you are going to have a loss based on some one else's misconduct.

Sometimes, a handshake agreement just leads to being slapped. An older farmer agreed to help a young farmer with access to land and equipment. The older farmer allowed the young farmer to trade the older equipment off on newer equipment. Nothing was documented or written down. The relationship went south and the young farmer left with all of the shiny new equipment. The older farmer sued for theft of the equipment. The court found that ownership wasn't clearly proven and the young farmer retained ownership of the equipment. 
 

Friday, July 01, 2022
  • Patrick B. Dillon
  • Jill Dillon
Dillon Law PC
Patrick B. Dillon enjoys finding solutions to legal issues and catching problems for clients. Pat practices in the Sumner office regularly represents clients in district, associate district and magistrate courts for agricultural, real estate, criminal and collection issues. He drafts wills and trusts, creates estate plans and helps clients through the probate process.
Dillon Law PC
Jill is a University of Northern Iowa undergraduate (Political Science Cum Laude) and a Drake University Law School graduate. Jill is the assistant Fayette County Prosecutor and a certified family law mediator. Jill still has ties to her family farm operation which includes a dairy herd. Jill Dillon focuses on bankruptcy, adoptions, and mediations.

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