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The Ag sector is looking at the lowest net farm income in 2016 since 2002, with a drop of 56% from 2013 prices. This is across the board, with decreases in dairy, meat, poultry, vegetable sand feed crops. Why does that matter? Iowa is consistently ranked #2 in gross farm receipts and is responsible for 7.6% of the US gross receipts in the Ag. Further, Farm Asset value is expected to decrease another 1.6% this year and debt to increase 2.3% for farms and non real estate debt to increase 3.8%. Net farm cash income projected for 2014-2015, when the numbers are finally in,  down 27% and  net farm income is down 37%. Add in a hotter than average July and low commodity prices and it is  uncomfortable time in the ag sector.

Why does that matter? Iowa is consistently ranked #2 in gross farm receipts and is responsible for 7.6% of the US gross receipts in the Ag.

I have referred to this last "good run" of farming as the rise of the "shorts farmer". A shorts farmer is one who hasn't had to have livestock to spread out risk or make hay for, can afford to hire out crop scouting and spraying, and can trade equipment to avoid getting covered in grease doing maintenance and repairs.  Shorts, while good for swimming, may not be the best gear for the rising waters ahead.

As trouble waters may be brewing, it is appropriate to review some basic concepts that perhaps we in the Ag community haven' t had  to consider in quite awhile.
Chapter 7 bankruptcy is a complete liquidation of non exempt assets, leaving the filer with some cash, some basic tools of the trade, the equity in their residence , retirement accounts, and up to $7,000 in equity in a vehicle. Eligibility depends on the size of the household. In Iowa, a single person can file if they are under $46,009 in annual income, 2 person household goes to $60,872 and so on. They can be filed once every 8 years. They are quick, taking about 3-6 months to discharge most debts.  Some debts will haunt you to the grave, including tax debt that is less than 3 years old, credit purchases made with in 90 days of filing, alimony/child support, government fines and student loans (with some small relief avaialbe for those who truly can do no work).

Chapter 12 is a bankruptcy tailored for farmers, with the requirement to repay creditors tied to a five year plan that is connected to the production schedule  of the ag economy, which is different that a factory. Farmers who file can only have $4,031,575 in debt to be eligible. That is owing $10,000/acre on 403 acre and nothing more, which isn't really that outlandish. Those who don't qualify will go to a 13 or a 11.

If you are thinking about filing a bankruptcy, you can do pre bankruptcy planning. Pull your financial statements, run a cash flow, get your taxes done and filed and meet with an advisor. Sometimes, the lenders  can restructure  your debts without filing a formal bankruptcy. Iowans have a tendency to hang on too long and miss opportunities to reset the game pieces and as result, end up consulting advisors and bankers when it is already too late.

Beware of gifts or below market sales prior to filing a bankruptcy, These transfers can be set aside and pulled back into a bankruptcy filing. Additionally, creditors who receive payments from someone who files bankruptcy can have those payments pull back into the bankruptcy estate if they were made 90 days prior to the filing.  The creditor has some defenses, to include showing that the payments were ordinary business transactions but it can sometimes be more painful monetarily than it is worth.

Think about the round baling being done this summer. The custom operator who waits in the field for the check and cashes it promptly  now doesn't care about a 1 March bankruptcy but the operator that avoids conflict and waits to send bills until December may be writing a check to the bankruptcy trustee for the work they did and collected on. If someone who owes you money files bankruptcy and you receive the notice or read it in the paper, stop contacting them at once. You have the opportunity to do some investigation into whether any you are going to get paid, but calling the debtor to ask is not the way to handle it.

If you inherit property with your brothers and sisters, you just got thrown in to business together with no business plan, no body in charge and perhaps, wildly different goals for the business. This form of ownership is called:

  • Tenancy in Common – , in which the two or more parties own an undivided fractional interest in the property, but when one of the “tenants in common” dies, that person’s fractional interest passes via probate (with or without a will) to the dead tenant’s heirs. This allows for a “step up” in the tax basis of the property for capital gains purposes, and can be used to bring in the next generation as a co-owner with the surviving spouse.

That’s why it gets complicated. Corn or beans. Hay ? CRP? Sunflowers? Multiple owners have multiple biases, goals and desires. If a co owner is deep in debt, they are motivated to maximize revenue while a well off co owner might consider things like land conservation, long term development potential or other agenda items that will bring conflict to the front burner.

Iowa law says people in these situations have the right to get paid from a cotenant who is in control of the property, their respective shares of the “rental value” of the property. Easy to figure when one co tenant got a rent check, not so easy when that co tenant is farming the ground.

The Iowa Supreme Court has pointed out that lease of executed by one tenant in common Is not binding on other tenants in common unless they okay it, like cashing a rent check.

In a case out of Clayton County:

The tenant had 85 acres of farmland owned Strawberry with a written lease that had automatically renewed each year . The tenant was terminated timely by the city. The tenant complained about how he was terminated (by the city clerk and not the council) but court found that the clerk followed the law and didn't need a separate vote of the council to terminate.

The tenant also took issue with him being barred from harvesting cornstalks following termination but the written lease clearly prohibited him from doing so, even though in a prior year he had made bales.

The tenant's only successful argument was that he was entitled to some prorated credit for lime application. A written amendment to the parties' lease provided that lime and trace materials were to be allocated over 7 years and that "if the Lease [was] not renewed," the tenant was to be reimbursed by the landlord "to the extent Tenant has not received the benefits, on a pro rata basis." The lime application was two years in when the lease was terminated. Strawberry Point unsuccessfully tried to say the lime was not an authorized expense, but because lime was primarily a tenant benefit, the city didn't have to authorize it. Just like it doesn't have to authorize herbicide.

It is clear that if this had been a handshake deal between two parties, it would have been even messier to determine who is entitled to what. As to the lease, I would think three years would be better fit for lime depletion, not seven. Consider the next level of argument, unless it is clearly spelled out in the lease, the lime proration can be determined based on uptake, cost of application, cost of product or some other method. As to the uptake, I have spoken to six different labs over the years and have gotten six different uptake rates (while similar, are still slightly variable) for minerals. Consider also how uptake would be determined, as unless a grid sample is used, data drawn at the beginning of the lease and at the end may not be really be comparing data points at all.

One Horse is all it takes.

This month, the Iowa Court of appeals ruled that one 38 year old nag horse was all that is required to create a farm tenancy. For those who rent out farm acreages, this is a big development. A farm tenancy needs to be terminated timely and appropriately by 1 September, while a residential lease can be terminated at various times. Until 2013, this would have not been a concern as at all. Unfortunately, the legislature changed the law in 2013 , removing exception from the 1 September rule for less than 40 acres unless animal feeding was the primary purpose. (read that to mean hog buildings built on leased ground). One horse is not an animal feeding operation, so 1 September is the date to keep in mind. I would think the legislature would adjust this as even the court thought "it may seem absurd to deem this tenancy a farm tenancy," but left with the black letter of the law, they really had no choice.

Lease Rates

According to Iowa State, farm rental rates slid 6.5% but that slide is not as fast as the crop cash prices. Unless a rally happens in the fall, expect tenants to be looking at their bottom lines and trying to find the best value for their rental dollars.  

By 2022 (which isn't really all that far away), drones or UAVs(unmanned aerial vehicles) sales could be up to $3.69 billion dollars. That is over a 700% increase from the current level of sales. It isn't just the farmers who grew up playing ATARI and Intellivision game systems driving the demand. As consumers demand beginning to end visibility of their food, drones will be position to provide the on demand information that consumers are growing accustomed to in all areas of their life. Farm operators benefit too. The operation can more efficiently apply time and resources to the growing product where it yields the most return. By targeting inputs in accordance with the uptake demands of any one region of a field, over application or under application of inputs is reduced.

As better sensors, camera and data gathering information tools become available, the desire and demand to acquire the data will increase. Site selection Concerns As markets continue to be volatile, on farm grain storage becomes more attractive all the time. Farm operators have a tendency to attempt to do things themselves to the extent possible to save on costs. Site selection for a new storage facilty is often driven by where the ground is available, ease of unloading and distance from other facilities. Some addition factors that should also be considered include soil suitability. Traditionally, farm building sites where placed on the poorest ground to maximize the productivity of the purchase.

However, the soil that isn't fit for farming may also may not be fit for storage either. As the grain bins become larger, the chance for soil settling after the grain bin is erected and fill increase. As most farm customers dictate where the grain bin may be located, they may have no body to blame but themselves when the walls come tumbling down on a shinny new facilty that couldn't bear the weight. Further, electrical servc ie can be denied if certain clearnces from existing power lines are not observed. The solution is to get a professional who will determine if the site you think work really does. For the soil , professional engineer is the best bet while the electrical service provider is the key to ensuring that the minimum set back distances are in fact met.

Des Moines Water Works Litigation

As the battle continues with the Des Moines Water Works suit against drainage districts, sometimes the attacker ends up exposing themselves to unwanted scrutiny. The Des Moines water works $241 million capital improvement campaign may be the first victim. After filing suit against the drainage districts, people began to ask questions about who was in charge of the Water Works and how it operates. Despite serving over 20 communities, the water works board is appointed by the Mayor of Des Moines exclusively. That means that despite the rate payers coming from a variety of municipalities, the rate is set by Des Moines and the proposed capital improvements are decided by Des Moines appointees. Further, the board routinely doesn't provide information without prompting to the communities it is serving. Calls have been made to form a regional board that reflects the entire population of the water works customers, not just the political appointees of the largest city in the state.

Saturday, February 23, 2019
  • Patrick B. Dillon
  • Jill Dillon
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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.
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Jill Dillon focuses on family law, estate planning and IRS matters. Jill is a University of Northern Iowa undergraduate (Political Science Cum Laude) and a Drake University Law School graduate. Jill spent extensive time advocating for low income tax payers in front of the IRS and the State of Iowa Department of Revenue while at Drake.

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