Ag Law Issues of the Year
Outside of the less than ideal crop season, ag issues in the law continue to have an impact on production ag, whether or not we see them immediately as muddy fields, rain-soaked crops, and lack of L.P.
Special Thanks to Tiffany Dowell Lashment for identifying these issues as being important to ag this year. Here are my thoughts on them.
The 2018 Farm Bill has opened a pathway for legal hemp production, which is slated to be used not for pirate ships (ropes used to be hemp in many cases) but rather for the production of CBD oils and other hemp-based consumer products. State-level production plans need to be created, approved, and approved by the USDA. For the want to be hemp growers in states without a plan, the USDA has a fall back plan. I am not convinced that this isn’t the latest sunflower, ostrich, emu, aquaculture, Aronia berry fad that sounds great but needs more work to make it work when the smoke clears and the true market for the product is established. Yeah, I said smoke…… but not that kind of smoke.
Beef checkoff litigation.
Under the checkoff program, a $1/head assessment is paid when cattle are sold. Producers don’t get a choice. Half of that payment is retained by the state beef council and the other half goes to the Cattleman’s Beef Board.
R-Calf, a group that decidedly does not like the check off or Beef Boards. They initially filed suit in the United States District Court in Montana, challenging the requirement. R-Calf argued this violates the First Amendment because the Montana Beef Council is a private entity and its members are being forced to pay for its speech (i.e. advertising). They don’ t have a way avoid that half their full assessment paid to the Cattleman’s Beef Board.
The beef councils say their messaging is not private speech but is instead government speech. This is because a memorandum of understanding entered into between the Montana Beef Council and other state beef councils with the USDA allows USDA control and oversight of their speech. This issue of whether the speech is private, or government is critical, as prior United States Supreme Court rulings have found that compelled government speech does not implicate the First Amendment, whereas compelled private speech does raise First Amendment concerns.
R-Calf was granted a preliminary injunction requiring all checkoff payments made by Montana producers be sent to the Cattlemen’s Beef Board unless producers specifically indicate they wish for a portion of their checkoff payment be retained by the Montana Beef Council.
The fight on who control checks off dollars has been engaged in many different commodity groups over the years. It won’t stop. OPM… Other People’s Money (that is the producers who have to pay the fee) is always a source of control issues.
The Clean Water Act gives federal jurisdiction to the Environmental Protection Agency and the US Army Corps of Engineers over “Waters of the United States” AKA WOTUS. WOTUS waters require federal permits. What the Clean Water Act failed to do, however, is define the meaning of “WOTUS.” This has been the source of legal disputes lasting several decades.
In 2015, the EPA made a new regulation that did define WOTUS. Lawsuits were filed related to this definition, including most recently Georgia v. Wheeler, where the United States District Court for the Southern District of Georgia hold that the rule was both procedurally and substantively invalid.
2015 Rule has been rescinded by EPA effective December 23, 2019. Now we are back the pre-2015 WOTUS approach that led to years’ worth of litigation.
The White house released their proposed draft to the public last December and took public comment through April 15, 2019. After reviewing the comments received, the government will issue a final rule imposing a new WOTUS definition. Vegas says litigation is highly likely.
Another issue year is whether indirect discharges from a point source into groundwater that eventually reaches a WTOUS is covered by WOTUS rules, which means a permit is needed. There have been a number of federal court rulings on this issue, which are not consistent with one another. Again, smart money is on more ligation on how much the fed can be involved in local waterways and what locals can do to stay out of another level of government control (i.e. the Federal system).
As a farm operation, this question is a central driving factor to profitability and sustainability. It ties up capital, is hard to acquire, and often comes with factors that are hard to mitigate, like poor neighbors, bad drainage, irregular shaped fields, and prior use restrictions. Each one of those factors has a unique score to any one potential buyer of land based on their tolerance for obnoxious neighbors, access to more capital to insert tile, size of equipment and desired crop. No one answer will fit all.
It is interesting to consider the long-standing observation of they are not making any more land. A more telling observation might be, we are losing production acres every year. Consider the population on July 1, 1970 was 3.7 billion people. Since then, we have added 4 Billion people and are projected to be at 10 Billion people on the planet by 2055. The take away from that is that those people need to live some where and those people all want to eat. In the next 40 years, it is projected that farmers must produce more food than the previous 10,000 years combined. That requires resources like land.
Since 1982, land developed for residential/commercial and industrial use has risen 58% in the United States but still only accounts for 5.8% of the total land use in the United States. Of the 1.94 Billion acres in the US, the federal government owns 20.6%, 2.6% is water, and 71% is classified as rural, with 18.5% in crop and 27% in rangeland or pasture.
Who owns the land other than the government? John Malone and Ted Turner (Of Turner Broadcasting Station) each own about 2,000,000 AC and 1.35 billion is owned privately all together, with 30 million of those acres held by 100 persons or companies. Ag focused investment funds are putting billions of dollars into landownership.
Why are they buying? They believe in general land provides stable long-term returns, they recognize that the global demand for food is on the rise between population and increased buying power of emerging nations. The resources under the ground (which is the only other place to get something if we can’t grow it) like natural gas, oil, and a place to site a wind generator, are going to increase in value as demand for energy increases. These investors also recognize the loss of land that can be put to farming and, in the US, specifically, despite our political theatre, is a stable environment to do business in.
Returns on farm land investing have run between 7% and 12% since 2014, while a 4.7% average since 1990. And a 40-year average return of over 10%, which beats the stock and bond market on an annualized basis for the same time period.
Sometimes, we are busy with the tactical level of farm ownership such as can we make the payment and how does this work with our crop cycle, we fail to contemplate the long term advantage of holding the ground for its own sake.
When it’s time to get out of farming, problems abound. Often times, the farm operator has equipment that has no tax basis left and high resale value. That triggers tax. Further, the operation is often left with the proceeds of a crop and if the habit of paying ahead on next years crop inputs is used to reduce taxes, the last year has no corresponding expenses to offset the income.
A million-dollar sale of iron means income of $1 million, all recognized that year. Then the regular income from the grain sales occurs. That is a tax bracket most farm operators don’t want to operate in. Many operators turn to the disappearing hedge row technique to slowly lose track of non-title equipment and sell it for cash or disguise by selling it under children’s names or simply failing to report the sale to their tax prepare and hope for the best. This plan is not a solid plan and fraught with danger. The modern farm operator will be held to modern farm standards. The ability to retrieve bank statements, auction purchase data and other data collection points means that Grandpa’s equipment distribution plan may not be a legitimate option for the current generations transition out of farming.
One option is the use of a charitable remainder trust (CRT). Like the name implies, a charitable organization gets the remainder of your assets, after you have a chance to use the revenue for a while.
Charitable Remainder Trust. There are four hats or jobs to a CRT, and the farm operator can put on three. The easiest is the grantor or person establishing the trust and puts the equipment or grain into the trust. The second is the Trustee, or the person responsible for managing the plan created by the trust. The third hat is the person who benefits from the plan. This can be the farm operator. The final hat is the charity, which cannot be the operator and who has to get at least 10% of the value of the assets put in to the trust.
The plan is then chosen. The two types of plans are CRUT and CRAT. A CRUT sets up a yearly payment to the farm operator based on a percentage of the assets in the trust (as determined each year of the trust). The second is a CRAT, which has a one-time determination of value and then a steady dollar amount or percentage is paid back to the beneficiary over the plan.
Why bother and what’s the incentive. When grain is moved into the trust, it is not a sale. The Trust then sells the grain and invests in stocks, bonds, cd, annuities etc. That gain from the sale is then spread out over the life of the trust. Because the trust is a tax-exempt organization, capital gains are deferred and the income tax on the sale of the grain and equipment is not the burden of the farm operator themselves. Further, the operator gets a charitable donation deduction on its tax return and shrinks the size of the farm operation for estate purposes. On the downside, the operator often notes that is providing assets to a charity and not keeping that capital available for the next generation. That loss of capital needs to be weighed against the loss of capital paid in the form of taxes.
$1 million equipment means a high tax bracket the year of the sale. By comparison, in the trust, the million is invested and the operator pays the tax on the annual income generated by the sale of these assets and in a lower bracket as time goes on and the operator’s other income fades.
There are costs to set up a CRT and annual expenses. The main question is often how much does the operator have to leave to the charity versus how much can the operator get back as a payment stream. The rule is 10% of the total contribution has to be there at the conclusion of the trust. The other question is, can the operator create a charity that controls the charitable uses? The answer is somewhat. Making a new charitable organization that only awards scholarships to left handed softball players from the local high school when the farm operator has three lefthanded girls is a bit suspect. The operator can choose its charity whether it’s the local 99 cent movie theatre, the ambulance service, the industrial development board or a church but should avoid telling those charities what movies to show, what ambulance to buy, what business to whoo, or who to pray for.
As we all look to the slowly dying crops and patiently wait for them to hit the optimum harvest condition, it is a good time to remember we are all slowly dying. Everyday, every hour. Yet we will never know when we reach optimum harvest time and depart. Like harvest prep, we can however, get our affairs in order to make transition as orderly as possible. Time to be blunt.
First, everyone, regardless of property status, wealth or relationship with children, needs a health care power of attorney and a general power of attorney. These documents are essential if you are incapacitated and need to have something done for you medically or financially. Everyone needs to pick a pinch hitter and a back up to the pinch hitter. Failure to do so will result in expensive court proceedings to name a pinch hitter. Do not leave it to guess. Name your spouse, name your child, name your neighbor (with their permission) but leave somebody in line to take care of your bills while you cannot.
A will is often the last directive a person gives. If you own real estate or have over $50,000 in assets you are going to need to have a directive on what goes where. If you do not, you will have the state of Iowa take guess for you. This can result in your second cousin that you never did like at the family reunions going out to eat on what is left of your retirement nest egg. Do not let the state give your stuff to your terrible 2nd cousin. Make a will, pick winners and losers and decide who gets the farm.
Don’t punt on tough decisions. Decide if your kids can own the farm together or decide who should get the farm and give the other children other assets. Do not expect the children to magically set aside their own personal goals and desires and do whatever it is that you hope they will. If you have a goal, invest in will/estate plan that makes those goals possible. If you have an adult child that is a perpetual criminal, spender, or has a physical /mental issue that impacts their ability to make a living, blindly giving them assets is not really planning at all.
12 percent of a plan is better than no plan at all. If you are not sure, get a base line plan and then modify it as you determine if your daughter’s desires to farm match her ability. Make the plan well before illness sets in. When you have trouble hiding your memory loss, its is too late to make a plan.
If you are single or divorced and thinking about getting married, whether you are 18 or 80, nothing says I love you like a prenuptial agreement. This document can be wielded like a club against those who whisper your partner married for money or land and make parting ways when thing don’t work out so much easier. Further, a prenuptial agreement can quash the concerns of adult children from the first marriage and hopefully stopping them giving the new partner the side eye at every family get together.
Tell your children your plan. So many times, people litigate because “Pop would be rolling in his grave and would never want Mom to reward the on-farm child with more assets than me.” If Pop spent an hour explaining to his son who moved away to South America when he was 29 why his sister gets more than 50 percent, it might save two lawyers, a judge and some witnesses from cluttering up a court room to figure out if Mom had he and Pop’s plan overridden by the sister.
Sumner, Iowa Attorney practicing in Iowa primarily in Ag Law, Bankruptcy, Estate Planning, Real Estate Law. Lawyers at the Dillon Law P.C. are dedicated to serving Iowa, including but not limited to the cities of Allison, Charles City, Cresco, Decorah, Des Moines, Dubuque, Elkader, Grundy Center, Independence, Manchester, New Hampton, Waterloo, Waverly, Waukon, West Union & Vinton, and the communities that make up Allamakee, Benton, Black Hawk, Bremer, Buchanan, Butler, Chickasaw, Clayton, Delaware, Dubuque, Fayette, Floyd, Grundy, Howard, Polk, Winneshiek, counties. © 2022 Dillon Law P.C. Sumner Location | 209 E. 1st Street, Sumner, IA 50674 Volga City Location | 502 Washington St, Volga City, IA, 52077. West Union Location | 103 N. Vine Street, West Union, Iowa 52175 West Union, Iowa 52175 We are there most Fridays 10-3 and by appointment. Telephone: (563) 578-1850 Email: email@example.com Home | Attorneys | Blog | Ag Law | Bankruptcy | Estate Planning | Real Estate Law | Contact | Iowa Ag Law Attorney Sumner Taxation Commercial Transactions Production Contracts Labor Hobby Farm Liability Bremer Fayette County Lawyer