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President Obama signed the new tax bill into law on Sept. 27. This law contains several new provisions as well as extensions of older provisions that were scheduled to expire at the end of 2010. Many of these provisions are very beneficial to businesses engaged in agriculture and provide numerous opportunities you should consider as you review your tax situation and do your year-end planning.
Expensing of equipment purchases
In the past, equipment and single-purpose agriculture building (barns, hay sheds, milk parlors, etc.) purchases were depreciated over a certain period of years. Several years ago, provisions were made allowing certain dollar amounts to be expensed in the year purchased.
One thing I like about working with dairymen is they are not afraid of taking risks to be successful.
Initially, we were asked to talk about expansion opportunities for dairy operations. While that sounds great and full of risk, we’d like to expand your thinking by asking you to see risk transfer as the business expansion itself.
Given today’s dairy environment, we believe it makes more sense to address expansion and planning from a different angle than what a traditional expansion looks like. Instead of expanding the dairy operation by adding more cows, land and facilities, let’s look at it from the individual owner’s perspective. For example, how does a son or daughter increase their ownership in the family dairy from 10 percent to say 25 percent or 30 percent?
Since mid-2008, we have seen milk prices as low as $10 and as high as $22. Corn, corn silage, soybean meal and other feedstuffs have also experienced significant price volatility. Day-to-day operation management in these times becomes a challenge, let alone planning for an expansion.
Many questions need to be evaluated before an expansion is considered. Some of them include the following:
1. Why does the operation need to expand?
2. What will the new operation look like?
3. Where will the new operation be located?
4. How will the operation be different from a management perspective?
5. When is the best time to expand?
These basic questions are naturally interrelated and need not be answered in any particular order. However, No. 1 is probably the most important and requires the closest consideration before moving forward.
As we enter the fall months of the year, it appears that we finally have milk pricing that would put us in the black once again, but how long will it last? We are already seeing the Class III market on the CME fall below the cost of production for the first six months of 2011.
Beginning in 2009, we have endured unprecedented losses. For approximately 10 months, we experienced losses averaging $5 per hundredweight (cwt), which was followed by another eight months of less than breakeven prices. We have seen our cow loans stretched to the maximum, our feed loans out of compliance, our property values falling below desirable levels and our cow values falling as well.
The objectives of federal milk marketing orders (FMMOs) are to assure consumers of an adequate supply of wholesome milk for beverage purposes and to promote greater producer price stability and orderly marketing, says Bob Cropp, professor emeritus and dairy marketing specialist, University of Wisconsin – Madison. To achieve these objectives, FMMOs use classified pricing and pooling.
Initially, FMMOs had two classes, one for beverage milk called Class I and another for all manufacturing use milk, called Class II. Later, a third class was added for milk used to make soft manufactured products. A fourth class, Class III-A was added in 1993 in some orders for milk used to make butter and nonfat dry milk.
The day after the auction of the cattle and equipment provides a mix of emotions for a dairyman. There is a bittersweet sense of relief that he is no longer responsible for milking and feeding his herd, but now that he has all this free time to think, he is afraid. What is in store for him in the future?
As he stands in the vacant freestall barn, he starts to wonder what will happen to him and his family now that he no longer has to be on duty 24/7. He starts to worry. What is he going to do? Maybe selling the farm was not a good idea after all. After the sale of the real estate closes, he will have 30 to 60 days left to live in the farmhouse.
Where will he be living after that? Who is going to hire a middle-aged man who has always milked cows and worked for himself? The feelings of anxiety are natural. The dairyman is leaving his comfort zone and walking into the unknown.
The road to better marketing continues for Dave Geiser and Deb Reinhart of Gold Star Farms. After choosing a marketing consultant in November 2009, Dave and Deb began their journey toward better control of their business through better marketing.
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Extended workers’ compensation, leaves and other disability leaves present an ongoing challenge to employers. For dairy producers, these challenges are magnified by the typical dairy’s lack of additional personnel to cover for extended absences, and the complications that arise when disabled employees refuse to vacate dairy housing. But there are proactive steps that can be taken to control the abuse of workers’ compensation and other legally-protected disability leaves of absence.
Most states have comprehensive workers’ compensation laws. Most workers’ compensation systems entitle employees to a period of leave to recover from their injuries and prohibit employers from discriminating against employees who suffer workplace injuries.
How much is $13,552,485,816,852? Let’s consider one billion first. One billion seconds ago it was 1959. Now multiply one billion by 13,552 and you have our national debt. But don’t stop there – it is constantly growing. A number that is easier to comprehend is $43,371 – each American’s share of the debt. Why don’t you go ahead and tack it on to your balance sheet?
How did we get here?
In all but four of the last 30 years, our U.S. government has spent more money than it has brought in. The most recent federal budget deficit, fiscal year 2009, was $1.4 trillion – the largest in the history of the U.S. In terms of gross domestic product (GDP), the deficit was 10 percent in 2009 – the highest since World War II. Final numbers are not available for 2010, but the Congressional Budget Office (CBO) estimates it will be around $1.3 trillion.
With the exception of the spot period for nearby Q4 2010, the forward profit margin outlook for dairy producers is unfortunately poor as negative returns are reflected throughout next year. In our last installment of this margin outlook in July, forward profit margins in 2011 were still projected around a breakeven level through the first half of 2011, although this has since changed as forward values of feed costs and milk have diverged over the past few months.
As of mid-October, profit margins for the first half of 2011 were projected at a loss of around $2.00 per hundredweight (cwt), with losses of about $0.80 per cwt projected in Q3 2011, which we have also started tracking since our last update in July.
