The importance of persistence

I have been considering a story I heard from a colleague about the beginning farmers who are currently renting his crop land.  The beginning farmers began to cultivate (pun not intended) a relationship with my colleague for a few years.  They would call my colleague, ask if he had any land they could rent without disrupting any current tenants, if he knew of any other landowners looking for a tenant, keeping my colleague up-to-date on their operation and plans, and generally letting my colleague know they were interested should an opportunity ever arise.

The opportunity then came.  My colleague was considering renting his land and, as he had in years past, received a phone call from the prospective tenant.  This time, my colleague indicated he was interested in renting the land and asked for more details regarding the tenants’ operation, their agriculture and educational background, and ideas for maintaining the environmental integrity of the land.  My colleague also discussed the use of the Nebraska Beginning Farmer Tax Credit program and the requirements for both himself and the tenants to qualify.

What have I gleaned from this story from the perspective of a beginning farmer?

  1. Polite persistence is key.  We all know that access to land is the single most difficult barrier for beginning farmers to overcome.  But that doesn’t mean you can’t talk to people in your community, create relationships with landowners, and generally let the word out that you’d like to rent land.
  2. Don’t expect immediate results.  It took the tenants in the above story a few years for their persistence to pay off.  But when my colleague was considering renting his land, the first people he thought of were the people who maintained a relationship with him and let him know about their interest in renting his land.
  3. Have a plan.  Don’t just approach a landowner and state you’d like to rent the land.  Know what type(s) of crops you wish to grow, your ideas on fertilization and pesticide use, whether you wish to pursue cash rent or share rent, your farming background, and any other pertinent details that demonstrate that renting to you is in the best business interest of the landowner.
  4. Be aware of any programs that assist beginning farmers.  A tax credit is a wonderful tool in your plan.  Know about it and discuss it with potential landlords.

What have I gleaned from this story from the perspective of the landowner?

  1. Be receptive to renting to beginning farmers.  Sure, it may be a bit outside your comfort zone to rent to a beginning farmer but it may make business sense as well.  Listen to the ideas and keep them in mind.
  2. Be aware of any programs that assist beginning farmers.  Who doesn’t like a tax credit?  As a landowner, you may qualify for the Nebraska Beginning Farmer Tax Credit.  Calculate the tax credit and consider it in the larger picture of your operation’s financials.
  3. Have a plan.  There may be a time when you can no longer cultivate your own fields.  If that time comes, do you have relationships with other farmers who would be interested in renting your land to maintain your income stream?  More long-term, if you want a successor to the operation, do you have one?  Renting to a beginning farmer may provide you with a mechanism to maintain your operation for another generation.

Ultimately, there are benefits to both beginning farmers and landowners by being persistent and allowing persistence.  You never know — you may just find the perfect fit if you persist.

What Are the Numbers Telling Us?

I have been reading a very interesting report from the USDA’s Economic Research Service, “Farm Size and the Organization of U.S. Crop Farming” by James M. MacDonald, Penni Korb, and Robert A. Hoppe published in August 2013.  What do I think I’ve learned that is useful to beginning farmers (beyond our previous discussion of the factors of beginning farmer success?)

First, there is no doubt that farming consolidation is happening.  Farms are getting bigger.  But, farming is also getting smaller.  There are a number of small farms in the United States, with niche or specialty products.

But here’s what really caught my attention: the return on investment for fruits, vegetables, berries, and nuts.  It is staggering, especially compared with “traditional” crops of corn, hay, soybeans, and wheat.  As the report notes, vegetables and melons; fruits, nuts, and berries; and greenhouse/nursery crops accounted for nearly 37% of all cash receipts from crops in 2007 but less than 4 percent of harvested acreage.

What does that mean in Nebraska, a state where consolidation doubled?  A cynical view of the numbers could mean that the opportunities for entering farming as a profession have decreased.  Or, it could mean there are opportunities for beginning farmers with a little ingenuity, imagination, and a business plan.  What does the beginning farmer need to know?

  • In order to know, research, research, research.  This doesn’t necessarily mean hiding your nose in a book all day, but it does mean knowing the return on investment for commodities you are interested in selling.  It also means knowing whether you can even grow/produce those commodities with the land you have available.  For example, as great as it would be, I don’t think cranberries are going to be successfully grown in western Nebraska.  (I am welcome to be proven wrong, however!)  So, talk to producers who have similar operations.  Take farm tours.  Check out webinars.  Take a class.  Do a small experimental patch for the commodity you are thinking of growing.  Learn how to market your commodity.  In short, keeping learning, because even when you think you know it all, there is something else to learn.
  • Be willing to change tactics and add enterprises.  Okay, so maybe your dream blueberry operation isn’t possible with the resources you currently have possible.  But perhaps a niche operation growing hops is possible.  Or you grow some great fruits and veggies and now, can expand to value-added enterprises such as jams and jellies.
  • Learn from failures.  So that value-added enterprise of making jams and jellies didn’t work out like you anticipated.  That’s okay so long as you learn from it and incorporate that knowledge into your next strategy.
  • Know that you will have to provide labor and physical capital to gain income.  I know of no other way but I’m happy to be proven wrong.

It is possible to become a successful farmer — after all, everyone begins somewhere.  But don’t just begin somewhere randomly.  Have a plan, know the markets, and use all the help you can get.  That help includes this program.  If you have financial or legal questions about beginning a farming operation or just want to discuss ideas, you are welcome to contact us.  After all, it is free of charge — why not take advantage of it?

Common factors of beginning farmer success

Courtesy of beginningfarmers.org, I learned of this project from Michigan State University on assessing common factors of success among Michigan’s Upper Peninsula beginning farmers.  The project interviewed eight beginning farmers and two supporting organizations to ask about, among other things, the challenges and opportunities for beginning farmers.*  What I found most interesting about the study were the responses from the two supporting organizations regarding:

  1. the most important factors of success among newer farmers; and
  2. the most common pitfalls newer farmer should try to avoid.

What struck me was the same themes in the answers to both questions.  Researching the market.  Persistence.  Organization/recordkeeping.  Calculated risk-taking.

With the possible exception of one of the above (persistence), the other themes are skills that can be learned by beginning farmers.  But how does a beginning farmer research the market, keep records, and decide when to take a risk with the operation?

Researching the market:

There is no one-size-fits-all answer to how to research the market because each market is different.  Do you want to establish an organic vegetable direct-marketing operation?  Or enter the feeder cattle market?  Maybe you want to establish a CSA?  Or perhaps row crops such as corn, soybeans, and wheat?  The possibilities truly are endless but that means different research is required for each possibility.

You must know the type of operation you want to run.  That requires making a business plan, even if it is a rudimentary one.  Research the cost of inputs (e.g. seed, fertilizer, livestock).  Research historical trends of input costs, productivity of the land, selling price.  Understand the possible federal, state, and local rules and regulations.  Talk with local producers about their operation and practices.  Determine how you will obtain access to land and how much land your operation requires.  With this research, you can determine how prepared you are to launch your operation but also, set the foundation to be persistent and become a successful farmer.

Recordkeeping:

We’ve discussed recordkeeping before but it bears repeating: without knowing the cost of your inputs, the cost of your time, and your break-even point, you will not be able to properly manage your operation.

Calculated Risk-taking:

This is the scariest proposition.  When do you look to expand your operation or change enterprises?  Are there value-added enterprises you may add to the operation?  Do you continue to rent or purchase land?  Do you have the resources and labor expand both your production and distribution capacity?  Can you live off the farm income alone or do you require an off-farm source of income?

To make those decisions, you have to return to research and recordkeeping.  Research and recordkeeping is critical to responsibly running your operation and knowing when it is possible to expand, when to consider changing enterprises, knowing whether production and distribution capacity are at their maximum, and knowing whether you are making a profit.

Want some help navigating the landscape?  Feel free to contact us because we’re here to help Nebraska and South Dakota’s beginning farmers and ranchers!

*The caveat to the study is that this is a small qualitative study focused on a small geographic region.  However, the study authors do you claim to extend their results beyond what the results state.  I am the person suggesting that the answers by the supporting organizations provide food for thought to all beginning farmers.

Timing the Nebraska Personal Property Tax Exemption

We previously discussed the math of the Nebraska Beginning Farmer Tax Credit.  Nebraska also offers a personal property tax exemption to beginning farmers for the purchase of personal property, such as machinery, used in the production of agriculture or horticulture.  Unlike the Beginning Farmer Tax Credit, the Personal Property Tax Exemption is provided to the beginning farmer, not the owner of agricultural assets (i.e. the person a beginning farmer leases from).

We have discussed the requirements for eligibility of the personal property exemption previously, but nonetheless, the requirements for the beginning farmer are the same as for the Beginning Farmer Tax Credit, with one exception: the personal property tax exemption does not require the beginning farmer to rent from someone to be eligible.

Why is timing important for the personal property tax exemption?  It is because the personal property tax exemption allows for a personal property tax exemption up to $100,000 a year for three years.  Once a beginning farmer is uses in the program, the beginning farmer may not use it again.  Thus, the beginning farmer should time when they apply for the tax exemption so as to maximize its potential.

Lets say that you are a beginning farmer.  Your business plan is to grow your business slowly but steadily.  Your business plan calls for you to steadily purchase equipment and machinery throughout your ten years as a beginning farmer.  You may begin with a drill or small tractor.  You plan to expand to a larger tractor and perhaps haying equipment.  Or, your operation may require specialized equipment.

Knowing this, it is best to plan when to apply for the personal property tax exemption at a time in your operation when you plan to outlay the most money on personal property purchases.  That way, the beginning farmer can use the personal property tax exemption to the maximum effect, helping the cash flow of the operation.

Keep in mind that the application for the personal property tax exemption is due by November 1st of the year prior to the year the exemption is sought.  For example, to apply for the exemption for 2014 through 2016, a beginning farmer must apply to the Beginning Farmer Board by November 1, 2013.  Then, to claim the exemption, the beginning farmer must present the eligibility certificate issued by the Beginning Farmer Board to proper county assessor by December 31 for approval.

Have questions?  Or just want to talk about the math?  Feel free to contact us!

The Math of the Nebraska Beginning Farmer Tax Credit

While out and about at workshops, I’ve been speaking about the Nebraska Beginning Farmer Tax Credit.  Today, I want to build upon an idea from the workshops, which is how to use the tax credit to provide more than a three-year lift to a beginning farmer.

But first, a recap of the tax credit.  An individual is eligible for the tax credit if they are the owner of an agricultural asset located in Nebraska and lease the agricultural asset to a beginning farmer for three years.  An agricultural asset is land, breeding livestock, grain bins, machinery etc.; however, note that a residence is not an agricultural asset.  The rental price must be based upon   An agricultural asset may only be used once in the program.  For example, the same parcel of land cannot be used to obtain the tax credit with successive three-year leases to beginning farmers.

A beginning farmer is defined as a person who has farmed for 10 out of the past 15 years.  A person’s age is not considered, meaning someone can be a 40-year-old beginning farmer.  The net worth (all assets minus all liabilities) of the beginning farmer must be under $200,000.  The beginning farmer must have some education and/or experience in farming or ranching and must provide the day-to-day physical labor and management.  The beginning farmer must also follow a soil management program if such a plan is in place or provide a narrative of how the farmer will maintain the soil/nutrients.  A beginning farmer is eligible for the program so long as the beginning farmer is a person who has farmed less than ten out of the past fifteen years.  But keep in mind that this eligibility requirement is for the beginning of the three-year lease, not the entirety of the lease.  Finally, the beginning farmer and owner of agricultural assets may be family members, but a succession plan, such as a will, trust, or business entity, is required which passes the leased agricultural asset to the beginning farmer.

If the above requirements are all met, the owner of the agricultural asset receives a refundable Nebraska state income tax credit.  (This means if the owner’s state income taxes are less than the tax credit amount, the owner will receive a refund in the amount of the tax credit not used to reduce income taxes.)  The amount of the tax credit depends upon whether the lease is a cash lease or share lease.  If the lease is for cash, the owner of the agricultural asset receives a 10% tax credit for Nebraska state income taxes.  If the lease is a share lease (such as a share-crop lease), the owner of the agricultural asset receives a 15% tax credit for Nebraska state income taxes from the gross profits.

The above are the requirements in a nutshell.  But, how can the tax credit be leveraged to assist a beginning farmer, especially in the context of a business succession by a farmer ready to retire?

Example 1:

The owner of the agricultural assets owns two parcels of cropland — Parcel A and Parcel B.  Parcel A is 100 dryland acres and Parcel B is 150 irrigated acres.  The owner decides to lease to a beginning farmer, who has five years of farming.  The owner and beginning farmer sign a three-year lease for Parcel A and Parcel B.  The rent is cash rent at $300/acre.

The tax credit available for the owner is 10% of the rent for Parcels A and B.  The rent is $75,000/year.  The owner receives a tax credit of $7,500 per year for three years for a total tax credit of $22,500.

Example 2:

Using Parcels A and B described above, the owner decides to lease to the same beginning farmer with five years experience.  However, this time the owner leases Parcel A only on a three-year cash lease at $300/acre.  After the three year lease and a successful landlord/tenant relationship, the owner leases for three years the beginning farmer Parcel B on a share-crop agreement, with the owner receiving 40% with corn traditionally averaging 200 bushels/acre at a (reasonably) predicted price of $4.50/bushel.

Is this possible?  Yes, it is.  First, Parcel A and Parcel B are separate agricultural assets and thus, can be leased at different times.  It does not matter when an agricultural asset is leased, it only matters that the agricultural asset has not previously obtained the tax credit and it is leased for three years to a beginning farmer.  Second, the beginning farmer is a beginning farmer at the start of the lease of Parcel A (and farms for years six, seven, and eight during the lease) and a beginning farmer at the start of the lease to Parcel B (and farms for years nine, ten, and eleven during the lease).  The tax credit is concerned with the beginning of the lease for eligibility of a beginning farmer, not whether the beginning farmer surpasses ten years of farming during the time of the qualifying lease.

Since this is a possible arrangement, what does the math show?  For Parcel A, the owner receives a tax credit of $3,000/year for three years ($30,000 rent/year at a 10% tax credit).  For Parcel B, the owner receives a tax credit of $8,100 per year for three years.  This number is found by calculating 150 acres multiplied by 200 bushel/acre multiplied by 40%, which equals 12,000 bushels for the owner.  Next, 12,000 bushels is multiplied by $4.50/bushel, equaling $54,000.  Fifteen percent of $54,000 is $8,100.

The total tax credit for Parcels A and B is $33,300.

Example 3:

The owner of the agricultural asset’s daughter is returning to the farm after obtaining her degree in agronomy.  The owner owns 500 acres of tillable land, machinery, and grain bins.  The land is three separate parcels; Parcel A is 100 dryland acres, Parcel B and C 200 acres center pivot irrigated each.

The owner signs a three-year lease for Parcel A to his daughter for $100/acre in her first year of farming.  The daughter wants to continue farming after those three years and the owner then leases for three years Parcel B to his daughter at the start of her fourth year of farming at $325/acre.  The farmer also leases storage for three years in a grain bin to his daughter for .10/bushel.  The daughter stores her harvest in the bins. Things are still going well in year seven of the daughter’s return to the farm.  The owner then leases for three years Parcel C to his daughter at 50% share-crop and his machinery for $5,000/year.  Parcel C traditionally produces 190/bushels of corn per acre and it is estimated that the price for corn will be $4.00/bushel.

Assuming the daughter remains under the $200,000 net worth requirement and a succession plan is in place, the above arrangement is possible.  The tax credit for Parcel A is $1,000/year for three years, for a total of $3,000.  The tax credit for Parcel B is $6,500/year for three years, for a total of $19,500.  The tax credit for Parcel C is $11,400/year for three years, for a total of $34,200 for three years.  The tax credit for the machinery is $500/year, for a total of $1,500 for three years.  The tax credit for the grain bin is $380/year (assuming 190 bushels per acre for 200 acres), for a total of $1,140 for three years.

Total tax credit for all parcels, machinery, and grain bin is $59,340.

Conclusion:

The Nebraska Beginning Farmer Tax Credit provides a mechanism for Nebraska’s farmers and ranchers to help assist in retirement by providing a possible means of income to a beginning farmer but also allows a beginning farmer to start or expand their operation.  Have more questions or need some help with the math?  Feel free to contact us!

Maybe leasing land isn’t a bad option?

I was planning a different topic today but the release of the Kansas City Federal Reserve’s Main Street Economist Report “Financing Young and Beginning Farmers” caused me to reverse course.

Of interest to me in the report is that more beginning and young farmers are turning to lease agreements to enter farming or ranching.  This is not surprising given the economic conditions discussed in the report: higher fixed costs, higher land costs, and higher debt-to-income ratios for beginning and young farmers.  But entering farming or ranching via leasing may not be the worst idea.

First, leases allow a beginning farmer to cultivate a relationship with a landowner.  This relationship, especially if it is with an established farmer or rancher, can lead to mentoring and education for the beginning farmer.  You have the opportunity to learn from someone, ask for advice, and develop a mentor/mentee relationship.

Second, leases allow for flexibility with changing market conditions.  Leases can be drafted so the beginning farmer shares the risk with the landlord.  Thus, if the drought continues or commodity prices dip, the beginning farmer will not be locked into a debt repayment; instead, there is flexibility in the lease price if the lease is drafted to share risk.

However, even if the lease is not drafted to share risk with the landlord, a lease provides more flexibility than debt repayments.  Instead of being obligated to repay the purchase price for a parcel of land, you may be able to stagger your leases so they are renewable on different dates, allowing you to determine which parcels of land provide the most bang for your buck and let go of parcels that are not producing to your standards when the lease ends.

Third, at least in Nebraska and Iowa, there are tax programs available for landlords who rent to beginning farmers.  These tax programs can be a strong incentive for landlords to rent to a beginning farmer and beginners should consider approaching possible landlords with a lease proposal with these tax programs incorporated into the proposal.

There are risks with leases, namely that the landlord will not renew the lease.  As a result, a beginning farmer has to weigh the risks and rewards of a lease with the risks and rewards of ownership.  Keep in mind your debt-to-income ratio, especially when considering purchasing land.  Your debt-to-income ratio affects everything from whether you can obtain a loan to what interest rate will be used to whether you will qualify for future loans you may need/want, such as for machinery.  In short, beginning your operation with a lease may allow you to build up a nest egg to purchase land at more attractive terms than would be possible without the lease.

To know whether it is better for you to lease or own depends upon financial knowledge of your operation.  As discussed earlier this week, that requires good financial recordkeeping.  And to know whether you are obtaining good lease terms also requires knowledge of the income your operation generates, meaning you need good financial recordkeeping.

Need some help deciphering the above information or perhaps need some help drafting a lease or purchase agreement?  Then contact us — it is what we are here for!