Fall 2019 KFMA Newsletter (Web Version)

Welcome to the Kansas Farm Management Association (KFMA) E-Newsletter! The KFMA E-Newsletter is sent quarterly throughout the year to update KFMA members and others interested in KFMA work on new research being conducted, new publications available, Economist spotlights, upcoming events, and much more! 

The newsletter is free to subscribe to.  To subscribe, click here or contact Mary Huninghake at mhuningh@ksu.edu or 785-532-1506 to get on the list.  Questions or feedback can be directed to Anthony Ruiz, KFMA Professional Development Officer, at anruiz@ksu.edu; or Kevin Herbel, KFMA Executive Director, at kherbel@ksu.edu.

Progress 

Anthony N. Ruiz - KFMA Professional Development Officer

Fall follows summer to reap the bounty that was planted in spring and will be utilized in future days. Our crops and livestock come closer towards completing production cycles as the nights grow longer. Wherever you and your farming or ranching operation is at today, I hope this E-Newsletter finds you well.

Progress seems to be the theme of the Fall 2019 KFMA E-Newsletter. As I reflect on the wonderful articles penned by Extension Ag Economists in the Northwest Association, each seeks to equip you, the member, to take your business into a future optimizing resources and mitigating risks. From fall farm visits to financial management and succession planning, KFMA and our highly skilled statewide team is focused on you and your progress towards a brighter horizon.

Progress isn’t staying put. It also isn’t heading aimlessly in any direction. No, progress is an intentional advancement toward a destination. What is your destination? What are your goals? Advances in science, agronomy, genetics, and equipment have changed the agricultural landscape. Markets, decisions, and consumers are not the same as last fall let alone decades ago. It often appears ag producers are shooting at a moving target. Amidst these fluid factors KFMA is here to help. This E-Newsletter seeks to bring you timely insight into ways to strengthen your operation. The research article links use KFMA data to ask questions and find solutions you can apply on your operation. Radio segments further elaborate on your data to dig deeper for on-farm application.

The Fall 2019 KFMA E-Newsletter reflects progress our members have made, advancement of our Extension Ag Economists, and momentum our organization is gaining as we seek to build strong relationships and produce excellence. KFMA’s purpose is to increase farm profitability and sustainability. To do that, we will sit down at your kitchen table or farm office desk, analyze your data, and deliver farm management insights for your unique situation. Talk to your Extension Ag Economist about how to move your business forward. Tell your friends about KFMA and what we can do for them. Take the initiative to ask questions and plan out a destination for your farm, your family, and your future this fall with KFMA.

Anthony

KFMA Core Values

Relationships                       Integrity                      Service                       Excellence

Fall Farm Visits: What to Expect from Your KFMA Economist

Ashley Sherman and Ana Stepanovic - Northwest KFMA Economists

If time allows the Economist and member can spend some time discussing tax planning and working through a tax estimate. Primary focus would be on gross income and comparing current year gross income to-date to prior year gross income. Making notes of quarterly estimates paid and any prior year deferred crop insurance or drought related livestock sales so these aren’t missed on the later date tax estimate or tax return. The Fall Farm Visit is an ideal time to catch up on any issues or questions the member may need help with.

Taking time and asking all the necessary questions will help both the Economist and member form a more accurate analysis and smoother tax planning experience. KFMA strives for building strong relationships and producing excellence. The primary goal of the KFMA program is to provide each member with information that can be used to help make farm and family decisions. If you’ve thought about becoming a member and wondered if KFMA could be an asset to your farm operation, give your local KFMA office a call and see how KFMA can play a role in your operation. For more information visit www.agmanager.info/kfma.

Family Communication and Estate/Succession Planning: Everyone’s Favorite Conversation

Jordan Steele - Northwest KFMA Economist

It is no secret effective communication is a struggle in agriculture, and sometimes family conversations are so rough that operations fail. Most farmers and ranchers would rather work on their finances than talk about generation transfer. That is, if they will come in the house away from the field to work on the books. KFMA economists are continually getting more questions and requests for estate and succession planning from our members as they look to retire and pass the operation down. In early August, I attended the Ranching for Generations Conference in Sheridan, Wyoming hosted by Ranch Management Consultants (https://ranchmanagement.com/), founder of The Ranching for Profit School. There were great presenters and even better conversation amongst the attendees about business plans and goals, but first I want to start with a quote:

“The children now love luxury; they have bad manners, contempt for authority; they show disrespect for elders and love chatter in place of exercise. Children are now tyrants, not the servants of their households. They no longer rise when elders enter the room. They contradict their parents, chatter before company, gobble up dainties at the table, cross their legs, and tyrannize their teachers.”  (Socrates, approximately 400 B.C.)

Socrates’ quote reminds us that every generation has had preconceived notions about their abilities in the workforce and life in general throughout time. I won’t be able to fit the whole conference in this newsletter, but I encourage you to contact me, or follow the included links, if you want more information. The conference served as more than just professional development. It also served as a business transfer for Dallas and Dixie Mount to take over the reins of Ranch Management Consultants from Dave and Kathy Pratt. Tara Kuipers from Cody, Wyoming started the conference with Bridging the Generational Divide (https://www.tarakuipersconsulting.com/). A panel interview consisting of Ranching for Profit alumni and Fred Provenza from Utah State University presented life experiences during the night session. Elaine Froese from Manitoba, Canada was in charge of the next day speaking on Who Gets What and When (https://elainefroese.com/). All speakers had a common theme: Communication is KEY, although sometimes difficult to start, in transition planning. 

Nicole Masters from New Zealand began the third and final day with CSI for Soils: The Scene of the Grime (https://www.integritysoils.co.nz/) demonstrating proper soil organisms and management considerations to ensure soil health and resilience. Although Nicole’s presentation was on soil health, it fit in with the overall theme of Ranching for Generations because it is the foundation. Successful agricultural operations need a foundation of healthy soil to produce grass or grain just as successful agricultural operations need a foundation of a healthy business structure to operate through more than one generation. Ranch Management Consultants has a great Profit Tips article about passing on a profitable, cash flowing business rather than a pile of expensive assets; sign up for Profit Tips here (https://ranchmanagement.com/profit-tips/). Nicole Masters finished her time with a soils workshop at The Padlock Ranch north of Sheridan, Wyoming (https://padlockranch.com/). Padlock Ranch is a wonderful operation calving out approximately 11,700 mother-cows on 430,000 acres with a farming operation to supply their feedlot. The Padlock Ranch is also a good reminder that who OWNS assets can be different from who MANAGES assets by following their five elements of purpose: excellent people, stewardship of natural resources, profitability, positive member of community, and a legacy for the Scott family. 

KFMA members are provided with an annual ProfitLink Analysis and financial reports which are a huge benefit to help with transition planning. Two important questions are: is the operation big enough for multiple families?  And is the operation profitable enough for multiple families? Using KFMA NW data (http://agmanager.info/kfma, contact us for a summary book) let’s look at an operation’s profit margin or Net Farm Income as a Percent of Value of Farm Production on the chart below. There are two important lines. The red jagged line represents each year’s Net Farm Income Percentage showing the volatility of farm income; below 0% actually represents a farm loss for the year and above 20% is generally a good Net Farm Income for the year. The dashed blue line is a trend line representing the change in average net farm incomes over the years. 

Since 1950 the average NW Kansas operation Net Farm Income Percentage has been 20.3%, or it takes eighty cents to make a dollar. The other twenty cents are profit and can be used for primarily family living and debt payments. However, compare the 26.38% average from 1950 to 1980, the 16.94% average from 1981 to 2012, to the atrocious 6.81% average from 2013-2018. Agricultural profit margins have certainly tightened over the decades.

Managing Through Challenges: Past, Present, and Future

Mark Wood - Northwest KFMA Economist

Agriculture in America can be characterized by three to five years of excitement (1914-1918, 1945-1948, 1973-1976, and 2007-2012) followed by 25 to 30-year periods of breakeven, at best, prices. All of these are similar in the sense that there were unexpected demand shocks, world wars, ag commodity fluctuations, energy needs, and accompanying currency fluctuations followed by years of excess production. From this brief thumbnail view of US Agriculture Economic history, one can state challenges are the norm in agriculture. Weather, markets, equipment breakdowns, employees, financial uncertainty, and physical or mental stress are challenges for every farm operation. How operators manage these challenges can be quite different. I would like to take a few minutes to note observations from 33 years serving KFMA members in northwest Kansas that separate those operators that plan for, and manage, challenges versus those who react to them. 

Planning, by my definition, simply means being prepared. On farm visits I make as a KFMA Extension Ag Economist, the discussion frequently focuses on problems and limitations for the current situation on one farm, only to shift when I move down the road and the next operator has a plan and is moving forward. Operators that make decisions in a forward-thinking manner are generally more successful and satisfied with their career in agriculture. I have found that to have made a decision, even if the future shows it was not “right,” frequently is better than NOT making a decision, which is a decision in itself. After all, “A ship that is not moving does not steer very well.” It seems when there are no “good” choices available, the tendency is to make NO decision because of the fear of making the wrong one. I call this management paralysis. Operators with this management pattern rarely have a farm operation suitable to hand off to the next generation; often becoming the terminal generation on that farm.

Step 1. Know your financial position: I am not talking just a balance sheet in this case. I handed a farmer a print out of his projected cash flow several years ago. He took one look at the balance sheet and said, “Good, I still have $10 million in net worth.” I pointed out the cash flow projection showed a shortfall of $1 million.  He was focused on equity, not on profitability. Many operations today have healthy equity positions, mostly due to persistence in land values, while they have lost liquidity and have ballooning operating debt. I have witnessed farms with excess operating debt to restructure on land twice or even three times. The squeeze is on and lenders feel it, too. Many are unwilling to extend additional credit leading to much of the financial stress I currently see.

Step 2. Focus on profitability through the “exercise” of creating a cash flow projection: Operators that know their costs have a decided advantage over those that do not. Obviously, no one knows what the weather is going to do in a given year, but you need to know whether it takes 80 bushel or 50 bushel per acre wheat to break even at $4. If your breakeven yield for a given enterprise is well beyond the normal yield expectations, consider moving to another crop enterprise or rotation. Alternatives are much easier to consider during the planning phase of a cash flow projection rather than after the resources have been committed or by making “knee jerk” decisions during the year.

Producers not completing a full projected cash flow can use their prior year ProfitLink analysis to get a good idea of enterprise profitability. A completed ProfitLink enterprise analysis looks at total cost per acre from the prior year. Begin with this and make some back of the envelope adjustments for current input costs (or use the KFMA Enterprise Projection spreadsheet) and plug in the anticipated yields based on crop conditions at the current time. Once those values are determined, we have a market price objective to cover cash flow needs. The key here is using the total expense value on the enterprise analysis which has all variable and fixed costs including operator labor charges (family living draws), depreciation (equipment payments), and a land charge (proxy for land payments on owned land). In most cases, the market is not providing resources to cover total expenses, but it is important for the cash flow plan to find a way to cover total variable cost and operator labor (the family living proxy). This leaves the machinery and land payments to the operating note and potential restructure if there are no other options.

Step 3. Income Timing: Once cash flow needs are established and market price objectives are defined, the next challenge is timing of income. In times past, lenders attempted to time term payments to match cash flow availability to make payments. Interestingly, I find most machine financing arrangements are simply termed to match the annual or semiannual date of purchase. Rarely does that coincide with cash flow sufficient to cover the payments. Buying a combine ahead of harvest and setting the payment date with that timing does not match well with selling grain after harvest. Land term debt is more likely to be scheduled with cash flow in mind, but frequently the payment is scheduled for December 31 so interest can be timed as a tax deduction either in the current year or following year. My experience working with farmers has shown December 31 is probably the worst cash flow timing for a land payment. The farm operator is likely focused on prepaying expenditures to lower taxes and will typically be running a negative cash balance at the end of the year. This can be mitigated by substantial deferred grain or livestock sales contracts receivable on January 2 to cover the “float” of the checks. The problem gets serious when the farm operation no longer has grain inventory priced for January 2 receipt. The past few years have found some operations with farm stored grain not deliverable due to full elevators or the weather, or simply not having the grain priced. I have strongly pushed my KFMA members to work on grain marketing with an eye to future cash flow needs and pull the trigger on grain sales whenever the market provides an opportunity. Many farm operators don’t like to price much grain ahead due to the uncertainty of production, which is understandable…but what about 25, 30 or 50% of the past several years production? Progressive managers have adequate commodities priced ahead at breakeven levels to keep their cash flow timed properly almost every year.

Step 4. Be willing to pay some taxes: A large part of the thought process for operators holding back on sales is the desire for a higher selling price and to reduce tax liabilities. Functioning on operating debt, they will not pay much if any taxes, but once grains are sold to repay loans, might pay some taxes. I argue that preparing for an appropriate tax liability is part of a successful plan. Those perpetually trying to avoid paying taxes, while still covering term debt payments and family living draws, are likely to experience continual financial stress.

Let us examine the results of the KMFA NW 2018 analysis by quartile of Net Farm Income in Table 1 on the following page. This is not a perfect comparison since accrual net farm income is used and is treated as if it were Schedule F cash income. I did assume $25,000 of the net farm income was from machinery or breeding livestock sales. Note how the Low 25% quartile needs an estimated Adjusted Gross Income on their tax return of $119,727 to cover family living and term debt payments. These farms are short of their Adjusted Gross Income needs and have an estimated earned equity change of ($116,105). The KFMA NW average for 2018 column shows an after tax estimated earned equity change of $44,140 after a tax bill of $46,196.  The KFMA NW High 25% showed an estimated Earned Equity Change of $255,087 after paying $121,471 in taxes. Note that the term debt payments are greater for the Low 25% and their depreciation is much lower. The Low 25% farm income is negative, the debt is the highest and the machinery older and likely worn out or less reliable. These are indications of current or impending financial stress. 

Table 1.

In which farm income category would you like to be? I would take the High 25% tax bill and earned equity change any day. KFMA members who have learned and applied this years ago are not likely in current financial stress. Many are ready, willing, and able to buy real estate from the Low 25% income farms when it comes up for sale. Think about it. Plan for the future you desire and manage accordingly.

Additional Thoughts…

Avoid the trap of too much debt: The term-debt payment schedule is a primary culprit for many farms in financial stress.  Simply put, an operator may have a healthy profitability for their farm size but lack adequate cash flow to support purchasing habits. Frequently, operators have purchased too much land, too recently, for their cash flow to adequately support. Two things bloat line of credit balances these days, term debt payments and family living draws that exceed cash flow available. It is always wise to spend some time to annually review debt and overhead cost items.

The challenge of machinery costs—balancing reliability, cost and ego: Equipment costs, including repairs, fuel, machine hire, and management depreciation, should be evaluated. The KFMA ProfitLink analysis provides an opportunity to compare your costs to farms of similar type and size. I use machinery cost per harvested acre as a discussion point at farm visits, when evaluating cost issues, and when building a cash flow. Rarely are these costs easily controlled but identifying where issues exist can be worth the time. Labor utilization is a key to efficient management on any farm. Labor is not just the hired hand, but also the operator or family members contributing to the farm labor resource. As the operator ages, the ability to do the more difficult, physical jobs starts to slip. Frequently maintenance begins to skid as well. This can contribute to more expensive equipment repairs, more services from dealers, or trading for newer equipment to improve dependability or timeliness of accomplishing farming tasks. Success requires sufficient equipment productivity to get the job done in a timely fashion. Whether your operation runs older equipment that is well maintained, or newer equipment, also well maintained, does not really matter, as long as, you get the job done timely and at a sustainable cost per harvested acre. It is important to have machinery costs balanced to your operation over time. Management attitude, when discouraged, frequently leads to neglect of equipment maintenance and personal health maintenance as well. It seems avoiding the problem can compound other issues in a variety of ways. For help making wise decisions and progressing forward, contact your local KFMA Economist.

Income and tax planning: At fall farm visits, I typically work through a year-end income planning projection. This entails current income and expenses year-to-date from computer records and adding expenses spent last year from the date of the last entry in their current year records through the end of last year. This total is a good proxy for estimated expenses to year-end for the current year. The focus is to plan for appropriate income to cover anticipated cash flow and tax planning objectives. I have found few think in August about how much income is needed to cover operating expenses and term debt payments by year-end.

For tax planning in a cash flow crunch year, start thinking of deferring expenses into next year. One can set major repair expenses on depreciation to stretch out the expenses, which raises taxable income, but does not help with cash flow stress. An infusion of income from the sale of unneeded assets is a possibility. Frequently the response to this is, “It really isn’t worth much, so why sell it?” It will be worth less next year and even less the next, so why ride the value on down to zero. Some opt to liquidate real estate to reduce a portion of their term debt payment schedule and try to fix their cash flow crisis. A non-farm income strategy that does not help cash flow but takes advantage of a negative tax situation is to roll Traditional IRA accounts into Roth IRA Accounts, if they qualify, while at a loss or in a lower tax bracket. You may pay some state income taxes, but at least you would use up your federal standard deduction and farm losses this way and eliminate future taxes on those dollars. On farms that are doing very well and generating income, they might have other problems. If carrying too much inventory over from 2018 when income is already higher than desired, future sales this year should be deferred into 2020. Though not common this year, operations in this strong position are out there and looking to continue thriving.

KFMA Vision

The Kansas Farm Management Association (KFMA), through its affiliation with K-State

Research and Extension, will be the valued and trusted provider of integrated data

management systems to apply critical thinking and strategic business planning for farm and

ranch decision makers; and will be the premier source of farm-level economic data in the world.

Economist Spotlight

KFMA Research Highlights

The following research articles can be found on the KFMA webpage (www.AgManager.info/kfma/research-articles) or look under “KFMA Research”.  Each newsletter will feature new publications that are available. 

Financial Benchmarking Tool

Robin Reid – K-State Agricultural Economics, Kevin Herbel-Kansas Farm Management Association

A tool to assess a farm’s financial position relative to other similar farms in the same region. Updated and enhanced from the 2018 release. A terrific tool with excellent visuals. It has caught on really well with those in the lending arena.

https://www.agmanager.info/finpack/financial-benchmarking-tool

Effects of Crop Insurance on Farm Disinvestment and Exit Decisions

Youngjune Kim, Jisang Yu, and Dustin Pendell – K-State Agricultural Economics

Over the last two decades, the US federal crop insurance program expanded rapidly. Despite growing importance of crop insurance programs, little is known about the relationship between crop insurance and disinvestment and exit decisions of farms. Using KFMA’s dataset, authors estimate the effects of crop insurance on farm disinvestment and farm exits with carefully developed identification strategies.

https://academic.oup.com/erae/advance-article/doi/10.1093/erae/jbz035/5541507

Farm Generations and Net Farm Income

Gregg Ibendahl, Terry Griffin, Aleksan Shanoyan, and Elizabeth Yeager – K-State Agricultural Economics

Generational analysis seems to be common practice today. However, there have been few studies on the generational effects on farming. This may be because less data is available on a farm level about each operator on a farm. K-State Agricultural Economics researchers dive into the KFMA database to determine if certain generations have been more profitable than other generations.

https://www.agmanager.info/finance-business-planning/research-papers-and-presentations/farm-generations-and-net-farm-income

The KFMA Operator Database: A Short Note On Age and Experience of Kansas Farmers

Terry Griffin, Elizabeth Yeager, Aleksan Shanoyan, and Gregg Ibendahl – K-State Agricultural Economics

Age, experience, and other demographic information are of interest to many applied research projects. This short note is intended to serve as an example to assist researchers using farm demographics such as age and experience from the Kansas Farm Management Association (KFMA) Operator Database. This unique KFMA data empowers researchers to conduct advanced analyses. This data demonstrations supports applied research and outreach projects by reporting details otherwise not readily available in respective studies.

https://www.agmanager.info/kfma/research-articles/kfma-operator-database-short-note-age-and-experience-kansas-farmers

Agriculture Today Interviews with Eric Atkinson

Spending Differences in Farm and Ranch Generations

Terry Griffin and Gregg Ibendahl – K-State Agricultural Economics 

K-State agricultural economists Terry Griffin and Gregg Ibendahl discuss the initial findings of a forthcoming research series on the generational makeup of Kansas farm operations and how that impacts managerial decisions on the farm.

http://agtodayksu.libsyn.com/kansas-farm-operations-the-generations-tomato-challenges

Financial Benchmarking Tool

Robin Reid – K-State Agricultural Economics

A tool to assess a farm’s financial position relative to other similar farms in the same region. Updated and enhanced from the 2018 release. This is a terrific tool with excellent visuals. It has caught on with those in the lending arena.

http://agtodayksu.libsyn.com/benchmarking-farm-financial-status-cooperative-leadership-opportunities

Volatility of Farm Incomes

Nathan Hendricks – K-State Agricultural Economics and Whitney Bowman – K-State Agricultural Economics Graduate Student

Nathan Hendricks and graduate researcher Whitney Bowman talk about their new analysis of the volatility of Kansas farm incomes over time, based on information from the Kansas Farm Management Association. They explain why understanding those volatility trends can be helpful in farm financial management.

http://agtodayksu.libsyn.com/estimating-soybean-yields-volatility-of-farm-incomes

KFMA Data in Action Elsewhere

2019 Risk and Profit Presentations and Slides

Once again, KFMA staff and data took center stage at K-State Ag Economics Department’s Risk and Profit Conference. Be sure to visit the link below to see the premier farm-level data set at work!

Market Facilitation Payments

In this year of trade uncertainty, there is much interest in the impact of the Market Facilitation Payments (MFP) made in 2018 and projections for the impact of these payments in 2019. Some information presented at the Risk and Profit Conference, particularly a presentation by Nathan Hendricks and Joe Janzen, looks specifically at the impact of expected payments being received from MFP2 in 2019.

https://www.agmanager.info/events/risk-and-profit-conference/previous-conference-proceedings/2019-risk-and-profit-conference

Early Weaning Cuts Cow Maintenance Cost

Beef Magazine - by Wes Ishmael

In a year where forage is a plenty, it’s hard to consider early weaning. But in reality, this year’s tough spring has some cows still recovering. Weaning those calves might be your economical answer to improve body condition score.

https://www.beefmagazine.com/cow-calf/early-weaning-cuts-cow-maintance-cost

Do Weaning Weights Pay the Bills?

Beef Magazine - by Wes Ishmael

Flat weaning trend emphasizes the importance of reducing cost

https://www.beefmagazine.com/weaning/do-weaning-weights-pay-bills

Formal Invitation to KFMA Facebook Page

Looking for up-to-date information on KFMA events and activities? KFMA has a Facebook page that is routinely updated with information and articles geared toward Kansas agricultural producers as well as links and scholarly articles of KFMA data in action. If you are on Facebook, be sure to search @KSFarmMgmt and like our page. Since Facebook is social media, be sociable and interact with your team there. Take a tour of the page, let us know what you like, and what you’d like to see. KFMA has been member-driven since the first day. As we strive to be the valued and trusted provider of integrated data management systems, we will continue to embrace technology, various media tools, and firm handshakes to deliver the service and excellence members have come to expect since 1931.

Upcoming Agricultural Economics Events

• October - December 2019 (8 dates): Kansas Income Tax Institute (8 locations)
  https://agmanager.info/events/kansas-income-tax-institute

•  

• October 29 – November 1, 2019 (4 dates): Kansas Crop Insurance Workshop (4 locations)
  https://www.agmanager.info/events/kansas-crop-insurance-workshop

• February 13-14, 2020: Women Managing the Farm Conference, Manhattan
  https://www.agmanager.info/events/women-managing-farm-conference

For more information about these and other events, visit http://www.agmanager.info/events/  or contact Rich Llewelyn at rvl@ksu.edu or 785.532.1504. Other events hosted by the Department of Agricultural Economics can be found at http://www.ageconomics.k-state.edu/events/index.html.

Vision: The Kansas Farm Management Association (KFMA), through its affiliation with K-State Research and Extension, will be the valued and trusted provider of integrated data management systems to apply critical thinking and strategic business planning for farm and ranch decision makers; and will be the premier source of farm-level economic data in the world. 

Kansas State University Agricultural Experiment Station and Cooperative Extension Service K-State Research and Extension is an equal opportunity provider and employer. Issued in furtherance of Cooperative Extension Work, Acts of May 8 and June 30, 1914, as amended. Kansas State University, County Extension Councils, Extension Districts, and United States Department of Agricultue Cooperating, Ernie Minton, Interim Director.