Ag Connection
Your link to the Universities for ag extension and research information

Volume 5, Number 1
January 1999


This Month in Ag Connection

The Farm or the Family?
SAAs Are Coming Home to Roost
CRP Payments — Farm Income or Rent?
Do Your Cattle Fit the Grid?
Events -
AgriExpo to Explore Value-added Opportunities
March 23
Ag Science Week
February 1-4

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The Farm or the Family?

During the past few years, there has been an increase in the number of days that farmers and family members work off the farm. Even if one member of the household farms full-time, the spouse may be employed elsewhere. This enables the family to maintain the farm — but at what price?

Finances are a major stress factor in families. Is working off-farm helping the family meet financial goals or is it creating greater hardship? While off-farm employment may slow down the pace of falling behind, is it sufficient to put the family ahead financially? If not, this may be a time to seriously consider minimizing the further erosion of assets and holding on to the essentials that make farm life satisfying.

Psychologists have long known that if people are occasionally successful, they will continue to try even if those successes are relatively infrequent. Lotteries capitalize on this trait and this is one of the rationales for the occasional small lottery payoff. People take their small winnings and buy additional chances, lose more, and continue to spend even more money. Farmers sometimes try to maintain their lifestyle by sinking what equity they have accumulated back into an inefficient and non-profitable situation.

If your family is in this situation, you will need to decide what it is about the farm lifestyle that is most important or rewarding to your family? Can you still have those benefits while farming on a substantially reduced scale? Or are there other enterprise options for using your farm resources to meet your financial and lifestyle goals?

If you find it necessary to seek non-farm income, do not discount your personal skills. Farmers have an abundance of skills: welding, truck driving, equipment repair, business management, equipment operation, construction, etc. There is a major shortage of people in those and related occupations. In addition, farmers are known for their strong work ethic and initiative.

Farm families may need an outsider's view of what's going on and help identifying their real options. They may want to consider meeting with a family financial counselor, their lender, or a University of Missouri Extension farm management specialist to realistically appraise their financial situation. Farm lifestyle is more than just farming. There are many ways to enjoy the rural lifestyle and agriculture.

Author: Art Schneider, Human Development Specialist

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SAAs Are Coming Home to Roost

During the farm financial crisis of the 80's many FmHA borrowers negotiated loan write-downs. Borrowers who received write-downs after 1988 signed shared appreciation agreements (SAA) that provided they would pay a percentage recapture of land appreciation. This recapture is to be calculated five months before the ten-year expiration date of the SAA, or sooner if one of the following occurs:

  1. title to the real estate is conveyed
  2. the FSA loan is repaid
  3. the borrower ceases farming

If any of these trigger events occurs after four years of signing the SAA, the amount of recapture is 50% of the appreciation. Recapture is 75% during the first four years.

The reality of these agreements is about ready to HIT HOME! Appreciation of the real estate's value will be determined by appraisal. Once the amount of appreciation has been determined, the borrower will be requested to pay the amount of recapture (up to the amount of the write-down).

If the borrower is unable to obtain commercial financing to pay this recapture, Farm Service Agency (FmHA was reorganized into FSA) will resume its role as the lender of the recapture amount. If the farm business projects a positive cash flow, the recapture appreciation amount will be identified by FSA as a new promissory note in a non-program loan. If the borrower cannot pay the recapture and a new note cannot be established due to lack of cash flow or other circumstances, the account will be considered delinquent and processed for liquidation.

During 1999, approximately 160 farmers in Missouri (27 in the CM — 12 of these in Chariton County) will receive notice their SAA has reached its 10-year mark and their real estate will be appraised to determine the recapture liability. The average write-down for FSA chattel and real estate borrowers in 1989 was approximately $120,000 per borrower. While 1999 will witness the greatest number of SAA notices, several SAAs will be maturing over the next few years.

Maturing SAAs will raise new issues for many borrowers, FSA, and tax professionals. Don't be surprised initially if there are differences of interpretation and application of the SAA regulations. If you are a party to a SAA — get your act together NOW! Additionally, not everyone felt the write-downs were appropriate in the first place, so not everyone is going to provide a sympathetic ear.

Author: Parman R. Green, Farm Business Management Specialist



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CRP Payments — Farm Income or Rent?

If you farm and are enrolled in the Conservation Reserve Program (CRP), you have probably reported your CRP payments on Schedule F as farm income subject to self-employment tax. If so, you reported to the IRS similar to most materially participating farmers. However, a materially participating farmer in Ohio has been reporting his CRP payments as rental income on Schedule E (not subject to self-employment tax). When the IRS challenged, they went to Tax Court and to most tax practitioners' surprise - the taxpayer won! In this case, the court appears to have largely based its finding on the fact the CRP contract describes the payments as rental payments. This is one of those rare situations where it appears form may have gotten the best of substance.

If you have a similar fact situation, you should be discussing the implications of this Tax Court case (Wuebker v. Commissioner, 110 T.C. No. 31 6-23-98) with a tax professional. There could be substantial implications beyond the self-employment tax issue. How you report CRP payments could affect your classification as a farmer, estimated tax payment requirements, soil and water conservation deductions, and some major estate tax provisions such as: special use valuation, small business exclusion, and 14-year installment payment of estate taxes.

If you decide to follow "Wuebker" in filing your 1998 tax return, you'll also want to consider filing amended returns for the past three years. It is possible we'll have more definitive information on this issue (from the IRS or Congress) before the tax return filing deadline, but don't hold your breath!

Author: Parman R. Green, Farm Business Management Specialist

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"To maintain market share, the beef industry will have to change."

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Do Your Cattle Fit the Grid?

A large part of risk management in any business is being able to position your business in the anticipation of change. The marketing of hogs is currently undergoing change and the poultry industry went through drastic change more than twenty years ago.

The beef industry has been slow to change due to the vast number of small producers and small cowherds scattered over the country. Beef cattle have changed phenotypically over the years but the way the majority of producers market cattle has not changed dramatically for the past fifty years. Furthermore, the market share that beef has enjoyed for the past fifty years has been slipping due to pressure from the poultry and swine industry.

Table 1: National Carcass Premiums/ Discounts as of November 30, 1998
Quality Range Average Change
Prime $3/$10 $5.67 0
Choice 0 0 0
Select -$7.49/-$10 -$8.29 0.82
Standard -$10/-$22 -$16.83 0.82
Certified 0/$2.50 $1.25 0
Yield Range Weight Range
1.0-2.0 0/$3 400-500 -$14/-$30
2.0-2.5 0/$2 500-550 -$12/-$25
2.5-3.0 0/$2 550-900 0
3.0-3.5 0/-$0.50 900-950 0
3.5-4.0 0/-$1 950-1000 -$10/-$22

To maintain market share, the beef industry will have to change. Technology is currently in place to track the carcass merit from the rail back to the individual producer. Pricing structures are also currently in place to pay individual producers based on the carcass merit of the individual animals. These pricing systems are based on the grade and yield of the individual animal and are called grid pricing.

This type of pricing system is designed to add value to carcasses that fit the grid. On the other hand, they penalize cattle that do not fit the grid. Table 1 gives the National Carcass Premiums/ Discounts as of Monday, November 30, 1998.

Currently, there are 37 different value-added programs in place now that use some type of pricing grid as in the table at right. As you can see the average price for this particular week is based on an average quality grade, yield grade 1-2.99 with a carcass weight of 550-950 pounds. Premiums would be added to animals that are above average while discounts are tacked onto animals below average. Note that premiums are higher for the lower yield grades that have a carcass weight that fit the box than for the higher quality grades.

As part of a sound risk management strategy that is positioning yourself for a future of beef cattle marketing that will involve more and more pricing grids, ask yourself how your cattle would fit into a grid such as the one in Table 1? This question needs to be answered before you feed out 200 head of cattle and market them on some type of grid pricing system.

How can you find out what is the carcass merit of your cattle without losing an arm and a leg in the feed lot? Many states including Missouri have some type of feed out program where you can feed a pen of five head and retrieve carcass data. This will give you a good idea of where you stand in terms of carcass merit and help position yourself for a future of grid pricing. Keep in mind that carcass change will take at least two to three years to occur.

Author: James Rogers, Livestock Specialist


Also Coming:
Ag Science Week
February 1st - 4th

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AgriExpo to Explore Value-added Opportunities

AgriExpo '99 will provide farmers and entrepreneurs with skills to start or expand businesses that add value to raw commodities. The workshop will be March 23 at the Holiday Inn Select in Columbia.

Concurrent sessions will focus on food processing, marketing, computers and Internet marketing, business development, community food systems, and government assistance to entrepreneurs.

Each session will feature five hours of presentation by experts in their field. Participants will also have a chance to meet many people who have successfully started their own businesses.

AgriExpo '99 will include a trade show for business suppliers, producers, commodity groups and government agencies.

A $15 registration fee includes all sessions, a trade-show reception and lunch. University of Missouri Extension, the U.S. Department of Agriculture — Rural Development and the Missouri Department of Agriculture are sponsoring the workshop. For more information, call (573) 882-1150. (Doug Holt, Director, Office of Value-Added Agriculture)

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University of Missouri ExtensionAg Connection - January 1999 -- Revised: April 20, 2004