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My Creditor Wants What?? The FINPACK Solution
Many creditors are requiring more financial information on your farm business. In addition to the usual information, you may be required to do a projected cash flow for the year 2000 and future years. FINPACK (Financial Package) is a comprehensive financial planning and analysis system designed to help farmers understand their financial situation and make informed decisions. This software includes three modules: long-range financial planning, cash flow projection and business analysis.
FINPACK is not a record-keeping system. Instead, it provides a tool to effectively use your farm records to make business analysis, long-range planning, and cash flow planning as complete, easy and meaningful as possible. With your 2000 farming plan and your records, an Extension Farm Management Specialist can help you understand preparation of the projected cash flow.
FINPACK helps you analyze your current situation (Where am I?); the long-range potential of alternative strategies (Where do I want to be?); and the cash flow implication of moving from where you are to where you want to be (How can I get there and can I afford it?). Even if you are not planning a major change, FINPACK provides tools to make sense of your financial records and to plan cash flows accurately for future years.
Complete and accurate data on your farming operation is essential for you to benefit from FINPACK programs.
FINLRB (Financial Long Range Budgeting) compares the long-range profitability and debt repayment ability. For growth in net worth of present plan or alternative farm plans FINLRB addresses the question: "Where am I and where do I want to be?"
FINFLO (Financial Cash Flow) projects cash inflow and outflow for each month of the planning year based on your production, marketing, and financial plan. FINFLO projects the timing of cash flow and credit needs during the year.
For more details contact your Extension Farm Management Specialist.
(Author: Bill Buehler, Farm Management Specialist)
The current farm economy is forcing several farm managers to consider the liquidation of some assets or in some extreme cases -- the entire business. Disposal of farm business assets can involve several different types of income (gain or loss).
For example, a farmer purchased a combine in 1998 for $165,000 and financed $150,000 of the cost through XYZ Equip. Company. The farmer claimed the maximum Section 179 (expensing election) deduction of $18,500 and $15,690 of regular depreciation on the 1998 income tax return. This gives a tax basis in the asset of $130,810 ($165,000-$18,500-$15,690). In 1999 with little prospects for any substantial fall grain harvest, the farmer talked the XYZ Equip. Co. into accepting the combine back in exchange for the complete discharge of the $150,000 principal balance on the note. At the time the combine was returned, its fair market value was $140,000. What are the tax consequences of this transaction?
The Section 1245 asset depreciation recapture and discharge of indebtedness are reported as ordinary income. However, since the discharge of debt involves farm debt, the farmer may reduce existing tax attributes such as net operating loss carryover, tax basis in other farm equipment, the tax basis of farmland in that order. Note the only means of realizing a capital gain tax rate on the sale of purchased farm equipment is if the item is sold for more than its original cost.
The following is a graphical presentation for analyzing this type of transaction.
Major Planning Points For Liquidation of Assets
1. Ordinary income versus capital gain
2. Recapture of depreciation
3. Unrecaptured Section 1250 gain
4. Sale of residence
5. Weather related sales of livestock
6. Deferred (like-kind) exchanges
7. Farm income averaging
8. Alternative minimum tax (AMT)
9. Discharge of indebtedness
(Author: Parman Green, Farm Management Specialist)
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You've Separated Non-GMO -- What's Next?
Few elevators have separated GMO (genetically modified organism) grains from non-GMO grain. However, many of the elevators and grain processors have encouraged farmers to segregate non-GMO grain. This suggests that non-GMO grains were separated and stored on the farm to capture any premiums that might later be offered. If you had the bins to do this and have separated your non-GMO grain, what do you do next?
A lot has been said about consumers wanting non-GMO products, with very little indication of what they are willing to pay to get them. According to market theory, consumer desires are communicated to producers through market demand expressed by price. Some consumers have cited safety concerns about GMO products and the desire for non-GMO products. But, with no known GMO safety hazards, how strong is the demand for non-GMO productsespecially if they cost more? This may limit premiums.
In addition to demand, price premiums will depend on the supply of non-GMO grain. It has been estimated that 35% of the 1999 corn crop and 55% of the soybean crop was planted with GMO seed. Additionally, cross-pollination and mixing of GMO and non-GMO has occurred. While it might appear that plenty of non-GMO grain is available, the supply really depends upon how many have kept it separate.
Price premiums should cover the cost of keeping the grain separate. If youve stored non-GMO separately, you should expect something for your effort. There will be additional costs to keep it separate until it reaches the consumer.
Since few elevators have segregated grain, in order for you to market it, they will have to "gear up" to segregate non-GMO or you will have to truck it (likely by semi) to someone who can. The grain will have to be kept separate in trucks, trains and barges. Exported grain will also have to be shipped separately. This all costs extra and there are always risks of contamination at some point in the process. Ultimately, the premiums will have to cover these additional costs and risks.
The question of risk is another factor that you need to be aware of if youve segregated non-GMO grain. Standards are essentially non-existent and testing will be limited, so processors and handlers will rely heavily on certification. Be careful about what you certify, the documents you sign or any oral commitments that you make. Other liabilities exist in the form of implied warranties. Implied warranties state that goods sold are fit for the use the buyer intends and this might apply to farmers as sellers.
Youve separated and stored non-GMO grain, but you arent finished yet. You still have to market it! Non-GMO grain marketing and handling is similar to any other specialty or identity preserved product. Be prepared to move quickly; premiums are uncertain and likely to be variable and spotty unless you have a specific contract.
(Author: Melvin Brees, Farm Management Specialist)
Ag Connection - November 1999