A griculture & B usiness M anagement Economic & Financial Considerations Due to Drought Jeffrey E....
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Agriculture & Business Management Economic & Financial Considerations Due to Drought Jeffrey E. Tranel Agricultural & Business Management Economist [email protected]
A griculture & B usiness M anagement Economic & Financial Considerations Due to Drought Jeffrey E. Tranel Agricultural & Business Management Economist
A griculture & B usiness M anagement Economic &
Financial Considerations Due to Drought Jeffrey E. Tranel
Agricultural & Business Management Economist
[email protected]
Slide 2
A Few Basic Questions? 1. Where were you on January 1,
2002?
Slide 3
A Few Basic Questions? 1. Where were you on January 1, 2002? 2.
How did you respond to the drought?
Slide 4
A Few Basic Questions? 1. Where were you on January 1, 2002? 2.
How did you respond to the drought? 3. Why did you respond as you
did?
Slide 5
A Few Basic Questions? 1. Where were you on January 1, 2002? 2.
How did you respond to the drought? 3. Why did you respond as you
did? 4. Where are you now?
Slide 6
A Few Basic Questions? 1. Where were you on January 1, 2002? 2.
How did you respond to the drought? 3. Why did you respond as you
did? 4. Where are you now? 5. Now what should you do?
Slide 7
Where Were You on January 1, 2002? Personally? Age. Health.
Children. Retirement. Other.
Slide 8
Where Were You on January 1, 2002? Personally? Managerially? On
target. According to plans. Herd development. Properly stocked.
Labor resource. Machinery, buildings, fences. Other.
Slide 9
Where Were You on January 1, 2002? Personally? Managerially?
Financially? Balance sheet. Net worth. Ratio analysis. Current with
loans.
Slide 10
How Did You Respond to the Drought? According to plans? Herd
development. Herd size. Marketing.
Slide 11
How Did You Respond to the Drought? According to plans? Feed?
Purchased additional feedstuffs. Moved cows to another state. Sold
excess feed.
Slide 12
How Did You Respond to the Drought? According to plans? Feed?
Cattle? Some cows. Deeper culling. Retained only very best females.
Sold cows, kept heifers. Sold all cattle. Purchased cattle.
Slide 13
Why Did You Respond As You Did? Personal situation. Goals
(plans). Financial situation. Lender. Taxes.
Pasture/Feedstuffs.
Slide 14
Where Are You Now? According to plan. Wondering.
Slide 15
Where Are You Now? Wondering. According to plan. Better off
financially. Worse off financially.
Slide 16
Where Are You Now? Wondering. According to plan. Better off
financially. Worse off financially. Better off personally. Worse
off personally.
Slide 17
Where Are You Now? Wondering. According to plan. Better off
financially. Worse off financially. Better off personally. Worse
off personally. All fences and buildings repaired. Pastures
rested.
Slide 18
Where Are You Now? Lender accepted management plan.
Slide 19
Where Are You Now? Lender accepted management plan. Taxes paid.
Tax liability exists (1033e, 451e, other).
Slide 20
Where Are You Now? Lender accepted management plan. Taxes paid.
Tax liability exists (1033e, 451e, other) Retired. Out of ranching
but still working.
Slide 21
Financial Situation Due to 2002 Drought
Slide 22
Remember: With no farm profits and no other income, there is no
money for principal repayment, family living, investments,
etc.
Slide 23
Comment by Old Timer: My Biggest Tax Problem Is Not Paying
Enough Taxes!
Slide 24
Slide 25
Have Carry-Over Sales? If have carry over income and little/no
profits, may want to recognize such income to offset current year
expenses. rather than continuing to carry forward income. rather
than pre-paying expenses.
Slide 26
Other? Do not elect accelerated depreciation. Use other profits
to offset farm losses.
Slide 27
Livestock Producers Feed Assistance Program Such payments must
be included in the year of receipt.
Slide 28
Livestock Producers IRS Code Sections 451(e) and 1033(e).
Requirements of taxpayer. Qualified farmer. Uses cash method of
accounting. Sale would not have occurred except for drought.
Slide 29
Tax Code Section 451(e) Primarily for sales of market/feeder
animals. Allows for deferring recognition of forced sale income to
the following year. Livestock sold due to drought, flood, or other
weather related conditions. Area must be designated as eligible for
assistance by the federal government.
Slide 30
Tax Code Section 1033(e) Allows for the non-recognition of the
gain on the sale of breeding livestock. Horses qualify if used for
draft, breeding, or dairy. Poultry is expressly excluded from
livestock. Animals sold in excess of normal numbers due to drought
(involuntary conversion).
Slide 31
Replacing Property Lost Due to Involuntary Conversion
Replacement property must be purchased. The taxpayer's basis in the
property is its cost. Replacement property acquired by gift, or
tax- free exchange, is not eligible for deferral. Since the basis
of the property is not cost. Must be similar or related in service
or use. Functions in the same way. Breeding cow and dairy cow do
not qualify.
Slide 32
Replacing Property Lost Due to Involuntary Conversion If
reinvestment in similar use property is not feasible because of
soil or other environmental contamination, Livestock may be
replaced by other property used for farming purposes. Toxic
chemicals are the contaminant. Brucellosis infected cattle do not
qualify (bacterial).
Slide 33
Replacing Property Lost Due to Involuntary Conversion The
converted property must be replaced within a two-year period. The
period ends two years after the close of the first taxable year in
which any part of the gain on the conversion is realized.
Replacement of the converted property must be completed by the end
of the period. Sales in 2002 = Replacement by 31 Dec 2004
Slide 34
Contact A Tax Professional Competent. Understands your
situation. Business. Finances. Business goals. Personal goals.
Personality.
Slide 35
Now What? * To restock or not to restock? * Possible
solutions.
Slide 36
Now What? * Restock. Herd back to original size. New herd
smaller than original. Slowly. Quickly.
Slide 37
Now What? * Re-stock slowly. Buy a few cows each year. Buy
heifers rather than cows. Run yearlings, then cows. Convert to
yearlings only.
Slide 38
Now What? * Re-stock quickly. Full AUMs with cows. Full AUMs
with heifers. Buy cows to replace open heifers. Buy heifers to
replace open heifers. Yearlings then cows.
Slide 39
How/What to Produce? and For Whom? Production environment.
Marketplace.
Slide 40
Cash Receipts Bureau of Economic Analysis Farm Income and
Expenses
Slide 41
Cash Receipts: Livestock and L/S Products Bureau of Economic
Analysis Farm Income and Expenses
Slide 42
Cash Receipts: Miscellaneous Income Bureau of Economic Analysis
Farm Income and Expenses
Slide 43
Total Receipts and Other Incomes Bureau of Economic Analysis
Farm Income and Expenses Bureau of Economic Analysis Farm Income
and Expenses
Slide 44
Cash Expenses: Livestock Purchased Bureau of Economic Analysis
Farm Income and Expenses
Slide 45
Cash Expenses: Purchased Feed Bureau of Economic Analysis Farm
Income and Expenses
Slide 46
Cash Expenses: Petroleum Bureau of Economic Analysis Farm
Income and Expenses
Slide 47
Cash Expenses: Hired Labor Bureau of Economic Analysis Farm
Income and Expenses
Slide 48
Cash Expenses: Other Production Expenses Bureau of Economic
Analysis Farm Income and Expenses
Slide 49
Cash Expenses: Total Expenses Bureau of Economic Analysis Farm
Income and Expenses
Slide 50
July 2002 Cow Calf Returns & Cattle Inventory
Slide 51
-$20
Slide 52
Realized Net Income: Colorado, 1991-2000
Slide 53
Colorado Agriculture Stagnant Income Growth - 2.9% Increasing
Costs - 3.5% Declining Net Incomes
Slide 54
Possible Solutions: Production Increase production
Production/harvest practices Technology Precision farming
techniques
Slide 55
Possible Solutions: Marketing Marketing Long-term Profit vs.
Short-term Windfalls Develop Market Plans and Strategies Marketing
goals Available tools
Slide 56
Possible Solutions: Marketing Consider alternative markets
Contract production New markets for current products New uses for
current products Shelf life enhancement Engineered products
(characteristics) Processing Packaging
Slide 57
Possible Solutions: Financial Understand Financial
Situation-Financial Statements Liquidity Profitability Solvency
Financial Efficiency Unit Cost of Production-Enterprise Budgets
Know your costs Manage the costs
Slide 58
Possible Solutions: Risk Management Enterprise Diversification
Different crops Combinations of crops and livestock Different end
points Different types-same crop Value-added/product
differentiation Different income sources
Slide 59
Possible Solutions: Risk Management Pricing Tools Forward
Contracts Futures and Options Direct Marketing
Slide 60
Possible Solutions: Risk Management Debt Management Debt
reduction Refinance loans Adjust terms of the loan Debt
consolidation Adjust payments dates
Slide 61
Possible Solutions: Risk Management Debt Carrying Capacity -
Rules of Thumb Cropland (Dryland) - $125-$150/acre Cropland
(Irrigated) - $800-$900/acre Cow/Calf - $300-$400 per cow Dairy -
$1,000-$1,200 per producing cow RULES OF THUMB Intended as a
general guideline Many variables impact these numbers (market
conditions, price cycles, interest rates, inflation, location,
management ability, etc.)
Slide 62
Possible Solutions: Risk Management Legal Estate planning
Agricultural contracting Renegotiate leases Government laws and
regulations
Slide 63
Slide 64
Enterprise Diversification - What Is It? An increase in the
number of enterprises and/or products sold. Additional ways to use
available resources.
Slide 65
Enterprise Diversification - Benefits Reduces dependency on the
production and price of a single (or fewer) products. May reduce
income variability. May increase net revenues. Increase net worth.
Financial stability. Opportunities to expand and broaden
investments. Taxes. Greater use of human resources.
Slide 66
Enterprise Diversification - Costs May mean not being a
specialist, (I run cows) but rather being a generalist. (I have a
land resource producing cattle, hay, dudes, and elk).
Slide 67
Enterprise Diversification - Costs May mean that the owner does
not get to brag about having the heaviest calves or topping the
sale. Reduced weaning weights in order to sell in a variety of
markets. Moving calving and weaning dates to better fit off-ranch
job schedule.
Slide 68
Enterprise Diversification - Costs May have to expend some
monies in the short-term in order to have long-term gains.
Slide 69
Enterprise Diversification - Costs More Enterprises = More
Management
Slide 70
Enterprise Diversification - Costs May have to relinquish some
control of business and/or daily life.
Slide 71
Enterprise Diversification Commodities and Commodities.
Commodities and Products.
Slide 72
Enterprise Diversification - Examples Calves - multiple selling
times. Calves, yearlings, fats. Cattle and sheep. Cattle and crops.
Livestock and Dudes. Livestock and Wildlife. Ranching and
4-Wheeling, Camping, Agri- business, and Non-Ag Business.
Slide 73
How/What to Produce? and For Whom? Marketplace. Production
environment.
Slide 74
General U.S. Population Information U.S. Population - 282
Million People 3rd Largest Population (China and India > 1
billion) Expected Annual Growth Rate - 1 % Median Per Capita Income
- $21,684 Median Household Income - $46,738
Slide 75
General Colorado Population Colorado Population - 4.2 Million
People Ranks 25th of all the states Expected Annual Growth Rate - 2
% U.S. - 1% Median Per Capita Income - $24,203 U.S. - $21,684
Median Household Income - $59,747 U.S. - $46,738
Slide 76
Ethnic Diversity - 2000 & 2025 Population Percentages by
Race U.S. Colo. White 7466 8074 Black 1112 4 5 Indian 1 1 1 1 Asian
4 6 2 3 Hispanic 1115 1217
Slide 77
Age - America Is Graying Median Age: 1988 - 28 years 2000 - 36
years 2050 - 50 years (projected)
Slide 78
Households Are Changing Single person households Smaller
families Two wage earner families
Slide 79
Income - 1999 Poverty Rates U.S. Poverty Rate Lowest since 1979
(12.6 %) Highest Poverty - New Mexico (20.8 %) Lowest Poverty -
Maryland (7.6 %) Colorado - 8.6 % (Rank 44th)
Slide 80
Income-1999 Household Incomes Median Household Income U.S. =
$39,657 Highest on Record Highest Income - Alaska ($51,046) Lowest
Income - Arkansas ($28,398) Colorado - $46,950 (Rank 5th)
Slide 81
Slide 82
Slide 83
Houses and shopping centers. Open spaces. Land trusts,
conservation easements, etc. Non-agricultural Demand for Land.
Slide 84
Tools For Decision Making? Partial budgeting. 1033e. (Excel
Template, CSU) What to Do With My Cows. (Excel Template, CSU)
Re-Stocking Your Herd. (Excel Template, UofA) Right Risk.
Other.
Slide 85
Typical Partial Budget Positive Outcomes Reduced Costs
Increased Returns Total Positive Negative Outcomes Reduced Returns
Increased Costs Total Negative Positive Negative = Net Impact
Slide 86
1033e Decision Tool (An Excel Template)
Slide 87
Slide 88
Slide 89
Slide 90
717 Articles 42 Categories 461,194 hits in 2002 717 Articles 42
Categories 461,194 hits in 2002
http://agecon.uwyo.edu/RiskMgt/Default.htm
Slide 91
http://agecon.uwyo.edu/RnRinAg/Default.htm 34 Articles 7
Chapters 5 Sources of risk 34 Articles 7 Chapters 5 Sources of
risk
Slide 92
47 Articles in 6 Sections 29 Authors, 16 states
National/Regional awards 47 Articles in 6 Sections 29 Authors, 16
states National/Regional awards
http://agecon.uwyo.edu/Marketing/MngTCMkt/Default.htm
Slide 93
WWW.RightRisk.org
Slide 94
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