Can I afford high cash rent?
I farm 1,200 acres of mostly corn and soybeans, with 40 acres in alfalfa. I own 400 acres and rent 800. I pay cash rent varying between $150 and $180 per acre. With declining crop prices, I can’t afford $180 rent for next year. I figure I’m better off renting whatever $150-per-acre ground I can get and letting the $180 ground go. That will leave between 800 and 900 acres total. The higher-priced land is the best land I farm, but it hasn’t been that much better than the rest. Am I right that I’m better off cutting back than to pay these high rent prices?
Swanson: The opportunity to lease farmland is quite competitive, and once you give it up, the lease may be difficult to regain in the future. Because of this, you should do some accurate budgeting to make sure the $180 rent land is not performing given it is more productive. Another consideration is your machine and power costs per acre. Since they are currently spread over 1,200 acres, they will go up when you abandon the high-rent acreage. Consider the impact of this decision on your long-term goals.
Edwards: Take your average yields from the higher-priced land for the past few years and multiply them by your expected prices for next year’s crop. You can check what local elevators are offering on a forward contract, or use the futures price minus a normal basis. Add in the direct payments from the Farm Service Agency. Estimate your costs for seed, fertilizer, pesticides, fuel and repairs, drying, crop insurance, and custom hire. Fixed costs such as machinery interest and depreciation, and your own labor, can be omitted. Decide whether the expected margin over cash rent is enough to justify the risk you will take. Show the numbers to the landowner and see if you can negotiate a lower rent, or a variable rent based on actual prices and yields.
Gassett: High cash rent can make it difficult to show a profit. However, if you choose to cut back, several things occur. First, costs actually rise on the remaining acres because the total cost of labor and equipment is spread over fewer acres. Second, if the best land is dropped, it increases the risk that a poorer average crop will be produced on the remaining acres in the event of adverse growing conditions. Third, crop prices are declining at the present time; however, the final value of those crops is unknown, and once the land has been dropped, the opportunity is gone. There is tremendous competition for good land. Once the land is given up, it is very unlikely you will get it back.
Federal estate tax in limbo
My wife and I own a 2,500-acre farm, and we’re both 65 years old. With no federal estate tax in place for this year, Congress has to come up with a new estate tax law by Jan. 1, 2011. Are there any moves my wife and I should be taking on the farm now regarding estate tax planning strategy?
Swanson: You should probably update your wills to include language that indicates the estate settlements should be structured to take advantage of the maximum marital deduction currently allowed by law. This would give you the flexibility needed to preserve your farm. With the current environment in Congress, I doubt if they are going to be able to come up with an agreement for replacement language before Jan. 1, 2011. Therefore, your wills need to be flexible until a new strategy can be put together based on the new federal estate tax laws.
Gassett: It would be difficult to make any decision on tax planning strategy until we know what the new tax laws are. Although there would be no estate tax, if you were to unexpectedly pass away this year, you should be aware that your heirs would not get stepped-up basis on the land when they inherited it. One possible pitfall would occur if you willed a farm that you bought 40 years ago to one child and willed a farm that you bought last year to another child: The first child may have a substantial capital gains tax liability, while the second child may have very little, even if the farms are of equal value.
Editor’s note: William Edwards deferred this question to Erin Herbold, staff attorney at Iowa State University’s Center for Agricultural Law and Taxation.
This article published in the August, 2010 edition of WALLACES FARMER.
All rights reserved. Copyright Farm Progress Cos. 2010.