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A griculture & B usiness M anagement. Economic & Financial Considerations Due to Drought Jeffrey E. Tranel Agricultural & Business Management Economist [email protected] A Few Basic Questions?. 1. Where were you on January 1, 2002?. A Few Basic Questions?.

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A griculture b usiness m anagement l.jpg

Agriculture &BusinessManagement

Economic & Financial Considerations

Due to Drought

Jeffrey E. Tranel

Agricultural & Business Management Economist

[email protected]


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A Few Basic Questions?

1. Where were you on January 1, 2002?


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A Few Basic Questions?

1. Where were you on January 1, 2002?

2. How did you respond to the drought?


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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?


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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?


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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?


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Where Were You on January 1, 2002?

Personally?

  • Age.

  • Health.

  • Children.

  • Retirement.

  • Other.


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Where Were You on January 1, 2002?

Personally?

Managerially?

  • On target.

  • According to plans.

  • Herd development.

  • Properly stocked.

  • Labor resource.

  • Machinery, buildings, fences.

  • Other.


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Where Were You on January 1, 2002?

Personally?

Managerially?

Financially?

  • Balance sheet.

    • Net worth.

    • Ratio analysis.

  • Current with loans.


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How Did You Respond to the Drought?

According to plans?

  • Herd development.

  • Herd size.

  • Marketing.


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How Did You Respond to the Drought?

According to plans?

Feed?

  • Purchased additional feedstuffs.

  • Moved cows to another state.

  • Sold excess feed.


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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.


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Why Did You Respond As You Did?

Personal situation.

Goals (plans).

Financial situation.

Lender.

Taxes.

Pasture/Feedstuffs.


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Where Are You Now?

  • According to plan.

  • Wondering.


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Where Are You Now?

  • Wondering.

  • According to plan.

  • Better off financially.

  • Worse off financially.


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Where Are You Now?

  • Wondering.

  • According to plan.

  • Better off financially.

  • Worse off financially.

  • Better off personally.

  • Worse off personally.


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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.


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Where Are You Now?

Lender accepted management plan.


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Where Are You Now?

Lender accepted management plan.

Taxes paid.

Tax liability exists (1033e, 451e, other).


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Where Are You Now?

Lender accepted management plan.

Taxes paid.

Tax liability exists (1033e, 451e, other)

Retired.

Out of ranching but still working.



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Remember:

With no farm profits and no other income,

there is no money for

principal repayment,

family living,

investments,

etc.


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Comment by Old Timer:

“My Biggest Tax Problem

Is

Not Paying Enough Taxes!”


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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.


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Other?

  • Do not elect accelerated depreciation.

  • Use other profits to offset farm losses.


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Livestock ProducersFeed Assistance Program

  • Such payments must be included in the year of receipt.


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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.


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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.


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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).


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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.


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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).


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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


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Contact A Tax Professional

  • Competent.

  • Understands your situation.

    • Business.

    • Finances.

    • Business goals.

    • Personal goals.

    • Personality.


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Now What?

  • “To restock or not to restock?”

  • Possible solutions.


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Now What?

  • Restock.

    • Herd back to original size.

    • New herd smaller than original.

    • Slowly.

    • Quickly.


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Now What?

  • Re-stock slowly.

    • Buy a few cows each year.

    • Buy heifers rather than cows.

    • Run yearlings, then cows.

    • Convert to yearlings only.


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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.


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How/What to Produce? and For Whom?

  • Production environment.

  • Marketplace.


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Cash Receipts

Bureau of Economic Analysis

Farm Income and Expenses


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Cash Receipts: Livestock and L/S Products

Bureau of Economic Analysis

Farm Income and Expenses


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Cash Receipts: Miscellaneous Income

Bureau of Economic Analysis

Farm Income and Expenses


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Total Receipts and Other Incomes

Bureau of Economic Analysis

Farm Income and Expenses

Bureau of Economic Analysis

Farm Income and Expenses


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Cash Expenses: Livestock Purchased

Bureau of Economic Analysis

Farm Income and Expenses


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Cash Expenses: Purchased Feed

Bureau of Economic Analysis

Farm Income and Expenses


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Cash Expenses: Petroleum

Bureau of Economic Analysis

Farm Income and Expenses


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Cash Expenses: Hired Labor

Bureau of Economic Analysis

Farm Income and Expenses


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Cash Expenses: Other Production Expenses

Bureau of Economic Analysis

Farm Income and Expenses


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Cash Expenses: Total Expenses

Bureau of Economic Analysis

Farm Income and Expenses





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Colorado Agriculture

  • Stagnant Income Growth - 2.9%

  • Increasing Costs - 3.5%

  • Declining Net Incomes


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Possible Solutions: Production

  • Increase production

    • Production/harvest practices

    • Technology

    • Precision farming techniques


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Possible Solutions: Marketing

  • Marketing

    • Long-term Profit vs. Short-term Windfalls

    • Develop Market Plans and Strategies

      • Marketing goals

      • Available tools


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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


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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


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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


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Possible Solutions: Risk Management

  • Pricing Tools

    • Forward Contracts

    • Futures and Options

    • Direct Marketing


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Possible Solutions: Risk Management

  • Debt Management

    • Debt reduction

    • Refinance loans

    • Adjust terms of the loan

    • Debt consolidation

    • Adjust payments dates


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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.)


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Possible Solutions: Risk Management

  • Legal

    • Estate planning

    • Agricultural contracting

    • Renegotiate leases

    • Government laws and regulations


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Enterprise Diversification - What Is It?

An increase in the number of

enterprises and/or products sold.

Additional ways to use available resources.


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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.


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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).


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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.


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Enterprise Diversification - Costs

May have to expend some monies in the

short-term in order to have long-term gains.


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Enterprise Diversification - Costs

More Enterprises = More Management


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Enterprise Diversification - Costs

May have to relinquish some control of

business and/or daily life.


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Enterprise Diversification

  • Commodities and Commodities.

  • Commodities and Products.


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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.

Enterprise Diversification - Examples


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How/What to Produce? and For Whom?

Marketplace.

Production environment.


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GeneralU.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


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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


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Ethnic Diversity - 2000 & 2025

  • Population Percentages by Race

  • U.S. Colo.

    • White 74 66 80 74

    • Black 11 12 4 5

    • Indian 1 1 1 1

    • Asian 4 6 2 3

    • Hispanic 11 15 12 17


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Age - America Is Graying

  • Median Age:

    • 1988 - 28 years

    • 2000 - 36 years

    • 2050 - 50 years (projected)


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Households Are Changing

  • Single person households

  • Smaller families

  • Two wage earner families


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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)


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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)


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Houses and shopping centers.

Open spaces.

Land trusts, conservation easements, etc.

Non-agricultural Demand for Land.


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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.


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Positive Outcomes

Reduced Costs

Increased Returns

Total Positive

Negative Outcomes

Reduced Returns

Increased Costs

Total Negative

Typical Partial Budget

Positive – Negative = Net Impact


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1033e Decision Tool(An Excel Template)


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1033e Decision Tool(An Excel Template)


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1033e Decision Tool(An Excel Template)


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1033e Decision Tool(An Excel Template)


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717 Articles

42 Categories

461,194 hits in 2002

http://agecon.uwyo.edu/RiskMgt/Default.htm


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34 Articles

7 Chapters

5 Sources of risk

http://agecon.uwyo.edu/RnRinAg/Default.htm


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47 Articles in 6 Sections29 Authors, 16 states

National/Regional awards

http://agecon.uwyo.edu/Marketing/MngTCMkt/Default.htm



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The Agriculture & Business Management Economists are dedicated to providing extension/outreach information including: - principles and concepts of production economics - financing methods and analysis - investment analysis - legal regulations on business activities - concepts of marketing and price determination.

ABM EconomistsABM Topics of InterestPresentationsFarm Business Associations CSU Department of Agricultural and Resource Economics

http://www.coopext.colostate.edu/ABM/


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Thank You! dedicated to providing extension/outreach information including:


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