Market Confusion!

This week the soybean market is fulfilling one of Murphy’s Laws: “The market will do whatever is necessary to fool the majority.” According to a report by Agriculture.com, cash soybean bids broke above the $1.00 rally level on October 29. Strength at that time led many to believe there were large gains still ahead. Since then, action has leveled off, and prices have become much less volatile. Bets that prices could go straight up were tempered by two days, November 4 and November 19, when they broke below the dollar level. Both times there was a quick rebound back above that “magic“ level.

Scanning the charts of cash bids and March futures gives the impression that the high was on October 31 with the price of $9.69. However, the ability of the market to rebound every time the support level is broken makes me think that the bids could hold in this area or higher for a long time.

In addition to chart action that is somewhat bullish is the fact that basis has finally started to improve. I admit that the move is small and not consistent across all price levels. It is at least better than having the basis deteriorate as the record soybean crop finally comes to town. Hope that the end of the year will see much better basis and gradually improving cash bids.

Meanwhile, corn bids continue to plug along, pennies up and pennies down. The net result has been a gradually improving cash bid. That is better than having violent large moves up and down but not going anywhere. At least the price today is such that market analysts have stopped taking about cash corn prices below $3.00. With the size of the 2014 crop, it may take until spring for corn to be above production cost if indeed it ever gets there for most of us.

All cash bids quoted in this column are from Midwest Farmers Co-op in southeast Nebraska.

Depressed Prices Ups Farmers Hedging

What do farmers need to keep in mind about the futures market?  Let Dave Leheman, CME Group Managing Director of Research and Product Development, tell you.  Here's a short video from an interview by Agriculture.com.

Corn & Soybean Crops Continue Historic March

U.S. corn and soybean producers are again on pace to set a new high in yields according to USDA's Aug. 12th Crop Production report.  Last years corn crop was a new record, and soybeans were the third highest ever.

Corn

Corn production is projected at 14 billion bushels, based on conditions as of Aug. 1st.  Yields are expected to average 167.4 bushels per acre, up 8.6 bushels from 2013.  If this turns out to be correct it'll be the highest yield recorded in the United States.  

Market analyst Brain Basting, Advanced Trading, said in a recent interview with Delta Farm Press that the corn production numbers "were a little below the average trade guess of 14.25 billion bushels.  It's a start, a mark on the wall.  Historically, there have been significant changes over time relative to the August report."

USDA's estimated ending stocks for corn, at 1.8 billion bushels, was also well below the average trade guess of 2.03 billion bushels, according to Basting.  "The key thing now is to see if we have some more export demand surface at these lower prices."

Soybeans

Soybean production is forcasted at a record 3.82 billion bushels, up 16 percent from last year.  Based on Aug. 1st conditions, yields should average 45.4 bushels per acre, up 2.1 from last year.  Area for harvest in the United States is expected to be 84.1 million acres, up 11 percent from last year.

Soybean carryout is expected to be 430 million bushels "which is exactly triple the estimate for 2013-14, at 140 million bushels," Basting said.  "That is a burdensome carryout.  The trade is going to be watching the weather the last three weeks of August.  The southwestern Midwest did get some good rains recently which helped those double-cropped soybeans there.  The soybean market is looking at what could be the largest soybean crop ever."

Corn Looking to Rebound

After having a rough May and June grain futures are trying to rebound on the heels of last Friday's modest gains.  Heavy rain in the Northwest of the Corn Belt could end up doing more harm than good.  However, Kansas City futures show strength that could trigger a short covering rally.  Otherwise, the saying of "rain makes grain" is being put to the test.

Farm Futures Senior Editor Bryce Knorr talks about the market with Robert Hahn, Valley News Live TV, Fargo.

To hear the interview click here and scroll down to the bottom of the article to find the audio link.

Disaster Assistance

The 2014 Farm Bill, formerly known as the Agricultural Bill of 2014, makes the Livestock Forage Program (LFP) and Livestock Indemnity Program (LIP) permanent programs and provides retroactive authority to cover eligible losses back to Oct. 1, 2011.

LFP provides compensation to eligible producers who suffered grazing losses due to drought and fire.  LIP provides compensation to livestock producers who suffered livestock death losses in excess of normal mortality due to adverse weather and attacks by animals reintroduced into the wild by the Federal Government or protected by Federal law, including wolves and avian predators.

USDA is determined to make implementing the livestock disaster programs a top priority and plans to open program enrollment by April 15th, 2014.

As USDA begins implementing the livestock disaster assistance programs, producers should record all pertinent information of natural disaster consequences, including:

• Documentation of the number and kind of livestock that have died, supplemented if possible by photographs or video records of ownership and loss.
• Dates of death supported by birth recordings or purchase receipts.
• Cost of transporting livestock to safer grounds or to move animals to new pastures.
• Feed purchases if supplies or grazing pastures are destroyed.
• Crop records, including seed and fertilizer purchases, planting and production records.
• Pictures of on-farm storage facilities that were destroyed by wind or flood waters.
• Evidence of damaged farmland.

Many producers still have questions.  USDA is in the process of interpreting the Farm Bill program regulations.  Additional information will be provided once enrollment period is announced.  In the meantime, producers can review the LIP and LFP fact sheet.  The USDA is working dilligently to put the Farm Bill programs into action to benefit the Farmers and Ranchers of rural America.

Closing Grain Futures

Just real quick I thought you would be interested in the closing grain futures from March 17th, 2014.

• May corn closed at $4.79, down 7 cents
• May soybeans closed at $13.91 and 3/4, up 3 and 1/4 cents.
• May soybean meal closed at $446.60, up $2.60.
• May soybean oil closed at $41.89, down 40 points.
• May wheat closed at $6.74 and 1/2, down 12 and 3/4 cents.
• April crude oil closed at $98.08, down 81 cents.
• May cotton closed at $92.03, down 16 points.
• April gold closed at $1,372.90, down $6.10.
• Dow Jones Industrial Average: 16,247.22, up 181.55 points.

1031 Exchange Under Attack

Proposed Tax Reforms Includes Ending 1031 Exchange

The ninety two year old 1031 tax exchange is once again up for abolishment in current tax reform proposals.  Congressman Dave Camp, Chair of the US House or Representatives Committee on Ways and Means, has a bipartisan tax reform group tasked with identifying eleven subjects including real estate tax matters as potential revenue raisers.  Senator Max Baucus, Chair of the Senate Finance Committee has targeted the elimination of the 1031 exchange as one of many means of tax reform.

Section 1031 "like-kind" exchanges is estimated to cost of $42 billion over the five year period 2012-2016 by the Joint Committee on Taxation (JCT).  Estimated by the JCT in prior years estimated the tax deferral to be $16.2 billion over the five year period 2010-2014.  The two fold difference is attributed to a change in accounting methodology.

The Treasury Department 1031 Regulation is enforced by the Internal Revenue Service in Section 1.1031 stating that "no gain or loss shall be recognized on the exchange of property held for productive use in trade business or investment, if such property is exchange solely for property of like ind which is to be held for productive use in trade or business or for investment."  Individuals, married partnerships, trusts, corporations use 1031 exchanges when selling and replacing real and personal property to defer federal and state capital gain and recaptured depreciation taxes.  The taxes are deferred until the replacement property is sold and not replaced, effectively cashing out.  The economic position of the taxpayer does not change in a 1031 exchange; they have the same amount of cash and debt if not more.  If the taxpayer receives cash or reduction in debt, then a tax is due.

Sixty percent of 1031 exchanges involve properties for sales of less than one million dollars with a third for less than $300,000 owned by small investors and businesses.  The majority of investors are individuals and small businesses with exchange proceedings of less than $300,000.  Corporate entities do utilize 1031 exchanges to replace worn equipment and reposition low income producing properties with higher income producing properties.  In the Florida Panhandle, from Perdido Key West of Pensacola, Florida to Panama City Beach, Florida, investment properties saturate the real estate market with the local counties benefiting from the country bed taxes on properties held for short term rentals.  Titleholders are individuals, husbands and wives, trust and small limited liability companies generating business for Realtors, lenders, contractors, title companies, attorneys, CPAs, appraisal, pest and survey companies.

Positive Impact of 1031 Exchanges

• Encourages the rate by which money is move from one transaction to another; otherwise, known as the velocity of money.
• Property located in the US must be exchanged with property located in the US requiring reinvestment in the US rather than overseas.
• Stimulates taxpayers to acquire properties of equal or greater value often times greater including improvements in real estate.

What a 1031 is Not

• A tax loop hole for the rich.  Ninety percent of investors are individuals, families and trusts within a seven hour driving distance to their investments.
• A tax scheme robbing US taxpayers and government, rather a temporary tax deferral with the tax due when replacement property is cashed out or due upon decedent's taxable estate.

Negative Impact of 1031 Exchange Elimination

• Fewer real estate transactions, real and personal property will be held longer with many families electing to hold until death.
• Increase in depreciation deductions offsetting income tax revenue.
• Businesses will downsize due to no longer having access to or qualify for loans and paying tax on the gain or depreciation recapture of relinquished or old asset.

1031 exchange provide significant benefits to the taxpayer and local economies where the asset is located encouraging reinvestment versus the hoarding of cash and removing those dollars from the economy.  The 1031 exchange allows many others to benefit in the transaction before ultimately deposited with the US Treasury.

WEEDS!

Weeds are getting stronger and more resistant to herbicides.  And the problem is only growing.  According to recent interview from agriculture.com of Mike Owen of Iowa State University "The problem is much more widely spread than what I think many of the growers recognize."

What's adding to to the problem is many growers think once they've found a good and effective herbicide they can stick with it.  Unfortunately that's not the case.  Weeds can become resistant to a normally lethal dose of herbicide if used over and over.

The problem is it's hard to spot weeds who have become resistant to the growers herbicide.  Most of the time they aren't noticeable til September and October when they start peaking out above the soybeans.

3 Factors

There are three factors that lead to weed adaptation to the enviroment.

1. Genetic

• Mutation rates
• Mode of inheritance
• Mechanism of resistance

2. Biological

• Species life cycle of plants
• Germination biology
• Population size and density of plants

This is vitally important.  According to Jason Norsworthy of the University of Arkansas, knowing when a weed emerges, its growth rate and when it flowers can all help you find its weakness.

3. Operational

• Herbicide efficacy
• Frequency of use
• Timing of use
• Herbicide use pattern including rotations or mixtures
• Crop rotation
• Herbicide rate
• Cultivation practices

Here is where you can really do something about it.  Understanding weed biology and using diverse tactics such as planting in weed fields can help delay weed resistance.  You can also manage field borders and prevent weed seed movement as well.

"We have to manage the weed before it becomes a major issue," says Norsworthy.  Scouting your field and identifying weeds before they really can grow is the best tactic.

Now What?

There is nothing new coming down the pipeline for at least another eight years or so according to Norsworthy.  Your first line of defense should always be getting to the weed early before it matures and spreads.

Diversity is the key.  They include cultural, mechanical and herbicidal strategies.  And of course make sure your chosen herbicide is effective.  "The way to know whether or not they are effective is to look at the herbicide use history, and also recognize the resistance that do exists in your particular area," says Owen.

Ownership and Estate Planning

Trusts

There are two kinds of trusts that are commonly seen in the farmland industry.  There is the revocable or family trust and there's the irrevocable trust.

The revocable or family trust is were usually you or a family member is the trustee.

A irrevocable trust usually involves a corporate trustee.  I will go into different kinds of corporate trusts you can set up and what is best for you in future posts.

Types of Property Ownership

Tenancy in Common

Tenancy in common is another commonly seen type of farmland ownership we see.  Tenancy in common is where a property is held by two or more persons with only the unity of possession.  There may hold a varying size of interest in the property.  The owners may take the title at different times.  The owners may also have different deeds.

Possible Issues

The owners will share an undivided possession.  So upon the death of one owner there is no right of survivorship.  The other owner can't take the passed owners shares unless stated so in a will.  Decedent's interest passes to his or her will.  Or, it passes to the state law of distribution.

Types of Property Ownership

Most Common is Joint Tenancy

The number one form of land ownership we see is called joint tenancy.  Joint tenancy is where all co-owners are equal.  There is a right to survivorship which means one of the co-owners passes away his or her share would then be passed on to the remaining co-owners.  This is common with married couples.  This does not go through probate when one owner dies.  And it does not pass according to a will.

Possible Issues

When the co-owners both die the descendant's ownership disappears.  It passes free of unsecured creditors.  There can be a problem if there are marriage difficulties or there are children for a previous marriage.  Also, it will not be included in the descendant's estate, therefore it cannot have an exemption made against it.

Fitting Future Farm Owners Into Your Plans

Succession Planning

This question almost always comes up at some point when people talk about buying farmland.  How do I make sure this is passed on to my children or grandchildren properly.  There are many different ways but they all fall under the umbrella of succession planning.  

Succession planning is a continuous process to transfer knowledge, skills, management, control and ownership between generations.

Decisions Affecting Succession Planning

There are three main things that affect succession planning.  First is ownership.  How is that defined or going to be defined.  The second is what type of business entity is it going to be.  Is it a corporation, a LLC etc.  Finally you have to think about estate planning.  Is it part of your retirement?  How will it affect you tax planning?

How To Get Started On Succession Planning

You want to know your basis and how your property is owned.  Depending on that is how you would get started.  I will go over the different forms of ownership in the next handful of posts.

Crop Exports

USDA has reported that corn exports have come in much higher than expected.  Soybeans remained about the same and wheat came in below expectations.

Wheat came in about 10 million bushels lower than last week.  However, with how good wheat came in the week before so I wouldn't worry too much about these numbers.

Corn is up over 8 million higher than the week before of around 19 million.  Right now the total is almost double what is what last year.

Soybeans came about 2 million less than a week ago.  But it's up almost 9 million than the year before.

While this had varied from week to week, what we've been seeing is a very strong year in crop production.  None of this is a shock but is much welcomed news after the last couple years.  And with what appears to be a good wet winter we may be looking at another strong year in crop production.

Fundamental Puzzle Pieces In The Market

What Are The Fundamental Players In The Commodity Market?

There are three things to think about when look at the commodity prices when it comes to farmland.  US supply, US demand and the US economy.

US Supply

This is production and potential production.  Both have an affect on the market.

US Demand

A good example of this is ethanol.  That has become a very popular source of fuel recently and has really driven then corn demand in this country.

US Economy

As long as the U.S. dollar is strong so will the marketplace for US crops abroad.

Corn is the Market Leader!

With the strong push for ethanol corn has exploded on the US market recently.  It should continue to do so for the foreseeable future.

Weather Will Always Trump!

With all these things that go into what affects commodities, nothing affects it more than the weather.  Keep an eye on the forecasts in the area of your farm.  If you truly want to know what the future of commodity prices are just look to the sky.

Piecing Together a Commodity Marketing Plan

What Affects The Market?

A handful of things really affect the commodity market.  

USDA Reports

USDA reports can really dictate what the next year or so could look like for the farming business.

Foreign Economies

For example, what happens in say Greece with all their economic woes can affect commodities we export out.  Also, China is a big exporter for us.  If that economy falls apart we would feel it as well.

Managed Commodity Funds

The market will react to these as well.  These are really where we see the numbers and how the prices in the market will be adjusted.

World Events

To really truly hurt the farming market a global event has to take place.  Such as an embargo or a third world war.  But little ones like economic woes of Europe can be felt here.

Weather

A few years ago we went through a pretty long drought.  It was actually getting scary.  But like most things the weather came back to the median.  However, that drought really affected prices.  Drove them through the roof.  So weather is something to keep an eye on when thinking about the market.

Crop Inputs

Changes For 2013

There were some changes to the amount farmers and farm owners had to put into their farms.  Crop production was up 1 to 4%.  Seeds were up 5 to 10%.  Machinery went up 1 to 6%.  Fertilizer, interest and fuel all remained the same.

These are trends to keep an eye on as we move into 2014.  It can help you make an informed decision on what kind of farm operation you want to run.

Have a Merry Christmas folks!

Fitting The Pieces Together For Your Farm

Considerations

When looking for a farm to buy you need to consider a couple things.  First thing is to remember it's YOUR farm.  Not the farmer's or the farm manager's it's YOUR farm.  You'll want a farm that fits your personality.  And no I'm not talking about whether or not you have sense of humor.  I'm talking about it needs to match your current situation and your goals.  Other things to consider as follows.

Location

Do you want to be able to drive to your farm easily?  To some this may matter.  They may want to have the ability to keep their eye on what's going on with their investment.  Or you may want to be close to town with the idea of selling it for development ground.  Others may not care about the location at all.

Soils

This may be an obvious thing but I figured I would hit it anyways.  For a farm to be a good farm it needs to have good deep soils.  We at Rural KC will help you identify what's good soils and not.  We will look at the depth and soil type and that helps us define what is good and what isn't.  But most importantly, we lean on the opinion of a local farmer over this.  A local farmer knows which farms are good and which aren't.  While these soil maps are great.  Nothing beats local knowledge.

Farmability

This is something the local farmer should be the go to guy.  However, by looking at an aerial you usually can get a good idea if it's farmable or not.  First you would look at the soils and make sure they are deep.  Next you need to ask yourself a few questions.  Is it hilly?  Is it rocky?  Is there too much timber?  Is it in pasture or already broken up?  If it's in pasture is there farmland around it?  These are good starting points but once again, the local farmer would be the best one to answer this question.

What Can a Farm Manager Do For You?

Landowners have benefited greatly from using farm management company.  Farm management companies can take away most of the stress and hassle involved in owning a farm.  What they do great is management of the farm and consultation with the land owner.

Farm Manager Can Help You Manage Your Lease Risk

Right now demand for land to rent is at a fever pitch in many areas.  Your farm manager can make sure you are getting what you should be getting in return.  He will make sure you are working with a farmer that respects you and your land.  Because, without that respect you could be taken advantage of and left with land that'll need to work to produce crops.  The farm manager will know the good and bad points about your farm.  He will help you negotiate from a position of strength.  Your farm manager will take care of everything for you so you can enjoy your farm asset as this is truly the golden age for agriculture.

Peace of Mind

Like most people, you are thinking about investing in farmland not only for your self but for your children or future children.  A farm manager can help you with that as well.  He make sure it's his fiduciary care for future generations.  He will make it a blessing and not a burden.

Need To Be Aware Of...

Start Simple

What is it you need to be aware of when thinking about your farm management plan?  While the first aspect is simple it's something some people make way more complected than it needs to be.  You need to think about the lands profit potential.  Basically, think of the income and expenses that go into the land.  You will also have to keep in mind your relationship with the farmer.  This will impact managing the farm as a valuable asset in one way or the other.  You don't want to hover over him constantly yet you can't be an absentee owner.  Absentee owners often get taken advantage of.  I heard a saying once from a farm manger that I love.  "What makes the crops grow the best?  My shadow."

Negotiation Skills

What are your negotiation skills?  Do you enjoy this part of the process?  Do you expect fair market value for your assets?  If you answered yes to this then you should consider custom farming.  I would highly suggest looking into hiring a farm manager to handle this.  They will get you the best deal you can for a small portion of the profits.

Written Lease

How would the farm manger work up a written lease?  I'll go over a quick standard way it's done.  While each deal is different this is the basic way it's written up.  First off he would negotiate a new lease every year.  This would insure that you get most out of the land year to year.  He would secure the cash rental payments or collect up front.  He would form a lease that would protect you and the farmer.  He would guard against any subleasing.  The lease would make sure you know your farm's production capability.  And they would use studies from local universities on cash rent.  However, take them with a grain of salt.  These studies tend to be out of date by the time they become public.

Cost of Management

This is simple much like the first step but often people don't think about it.  Basically this is the difference between what the owner/farm operator thinks might be fair vs analysis of value the land brings to farming operation.  Simply put, think of it like any other business.  Most first time investors forget that it's a business and treat it differently.

Unique Midwest Opportunity

A Unique Opportunity

We at Rural KC truly believe we live in the hot spot of cropland.  Right along the Kansas Missouri border.  Eastern Kansas and Western Missouri present special investment opportunities.  These two states are currently undervalued as compared to their productive capability.  Missouri in particular offers two advantages for first time cropland investors.

Missouri has a culture of cash rent as compared to a share crop culture such as Kansas.  Missouri also has a free capture on water for irrigation.  That means any water on, borders or adjacent to the property can be use for irrigation.  In Kansas you have to get permits to use water and usually you have a limit in the amount.

However, for the more seasoned and aggressive investor, Kansas may be the one for you.  Share cropping is the norm in that side of the border.  If you feel comfortable enough and willing to take the risks, Kansas provides that option to you.

The Efficiency of Farmland

Let's compare Iowa to Eastern Kansas and Western Missouri.  In Iowa per acre you can get 280 bushels per acre with a rent of $450 per acre.  That would make your return on investment 4.5% at a per acre cost of $10,000.  Now let's compare that to Kansas/Missouri.  You would get 170 bushels per acre with a rent of $110 to $350 per acre.  That would bring in a return on investment of 4% to 5% at a per acre cost of $5,000 to $2,500.  Based on comparative production of bushels, per acre cost in Eastern Kansas and Western Missouri would be $6,072.

Common Mistake

There are many things we hear over and over again in our industry from buyers.  But by far this is the most common thing we hear.  "I had a chance to buy that for $_____ back in _____ and didn't do it.  I'm still kicking myself."  Do yourself a favor, don't be that guy.  We can help you avoid that.  Call us at 913-837-4665 or email us at info@ruralkc.com.