The Management Calendar

Farm Business Management Update, October - November 2008

By Gordon Groover (xgrover@vt.edu), Extension Economist, Farm Management, Department of Agricultural and Applied Economics, Virginia Tech

The short run drought situation appears to be improving as I have observed through the windshield over the last few weeks. In a number of areas this rain came too late to insure average yields. Long-term, we still need some serious rainfall to recharge groundwater and reservoirs.

Listed below is information that may be useful to add to your library and plan to read when the harvest season is over.

• Still studying the 2008 Farm Bill to understand what is different from previous farm bills? Then take a look at the side-by-side comparison at the USDA-ERS www.ers.usda.gov/FarmBill/2008/.
  
  
• Need to be COOL (Country of Origin Labeling)? The Agricultural Marketing Service (AMS) of USDA has a Frequently Asked Questions paper explaining the details of COOL in a concise manner and is found at: www.ams.usda.gov/AMSv1.0/getfile?dDocName=STELPRDC5071922.
  
  
• Want to know how you stack up with other farmers across the U.S. or which region has the lowest costs of production? View the commodity costs and returns web site hosted by USDA-ERS www.ers.usda.gov/Data/CostsAndReturns/. USDA has estimated annual production costs and returns and published accounts for major field crop and livestock enterprises since 1975. Cost and return estimates are reported for the U.S. and major production regions for corn, soybeans, wheat, cotton, grain sorghum, rice, peanuts, oats, barley, tobacco, milk, hogs, and cow-calf. These cost and return accounts are historical accounts based on the actual costs incurred by producers during each year.
  
  
• Interested in tracking U.S. fertilizer use and prices? See the USDA-ERS web site for historical data at: www.ers.usda.gov/Data/FertilizerUse/. This product brings together 1960-2007 data on fertilizer consumption in the United States by plant nutrient and major selected product, as well as consumption of mixed fertilizers, secondary nutrients, and micronutrients. Share of crop area receiving fertilizer and fertilizer use per receiving acre by nutrient are presented for the major producing states for corn, cotton, soybeans, and wheat. Additional data include fertilizer farm prices and indices of wholesale fertilizer price.
  
  
• Interested in a variety of information about Virginia agriculture from apples to watermelons? Get a copy of the Virginia Agricultural Statistics Bulletin and Resource Directory Number 80. The publication covers year 2007 and is published annually in September. You can download a copy by going to www.nass.usda.gov/Statistics_by_State/Virginia/Publications/Annual_Statistical_Bulletin/bulletin2007.pdf. A hard copy can be obtained by contacting Virginia Agricultural Statistics Service (VASS) via telephone (804) 771-2493 or e-mail nassva@ nass.usda.gov.

Farm business managers should consider putting the following activities on their management calendar for October-November.

• The word of the year may be “liquidity.” As I was working on this newsletter, a press release for the Richmond Federal Reserve Bank hit my inbox stating that they are ready to provide liquidity in Citigroup’s acquisition of Wachovia Corp. Farmers and small business managers now more then ever need to make sure that you understand this concept. In short, this means cash to meet obligations as they come due. Over the last three years, we have moved from a situation where prices of inputs and outputs were somewhat stable to where now when it is anyone’s guess as to what will happen next to prices. This price volatility makes it very difficult to plan the level of cash or liquid assets needed to meet all obligations. The old cash flow statement is still the best tool we have to estimate when and under what conditions the business has a cash surplus or deficit. If you project cash flow, look for problems. Actual inflows or outflows that differ from your projections may not signal a problem, but understanding why you have differences helps you understand changes in the farm business. Finally, Alex White has a number of excellent resources at www.extension.agecon.vt.edu/farmbusinessmgt.html. He also has a spreadsheet to help develop all the common business financial statements at www.extension.agecon.vt.edu/spreadsheets/Financial%20Statements%20template.xls.
  
  
• Time to order your farm record book: As we enter the last quarter of 2008, it is time to order a new copy of the Virginia Cooperative Extension “Farm Record Book: Expenses and Receipts” (Publication 446-017). This 120-page record book provides an organized way of keeping track of annual financial, labor and personnel, and production related records. It provides forms for many categories of expenses, receipts, labor, and financial summaries to meet the needs of most agriculturally related businesses using cash accounting methods. Column headings are included for major items with some columns remaining blank for your own headings. Forms are arranged to facilitate transferring totals to income tax forms (Schedule F, tax deprecation, and Form 4797) and to help complete end-of-the-year analysis. Virginia Cooperative Extension “Farm Record Book: Expenses and Receipts” is available from Virginia Cooperative Extension for $12.00. Call your local extension office and request the order form VCE Publication 446-016, print the form at www.ext.vt.edu/pubs/agecon/446-016/446-016.pdf, or contact me at 540-231-5850.
  
  
• Farmers faced with high input costs or low returns driven by drought and other issues can look to their top five cash expenses as a way to reduce costs in the short run. Total all expenses and estimate spending for the remainder of the year. Then identify the largest expense items and review each, looking for ways to reduce spending. Ask questions: Are there lower priced alternatives? Is this item needed? If I reduce usage, will output be reduced? Also, make use of local experts for advice on ways to improve costs management.
  
  
• Using the last three-quarters of cash flow and financial records, estimate total farm expenses, income, and capital purchases and sales. Then make an appointment with your tax advisor to plan year-end tax management strategies. Be sure to estimate crop insurance payments and any government payments that will appear on this year’s taxes. To take full advantage of year-end tax management strategies, cash-based farmers must make decisions before December 31, 2008. Be sure to review changes to state and federal tax laws with your tax advisor to make sure you have not missed deductions and/or credits.
  
  
• Farm business managers should never loose sight of the two objectives of tax management: 1) all decisions, including tax management, should be made to improve the long-term survivability and profitability of the business, and 2) tax management tools are used to level out the year-to-year swings in reported income and subsequent taxes paid. You can use the multitude of tools and techniques written into the tax code for farmers and all businesses to manage income and expenses and to even out the wide swings in annual profits and losses that many farmers experience. Leveling out the income tax liabilities year-to-year will lead to lower total taxes being paid.
  
  
• Be sure to keep crop records up-to-date during harvest: include yields, machine times and equipment used, weed problems, and differences in hybrids. If you’re moving up in the information age, consider the fully integrated record keeping systems using yield monitors, GPS, handheld computers, and management software on your office computer. One example of this whole farm system (includes accounting, personnel, and livestock records add-ons) is FarmWorks at www.farmworks.com.
  
  
• Be sure to keep livestock records up-to-date during fall sales. At a minimum, include weight, grade, sale prices, and identification numbers of all calves sold and/or purchased.
  
  
• The 2008 Farm Bill changed a number of items that relate to disaster eligibility and crop insurance. Make sure you visit with your local FSA office (www.fsa.usda.gov/FSA/stateOffices?area=stoffice&subject=landing&topic=landing) and your crop insurance agent. See the following web site to find an agent in your area www3.rma.usda.gov/apps/agents/. Check the following web site for closing dates for all insurance policies: www.rma.usda.gov/data/sales-closing-dates/.

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