WEST LAFAYETTE, Ind. -– When commodity prices are high and incomes are up, farmers often can borrow money to plant their spring crop with almost no questions asked by lenders. That is not the case this year, said a Purdue University agricultural economist.

As farmers approach lenders about renewing their operating line of credit they should be prepared to answer questions about their profitability, managing risk and working capital, said Michael Boehlje.

“If you look back at the last couple of years, grain farmers have had pretty good incomes — even though operating costs rose quite a bit — so lenders felt fairly comfortable with the profit margins many producers had, meaning it was not as tough getting an operating loan,” Boehlje said.

“This year a lot of lenders are increasingly concerned about risk because of the financial challenges they face from regulators and loan review committees. So most farmers should anticipate providing their lenders with concrete, definitive answers to loan-related questions. Part of your job as a farmer is to sell your credit worthiness.”

Questions about profitability could be among the first asked by lenders, Boehlje said.

“Farmers need to fully understand the profitability of their business,” he said. “If it hasn’t been profitable, they’ll need a plan for turning that around. You want to make sure before you talk to your lender that you have a solid understanding of what you’re reporting on your Schedule F tax form for profits.”

Schedule F is for self-employed farmers. Because producers often adjust their taxable income up or down through the strategic timing of crop sales, the information on the tax form can vary greatly from year to year.

“Your lender is going to ask you if you changed your strategy this year compared to last year in terms of sales,” Boehlje said. “They will want to know if you prepaid or delayed expenses.”

Managing risk questions likely will focus on crop insurance.

“Lenders may be encouraging you to up your coverage level,” Boehlje said. “Maybe you’re buying crop insurance at a 70 or 75 percent coverage level. They may say you might need to up that coverage because your input costs are up and your existing coverage won’t cover even input costs. The lender might want you to have more protection, which means it could cost you more money. There might be some sticker shock if the lender starts talking about 80 or 85 percent coverage.”

Farmers also would be wise to retain adequate working capital when seeking a new operating loan, Boehlje said.

“Probably the most important thing that a farmer can do to protect their working capital is to make sure that they don’t make any capital expenditures out of current cash,” he said. “The quickest way to destroy working capital is to say, ‘Well, I sold some grain and put some cash in the bank, but I do need to replace that tractor.’ Or, ‘I need to buy a new planter, and I’ll just use that cash to do that, and not pay down on my operating line.’

“Be really careful about destroying your working capital position. Lenders are going to be asking more and more questions about that this year.”

Boehlje said farmers should keep a few other things in mind when meeting with lenders:

Covenants – Lenders could place more restrictions or covenants on farm borrowers in 2010. A covenant is a set of conditions under which the borrower must comply and spells out the consequences for violating those conditions.

“A common covenant is a limit on capital expenditures without prior approval,” Boehlje said. “The purpose is to make sure that cash that could be used for debt servicing or buying operating inputs is not diverted to capital expenditures that do not directly contribute to the cash flow of the operation.”

Liquidating assets – While usually a smart strategy for paying down debt, selling less productive assets can result in an unintended taxable gain. “Farmers should visit with their tax accountant before liquidating any assets and using the proceeds for debt reduction,” Boehlje said.

Farm Service Agency (FSA) loan guarantees – “In some cases you and your lender may find that a FSA loan guarantee is needed to support the financing request,” Boehlje said. “If that is perceived to be a possibility, it is critical to move quickly to start the process and get the application submitted. Many commercial lenders are positioned to facilitate guaranteed loan applications and you don’t necessarily have to go to FSA to apply.”

Additional loan renewal tips are available in Boehlje’s white paper, “The Loan Renewal Season: Your Lender’s Concerns.” It is available online at http://www.agecon.purdue.edu/news/financial/LOAN_RENEWAL_SEASON.pdf

WEST LAFAYETTE, Ind. — Indiana farmers could see a substantial increase in property taxes over the next few years if the state’s farmland taxation formulas remain unchanged, said one Purdue University expert.

“Indiana assesses farmland based on its use value rather than its market value,” said Purdue agricultural economist Larry DeBoer. “Almost all states do this. It is a value based on how much income a farm acre can earn if it is used in agriculture. This means that farmland that borders on commercial or residential development is not assessed based on selling price, but rather only on the income it can earn from farming.”

The government calculates farm property taxes with a formula that takes into account three separate factors.

“The formula starts with the base rate, which is a dollar amount per acre that is set by the state’s oversight agency on property taxes,” DeBoer said. “The base rate is multiplied by a productivity factor, which is based on soil productivity for growing corn. Those factors range from about 0.5 to 1.3. For some acreage an influence factor is subtracted. That factor is a percentage reduction in the dollar amount based on things like frequent flooding, grade or forest cover. So, base rate, times productivity factor, minus influence factor, gives you the dollar amount per acre that’s actually taxed.”

Where the problem comes into the formula is that commodity prices are accounted for when the base rate is determined.

“Since 2006 Indiana has been trending its assessed values, meaning changing every year based on changes in a whole host of factors like land rents, commodity prices, costs and interest rates,” DeBoer said.

Land rents have been going up some, but commodity prices were high in 2007-2008. Since the base rate formula is a six-year rolling average with a four-year lag, taxes payable in 2011 will include the 2007 commodity prices, and 2012 taxes will include both 2007 and 2008 commodity prices.

The problem with this, DeBoer said, is that over a five-year period the farmland base rate per acre will have nearly doubled from $880 for taxes in 2007 to more than $1,600 in 2012. But there are potential solutions the Legislature can consider to offer some relief.

“They could reduce it from a six-year lag to four and that would make the two big years drop out two years sooner,” he said. “They could also move it up from a four-year lag to a two-year lag. So, if they did both those things, they’d get those two big numbers out in about two years instead of about six.”

In addition, DeBoer said some farm interest groups have suggested an Olympic-style average system in which the high and the low numbers are dropped and the rest are averaged.

Indiana recently passed a 2 percent farmland property tax cap that will be implemented in 2010. However, DeBoer said the cap won’t be of much assistance to farmers because of their rural locations.

“The tax cap for farmland is 2 percent,” he said. “What that means is that you take the initial assessed value per acre, apart from any deductions, multiply that by 2 percent and that is the maximum amount a farmer would have to pay in property taxes on that acre.

“That’s terrific if you happen to be in a place where your tax rate is higher than $2 per $100 assessed value, or higher than 2 percent. However, most of the time, out in rural areas where farmland is found, tax rates are lower than the $2 limit.”

Limiting farmland assessments is likely to shift taxes to other taxpayers, DeBoer said. That means that legislators representing primarily non-farming areas will want to have a say in the farmland assessment formula.

“The way homeowners and industry, urban and suburban counties respond to these measures is going to be important politically,” he said. “If you reduce the assessed value of farmland in order to reduce taxes for farmers, and you raise the same amount of revenue from the property tax, that means somebody else has to pay more.”

WEST LAFAYETTE, Ind. — Indiana farmland values dropped slightly but held their own in a tumbling economy, according to the 2009 Indiana Farmland Values and Cash Rents Survey completed by Purdue University.

Statewide, top-quality land averaging 182 bushels per acre for corn was valued at $28.40 per bushel; average-quality land averaging 150 bushels per acre for corn was valued at $27.92 per bushel; and poor-quality land averaging 118 bushels per acre for corn was valued at $27.44 per bushel.

The survey, conducted each June by the agricultural economics department, reports that the value of top-quality farmland in Indiana declined 0.2 percent from 2008 numbers, while average- and poor-quality farmland declined by 1.2 percent and 1.7 percent, respectively.

Indiana farm managers, appraisers, land brokers, agricultural loan officers, Purdue Extension educators, farmers and representatives from the Farm Service Agency county offices, Farm Credit System and insurance companies were asked to complete the survey, which had 328 respondents. Results from the survey and a full report are available online at http://www.agecon.purdue.edu/extension/pubs/paer/2009/august/dobbins.asp

Craig Dobbins, Purdue Extension farmland economics specialist, said he was surprised that farmland values were not down more than they were.

“I expected the drop in grain prices and higher input costs would lead to a fairly significant drop in farmland values,” said Dobbins, who conducted the survey. “But farmland real estate is often seen as a strategy to hedge against inflation, so we may have some of that coming into play here.”

Statewide, top-quality land averaging 182 bushels per acre for corn was valued at $28.40 per bushel; average-quality land averaging 150 bushels per acre for corn was valued at $27.92 per bushel; and poor-quality land averaging 118 bushels per acre for corn was valued at $27.44 per bushel.

The average value of bare Indiana cropland ranged from $3,351 per acre for poor-quality land to $4,994 per acre for top-quality land.

“The top-quality land tended to hold its value better than poor-quality land,” Dobbins said. “This means people in the market are more picky or selective about the land they purchase.”

For cash rents, Dobbins said “variation” is the buzzword.

“On a statewide basis, we found cash rents moving in just about every direction,” he said. “For top-quality land, cash rents were up about 2 percent. For average-quality land, cash rents were just about constant with 2008 numbers, and for poor-quality land, cash rents were down 1 to 2 percent.”

The average estimated cash rent was $198 for top-quality land, $158 for average-quality land and $121 for poor-quality land. The report showed that statewide, rent per bushel of estimated corn yield was $1.03 to $1.09.

There were significant variations in cash rents by region of the state, Dobbins said.

Some areas did see an increase, such as the west central and southwest regions of Indiana, where cash rents increased from 2.1 to 6.7 percent. The central and southeast regions reported constant or declining cash rents, while the north and northeast reported increases for top-quality land and declines for average- and low-quality land.

The west central region had the strongest cash rents across all land qualities, ranging from $145 per acre to $220 per acre. Cash rents were weakest in the southeast, ranging from $86 per acre to $146 per acre.

In looking to the future and trying to decipher what these numbers will mean for the 2010 crop year, Dobbins believes margins will continue to get tighter.

“We’ve seen some input costs drop. Fertilizer prices seem to be declining and fuel declined but is coming back up,” he said. “At this time, it looks like the net return for crop production is going to be smaller in 2010 than in 2009, and certainly 2007 and 2008. Some cash rents will need to be adjusted downward.”

Dobbins recommends that if there were large upward adjustments in cash rents in previous years, tenants may need to convince landowners to make a downward adjustment.

“It does not appear that the large margins needed to support high cash rents will be there for 2010,” he said.

Now is the time, Dobbins said, for tenants to get out their calculators and budget through what the potential returns are for each rental farm.

“Given the variability to both parts of the profit equation, it’s dangerous to lock in input prices but not revenue, or to lock in revenue but not input costs,” he said. “Growers will have to work to protect both parts of the equation.”

The Purdue report also tracks the value of transitional and recreational land.

“There was a significant decline for both transitional land and recreational land,” Dobbins said.

The value of transitional land – or land moving out of agriculture – was down 7 percent, and the value of recreational land had decreased by 13 percent, according to the survey.

“I think this is a general reflection of the economy,” Dobbins said.

For questions and additional information about the survey, contact Dobbins at 765-494-9041, cdobbins@purdue.edu

WEST LAFAYETTE, Ind. — A Jan. 30-31 workshop at Purdue University will include information on how to bring the new generation into the farm as smoothly as possible.

The 29th annual Farming Together will provide information and work time to develop answers for many issues involved with bringing a new manager into the operation. It also will provide an opportunity for participants and potential new partners to begin making decisions together about their farm operation’s future.

“As the farming industry is going through a new era with prices and input costs higher than ever seen before, it is a situation that needs to be thought through when bringing in the next generation,” said Alan Miller, Purdue Extension farm business management specialist. “This workshop offers the opportunity for partners to come in and examine their operation and how they are going to move into the future.”

During the two-day conference, participants will work with Purdue Extension specialists on topics that are important to making transitions on the farm.

“This workshop is a great way for participants to sit down and work through some of the difficult questions or situations they think they may face,” Miller said. “Specialists will be available and bring an outside perspective to help address the problem.”

Topics include, but are not limited to:

• Effective communication in the family business, Janet Ayers, Purdue Extension leadership specialist.
• Developing a shared vision for the future of your farm, Maria Marshall, Purdue Extension small business development specialist.
• Developing a management succession plan, Miller.
• Farming together — assessing your resources, Craig Dobbins, Purdue Extension farm business management specialist.
• Farming together — working with family and staying friends, Robert Taylor, Purdue Extension farm business management specialist.
• Legal question-and-answer session, Gerald Harrison, legal affairs specialist and attorney.

Registration is $120 per farm before Jan. 15. After Jan. 15, registration is $150.

Registered participants will receive a packet, which will include an assessment to be completed and returned prior to attending the workshop. More information about the workshop is available at http://www.agecon.purdue.edu/extension/
programs/farm_together.asp

For more information or to request a registration form in a different format, contact Marsha Slopsema at (765) 494-4310, mslopsem@purdue.edu or Miller at (765) 494-4203, millerwa@purdue.edu