Month: October 2018

Three Keys to Financial Success –

By Kit Pharo

Status quo cow-calf producers are getting by – but most would not consider themselves to be financially successful.   Truth be known, in a ten-year period, status quo producers are doing very good just to break even.   Well over half of them won’t break even.   In a nutshell, there are three keys to attaining real financial success in the cow-calf business.

  1. Reduce and eliminate expenses
  2. Increase pounds per acre
  3. Sell calves for a premium

Reducing and eliminating expenses is easier than most cow-calf producers think – but it will require a slight paradigm shift.   Most expenses are fossil fuel-based.   Real success in this business will take place when we transition from fossil fuel energy to free solar energy.   Winter feeding is usually the biggest expense.   With the right kind of cows and with proper grazing management, most winter feeding can be eliminated.   Working with nature will also reduce and eliminate expenses.

Increasing pounds per acre will never take place until you STOP focusing on increasing pounds per animal.   Status quo producers have been focused on the wrong thing for the past 50 years.   Stocking rate affects profitability, or lack thereof, more than anything else.   With the right size and type of cow, most cow-calf producers can increase stocking rate by at least 30 percent.   With proper grazing management, it is possible to increase stocking rate by another 50 to 200 percent.

Status quo cow-calf producers will never sell their calves for a premium.   They will always take what the market is willing to pay them on that particular day.   PCC customers, on the other hand, will soon be able to sell their calves for a $15/cwt premium.   That amounts to a premium of $75 per head on 500-pound calves – and a premium of $120 per head on 800-pound yearlings.   Nowhere else can you receive premiums like this.

Is it time to step away?

By DTN Oct 16, 2018

As harvest presses on, and the year comes to a close, many farmers turn their thoughts to the future and whether it’s time to retire. While federal estate tax laws have changed, there are still many reasons to assemble a succession plan.

With every harvest comes the age-old question: Do I farm another year, or is it time to get out?

It’s a question many of my clients wrestle with, especially in poor economic times. The topic tends to come up in the late fall and winter, so now is a good time to review the new federal estate tax laws and share a few thoughts on farm succession planning.

Starting in 2018, the federal exemptions for gift, estate and generation-skipping taxes approximately doubled what they were prior to tax reform.

In 2018, the exemption amounts are $11.18 million, indexed for inflation. As before, the surviving spouse can elect to use the deceased spouse’s unearned exemption amount (“portability”). Although it isn’t new, the thing to keep in mind is that assets are still stepped up to fair market value at date of death. This includes equipment, buildings, prepaids, unharvested crops, and harvested crops not yet sold.

 

Even though exemption amounts are large, succession planning is still important. It has both economic and non-economic benefits. It forces the older generation to take ownership of the process of determining if the farm will be passed down or sold.

A little planning can also create huge financial and tax opportunities for the retiring farmer that could be lost in an unplanned transition. It also allows the retiring farmer the opportunity to deal with the age-old issue—fair but not equal.

 

The financial benefits of succession planning are clear. While most farm operations do not have a value in excess of $24 million, there are some. With proper planning and creativity, most estate taxes can be avoided.

 

State laws pose a challenge here. Depending on what state you live in, farmers may be surprised that their state has an inheritance or estate tax. Currently, 18 states have these taxes. There are also two states that have a gift tax on pre-death transfers.

While the federal exemption is $11.18 million, a few states have estate taxes that affect farmers with assets as low as $1 million. Considering farm land value and the cost of equipment, that is a relatively low amount, but those state estate and inheritance taxes can often be reduced or eliminated with proper planning.

Another economic issue estate planning addresses is cash flow. One of the most important exercises I have my client do is to calculate family living expenses without the farm. Why is this important? Many times, the line between farm expense and non-farm expense is blurry.

 

For example, if you no longer farm, you will still have to pay for electricity for the barn without being able to deduct it. So, understanding how much you really spend is critical to figure out how much you need when you exit. I have my clients work backwards, determining their income needs in retirement and then figuring out how to get there. Sometimes that means they can’t retire yet.

 

Besides economic issues, estate planning addresses important family issues. I tell my clients, “The best last gift you can give your kids is for them to hate you.”

What does this mean? While alive, parents have the ability to address the difficult issues rather than passing them down to their kids to resolve. As important as the family farm is to you, it is meaningless if there is no “family” left after you are gone. — Rod Mauszycki, DTN tax columnist

 

The founder’s paradox

Family Business Matters
Guest opinion: The founder’s paradox
By Lance Woodbury, DTN Farm Business Adviser Oct 24, 2018 Updated Oct 25, 2018

Many family-farm and ranch owners define one aspect of success as the transition of the land and operating business to the next generation. “The opportunity for my kids and grandkids to come back to the farm” is a frequent refrain when I ask about the hopes and goals of the senior generation.

Another goal often mentioned immediately thereafter is for the next generation to “get along” and “work together.” I often ask which goal is most important: “If you had to pick, would you rather see the business intact but experience family discord, or see the land and business sold in hopes that family members have better relationships?” In my experience, most say they want the relationships but often end up with a business or family full of conflict.

Family loyalty can lead to business turmoil
Photo by Pixabay.
Neither option offers a guaranteed outcome. Passing the business to children does not guarantee they will be successful operators just as selling the land and giving them cash does not guarantee they will enjoy spending time together. But, neither are the two goals mutually exclusive; some families achieve both. In many cases, it is difficult to achieve the twin goals of business succession and great sibling or parent-child relationships. Why?

Natural differences

As much as family members share DNA, a similar upbringing or common family values, individuals in a family can be remarkably different. Personalities, conflict styles, political views, cognitive skills, goals, financial skills, communication preferences, egos—all of the differences cause some to wonder if they really grew up in the same household. When you place those differences in close proximity such as working together in the family business, there is bound to be friction. Even when family members don’t work together, the differences can distract from efforts to build relationships.

Different expectations

Transitioning a business or passing land down involves the movement of wealth, often in the form of gifts, to the next generation. Those receiving the gifts, however, are in different life circumstances. Some may be working in the business or farming the land, while some may instead have a spouse working in the business. Others may have nothing at all to do with the business. Parents often struggle with whether a gift of wealth in the form of land or business ownership should be predicated on whether family members or spouses are involved in the business. And indecision, hesitancy, or unwillingness to talk about that issue can create misunderstandings. Parents often add to the confusion by publicly wrestling with what is “fair” or how to treat everyone equally.

Poor communication

Most family businesses I know feel communication as a family and business could be better. Particularly when there is conflict, many family members either blow up at one other or avoid confrontation at all costs. Many also tend to take those closest to them—siblings and parents—for granted, assuming “they should know” how they feel and think, or how they will decide important issues. The result is that they either don’t say what they are thinking, or they say it in a rude and disrespectful manner.

Regardless of why it happens, the unfortunate result of poor communication, different expectations, and natural differences is that assumptions flourish about wealth, inheritance, and behavioral norms. The collision of these assumptions about how the future should unfold or how people should behave are obstacles to getting along.

But, it doesn’t have to be this way. Regardless of whether family members are in business together, don’t operate a business but own land together or simply rent land to a family member, accepting others’ differences, clarifying everyone’s expectations and keeping the lines of communication open are the key ingredients to achieving the senior generation’s goals. — Lance Woodbury, DTN Farm Business Adviser

Market cows and bulls rather than cull

Market, Don’t Cull
  • Updated 

Fall is the time for breeding cattle inventory reconciliation.

Factors such as the availability of feed, labor and desire will be part of the review. The outcomes of this review really set the future for the cow-calf enterprise and the degree of managerial pressure through cattle numbers a producer places on the land resources available.

This is a big deal. Individual animals will be scrutinized critically and selected for next year’s production herd. The decisions will set the future marketable production of the breeding herd but also will help capture maximum value for market cows and bulls. This an important facet of cow-calf operations, especially as inventories are adjusted to bring in younger cows.

BeefTalk: Market cows and bulls rather than cull

The marketing of cows and bulls no longer needed in the herd (often called culling) is similar to the annual sale of calves and yearlings. Once completed, the producer and herd settle in for another production year.

If one reviews cattle history, the term “cull” should be dropped from cattle vocabulary. But first, let’s take a closer look at market cows and bulls. I reviewed the executive summary of a publication titled the “National Beef 2016 Market Cow and Bull Quality Audit” that was published by the Cattlemen’s Beef Board and National Cattlemen’s Beef Association.

The previous (2007) audit encouraged producers who “recognize and optimize cattle value, monitor health, market cattle in a timely and appropriate manner, prevent quality defects and are proactive to ensure beef safety and integrity.” Within the industry, steps were taken to address the 2007 goals.

A review of the 2016 executive summary notes a successful outcome of the targeted goals for commercial beef producers when marketing cows and bulls. The implementation of the 2007 goals deserves a pat on the back because market cows and bulls are a significant part of a commercial cattle producer’s marketable pounds.

How much? Let’s look at the CHAPS (Cow Herd Appraisal Performance Software) benchmarks from those producers involved with the North Dakota Beef Cattle Improvement Association (NDBCIA). The CHAPS benchmark shows that for every 100 cows exposed to the bull, the producer would have 91 calves in the fall.

If the male-to-female ratio was 45 steers and 46 heifers, this producer would have approximately 25,785 pounds of steers (573 pounds per steer) to market and 24,932 pounds of heifers (542 pounds per heifer) available as potential replacements and/or to market at 193 days of age. The 15 replacement heifers (14.9 percent) would account for 8,130 pounds, leaving 16,802 pounds of market heifers.

Approximately 13.2 percent of the cow herd inventory also will be reduced, accounting for 18,057 pounds (1,389 average cow weight for 13 marketed cows). If a bull also is replaced, more than 2,000 pounds of market bull would be available for this assumed NDBCIA herd of 100 cows.

If a producer marketed calves at weaning, approximately 42,587 pounds of calf would be available to sell and 20,057 pounds of market cows and bull would be on the auction block. This is no small piece of change because 32 percent of the production weight is market cows and a bull.

So think positively. Market, not cull, animals.

Back to history: The word “cull” was probably an unfortunate term associated with fall herd reduction. A scan through some computer dictionaries or Webster’s Dictionary shows the definition of the word “cull” as rather offensive. Webster says that if we use the word “cull” as a noun, we are referring to “something rejected, especially as being inferior or worthless.” The word also can be used as an action verb meaning to “select from a group or to identify and remove the culls.”

When producers say they are culling, the statement is still true; however, the days of removing inferior and worthless animals should be historic, not current concepts of the process. More correctly, cattle removed today are market cattle, and the livestock markets actively sort and present excellent market cows and bulls. The culls, that is, those cattle that are so inferior as to be worthless, never should be marketed.

A managerial talking point certainly is created when nonmarketable cattle arrive in the sale pen. In terms of marketing alternatives, producers need to strive for zero tolerance by marketing all cattle in a timely manner. Holding some cattle through the grazing season when they should have been marketed the previous year is poor management with serious consequences.

When cattle arrive home from summer pasture, sort, resort and market bulls and cows without delay. The concept may seem simple, but understanding the roots of the process means changing a very deeply embedded concept that has been long established in the cattle industry. No herd should have any cull cows or bulls. Now go read the 2016 executive summary.

May you find all your ear tags. — Kris Ringwall

(Kris Ringwall is a North Dakota State University Extension beef specialist, director of the NDSU Dickinson Research Center and executive director of the North Dakota Beef Cattle Improvement Association. He can be contacted at 701-483-2045.)