Farmers weigh key income factors
Where's your farm income headed?There are a lot more questions about farmland values right now than there were a year ago. And, there's a lot of anxiety -- both on and off the farm -- about expanding tax burdens if the U.S. economy falls off the "fiscal cliff."
They're 2 big factors that farm income projections aren't as rosy as they were a year ago. So, will the pressure remain clamped on incomes next year?
"I just got back from a meeting with my CPA and it seems a lot of famers are surprised at their tax bill this year," says Agriculture.com Farm Business Talk advisor Jim Meade / Iowa City. "He thinks there will be a lot of farmers who get active about tax planning because taxes are going to be rather higher than usual if they don't do the planning."
Apprehension about a possible tax jump has other farmers planning on a different year-end strategy. Some say that shift is manifesting itself most in the farmland market.
"Given that tax increases appear inevitable, many will pull income into 2012 instead of the usual pushing income into the next year. Anecdotal, but it seems like more than the usual amount of land being sold in this area," says Farm Business Talk veteran contributor clayton58. "Is it because people fear a 'balloon' about to burst? Or to avoid capital gains tax increase? Some of both?"
Adds Farm Business Talk frequent contributor Wind: "I too have noticed the more than normal amount of land for sale in eastern Colorado and western Kansas. Just today I received 4 emails listing 4 new land listings and 2 new auctions coming up. A lot of folks in that area feel the time is now to sell. Some are selling the mineral rights and some are not."
Taxes aside, experts say there are signs that 2013 could yield healthy incomes if grain prices and crop insurance indemnity payment levels remain at high enough levels. A recent study in Illinois shows that average prices of $5.80/bushel for corn and $12.40/bushel for soybeans -- which University of Illinois Extension ag economist Gary Schnitkey says will likely be the case -- will yield, for example, a net farm income of $291,000 on a 1,200-acre farm.
"These prices likely would result in above average 2013 net farm income. These projected 2013 income also would be considerably above income projected using long-run prices," Schnitkey says. "Overall, 2013 currently is projected as a good income year for crop farms. Worst case incomes will be influenced by projected prices and coverage level choices."
On the other end of the spectrum, average farm income could potentially bottom out just shy of $45,000 for the same 1,200-acre farm, Schnitkey adds.
"A number of price-yield combinations can results in this $43,000 income. Holding yields constant at 187 bushels per acre for corn and 54 bushels for soybean, the $43,000 worst case income would result with a $4.40 corn price and $9.10 soybean price. Again, projected price used for crop insurance have a large impact on worst case incomes," he says, adding the worst-case incomes for lower projected prices are:
- $5,000 for projected prices of $5.70 for corn and $12.10 for soybeans, and
- $64,000 for projected prices of $5.20 for corn and $11.40 for soybeans.
Finally, taking into account indemnity payment levels that could result from any number of these price/yield combinations and Schnitkey says the following incomes are possible under different crop insurance rates:
- $92,000 for an 85% coverage level (both corn and soybeans),
- $43,000 for an 80% coverage level,
- $5,000 for a 75% coverage level,
- $53,000 for a 70% coverage level, and
- $101,000 for a 65% coverage level.
"Likely projected prices will provide significant downside risk protection given that relatively high crop insurance coverage levels are selected," Schnitkey says.