President Signs Tax Cut Extensions into Law!

Congress has approved and President Obama has signed a multi-billion dollar tax cut package, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act).  The new law includes, among many other items, an extension of the Bush-era tax cuts for two years, estate tax relief, new incentives to invest in machinery and equipment, and a host of retroactive and extended tax breaks for individuals and businesses.  The following are paramount in the legislation:

• The current individual income tax rates will be retained for two years (2011 and 2012), with a top rate of 35% on ordinary income and 15% on qualified dividends and long-term capital gains.  

• Employees and self-employed workers will receive a reduction of two percentage points in Social Security payroll tax in 2011, bringing the rate down from 6.2% to 4.2% for employees, and from 12.4% to 10.4% for the self-employed. Employers do not receive a reduction in Social Security payroll tax and are still responsible for paying 6.2% on behalf of employees.

• Businesses can write off 100% of certain equipment and machinery purchases, effective for property placed in service after September 8, 2010 and through December 31, 2011. For certain property placed in service in 2012, the new law provides for an additional 50% first-year write off.  

• Specifically for farmers, a valuable provision was passed extending the enhanced write off of charitable contributions of conservation easements.  The two year extension limits contributions to 100% of adjusted gross income (AGI) and allows unused contributions to be carried forward 15 years. Without the extension, these contributions would have been limited to 50% of AGI and would only have been eligible to be carried forward 5 years.

• A new estate tax rate and exemption amount has been established for 2011 and 2012. The 2010 Tax Relief Act sets the exemption amount at $5 million per person ($10 million per couple) and creates a maximum 35% tax rate. The estates of those who died in 2010 can choose to follow either the existing 2010 or new 2011 rules.

• A two-year Alternative Minimum Tax (AMT) “patch” for 2010 and 2011 will keep the AMT exemption near current levels and allow personal credits to offset AMT. Without the patch, an estimated 21 million additional taxpayers would have owed AMT for 2010.

2011 Milk and Feed Price Outlook

A common question I’m hearing these days is “What is the milk price outlook for 2011?” Similarly, an important related question that needs to be asked is what will feed prices be for 2011?  In case you have the same questions, I came across the following articles on agweb.com that you may find helpful. 

Tight Butter Supply and Falling Price: Why?  (by Robin Schmahl)

2011 Dairy Outlook: Are Higher Prices Sustainable? (by Dairy Today editors)

High Feed Prices Likely To Limit 2011 Dairy Expansion   (by Dairy Today editors)

Michael Peachey

Tax Planning: Utilize Upgraded Section 179 Deduction

With the harvest rush over and the year end rapidly approaching, now is an excellent time to sit down with your tax advisor and analyze your 2010 tax picture. For 2010, farmers have many valuable tax planning opportunities including an expanded Section 179 accelerated depreciation deduction.

Rather than depreciating assets over several years, Section 179 allows farmers to immediately expense the cost of certain assets in the purchase year. Eligible agriculture assets include machinery and equipment, livestock, single-purpose Ag structures, water wells, drain tiles, and other select assets. Both new and used assets qualify. Notably, the maximum 2010 and 2011 deduction has been increased to $500,000 with phaseout only occurring for farms purchasing over $2 million in assets during the year.

Beware of pitfalls. There are two key requirements that must be followed to ensure that you can take the deduction in the current tax year. It is also important to recognize state limitations on the deduction.

• Purchased – According the IRS code, the asset is only eligible if it is “purchased.” “Purchased” is practically understood to mean that the farmer has paid for the asset or is legally liable for the purchase. Payment doesn’t need to occur in cash but could come in the form of a loan. With equipment, legal title must pass before December 31.

Is the Dairy Industry Heading into a Perfect Storm?

Is the dairy industry heading into a perfect storm – high feed costs and low milk prices? It may happen. Global and domestic events in crop production have driven grain prices up significantly in the last 90 days. This was totally unexpected as grain prices settled down this spring and early summer amidst confidence of adequate supply. Then, in August Russia announced they were suspending wheat exports due to extreme drought in their wheat belt. Wheat prices spiked and other grains followed suit. In September growing concerns about U.S. corn yields not hitting 165 bushels per acre drove up the corn price. USDA found 300 million additional carryover corn bushels in late September which pushed grain prices down. Finally, USDA’s October 8 estimate of corn yields at 156 bushels instead of the 162 bushels per acre the market had priced in drove the price up to the point that daily trading limits kicked in. Word is that speculators saw an opportunity, entered the market, and pushed the price even higher.

Historically, milk prices have moved with grain prices. That was the old normal, which I don’t know exists anymore. So if you think milk prices will move up with grain prices, think again. The reality is that the milk price will follow its own supply-demand curve, not necessarily a curve mirroring grain prices. Robin Schmahl echoes these thoughts in his most recent article in Dairy Today in which he shares some statistical analysis of the relationship between milk prices and grain prices over the last 10 years.

Milk production continues to grow, outpacing domestic demand. Milk production is returning to pre-CWT buyout levels. Fortunately, the export markets

New Tax Breaks Signed into Law

Temporary tax help has arrived. On September 27, President Obama signed the Small Business Jobs Act into law. This $42 billion measure is designed to assist small businesses and create jobs. It features numerous tax breaks for 2010 and 2011 that will benefit the agriculture industry.

• The Section 179 (equipment expensing election) deduction which was $250,000 for 2010 and was scheduled to be reduced to $25,000 in 2011 is increased to $500,000 for 2010 and 2011.

• The 50% bonus depreciation available for purchases of new (not used) equipment is extended for one year to property acquired in 2010. Most single purpose agricultural facilities will qualify for both Section 179 and bonus depreciation.

• Depreciation of new vehicles acquired in 2010 is increased by $8,000 to $11,060 for autos and $11,160 for light trucks or vans.

• For 2010 and 2011, self-employed taxpayers will be able to deduct the cost of their health insurance in computing the earnings subject to self-employment taxes. For farmers showing a profit at the end of the year, this change could potentially result in significant savings. For example, a family policy costing $10,000 would save the farmer around $1,500 in self-employment tax.

The legislation also includes the following new reporting requirements and penalties:

• Beginning in 2011, taxpayers who own rental property will be required to comply with the 1099 reporting requirements.

• Penalties for failure to comply with the 1099 reporting requirements are doubled. In addition, the minimum penalty for each failure due to "intentional disregard" is increased to $250.

Farm Input Costs Predicted to Rise

With corn futures currently trading at prices last seen in the fall of 2008, there are indications that the commodity market volatility will continue.  The uncertainty that results from market volatility is another reminder of the importance of knowing the impact of market changes on your input costs.  This uncertainty can be partly mitigated through budgeting, business planning and risk management.

While no one can make predictions with any degree of certainty, The Kiplinger Agricultural Letter (9/10/10) has made the following predictions on how farm input costs may be tracking.  Overall, Kiplinger is predicting modest input price increases across the board as herds and flocks expand in 2011.

• Fertilizer:  Due to tight supplies, anhydrous ammonia (nitrogen) prices are up 30%-35% to $570 since July 1.  Prices for most fertilizers should ease by next spring.  Diammonium phosphate (phosphorus) prices could increase significantly as the largest U.S. miner of phosphate rock faces court action. 
• Fuel:  There will likely be price swings as investors and speculators enter and leave the futures markets.  However, price spikes should be temporary as inventories are strong.  Crude oil will average $80 in 2011.
• Gas - 2011 gas will average $2.85 with a summer peak of $3.  Prices should hover about $.10 higher than 2010.
• Diesel - The average diesel price will increase $.15 to around $3.10 for 2011.  It will peak at $3.25 in the summer of 2011. 
• Natural Gas - Prices to increase 10% to $4.25 per million btu by January as growers dry their corn.  Average 2011 price will be $4.90.
• Propane - Prices will average about $2.35 a gallon in 2011.
• Freight:  Freight costs will rise slightly due to increasing fuel costs and larger harvests.  Truck and rail rates will be up 3% and 5%, respectively.  
• Labor:  The current average hourly rate is $10.80, but rates will increase beyond $11 next year.  With foreign works making up 50% - 70% of the ag labor force, the renewed focus on illegal immigration will drive up labor costs.
• Interest rates: With the federal base rates at historically low levels, small and midsize ag lenders and the USDA are holding interest rates.

A Regional Biodigester in Lancaster County?

A regional biodigester facility in Lancaster County could soon become a reality.  Herbert, Rowland & Grubic, Inc. (HRG) is currently conducting a feasibility study on a biodigester facility similar to the one under construction in Morrisons Cove in Blair County, PA.  HRG recently pitched the project and presented its initial findings to Ag leaders attending the Lancaster Chamber Ag Issues Forum.

The proposed facility would be fueled by manure from 7,000 cows.  Swine manure or food waste could also be potentially used.  The manure would need to be less than 7 days old and farms would need to be within a 10 mile radius of the facility due to hauling logistics.  HRG is proposing two potential sites: Greater Mount Joy Area (large herds, good highway network) and Paradise/Strasburg Area (50% of dairy cows in Lancaster County, stream pollution issues).

Farm Benefits
- Alternative Revenue Stream:  $250/dairy cow/year and +-20% of annual profit distributed to farmers.
- Herd Expansion:  Minimize nutrient management constraints when considering future expansion.
- Compliance:  Improve ability to satisfy current and future Chesapeake Bay nutrient restrictions.

Challenges & Potential Issues
- 50-70% of project revenue is dependent on sale of nutrient credits.  Will there continue to be a demand?
- Farms would be required to sign long-term contracts of up to 10 years.
- Need to purchase fertilizer to replace manure sold to digester.  What if fertilizer prices rise rapidly?

If the logistical challenges and long-term financial viability questions can be resolved, a regional biodigester could provide a valuable revenue stream and improve future expansion opportunities for area farmers.  It would also further solidify the region as a leader and innovator in the Ag community.

Chad Fox