Tough To FarmWritten by Dennis Sun
Published: 09 July 2016
Reading through some recent articles on farming in the corn belt, I soon realized that while those of us in the Northern Plains Region think we have it tough with dropping cattle prices, it is nothing to what the farmers are experiencing back in the Midwest – or any place there is farming for that matter.
We’ll focus on Iowa, as it seems to be the hardest hit. When corn was at its peak, land for sale and rent was out of sight, literally. Good farmers were really looking for farmland, so much so that investors headed to the Corn Belt and bought farmlands as an investment to rent out. Good farmland rented for up to $270 an acre per year in 2013, a 53 percent spike over the previous five years and more than double the cost over 10 years ago, according to an Iowa State annual survey. In the last two years, farmland rents have declined nearly nine percent. But that isn’t enough to save the farmers.
With farm real estate debt across the nation at its highest levels since the farm crisis years of the early 1980, farmers are increasingly nervous about trying to turn a profit while paying sky-high rents. As a result, more and more farmers are dropping leases that they have rented for years, even though they may be next to their farm or in close proximity.
Farmers are telling land managers and landowners that bankers are tightening credit, with growing losses and dwindling reserves built up during farming’s boom driving lending decisions. Some farmers went in to renew their line of credit and found out that the bank wouldn’t extend credit to them, and other farmers are coming back saying the cash flows just don’t work.
They say U.S. farm income in 2016 is projected to fall for the third year in a row, with farmers squeezed between tumbling corn and soybean prices and stubbornly high costs for land, seed, fertilizer and other inputs needed to grow a crop. Grain prices have sunk 50 percent or more since 2012, when drought drove prices to record highs. Last year was a tough year, and this year looks to be another tough one. They say if you have the ability to withstand losing money, the banks will work with you. Man, those are tough words to have to do business by.
The drop in prices is also causing some farmers who have fully depreciated farm machinery to lease machinery. In this situation, the farmer trades in their machinery and then leases new machinery. Depending on the type of lease, this practice can result in unintended tax consequences to the farmer. The farmers traded owned farm machinery for what turned out to be “operating leases” – essentially tax language for lease rentals with no bargain purchase price at the end of their lease term. These farmers thought they were trading machinery as a down payment on a lease. In reality, it wasn’t a trade, it was a sale, and they owed the IRS for all of their depreciation recapture in the year of the trade.
So, if you do something like this, be very careful of what type of lease you have. I realize this column is not very positive this week, but I hope it keeps you from doing what others have done and ended up paying a heck of a lot of taxes.