Ask The Ferguson Group
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Below are questions regarding the agriculture industry and related finance along with expert answers from the FG Publishing editorial staff.
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|we purchased a suredrop distributor at an auction looks like a seed planter or fertlizer spreder trying to find out when it was made
wooden box /2 handles and metal wheel lever to open bottom|
|Thank you very much for your inquiry. Unfortunately, the Ferguson Group is not a source of information concerning antique farm and ranch equipment. We specialize in providing financial and business counsel to commercial agricultural operations and lenders in addition to publishing our two newsletters.|
Roy Ferguson II
|Has the Ferguson Group produced a report on the advantages of Solar technology|
|My father, Frank Frazier, wrote articles in the past for the Ferguson Ag Report. We are sad to pass along the sad news that he passed away on October 20, 2011, at the age of 91. Would you be interested in any biographical materials for your publication?|
Please let me know asap whether my reply not received.
|What are the names and telephone numbers of agricultural venture capital companies?|
|Unfortunately, venture capital companies that provide financing in the sense which you are probably interested very likely do not exist. Yes, there are several firms in NYC and elsewhere that indicate they are interested in venture capital financing involving agricultural projects. Conversely, past personal experience searching for such firms on behalf of clients have been completely unsuccessful. Each of the firms which were contacted were interested exclusively in discussing potential arrangements with huge corporations involving multi-million dollar projects exclusively. Even then, the individuals who were contacted were clearly not familiar with U.S. agricultural topics. All of the preceding is very unfortunate since U.S. production agriculture continues to be a deficit capital sector other than for conventional financing from banks, the Farm Credit System, and some suppliers. |
|Can a husband and wife who operate the family farm together be considered "sole proprietors". Sole means one, but can a married couple be considered sole proprietors? Title to the real estate is held by the couple as husband and wife.|
Inquiry was made to...and confirmation received from...a consulting CPA regarding the answer to your question. A husband and wife who operate a family farm can operate it as a "proprietorship" and file their tax return via a Schedule F within a conventional 1040 tax return. Conversely, the term "sole" refers to just one person. The fact that your real estate is held via some form of joint tenancy reinforces the fact that two people are involved in the farming operation's ownership.
I am writing from the library at Brigham Young University. For many years, our library had a subscription with Ag Executive to receive its Business Manager Ag Executive publications. Now, we are no longer receiving this publication. It appears that in September 2006, we began to receive "The Ferguson Ag Report".
We are wondering how we came to receive this publication. Did our subscription payment sent to Ag Executive get switched to Ferguson to begin the supply of "The Ferguson Ag Report"? If so, when does our subscription expire? How will future renewals be handled?
Does "The Ferguson Ag Report" replace the Ag Executive Business Manager?
We would be very grateful for any information you could supply us regarding these questions. Thank you very much for your efforts in our behalf.
Your subscription to The Ferguson AgReport expires with the December, 2007, issue. You are correct that your subscriptio to Ag Executive was transferred automatically to The Ferguson AgReport immediately following the acquisition of Ag Executive by FG Publishing Ltd.
The Ag Executive Business Manager was not included in the purchase, thus you will need to contact Mr. Dunteman regarding any questions concerning it.
We apologize if this is the first response that you have received to your inquiry. An effort was made to contact you via conventional email immediately upon receiving your inquiry, but it was not possible to determine if you received it. Hopefully, you will remain as a subscriber in the future! Your business is genuinely appreciated.!!
Mr. Bill Reeves of central Arkansas asked, "What deficiencies do you see with the current accounting model? What is it missing? What does it do a poor job of doing?
First, all of the basic accounting methods currently being used have certain strengths and weaknesses. Used correctly, however, each provides invaluable information concerning the financial status of the entity being reviewed. Assuming proper utilization, Cash basis accounting, reveals an entity's [person/business/organization] exact financial condition regarding Cash actually received and expended for the precise period being reported. Its primary weakness relative to Operating Statements [Income Statements/P&L Statements] is that no recognition of Accounts Payable, Accounts Receivable, or Depreciation occurs because they have not become Cash transactions. The net result is that bottom-line Profitability can be grossly overstated or understated simply by delaying or accelerating the accounting period recognition of various items of Income or Expense...which is a common practice in agriculture to minimize or avoid entirely paying income taxes.
Accrual accounting is commonly regarded as being a superior method for most businesses since it recognizes [accrues] both Income and Expense items when they actually occur during an accounting period rather than when Cash is received or paid. Its key strength is that the reporting entity's actual Operating Profitability for the period being reported is portrayed more accurately. Its weakness from a practical view is that all Accounts Receivable are recognized as having been received completely and all Accounts Payable are recognized as having been paid completely when Profitability is calculated for the accounting period being reported...which obviously may not be correct.
Managerial accounting is much less well known generally, but is gaining popularity in large business and corporate environments, since it displays financial information in a more condensed format which is considered among many accounting experts to be more useful for senior management involving key decision-making. Generally, however, its mechanics are more complicated and require thorough understanding of accounting procedures for correct application.
Fund accounting is commonly utilized by foundations, trusts, government agencies, various public entities, educational institutions, etc. It has no practical application to agriculture or other businesses.
|Mr. Bill Reeves of central Arkansas enquired: What about real estate that may have a depreciated book value but a gigantic fair market value? Does this distort the balance sheet. For example, buildings you purchased in 3 different time periods such as 1960, 1980, and 2000.|
Rather than distorting Balance Sheets, pure reality appears. The real issue concerns the type of Balance Sheet that is being utilized. Balance Sheets @ Cost...commonly know as Balance Sheets @ Book Value...state the actual Net Cost of Assets which were purchased. Depreciation is subtracted subsequently as time passes. The inevitable result is that Depreciable Assets which are retained for a considerable length of time can eventually have "0" Book Value. But, that is reality...not a distortion since the remaining Cash actually invested is revealed. Moreover, the speed by which valuations decline generally reflects discretionary decisions by management/ownership.
Balance Sheets @ Fair Market Value are created to reflect "what a willing buyer would pay a willing seller," assuming neither party is confronted with unusual pressure. Production agriculture and certain areas of real estate have traditionally been the primary business/industrial sectors which have utilized Fair Market Values extensively. Recently, however, regulatory moves are being implemented to require banks and certain other types of businesses to calculate Fair Market Values by "marking to market." Since many types of Assets such as land and buildings do not lose their inherrent value as rapidly as management/ownership "Depreciates" them on Book Value Statements [ag land has typically increased], both Asset Values and Net Worth are often quite greater at Fair Market Value. But, neither Book Value nor Fair Market Value represents "distortion" if prepared correctly.
A key item that should be noted concerns the fact that Generally Accepted Accounting Principles [GAAP] now require that the potential Capital Gain tax liability reflecting the difference between Depreciated Asset Values and those at Fair Market Value be shown on the front side of Balance Sheets @ FMV. Neither most CPAs nor lenders are currently insisting that the liability be shown as a subtraction from Net Worth @ Fair Market Value, but producers should be prepared that the procedure will likely become mandatory in the not too distant future.
|"I hate to admit it, but my budgeting and financial forecasting are poor-to-nonexistent. What are the first steps and what is the process to accurate budgeting and financial forecasting?"...Steve Henry, central Iowa.|
The first element is to adopt "zero-based" budgeting in your total process involving Operating Statements [Income/Expense], Cash Flow Statements, and Balance Sheets @ Book Value & Fair Market Value. Achieving 95-97% forecasting and control accuracy consistently will require a high level of attention to detail and reference notes involving each line item. Avoid developing numbers ending in 3 & 4 zeros, such as $13,000 or $130,000 since they are obvious tip-offs of pure guesswork rather than careful development.
Avoid line item consolidation. A standard rule is "when in doubt, separate." List Income separately for such categories as corn, wheat, soybeans, cotton, hay, etc. as well as for livestock, poultry, etc. Also separate livestock/poultry/etc. Sales categories for males, females, breeding stock, salvage breeding stock, downgrades, etc. Do not use net amounts for livestock/poultry/etc. Sales totals as is standard procedure with IRS 1040 tax returns. Enter the gross amounts for Sales as well as the accompanying acquisition Costs in the Expense sections of both Operating Statements and Cash Flow Statements.
Avoid consolidating key Expense line items...especially those having opposing purposes such as fertilizers and chemicals since chemicals make things grow while chemicals are commonly used to kill things. Never consolidate management and labor categories. Numerous other issues are also critically important to assure achieving high levels of Budget Accuracy. You may need guidance to achieve 95-97% accuracy levels, but many farmers and ranchers throughout the U.S. and Canada do it consistently.
|"I don't own any land, so my assets are equipment. Can a Balance Sheet at Fair Market Value be achieved by getting an auction based appraisal value every year? Also, isn't this the most accurate value to use for determining true depreciation? Thanks"...John McGraw, southeastern Arkansas.|
Obtaining an appraisal from a certified agricultural appraiser every year would be the most accurate method for identifying Fair Market Value. The appraiser would very likely include recent sales of comparable land in the area as part of his/her own evaluation process. But auction-based prices are usually established under duress rather than "what a willing buyer would pay a willing seller when neither is being pressured," which is the commonly used practical definition for Fair Market Value.
Also, depreciation is based upon specific, income tax related, accounting charges which may, or may not, be related to some degree to Fair Market Value...and typically are not. Also, land is very rarely depreciated like buildings, machinery, equipment, and vehicles.
|"Although it's a non-agricultural business loss, can I deduct the two bets I made on this year's and last year's Oklahoma University bowl games? I suffered a pretty fair financial loss. Anxious for your reply or any good ideas!"...Steve Ruggiero, eastcentral Massachussetts.|
|Considerable doubt exists whether you can manage to persuade IRS to accept your gambling losses as being tax deductible. Perhaps the best idea is to refrain from betting on major sports events involving 19-21 year-old kids! While no money was lost personally from betting, the psychological salvation from a personal perspective regarding both bowl games was the fact that Oklahoma's coaches and media acknowledged that OU's punter performed with special distinction in each one. |
|“What are the key elements which separate “productive” Debt from “unproductive” Debt? Also, can they be corrected reasonably quickly in order to prevent financial disaster from occurring?" Margaret Brooks, northeastern Oklahoma. |
|A glaring weakness regarding a huge portion of the Total Debt accumulated during recent years by U.S. farmers and ranchers is simply that it has been largely “unproductive” by accomplishing only minimal positive results...and in many cases severely negative. A strong or weak Debt Structure is confirmed by Current Liabilities % Of After-tax Profit Index. Exceeding a 90% level clearly invites serious financial trouble. Why? Because that means that a huge 90¢ of every After-tax Dollar is obligated by contract to repay Current Debt. Unfortunately, financially distressed producers typically maintain CL%ATP index values above 200%.
Solving dangerously excessive levels of Current Liabilities quickly normally requires either inserting more Equity Capital, liquidating Assets, or restructuring a substantial portion of the existing Current Debt into Long Term. Since relatively few producers have easy access to substantial amounts of Equity Capital and resist vigorously selling Assets, persuading their existing lenders to restructure Short Term Debt into Long Term as required is commonly the preferred action.
|“How can you Cash Flow a $100,000 combine from the Sales generated by a 600-acre farm that a producer owns? Buyers must either pay more for farmers’ products or government programs must be increased considerably.” Richard Timmons, central Texas.|
|First, the preceding scenario could definitely be done by farmers producing grain within highly favorable circumstances...including a “normal” Debt load. Unfortunately, prospects are dim that production and market economics will ever combine sufficiently during the foreseeable future, so the real issue concerns what makes sense financially.
Years of experience with clients throughout the U.S. suggest that any producer who buys a $100,000 combine for a 600-acre grain farm will almost assuredly have a much greater investment in land and vehicles along with accompanying Debt greater than whatever is incurred via the combine purchase. The total investment in land, buildings, machinery, vehicles, and residence would likely equal at least $955,000 to $1,825,000. Assuming a quite common 60% Equity would leave Total Liabilities of $382,000 to $730,000.
Estimating 175-bushel corn @ $3.30 per bushel indefinitely accompanied by 60-bushel soybeans @ $6.50 would be an extremely unlikely scenario. Yet, something of that magnitude is perilously close to what many of today’s producers who are struggling financially must have to avoid financial disaster. In fact, a surprising number literally could not support their present Debt loads with $4.00 corn and $8.50 soybeans. Yes, that’s grim, but it’s true!
|“What are the basic differences between ‘elastic’ and ‘inelastic’ pricing regarding agricultural products?” George Brooks of southeastern Illinois.|
|Strangely enough, many U.S. farmers and ranchers commonly apply the two terms in exact reverse of their real meanings. Most agricultural products are actually classified as “commodity products having inelastic demand”...just as with gold and other precious metals, diamonds, oil and natural gas, electricity, dimension lumber, money, etc. Within normal, unregulated market circumstances, increasing or decreasing the supply by 1% will cause an approximate price change of 2-4% the opposite direction.
Many agricultural producers believe mistakenly that “Production Cost” is [or should be] the primary determinant of market prices for standard agricultural commodities such as corn and other grains, beef and pork, vegetables and fruit, etc. Yet, they are not, except on a long-term basis. Thus, for example, if industry-wide production increases by 5% paralleled by a 2% jump in global supply, a common reaction among producers when market prices inevitably decline sharply is that some sinister collusion or conspiracy exists. Simple reality, however, is that increasing the available supply of an agricultural commodity substantively will automatically trigger a proportionately greater reduction of its market price to producers in the overwhelming majority of instances. Conversely, restricting the supply nationally or globally via reduced plantings or reproduction subsequently will cause market prices to rebound reasonably greater in proportion to the smaller crop. Another contributing factor involves parallel availability of completely fungible [substitutable] products.
|“Why are there no specialized agricultural venture capital companies currently operating in the United States.” Ted Tietjen from southwest Nebraska.|
|The sad truth is that only one venture capital firm in southwest Iowa is the only agriculturally oriented venture capital company in the U.S. that the Ferguson Group knows which is actually operating and seeking sound, profitable opportunities in agribusiness for equity investment. Whereas some 5-6 organizations can be found on the Internet which indicate they are interested in agribusiness investments, personal inquiries revealed their thrusts to be restricted primarily toward associations with either foreign governments or giant corporations. Unfortunately, the term “agriculture” contains no glamour or investor pizzazz. Potential interest by outside investors is also sabotaged by the constant harangue from so many of today’s producers that “no one can be Profitable in U.S. agriculture without major government subsidies.” So, why would any investor having a sound mind be interested in providing funds in a “losing” industry? Yet, official data reveal that Cash Profitability during the six-year period of 2000-2004 recorded huge levels of 22.4% to 25.7% Gross Profit On Cash Revenue nationally, as well as excellent 16.3% to 20.0% margins if all USDA subsidies are eliminated from consideration.
Three other strategically crucial factors that block investor interest in the agricultural sector are [a] widespread lack of concern for After-tax Profitability, [b] correspondingly inadequate financial reporting systems, and [c] generally extremely weak Asset Turnover Indices...even among operations reporting attractive Profitability on Sales. The net result from all three is that Return On Investment to outside investors would be completely unacceptable. The situation’s negative image is also compounded by various state and federal agencies’ conviction that inadequate opportunities exist for sound venture capital funding in Profitable agricultural entities...even though careful evaluation reveals that attractive situations are actually abundant.
|“The U.S. has suffered erosion of the dollar’s purchasing power much more than technical inflation as a result of the nation’s unprecedented Debt levels in the form of money substitutes and unrestrained credit. Both the U.S. monetary system and the world are currently awash in Debt more than any time in history. Homes that cost $25,000 in Boston during the 1960s are valued at $450-500,000 today, without any improvement in quality. I am very concerned regarding today’s prevailing misunderstanding regarding key, undesirable aspects about inflation. What do you think?” Steve Ruggeiro from east central Massachusetts. |
|Both global and our national economics are obviously too dependent upon deficit spending which results in mountainous Debt. Many countries’ currencies have, consequently, been devalued to the point of being almost worthless. Unfortunately, a number of relevant values in production agriculture confirm several of the basic tenets of galloping inflation’s impact on farm/ranch economics and Profitability. New tractors and combines today cost 4-5 times their prices during the early 1960s. Excellent crop land also costs 5-7 times its normal value during the mid 1980s. Whatever yield improvements that have occurred within the last 20 years usually resulted from non-land oriented technological advances. Since grain prices remained rather static during the same two decades, inflated producer expectations have obviously been the dominant factor.
Unfortunately, most U.S. farmers and ranchers have consistently welcomed steadily inflated land values during the past 30 years because of their perceived “wealth effects” on individual Balance Sheets @ Fair Market Value...an approach used only by production agriculture and a few other real estate oriented industries. The method has enabled increased borrowing power for literally thousands of producers despite their obvious inability to repay the subsequent Debt on schedule from After-tax Income.
Another seriously negative consequence from years of land value inflation in U.S. production agriculture has been the accompanying deterioration of our ability to compete effectively in many global markets. Our domestic corn and soybean producers farming $2,500 to $3,500 per acre land, for example, often have Cash Flow requirements for Principal and Interest totaling $225 to $315 per acre annually. Conversely, their Brazilian counterparts who farm comparable productivity land costing a much lower $2-300 per acre typically have Total Cash Flow requirements equaling just $13-20 per acre annually. Latin America’s significantly lower labor costs are not a major factor since their local Interest Rates are typically 4-6 times ours...if their local farmers and ranchers can even obtain adequate bank financing.