Blank Article24 Sep 2013
- Written by Joe Winett
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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.
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.
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.
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.
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.
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.
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.
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.
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%.
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.
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.
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.