Salvage: A Junk Run to Belmont

October 15, 2009

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Loaded for a junk run to 1st Capitol Salvage in Belmont.

As we accumulate trash on the farm, we sort.  Recyclables, trash, and metal.  We take the recyclables and trash to our township pickup point in Calamine, open two days a week.   This is a service paid for by our property taxes. 

The metal is thrown into an old wagon and when the wagon is full we make a junk run.  This happens a few time per year.  The fun part about this is that scrap metal is actually worth something.  So as we get rid of what we consider trash, we have a payday.

1st Capitol Salvage was paying $100 per ton, yesterday.  I don’t know if this is a good or bad price.  I do know that a few years ago there was a huge demand for scrap metal and prices were at least double.  I saw junk moving out of fields and fencelines that hadn’t moved in my lifetime.  People made part-time jobs out of cleaning up other people’s junk.

We never let our farm get to the point where a junk-man would salivate.   It’s a constant struggle to keep a farm looking decent.  I’m glad we have a system in place to help us.

Our small load only weighed 580 lbs.  We drove away with a check for $29 dollars.  Another successful junk run!


Money is the Only Thing That Can Be Insured

September 8, 2009

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Nothing in this picture is insured, not the barn, not the hoop buildings, not the crops, not even the dog.  I only insure that which would be financially devastating to replace.   Am I a reckless wildman of the north woods?  Or am I an astute businessman? 

I go over my farm insurance with my agent nearly every year.  A few years ago he pushed a paper across his desk and asked me to sign it.

“What’s this?” I asked.

“Oh, it’s just a waiver.  The insurance company won’t insure the hoop buildings for wind or hail.”

“Hmmm,” I scratched my head and smiled.  “What else could happen to them?” I asked.

“Oh, someone could take a knife and run along them,” he said, still trying to make the sale.

I thought to myself, “If someone is doing that, then I have bigger problems than hog housing.” 

“I guess I’ll take my chances,” I said and pushed the paper back across his desk.  “Let’s go over the rest of the policy.”  Now I was in a cutting mood and starting to get the high a spendthrift feels upon finding a nickel.

“The barn is insured for $10,000,” he said.

The premium for the barn was $150.  I thought about how little economically I use the barn.  I keep a few square bales of hay and straw in the top and I keep my chickens, (which is a hobby), in the bottom.  But I love that big, old, red barn.  If I were to drop the insurance I would somehow feel like I was neglecting the barn.

“We both know it couldn’t be replaced for $10,000,” he said.

Never talk through the close.

I perked up.  “You’re right, it couldn’t be replaced for $10,000.”

“But you could build something else, like a pole shed,” he stammered as he felt another premium slipping away.

I thought to myself, “If I wanted a pole shed, I would build a pole shed.  What I want is this barn, and the only real insurance is to avoid fires, keep up the roof and structure, and pray.”

What I was in considering in actuality was a $150 lottery ticket which would pay out $10,000 and the only way to win was for my barn to burn down.  I didn’t want any part of it.

So the test I came up with is, Could I afford to lose it?  What I was left with is insurance on my house and garage and personal belongings for $200,000 for a premium of $316 per year.  $500,000 liability for $82.  $36 because I have a 4-wheeler.  And an $18 policy fee which is unexplainable and would drive me crazy if I gave it much thought so I won’t for now.

So what do you think?  Was I raised by wolves?


Health Savings Account

August 27, 2009

J9 recently commented and ask that I explain my healthcare.  Thank you for this suggestion.  This topic is timely as the country debates health reform. 

So I’m writing this on a rainy Thursday morning, trying to decide whether to eat eggs or hamburgers for breakfast.  Yes, my diet is still meat heavy.  I’m conducting a lifelong test on the question, “Does saturated fat clog arteries?”

I have a Health Savings Account combined with High Deductible Health Insurance through Golden Rule Insurance.  My insurance premiums and the money I contribute to the savings account are tax-deductible. 

Congress created this program in 2003.  I jumped on it quickly because I already had high-deductible health insurance.  It’s a burden to pay the premiums and to contribute to the savings account, but it’s nice to have money I can use for medical expenses.  And any money I don’t use for medical expenses can be used tax-free for any purpose once I reach retirement age. 

So what does this look like in practice?  I have a $3000 deductible policy.  For this insurance I pay $2223 annually.  I contribute $2850 annually to my savings account.  So my total health cost for the year is $5073.

I am in favor of healthcare reform.  However, I reluctantly admit, I am not writing letters or attending listening  sessions.  I do little more than vote.  I am waiting to see what congress comes up with and will choose the best option for me.


Kiva: Microfinance With American Ingenuity

July 27, 2009

Can a loan of $500 dollars change someone’s life?  Microfinance says yes.  Microfinance is the supply of loans and other financial services to the poor. 

Muhammad Yunus is a Bangladeshi banker and economist.  While visiting a poor village near his university in Bangladesh in 1976,  Mr. Yunus was shocked to meet people kept in virtual servitude by usurious loans.  He made a loan of $27 to 42 women out of his own pocket.  This experience caused him to realize that an organization was needed that would provide banking services to the poor.  Grameen bank was born.

In 2006, Muhammed Yunus and Grameen bank were jointly awarded the Nobel Peace Prize “for their efforts to create economic and social development from below.”

Something about microfinance inspired me.  I like the idea of helping someone with their own idea.  After all, I’ve benefited from borrowing. 

I started looking for a way to get involved.  In 2007 I read that Premal Shah, the President of Kiva, was speaking in Madison.  Kiva is microfinance with American ingenuity.  Kiva’s mission is “to connect people through lending for the sake of alleviating poverty.”  “Kiva is the world’s first person-to-person micro-lending website, empowering individuals to lend directly to unique entreprenuers around the globe.”

I attended Mr. Shah’s invigorating talk.  The next day I made a loan of $25 dollars to Guloglan Agakishiev, who was running a butcher shop on what looked to be card tables.  Within a couple of months Guloglan had started repaying his loan of $1000 on schedule.  He finished repaying his loan in the fifteen months that was promised.

Testing Kiva even further, I let my money sit in their account and watched to see if they would sweep it into their coffers.  To their credit, they haven’t, and occasionally remind me that I have money in my account that could be loaned again or taken out.

Hooked, I started to give gift certificates to try to get more people involved.  And so now I am offering a $25 Kiva gift ceritificate to each of the first three people who comment.


2008 US Farm Bill

March 29, 2009

“The unintended consequences of a government program are usually greater than the intended consequences.”  Unknown origin.

Have you ever wondered what the US Farm Bill looks like to an individual farmer?  We signed up our farm for the 2009 growing season.  I wanted to get on my high-horse and opt-out; but my parents talked me into taking the “free” government money.  When I hear farmers griping about “welfare moms” taking government hand-outs I can usually change the conversation with a simple question.  “How much is your government payment?”

The 2008 Farm Bill is on the books.  It covers the 2009 through 2012 growing seasons.  According to the “Wisconsin Agriculturist”, the 2008 Farm Bill works out to $189 billion for domestic nutrition programs and $102 billion direct support for farmers.  The direct farmer support can be further broken down into $42 billion for commodity crops, $24 billion for conservation, $22 billion for crop insurance, and $14 billion for supplemental disaster assistance, trade, horticulture and livestock production, rural development, research, forestry, energy, and other programs.

With $10 billion in offsets from tax provisions the direct farmer support is reduced to $92 billion, or about $18.4 billion per year.  That works out to about $60 for every American.  What are you getting for your $60?

An excellent informational resource is 2008 Farm Bill Side-by-Side.

Eligible commodities are wheat, corn, grain sorghum, barley, oats, upland cotton, rice, peanuts, soybeans, other oilseeds, and pulse crops.  Payment rates are found in the previous link.

What entitles a farmer to receive a direct government payment?  Eligible producers share in the risk of producing a crop on base acres on a farm enrolled in DCP; annually report the use of the farm’s cropland acreage; comply with conservation and wetland protection requirements on all of their land; comply with planting flexibility requirements; use the base acres for agricultural or related activities; and protect all base acres from erosion, including providing sufficient cover as determined necessary by the county Farm Service Agency committee, and control weeds.

That all sounds great, except I know of no farmer that has had their farm checked for these provisions. 

Our direct government payment for 2009 is $3,552.  How is this determined?

The direct government payment is based on the historical production of a farm.  This is an average record of the various crops and acres planted to each crop.   The USDA refers to this as “base acres”. 

The base acres are then multiplied by 83.3% to get your payment acres.  This has been reduced from 85% in the previous farm bill.

Your payment acres are then multiplied by the historical county yield to calculate yield per acre in bushels.

Bushels are then multiplied by the payment rate to determine the direct annual payment in dollars.

Here is what our farm looks like:

Commodity Base Acres Payment Ac. Yield Pay rate Direct pay
Corn 130.6 108.8 112 $.28 $3412
Barley 10.7 8.9 55 $.24 $ 117
Oats 18.2 15.2 62 $.024 $  23

The strange thing about this is we don’t have to grow these crops to receive the payment.  All we have to do is own or rent the base acres.  Farmers look at the expected government payment when valuing land.  An unintended consequence of the US Farm Bill is raising the value of farmland. 

Another strange thing is the pay rate.  This seems to be based on the strength of commodity lobbyists.  Look at barley and oats.  On our farm these two crops are managed the same.  Their effect on the soil is virtually the same.  Why is their payment rate so different?  The only reason I can guess is that the barley lobby is more powerful than the oat lobby.

We have over 100 acres of hay.  Why isn’t there a payment for this commodity?

The strangest thing of all is we don’t know why we receive this money.  We are long-term stewards of the land.  We don’t do anything differently based on the government program.  All it costs us is a couple hours of paperwork.

The most recent statistic I saw was from 2002.  Only one third of farms received a government payment.  Most of the farms that received a government payment received substantially more than $3500.  If anyone knows of more recent statistics, please comment.


Capital Gains: A Great Way to Reduce Your Tax

February 19, 2009

We met with our accountant today to do our income taxes.  We found out we have to come up with money for Uncle Sam we don’t have right now.  So why are we happy?  Capital gains!  For every $10,000 we made with capital gains, we saved $3,000 in tax.

Capital gain is an underutilized tool to reduce tax.  We have concentrated on using capital gains to increase our after-tax income.  If your farming enterprise typically doesn’t show a profit, this post will have little value to you.

Ordinary income is subject to self employment tax, (social security), which is 15%.  Ordinary income is also taxed at increasing brackets beginning with 10% and going to 35%.

Most people think of stock appreciation when they think of capital gains.  The Bush years were kind to the capital gain tax rate.  Depending on your tax bracket, capital gains were taxed at 5% or 15%.  In 2008, according to our accountant, capital gains were taxed at 0% or 15% depending on your tax bracket.  Self employment tax is not applied to capital gains either.  This is another savings of 15%.

Capital gains occur in livestock farming with the sale of breeding stock.  Breeding stock used on your farm.  If an animal is used as a parent on your farm then it is breeding stock. 

If an animal is sold to another farmer for the purpose of becoming a parent, but was not a parent on your farm, it is classified as ordinary income. 

Animals sold as meat are classified as ordinary income, unless the animal was used as breeding stock, and then sold as meat.  That would qualify as a capital gain.

How does this work for our farm?  We sell many animals for meat.  We sell many animals for breeding stock to other farms.  The profit from these sales put us into the 15% tax bracket for 2008.  We also have to pay the 15% self employment tax on this ordinary income.  This means that for every incremental dollar we make, we pay 30% to Uncle Sam.

But for every capital gain dollar we make, we pay no self employment tax and 0% federal tax because we are in the 15% tax bracket.  This is a savings of 30%.

Even if we are in a higher tax bracket, the most tax we would have to pay on capital gains would be 15%.  This would still be a substantial savings.

So how do we shift more of our income from ordinary to capital gains?  Most farmers look at breeding stock as a cost and a net drain to their farm.  They select a $600 heifer from within their herd for breeding stock and keep her for her entire productive life of 10 to 15 years.  At the end of her productive life, and sold on the commodity market for hamburger, she will only bring $300 to $500.  It looks like a loss.  The capital gain tax break will make up some of the difference but it still doesn’t look very lucrative.

What if the $600 heifer is kept as breeding stock but sold at a younger age, say 7 years, for $900 or $1000 to another farmer.  Now your asset is appreciating and you have the capital gain tax break besides.  This is the strategy we have been using.

To make this system work and to keep your herd size constant you will have to keep more replacement heifers.  Heifer management and the selection of a calving-ease bull is paramount to success.

Also keep in mind that taxes change all the time.  It appears that the 2009 capital gain tax rate will be the same as 2008.  This tax break may disappear by 2010.  Take advantage of capital gains while you can.


Triple Bottom Line Accounting: A Truer Measure of Success

February 18, 2009

How is your company’s Triple Bottom Line, (TBL)?  Triple Bottom Line is the concept that a balance sheet can be more than profit or loss.  Social and ecological factors, as well as economic factors, need to be considered for a company to be truly successful.  People, planet, and profit.

TBL can even be considered for your personal life.  Almost everyone makes/spends money.  Everyone has an impact on the environment.  Everyone has social interactions.  How is your personal TBL?  Where would you like to improve?

TBL is highly relevant for a family farm.  We own/manage the farm. We live and raise our family on the farm.  We are the labor.  We consume its products.  We interact with neighbors and the surrounding community.  We pass the farm on to another generation.  Farmers were thinking about TBL before the concept was named.

Let’s look at TBL from the perspective of my farm.

PROFIT          

There are three of us on this farm.  No one has an off-farm job or any other source of income.  We need to make enough profit every year to cover our living expenses or we will have to borrow the difference from the bank.  This would take our net worth in the wrong direction.

A farmer can use many write-offs to reduce his tax burden.  Machinery depreciation, interest on loans, and health savings accounts, are examples of write-offs, along with regular business expenses as well.  However, it’s worth noting that if a farmer wishes to pay down debt he must use after-tax dollars.  So, even though we want to minimize our taxes, it’s not a bad thing to show a profit.

Our farm had two tough years in 1998 and 1999 when the hog market crashed.  Since then, we have been able to cover our living expenses and pay down some debt every year.  Our economic bottom line is ok for now.

PEOPLE

For the most part, the three of us work well together.  We communicate regularly and respect each other’s contributions.  Each of us can take time off from the farm when we want to.  We take time to interact in our community and visit friends and family.

What concerns me is our average age, which is 56.  It’s been said that if the average age in your company is over 35, your company is dieing. 

How will I manage the work-load if my parents want/need to retire?  I don’t really want to work with an employee.  Could I find an intern who would like to apprentice farm?

Our social bottom line is ok for now, but changes loom in the future.  We need to visualize and make plans now. 

PLANET

There are many ways to measure ecological bottom line.  Soil is probably the most popular way to measure ecological bottom line for a farm.  Is there a net gain or loss in volume of soil?  Is the soil more or less mineralized?  Are we growing better crops with less synthetic fertilizer or does it take more synthetic fertilizer to grow the same crop?

Soil is vitally important to us.  We use contour strip cropping to protect our soil from erosion.  We use no-till planting on some of our acres.  We use crop rotation to break the pest cycle.  We use legumes to produce nitrogen for the subsequent corn crop.  We use animal manure to mineralize the soil.  We have started mob grazing in our pastures to mimic the soil-building properties of the bison-made tall-grass prairies.

With all of these techniques though, I’m still not happy.  Soil tests don’t show an increase in organic matter.  I want to double the organic matter in our fields.

Last spring I saw some soil erosion in our tilled fields.  I don’t want to see any.

On the other hand, we continue to grow excellent crops with very little synthetic fertilizer.  Animal performance on our pasture is excellent.  Wildlife seems to be as abundant as ever.

I’m excited about changes we are making, but we need to monitor our ecological bottom line closely.

This is an overview of the thought processes that constitute our TBL.  What factors are important for your personal TBL?  Does your company practice Triple Bottom Line accounting?